Presbyterian Healthcare Servs. v. Goldman Sachs & Co.

Decision Date16 March 2017
Docket Number15-cv-6579 (AJN)
PartiesPresbyterian Healthcare Servs. et al., Plaintiffs, v. Goldman Sachs and Co., Defendant.
CourtU.S. District Court — Southern District of New York

ALISON J. NATHAN, District Judge:

Plaintiffs Presbyterian Healthcare Services and the New Mexico Hospital Equipment Loan Council were investors in the Auction Rates Securities ("ARS") market and allegedly lost over $10,000,000 when the ARS market crashed in 2008. Like many ARS investors before them, Plaintiffs have sued their financial advisor and the broker-dealer for their ARS, Goldman Sachs and Co. ("Goldman Sachs"), alleging that Goldman Sachs wrongfully failed to disclose material facts about the stability of the ARS market. Before the Court is Goldman Sachs's motion to dismiss Plaintiffs' amended complaint. Because the Second Circuit Court of Appeals has repeatedly rejected claims materially identical to the claims here, and because some of Plaintiffs' causes of action are barred by the statute of limitations, the Court grants Goldman Sachs's motion to dismiss.

I. Background1

This lawsuit centers around Goldman Sachs's allegedly wrongful behavior in the ARS market. In order to understand the context of this lawsuit and the allegations in the amendedcomplaint, some background information about the ARS market and 2008 collapse is necessary.

A. Auction Rate Securities

Auction Rate Securities, or "ARS," are debt instruments whose interest rate is reset at periodic auctions. Amend. Compl. ¶ 13 (Dkt No. 61); Def. Ex. 11 at 1 (Dkt No. 64-11); Anschulz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 102 (2d Cir. 2012). These auctions that reset the ARS interest rate typically occur every seven, twenty-eight, or thirty-five days. Amend. Compl. ¶ 14. The auctions work as follows. At each auction, holders and buyers of ARS specify the minimum interest rate at which they are willing to hold or buy ARS. "If buy/hold orders meet or exceed sell orders, the auction succeeds. If supply exceeds demand, however, the auction fails and the issuer is forced to pay a higher rate of interest in order to penalize it and to increase investor demand." Ashland Inc. v. Morgan Stanley & Co., Inc., 652 F.3d 333, 335 (2d Cir. 2011); Amend. Compl. ¶ 15. Prior to 2007, ARS were generally viewed as "safe, liquid" investments and a great way for debtors to maintain long-term debt obligations at short-term interest rates. Anschutz, 690 F.3d at 102 (quoting Wilson v. Merrill Lynch & Co., Inc., 671 F.3d 120, 123 (2d Cir. 2011)); Amend. Compl. ¶ 7. Consequently, the ARS market eventually attracted a number of unsophisticated investors. Anschutz, 690 F.3d at 102.

Like many large banking and investment firms, Goldman Sachs participated in the ARS market in multiple ways. For example, through its capacity as a financial advisor, Goldman Sachs would sometimes recommend that its clients enter the ARS market. Amend. Compl. ¶¶ 7, 70. Goldman Sachs also served as an underwriter for issuers who wished to raise cash through the use of ARS. Amend. Compl. ¶¶ 7, 70; see Wilson, 671 F.3d at 124. Furthermore, Goldman Sachs received a fee for acting as the broker-dealer through which investors submitted auction orders. Amend. Compl. ¶¶ 57, 70; Wilson, 671 F.3d at 124. Importantly for purposes of thiscase, broker-dealers such as Goldman Sachs frequently bid in their own ARS auctions. Amend. Compl. ¶ 17; Wilson, 671 F.3d at 124. This practice, known as "cover" or "support" bidding, would prevent auction failures from occurring, making the ARS market appear more lucrative and stable than it actually was. Amend. Compl. ¶ 17; Wilson, 671 F.3d at 124.

B. The 2006 SEC Order and The Resulting Disclosures From Goldman Sachs

In 2004, the SEC started investigating several ARS broker-dealers, including Goldman Sachs. Amend. Compl. ¶¶ 42 & n.4, 60; Wilson, 671 F.3d at 125. The investigation concluded on May 31, 2006, when the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 15(b) of the Securities Exchange Act of 1934" (the "2006 SEC Order"). Wilson, 671 F.3d at 125; Def. Ex. 11 at 3.2

In this 2006 order, the SEC concluded that broker-dealers, including Goldman Sachs, had violated securities law through their cover bidding practices in the ARS market. While the SEC did not conclude that the practice of cover bidding itself was illegal, the SEC did conclude that broker-dealers were violating the law by engaging in the practice without adequate disclosures. 2006 SEC Order at 5-9 & n.6; Anschutz, 690 F.3d at 103 & n.3; Wilson, 671 F.3d at 125. The SEC order required several broker-dealers, including Goldman Sachs, to pay a $1,500,000 fine. 2006 SEC Order at 9. It also required the broker-dealers to make certain disclosures. Specifically, the order required Goldman Sachs (and other broker-dealers) to "at all times make a description of its then-current material auction practices and procedures available to (1) all customers and broker-dealers who are participating through [Goldman Sachs] in an auction ofauction rate securities on the portion of its website that is accessible to such customers and broker-dealers and is related to such auction and (2) the general public on another portion of its website accessible to the general public." Id. at 11. These disclosures were to be made no later than three months after the date of the order. Id.

To comply with this order, Goldman Sachs created its "Material Auction Practices and Procedures" ("MAPPS"). This list of disclosures was distributed to investors and publically posted on Goldman Sachs's website. Amend. Compl. ¶¶ 42 n.4, 60; Ashland, 652 F.3d at 338 n.4. Several of the disclosures related specifically to the practice of cover bidding. Those disclosures included the following statements:

"Goldman Sachs generally submits orders to sell all of its Auction Rate Securities in each Auction and may also submit Bid Orders."
"Goldman Sachs is permitted, but not obligated, to submit Orders in Auctions for its own account either as a Bidder or a seller and routinely does so in the Auction Rate securities market in its sole discretion. We may make multiple Bids for our own account provided that each Bid is at a market rate."
"While we are not obligated to do so, we routinely place one or more Bids in an Auction for our own account to acquire the securities for our inventory or to prevent an Auction from failing or clearing at a Rate that we believe does not reflect the market for the securities."
"Bids by Goldman Sachs . . . are likely to affect (i) the Auction Rate . . . and (ii) the allocation of securities being auctioned . . . Because of these practices, the fact that an Auction clears successfully does not mean that an investment in the securities involves no significant liquidity or credit risk. We are not obligated to continue to place such Bids or encourage others to bid in any particular Auction to prevent an Auction from failing . . . Investors and issuers should not assume that we will do so or that Failed Auctions will not occur. Investors should also be aware that Bids by us or those we may encourage to place Bids may cause lower Rates to result."

Def. Ex. 11 at 5-6. These disclosures mirror, and sometimes use identical language as, the disclosures of other broker-dealers also subject to the 2006 SEC order. Compare Wilson, 671 F.3d at 125-26 (outlining Merrill Lynch's disclosures pursuant to the 2006 SEC Order); Ashland, 652 F.3d at 336 (outlining Morgan Stanley's disclosures pursuant to the 2006 SEC Order).

C. Presbyterian's Purchase of ARS

Plaintiff Presbyterian is a private, nonprofit healthcare system and provider located in New Mexico. Amend. Compl. ¶ 1. Plaintiff New Mexico Hospital Equipment Loan Council is an independent instrumentality of the State of New Mexico that allows health care organizations, such as Presbyterian, access to capital markets for debt purposes. Amend. Compl. ¶ 2.3

In 2003, Presbyterian contacted Goldman Sachs for help "evaluating its future capital needs and its existing debt portfolio." Amend. Compl. ¶ 29. In November 2003, Goldman Sachs provided an investment bank services proposal to Presbyterian. Amend. Compl. ¶ 30. Over the next few months, Goldman provided several additional presentations to Presbyterian. Amend. Compl. ¶ 31. Based on these presentations, Presbyterian engaged Goldman Sachs as their "strategic capital advisor" in 2004. Amend. Compl. ¶ 33.

Goldman Sachs recommended that Presbyterian borrow money through the issuance of ARS. Amend. Compl. ¶ 35. Presbyterian followed this advice, and in May 2004, ARS totaling $147,485,000 were issued to Presbyterian. Amend. Compl. ¶ 36. According to Presbyterian, "[a]s the sole underwriter and Presbyterian's strategic capital advisor, Goldman influenced almost every aspect of the transaction, including the structure, initial rates and the maximum rate on the issuance." Amend. Compl. ¶ 38. Goldman Sachs and Citigroup Global Markets Inc. were designated as the broker-dealers. Amend. Compl. ¶ 36. In connection with this transaction, the parties entered into a "Broker-Dealer Agreement" ("BDA"), which set forth Goldman Sachs's duties as broker-dealer for Presbyterian's ARS. Amend. Compl. ¶¶ 79, 81; Def. Ex. 4 (Dkt No. 64-4); Mot. at 4 (Dkt No. 63).

In 2006, Goldman Sachs recommended that Presbyterian enter into "a series of interestrate swaps." Amend. Compl. ¶ 40. Goldman Sachs recommended the swaps in order to "potentially hedge against a general rise in interest rates" for ARS. Amend. Compl. ¶ 42. Goldman Sachs advised Presbyterian that entering into the swaps would establish a fixed rate for Presbyterian's ARS payments. Amend. Compl. ¶ 40. These swaps were entered into in February 2006, with an effective date of January 1, 2007. Amend. Compl. ¶ 40. Goldman...

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