The Anschutz Corp.. v. Lynch

• Decision Date: 27 March 2011
• Docket Number: No. C 09–03780 SI.,C 09–03780 SI.
• Court: U.S. District Court — Northern District of California
• Parties: The ANSCHUTZ CORPORATION, Plaintiff,v.MERRILL LYNCH AND CO. INC. et al, Defendants.

785 F.Supp.2d 799

The ANSCHUTZ CORPORATION, Plaintiff,

v.MERRILL LYNCH AND CO. INC. et al, Defendants.

No. C 09–03780 SI.

United States District Court, N.D. California.

March 27, 2011.

Andrew C. Shen, David Lawrence Schwarz, Kevin J. Miller, Mark C. Hansen, Kellogg Huber Hansen Todd Evans & Figel PLLC, Washington, DC, Geoffrey Conrad Rushing, Gianna Christa Gruenwald, Richard Alexander Saveri, Saveri & Saveri Inc., San Francisco, CA, for Plaintiff.Kimberly J. Shur, Foley & Lardner LLP, Washington, DC, Page R. Barnes, Bill James Symes, Foley & Lardner LLP, David T. Biderman, Farschad Farzan, Jonmi Nai On Koo, Philip A. Leider, Perkins Coie LLP, Stephen E. Taylor, Jonathan Alan Patchen, Stephen McGeorge Bundy, Taylor & Company Law Offices, LLP, Elizabeth Allen Frohlich, Morgan, Lewis & Bockius, San Francisco, CA, David Andrew McCarthy, Wilson Sonsini Goodrich & Rosati, Palo Alto, CA, Barry J. Mandel, Jonathan H. Friedman, Foley & Lardner LLP, Floyd Abrams, S. Penny Windle, Tammy L. Roy, Cahill Gordon & Reindel LLP, Andrew J. Ehrlich, Martin Flumenbaum, Roberta A. Kaplan, Tobias J. Stern, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendants.

ORDER RE: MOTIONS TO DISMISS AND STRIKE

SUSAN ILLSTON, District Judge.

Currently before the Court are defendant Deutsche Bank Securities, Inc.'s motions to dismiss and to strike, defendants Rating Agencies' motion to dismiss and defendant Fitch Ltd.'s motion to dismiss for lack of personal jurisdiction. (Dkt. 122, 125, 127 and 131.) Based on the pleadings submitted and arguments made, the Court GRANTS in part and DENIES in part DBSI's motion to dismiss; DENIES DBSI's motion to strike; DENIES the Rating Agencies' motion to dismiss; and GRANTS Fitch Ltd.'s motion to dismiss.

BACKGROUND

1. Procedural background

On March 19, 2010, plaintiff The Anschutz Corporation (“TAC”) filed an amended complaint against seven defendants: (1) Merrill Lynch & Co., Inc., (2) Merrill Lynch, Pierce, Fenner & Smith, Inc., (3) Deutsche Bank Securities, Inc., (4) Moody's Investors Service, Inc., (5) The McGraw–Hill Companies, Inc., (6) Fitch, Inc. and (7) Fitch Ratings, Ltd. The claims against the Merrill Lynch defendants, as well as the related claims against Moody's, have been transferred to the Southern District of New York by order of the Judicial Panel on Multidistrict Litigation. See MDL Transfer Order, Docket No. 90. ¹ Plaintiff's claims against all other defendants remain before this Court.

The claims brought by plaintiff against Deutsche Bank Securities Inc. (DBSI) are (1) violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b–5, (2) violations of the California Corporate Securities Law of 1968, Cal. Corp.Code §§ 25500 and 25501, and (3) common law fraud. Currently before the Court are DBSI's motions to dismiss the FAC and strike portions of the same.² The claims brought by plaintiff against The McGraw Hill Companies, Inc. (doing business as Standard & Poors Rating Services (“S & P”)), Fitch, Inc. and Fitch Ratings, Ltd. (collectively, the Rating Agencies) are for negligent misrepresentation. The Rating Agencies have moved to dismiss those claims and, separately, defendant Fitch Ratings, Ltd. (FRL) has moved to dismiss for lack of personal jurisdiction.

2. Factual background ³

Plaintiff brings this action to recover damages and for other relief resulting from its purchase of auction rate securities (“ARS”) ⁴ that were underwritten by DBSI and marketed and sold to investors. FAC ¶ 1. Plaintiff claims that it purchased the ARS in reliance on material omissions made directly and indirectly by DBSI. Id. Plaintiff alleges that it purchased DBSI's securities based upon an appearance of ready and regular liquidity that was created by the market impact of an extensive pattern of deceptive and manipulative activities by DBSI in connection with the “Dutch auctions.” ⁵ Id. Plaintiff alleges that it believed it could resell the DBSI securities, at par, in auctions conducted on prescheduled dates. Id. Plaintiff also claims to have believed that an investment in these auction rate securities would be extremely safe and highly liquid, and have virtually no risk of loss of principal. Id.

Between July 2006 and August 2007, plaintiff purchased the DBSI ARS through the San Francisco office of its agent, Credit Suisse. FAC ¶ 2. Plaintiff alleges that DBSI played three roles in the ARS market: (1) underwriting ARS on behalf of issuers, (2) serving as dealer-brokers, therefore collecting and receiving every buy, sell or hold order for each auction, and (3) serving as a “market maker” for the ARS by placing “support bids” in 100% of the auctions in which DBSI participated as the sole or leading broker-dealer. FAC ¶ 4, 32. According to plaintiff, this third role “ensured that auctions would be successful, as long as [ ] Deutsche Bank continued to place support bids,” because without DBSI's support bids, “there was no market for auction rate securities; they were unsaleable.” Id. ¶¶ 4–6.

A. DBSI's Structured ARS and TAC's Purchase

Plaintiff's claims stem from the purchase of complex derivative-backed ARS from two trusts: The Pivot Master Trust and the Capstan Master Trust (Trusts). FAC ¶ 82. The Trusts were set up by DBSI for the sole purpose of issuing the securities involved in this case. Id. ¶¶ 82, 83. Plaintiff alleges that the Trusts used the proceeds from their offerings to acquire a series of Credit Linked Notes (CLNs) that had been issued by a special purpose vehicle (SPV) trust, also established by DBSI. Id. ¶ 83. The proceeds received by the SPV were invested in medium term notes or deposit accounts held by DBSI or an affiliate. Id. The SPV then entered into a series of credit default swaps (CDS) with Deutsche Bank AG, DBSI's parent company. Id. ¶ 84. A CDS is a contract between two parties through which one of the parties purchases protection or insurance against any losses associated with some specified “reference” entity. Here, Deutsche Bank AG purchased protection from the SPV that DBSI had established, and the medium term notes and deposit accounts purchased by the SPV served as collateral for the CDS transactions. Id. The “reference” securities were a portfolio of corporate bonds held by Deutsche Bank AG. Id. As such, plaintiff alleges that the SPV provided a form of insurance against the performance of the Deutsche Bank AG portfolio of bonds, “agreeing to compensate the Deutsche Bank AG office in the event the bonds were downgraded or otherwise failed to make payments of interest or principal.” Id. Thus, in return for a “nominal ‘premium,’ ” Deutsche Bank AG received a guarantee that it would be made whole in the event that it suffered losses on its portfolio of corporate bonds, “offloading the risk from its balance sheet onto the shoulders of unsuspecting investors several steps down the chain.” Id.

Plaintiff alleges that the interest rate range for the securities issued by the Trusts was narrowly circumscribed and tied to their ratings. Id. ¶ 90. DBSI structured these securities as ARS in order to market them as short-term, liquid notes rather than as “fixed-income notes with maturity dates some 10 years in the future.” Id. ¶ 91. Plaintiff specifically alleges that because the interest rates were fixed at such a low range, the securities “would have been unsaleable without [DBSI's] undisclosed, manipulative, and deceptive practices” of fixing auctions to make the securities seem liquid, and that “no investor would have purchased long-term notes with a 10–year maturity date that paid only short-term interest rates.” Id.

Relatedly, plaintiff explains that the ARS at issue were not available to the public in general. Instead, because these securities were unregistered, they were available only to a limited group of “qualified institutional buyers” (QIBs) like TAC. FAC ¶ 180. TAC, as an institutional buyer, sought to invest its working capital exclusively in short-term, investment-grade securities. Id. ¶ 186. TAC purchased the DBSI securities based on its understanding that these securities would be highly liquid, safe, short-term debt securities. Id. As relevant to its claims in this lawsuit, TAC purchased $20 million of the Pivot Master Trust—Series I securities through Credit Suisse on May 8, 2007. Id. ¶ 197. On or about August 1, 2007, TAC purchased $10 million of the Capstan Master Trust–Series 1 securities and $10 million of Capstan Master Trust—Series 2 securities through Credit Suisse. Id.

B. DBSI's allegedly fraudulent role in its Structured ARS Market

In order to create the appearance that the securities had sufficient liquidity to be marketed to institutional investors, plaintiff alleges that DBSI manipulated the market by placing support bids in every auction for the securities at issue, as well as for other ARS for which it served as the sole or lead broker-dealer, including the Camber Trust. FAC ¶¶ 31, 94–95, 102. DBSI also placed bids for the full amount of the issue of the auction. Id. ¶¶ 31, 102. Given its conduct supporting the auctions, DBSI knew that auctions would fail in the event that DBSI decided to stop placing bids, which it decided to do in July 2007 and did in August 2007, resulting in the collapse of the market for these securities. Id. ¶¶ 95–98, 105.

Plaintiff also alleges that because DBSI was the only broker-dealer which could participate in the auction for the securities held by the Trusts, it had full access to all bids to purchase and orders to sell which permitted it to place bids for its own account so as to influence the outcome of the auction. FAC ¶ 92. This sole access not only allowed DBSI to manipulate the auctions to make it appear as if there were sufficient third-party demand for the ARS, but also allowed DBSI to set the auctions' interest rates lower than they otherwise would have been, so that TAC and other investors earned less interest. Id. ¶¶ 4, 113.

Plaintiff asserts...