With $667 Million Complaint Against BB&T, Dow Corning Is Latest Company to File Big-Money Auction-Rate Securities Suit
By Alison Frankel
November 06, 2009
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Back in March, when Manhattan federal district court judge Lawrence McKenna dismissed a class action accusing UBS of manipulating the market for auction-rate securities, we wondered if that was the beginning of the end of ARS litigation. McKenna essentially concluded that regulatory deals scored by state AGs, in which banks agreed to buy back their auction-rate securities, meant that investors had no claims for damages--reasoning that seemed to us to spell doom for plaintiffs' cases.And while it's true that shareholder class actions involving auction-rate securities seem unlikely to succeed, especially as downstream sellers have settled with regulators, we've begun to notice some big-ticket cases in which corporations are suing financial institutions that sold them auction-rate securities.
The most recent--and the biggest yet: Dow Corning's November 4 complaint against BB&T and Scott & Stringfellow. Dow Corning was stuck with $667 million in auction-rate securities when the ARS market collapsed in February 2008. It's represented by Boies, Schiller & Flexner and its spin-off, Stone & Magnanini.
The Dow Corning suit comes less than a month after the Gibbons firm filed a similar complaint against Credit Suisse on behalf of Roche, which held more than $500 million in auction-rate securities and collateralized debt obligations. Texas Instruments sued three banks in Texas state court in April, claiming it was misled into buying $524 million in auction-rate securities. Kasowitz Benson Torres & Friedman filed a $258 million ARS case against Citibank for American Eagle in February.
And of course, in a whopper of an auction-rate securities case, Jenner & Block won a $431 million FINRA arbitration ruling for STMicroelectronics in a 2008 ARS case against Credit Suisse. Jenner has since carved out a bit of a niche in ARS litigation; the firm is litigating against SunTrust, for instance, on behalf of the bankruptcy LandAmerica, which held $200 million in auction-rate securities.
You may wonder--we certainly did--why companies that held hundreds of millions of dollars in auction-rate securities didn't participate in the regulatory buybacks. We recently posed that question to a lawyer who represents a major bank in ARS cases. He explained that the regulatory settlements, in the main, covered only individuals and nonprofits--not sophisticated investors like corporate ARS holders. They didn't participate in the buybacks, in other words, because they weren't eligible. Those that have filed suit had no other recourse.
There are still billions of dollars in unredeemed auction-rate securities out there on corporate balance sheets. So the Dow Corning ARS suit likely won't be the last we see.
