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Representations concerning transaction fees for purchasing securities are not considered statements made “in connection with” the purchase or sale of securities, a U.S. District judge in the Southern District of New York has ruled. Deciding an issue that has yet to be addressed by the 2nd U.S. Circuit Court of Appeals, Judge Denise Cote remanded a case against Merrill Lynch to state court after finding that transaction fees have an insufficient connection to the underlying securities to allow the case to be removed to federal court. The fees at issue in Spielman v. Merrill Lynch, Pierce, Fenner & Smith Inc., 01 CIV. 3013, concerned one of a series of securities offerings the company made to customers for its Cash Management Accounts. Merrill Lynch marketed the accounts, in part, as a way for customers to buy certain securities without having to pay a transaction fee. Among the securities offered to accountholders were “Holding Company Depository Receipts,” (HOLDRS), which were shares of the common stock of 20 different companies from a variety of industry sectors. Plaintiff Michael Spielman filed suit in New York State Supreme Court alleging that Merrill Lynch, contrary to its representations that accountholders could purchase holding company securities without a transaction fee, charged him 2 percent fees for a number of transactions. Merrill Lynch removed the state action to federal court, claiming it was pre-empted by the Securities Litigation Uniform Standards Act, 15 U.S.C. �78bb(f). The act makes federal court the “exclusive venue for class actions alleging fraud in the sale of certain covered securities.” Under the act, Judge Cote said, an action can be removed from state to federal court if the removing party shows that the suit is a “covered” class action, the claims are based on state law and allege that one or more “covered securities” were purchased or sold, and the defendant made a misrepresentation or omitted a material fact “in connection with” the purchase or sale. Spielman and Merrill Lynch, she said, contested only the fourth requirement, whether the representations about transaction fees were made “in connection with” the purchase of the holding company securities. Cote said that other courts have found the requirement satisfied where the alleged misrepresentation concerned the value of the securities or the consideration received in return for their sale. However, she said, courts have been reluctant to implicate the anti-fraud provisions of federal securities laws where there is only an “incidental” involvement with securities. STATE COURT “The present case presents an issue similar to one that the 2nd Circuit and this court declined to reach” in an earlier case that alleged a brokerage firm was hiding commissions by mislabeling the amount as transaction fees, Judge Cote said. And the only other case that appeared to have dealt with the issue was a California suit that alleged that a brokerage firm misrepresented its commission structure, she said. The court in California remanded that case to state court after ruling that the misrepresentations at issue were not “intrinsically related” to the securities and were merely a “vehicle” for delivery. In Spielman’s case, Cote said, “The misrepresentations alleged here are not integral to the purchase of HOLDRS.” “While the transaction fees charged by Merrill Lynch affect the cost of trading, this cost is part of Merrill Lynch’s bargain with its accountholders … ,” Cote said, and are “not sufficiently connected to the underlying securities to meet the requirement that the misrepresentation about those fees be ‘in connection with’ the purchase or sale of covered securities.” John M. Dillon and Stephen Moore of Caruso & Dillon represented Spielman. Edward J. Yodowitz, Jay B. Kasner and Jill Renert, of Skadden, Arps, Slate, Meagher & Flom, represented Merrill Lynch.

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