Merrill Disclosures Sink Another Auction-Rate Securities Suit at Second Circuit

The graveyard of auction-rate securities claims against Merrill Lynch & Co. got a bit more crowded this week, with two decisions in the space of two days dismissing suits by ARS investors. And judging by a ruling by the U.S. Court of Appeals for the Second Circuit in one of the cases, most Merrill ARS claims are going to stay buried for good.

The Second Circuit’s 23-page decision, issued Tuesday, marks the court’s second foray into the Merrill Lynch auction-rate securities litigation, which is consolidated before U.S. District Judge Loretta Preska in Manhattan. Investors filed about a dozen individual and class suits against Merrill after the $330 billion ARS market froze in 2008, alleging that the bank had deceptively propped up the market by placing “support bids” to grease demand. Last November the Second Circuit upheld Preska’s dismissal of the lead case in the multidistrict litigation, a proposed class action, citing the bank’s 2006 disclosure that it “may routinely place one or more bids in an auction . . . to prevent an auction failure.”

As we’ve reported, Merrill’s July 2006 statement–which the bank posted on its website two months after signing a Securities and Exchange Commission consent decree–has stymied nearly every attempt by disgruntled investors to hold the bank liable for its conduct in the ARS market. The latest case to reach the Second Circuit was no different.

In Tuesday’s ruling, Circuit Judge Jose Cabranes wrote for a three-judge panel that Preska had properly dismissed claims by plaintiff The Anschutz Corporation against Merrill Lynch, Pierce, Fenner & Smith Inc., Moody’s Investors Service Inc., and Standard & Poor’s Ratings Services. (Here’s our prior story on Preska’s original February 2011 ruling.) As in its previous ARS ruling, the Second Circuit concluded that Merrill’s 2006 disclosure was fatal to the plaintiff’s market manipulation claims. By the time Anschutz purchased $19 million in Merrill auction-rate securities in 2006 and 2007, Cabranes wrote, “Anschutz was fully informed of Merrill Lynch’s ARS practices, and still decided to hold.”

Anschutz’s lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel had some reason to hope that they could succeed where other ARS plaintiffs failed. In its ruling last November, the Second Circuit had described a “hypothetical complaint” that could potentially survive dismissal if it alleged that Merrill “intended to place bids in every single auction, knew that each auction would fail if it did not place these bids, and signaled to its ARS investors that these securities were genuinely liquid.” Anschutz tried to follow that roadmap, but the appellate court still found that Merrill’s disclosures were sufficient to put investors on notice.

Barry Mandel of Foley & Lardner, who made the case for Merrill at at oral arguments in April, declined to comment. Merrill was also represented by Jay Kasner of Skadden, Arps, Slate, Meagher & Flom in the MDL and in the prior Second Circuit appeal.

Kevin Miller of Kellogg, Huber argued for Anschutz. Miller wasn’t immediately available to comment on Tuesday.

The Second Circuit also upheld Preska’s dismissal of negligent misrepresentation claims against Moody’s and S&P on Tuesday, agreeing that their ARS ratings amounted to opinions and weren’t actionable under New York law. Floyd Abrams of Cahill Gordon & Reindel, who represents S&P parent The McGraw-Hill Companies, Inc., argued for the rating agencies. James Coster of Satterlee Stephens Burke & Burke represents Moody’s.

On Monday, meanwhile, another Merrill ARS case bit the dust before Judge Preska. She dismissed claims by Cellular South Inc. over its purchase of $26 million in ARS in 2007 and 2008, finding that the purchases “occurred well after Merrill produced its Website Disclosure and even further after the May 2006 SEC Order.” Maynard, Cooper & Gale represents Merrill in that case; Cellular South has Brunini, Granthan, Grower & Hewes.