A group of Merrill Lynch entities (Merrill Lynch) recently filed a motion to dismiss a securities class action pending in United States District Court for the Southern District of New York. The plaintiffs generally assert that Merrill Lynch failed to disclose the extent of its subprime exposure arising out of its holdings in collateralized debt obligations. In its motion to dismiss, Merrill Lynch asserts that the plaintiffs' allegations do not satisfy the pleading standards imposed by the PSLRA.
Specifically, in its motion to dismiss, Merrill Lynch principally argues that the plaintiffs have failed to adequately plead scienter and loss causation. Under the PSLRA, as recently interpreted by the Supreme Court in the Tellabs decision, in order to properly allege scienter, plaintiffs must allege facts that give rise to a strong inference of scienter that is as compelling as any opposing inference. In its motion, Merrill Lynch argues that the plaintiffs have failed to plead any facts – other than those based on hindsight – that demonstrate that Merrill Lynch was aware that it faced greater subprime exposure than it disclosed to investors. Merrill Lynch further argues that similar securities class actions have been filed against all the major banks and that Merrill Lynch ultimately disclosed that it would take subprime-related write downs at approximately the same time as its competitors. Finally, Merrill Lynch argues that the plaintiffs fail to adequately allege that Merrill Lynch had any motive to conceal the risks associated with its CDO holdings.
Merrill Lynch further argues that the plaintiffs have failed to adequately allege loss causation. Specifically, the defendants emphasize that when Merrill Lynch disclosed on October 5, 2007 that it would take a $4.5 billion write down, its stock price actually rose in response to this disclosure. In addition, Merrill Lynch argues, its general loss in market capitalization value was the result of a general economic downturn and the market wide credit crisis.