Despite its settlement with regulators, two new Auction Rate Securities (“ARS”) suits have recently been filed against Merrill Lynch. Unlike the suit against UBS filed last November by investors alleging the regulatory settlements would not provide them with suitable relief (see here), these suits are brought by investors who do not qualify for payments from the regulatory settlements.
On August 21, 2008, the New York Attorney General announced that it had reached a settlement agreement with Merrill Lynch for its involvement in certain allegedly wrongful practices relating to ARS. The Settlement called for Merrill Lynch to offer to buy back ARS from retail investors with accounts less than $4 million by October 1, 2008, and all other retail investors and all businesses with accounts less than $100 million by January 2, 2009.
On December 31, 2008, Community Trust Bank Inc. ("Community") sued Merrill Lynch for its alleged misstatements and failure to disclose certain features of ARS. Community Trust Bank Inc. v. Merrill Lynch Pierce Fenner & Smith Inc., No. 08-CV-0231 (E.D.K.Y.). Click here for a copy of the complaint.
According to the complaint, Community purchased approximately $10 million in ARS from Merrill Lynch in 2006. Community owned approximately $9.9 million in ARS when the market collapsed in February 2008. In addition to seeking compensatory damages of $9.9 million, the Community complaint seeks $29 million in punitive damages for Merrill Lynch's breach of its fiduciary duty.
Community alleges that Merrill Lynch aggressively marketed ARS despite its knowledge of a growing liquidity risk with the securities. As in other ARS suits, Community alleges that Merrill Lynch misrepresented that ARS were highly liquid, safe investments, which were a "suitable alternative to money market funds." Additionally, Community alleges that Merrill Lynch failed to disclose to investors that it was artificially supporting the ARS market by buying and selling ARS for its own account in order to "prop up the market for such securities."
Although Merrill Lynch began making offers to repurchase ARS in October 2008 (pursuant to its settlement with State and Federal regulators), Community was unable to receive any part of the regulatory settlement, because it is an institutional investor.
On January 23, 2009, a group of Texas investors brought a putative class action complaint against Merrill Lynch for its alleged misstatements and failure to disclose the liquidity risks involved with ARS. Blankfeld, et al. v. Merrill Lynch & Co., et al., No. 09-CV-0162 (S.D.T.X.). Click here for a copy of the complaint.
According to the Blankfeld complaint, Amgey Investments Inc. (which is not a party to the litigation), a Texas-based corporation, purchased auction rate preferred stock ("ARPS") from Merrill Lynch and resold the ARPS to investors. (ARPS is a type of ARS). The group of eight investors who filed the Blankfeld complaint, had bought approximately $38.7 million in ARPS underwritten by Merrill Lynch from Amgey. The Blankfeld complaint alleges that that there were approximately seventy investors who had purchased ARPS underwritten by Merrill Lynch from Amgey, totaling $140 million.
In Blankfeld, the plaintiffs allege that Merrill Lynch aggressively marketed the ARPS despite its knowledge of a growing liquidity risk. As in other ARS suits, plaintiffs allege that Merrill Lynch misrepresented that ARPS were safe, liquid investments "equivalent to money market instruments or cash." Additionally, plaintiffs allege that Merrill Lynch's decision to stop supporting ARS auctions was the primary cause for the ARS market collapse in February 2008.
The Blankfeld complaint noted that although Merrill Lynch began making offers to repurchase ARS (and ARPS) in October 2008 (pursuant to its settlement with State and Federal regulators), plaintiffs were unable to receive any part of the regulatory settlement, because they did not purchase the ARPS directly from Merrill Lynch but, instead, purchased them indirectly through Amgey.