In a recent decision issued by the Southern District of New York, In re UBS Auction Rate Securities Litigation, No. 08-cv-2967, 2009 WL 860812 (S.D.N.Y. Mar. 30, 2009), the District Court granted a motion to dismiss brought by UBS Financial Services (“UBS”). The court held that the plaintiffs’ federal securities law claims failed to state a cause of action because they had no damages as a matter of law. The court’s decision turned on the fact that plaintiffs had already rescinded their purchase of Auction Rate Securities (“ARS”) from UBS. Under these same facts, the court also held that the plaintiffs lacked standing to represent a class of investors who still retained their ARS purchased from UBS.
ARS can be either debt or stock-based securities. ARS have interest rates and dividends that are determined by auctions held by a broker-dealer, in this case UBS, where ARS holders can sell their ARS. Plaintiffs had alleged that UBS failed to disclose (1) the risk of illiquidity of ARS – specifically that the interest and dividend payments were “too low to attract liquidity to the ARS market,” – and (2) the frequency with which UBS had to purchase ARS at auctions to prop up the ARS market. Id. at *2. Plaintiffs alleged that, when UBS was no longer able to intervene in the ARS auctions, the ARS held by plaintiffs and the proposed class became illiquid. Id.
The District Court focused on the important fact that UBS entered into a settlement with federal regulators, whereby UBS agreed to repurchase all ARS shares it sold at par value. Plaintiffs in the current action received a refund at par plus interest and dividends. Nevertheless, they continued to allege that they and the class suffered out-of-pocket damages. First, plaintiffs argued that the purportedly fraudulent acts of UBS “prevented . . . [them] from receiving a sufficiently high rate of interest or dividends to compensate them for the risk of illiquidity associated with their ARS investments.” Id. at *5. Second, they argued that certain members of the class were excluded from the buy-back, and therefore still had damages associated with their retention of illiquid assets.
The court rejected both arguments. Concerning plaintiffs’ claim regarding appropriate interest and dividend payments, the court looked to Section 28(a) of the Securities Exchange Act of 1934. That provision confirmed that plaintiffs and the class were only entitled to receive “actual damages,” which is typically measured by either out-of-pocket loss, benefit of the bargain damages, or rescission. Id. at *4. The court held that, by accepting the payment at par value for their ARS pursuant to the regulatory settlement, plaintiffs chose to rescind their purchase of ARS. Therefore, they were not entitled to out-of-pocket or benefit-of-the bargain damages. Thus, “[p]laintiffs in this action may not now seek additional interest or dividends as benefits of ARS purchases they have already elected to disavow.” Id. at *6.
Plaintiffs’ other damages claim related to class members that still held ARS. The court determined, however, that the appointed lead plaintiffs lacked standing to assert these claims because they did not personally have the same damages as those members of the class who were still ARS holders. Id. at *6 (citing W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008)).
Accordingly, the District Court granted the defendants’ motion to dismiss.
