UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF … -- motion dismiss.pdfunited states district court southern district of new york -----x in re merrill lynch auction : master case

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------x IN RE MERRILL LYNCH AUCTION : Master Case File RATE SECURITIES LITIGATION : No. 09-md-2030 (LAP) : ---------------------------------------------------------------: ECF Case This Document Relates To : Electronically Filed No. 1:09-cv-9888-LAP : ---------------------------------------------------------------x

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS PLAINTIFF’S FIRST AMENDED COMPLAINT

Barry J. Mandel Jonathan H. Friedman Foley & Lardner LLP 90 Park Avenue New York, NY 10016 (212) 682-7474

Attorneys for Defendants Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated

Case 1:09-cv-09888-LAP Document 18 Filed 04/13/10 Page 1 of 44

i

TABLE OF CONTENTS

TABLE OF AUTHORITIES ......................................................................................................... iii

PRELIMINARY STATEMENT .................................................................................................... 1

BACKGROUND FACTS............................................................................................................... 8

I. Auction Rate Securities and Merrill Lynch’s Role in the ARS Market ................. 8

II. The 2006 SEC Order............................................................................................... 9

III. Merrill Lynch’s Extensive Disclosures Regarding Its Intervention in ARS Auctions ................................................................................................................ 10

IV. Anschutz’s ARS Purchases................................................................................... 10

V. Anschutz’s Claims Against Merrill Lynch ........................................................... 11

ARGUMENT................................................................................................................................ 12

I. The Amended Complaint Fails To State a Claim Pursuant to Rule 10b-5. .......... 13

A. Anschutz’s Market Manipulation Claim Should Be Dismissed Because the Amended Complaint Fails To Identify Any Manipulative Act. ..................................................................................... 14

B. Anschutz’s Disclosure Claim Should Be Dismissed Because the Amended Complaint Fails To Identify an Actionable Omission or Misstatement. ............................................................................................ 16

(1) The Amended Complaint Fails to Identify an Omission or Misstatement of Material Fact. ..................................................... 17

(2) The Amended Complaint Fails To Identify a Duty To Disclose the Allegedly Omitted Information to Anschutz............ 18

(3) The Alleged Omissions and Misstatements Are Protected by the “Bespeaks Caution” Doctrine. ........................................... 19

C. Anschutz’s Market Manipulation and Disclosure Claims Should Be Dismissed Because the Amended Complaint Fails To Adequately Plead Reliance. ...................................................................... 20

(1) The Fraud on the Market Presumption Is Not Applicable. ........... 21

(2) The Affiliated Ute Presumption Is Not Applicable. ...................... 22


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(3) The Complaint Fails To Allege That Anschutz Directly and Reasonably Relied on an Assumption of the Efficiency of the ARS Market. ........................................................................... 23

D. Anschutz’s Market Manipulation and Disclosure Claims Should Be Dismissed for the Additional Reasons That the Amended Complaint Fails To Adequately Allege Scienter, Economic Loss, or Loss Causation...................................................................................... 24

(1) The Amended Complaint Fails To Adequately Allege Scienter. ........................................................................................ 24

(2) The Amended Complaint Fails To Adequately Allege Loss Causation....................................................................................... 27

II. The Amended Complaint Fails To State a Claim for Control Person Liability Under Section 20(a). .............................................................................. 29

III. The Amended Complaint’s Securities Claims Are Time-Barred. ........................ 29

IV. The Amended Complaint Fails To State a Claim for Violations of California Corporate Securities Law. ................................................................... 31

V. The Amended Complaint Fails To State a Claim for Common Law Fraud. ........ 34

CONCLUSION............................................................................................................................. 35


iii

TABLE OF AUTHORITIES

CASES

Adler v. Berg Harmon Assocs., 816 F. Supp. 919 (S.D.N.Y. 1993) ..........................................................................................24

Affiliated Ute Citizens of Utah v. U.S., 406 U.S. 128 (1972)....................................................................................................... 6, 22-23

Aimis Art Corp. v. Northern Trust Secs., Inc., 641 F. Supp. 2d 314 (S.D.N.Y. 2009)........................................................................................2

Alameda v. Nuveen Mun. High Income Opportunity Fund, No. C 08-4575, 2009 WL 1424529 (N.D. Cal. May 20, 2009) ...............................................33

Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009).............................................................................................................12

ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007)...............................................................................................Passim

Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)........................................................................................................... 12-13

Black v. Finatra Capital, Inc., 418 F.3d 203 (2d Cir. 2005).....................................................................................................22

Boguslavsky v. Kaplan, 159 F.3d 715 (2d Cir. 1998).....................................................................................................27

California Amplifier, Inc. v. RLI Ins. Co., 113 Cal. Rptr. 2d 915 (Cal. Ct. App. 2d Dist. 2001) ...............................................................33

Chiarella v. United States, 445 U.S. 222 (1980).............................................................................................................5, 18

Churchill Village, L.L.C. v. General Elec. Co., 169 F. Supp. 2d 1119 (N.D. Cal. 2000) ...................................................................................32

Condit v. Dunne, 317 F. Supp. 2d 344 (S.D.N.Y. 2004)........................................................................................8

Davidoff v. Farina, 04 Civ. 7617, 2005 WL 2030501 (S.D.N.Y. Aug. 22, 2005) ..................................................27

Defer LP v. Raymond James Fin., Inc., 654 F. Supp. 2d 204 (S.D.N.Y. 2009)............................................................................ 2, 25-26


iv

Dent v. U.S. Tennis Assoc., No. CV-08-1533, 2008 WL 2483288 (E.D.N.Y. June 17, 2008) ............................................10

Desiano v. Warner-Lambert & Co., 467 F.3d 85 (2d Cir. 2007), aff’d, 552 U.S. 440 (2008) ..........................................................12

Diamond Multimedia Sys., Inc. v. Superior Court, 19 Cal. 4th 1036 (Cal. Sup. Ct. 1999)......................................................................................32

Dodds v. Cigna Sec., Inc., 12 F.3d 346 (2d Cir. 1993).......................................................................................................31

duPont v. Brady, 828 F.2d 75 (2d Cir. 1987).......................................................................................................22

Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005).................................................................................................................14

Edison Fund v. Cogent Inv. Strategies Fund, Ltd., 551 F. Supp. 2d 210 (S.D.N.Y. 2008)......................................................................................34

Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189 (2d Cir. 2003)...............................................................................................20, 23

First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir. 1994).........................................................................................................8

Geiger v. Solomon-Page Group, Ltd., 933 F. Supp. 1180 (S.D.N.Y. 1996).........................................................................................24

GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189 (3d Cir. 2001).....................................................................................................16

Glazer v. Formica Corp., 964 F.2d 149 (2d Cir. 1992).....................................................................................................19

Good Hill Partners L.P. v. WM Asset Holdings Corp., 583 F. Supp. 2d 517 (S.D.N.Y. 2008)......................................................................................14

Gotlin v. Lederman, 367 F. Supp. 2d 349 (E.D.N.Y. 2005) .....................................................................................10

Healthcare Fin. Group, Inc. v. Bank Leumi USA, 669 F. Supp. 2d 334 (S.D.N.Y. 2009)........................................................................................2

Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971 (9th Cir. 1999) ...................................................................................................21


v

Hevesi v. Citigroup Inc., 366 F.3d 70 (2d Cir. 2004).......................................................................................................21

Hunt v. Alliance N. Am. Gov’t Income Trust, Inc., 159 F.3d 723 (2d Cir. 1998).....................................................................................................17

In re Bristol-Myers Squibb Derivative Litig., No. 02 Civ. 8571, 2007 WL 959081 (S.D.N.Y. Mar. 30, 2007) ...............................................8

In re Citigroup Auction Rate Sec. Litig., No. 08 Civ. 3095, 2009 WL 2914370 (S.D.N.Y. Sept. 11, 2009) ...................................Passim

In re Geopharma Sec. Litig., 399 F. Supp. 2d 432 (S.D.N.Y. 2005)......................................................................................26

In re GlaxoSmithKline PLC Sec. Litig., No. 05 Civ. 3751, 2006 WL 2871968 (S.D.N.Y. Oct. 6, 2006) .................................. 17-18, 29

In re Initial Pub. Offering Sec. Litig., 227 F.R.D. 65 (S.D.N.Y. 2004) ...............................................................................................21

In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d 595 (S.D.N.Y. 2005)......................................................................................26

In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 218 F.R.D. 76 (S.D.N.Y. 2003) ...............................................................................................10

In re Merrill Lynch & Co. Research Reports Sec. Litig., 289 F. Supp. 2d 416 (S.D.N.Y. 2003)..................................................................................8, 25

In re Merrill Lynch & Co. Research Reports Sec. Litig., 568 F. Supp. 2d 349 (S.D.N.Y. 2008)......................................................................................28

In re Merrill Lynch Auction Rate Sec. Litig., No. 08 Civ. 3037, slip op. (S.D.N.Y. Mar. 31, 2010)......................................................Passim

In re PXRE Group, Ltd., Sec. Litig., 600 F. Supp. 2d 510 (S.D.N.Y. 2009)......................................................................................26

In re Qwest Commc’ns Int’l, Inc. Sec. Litig., 387 F. Supp. 2d 1130 (D. Colo. 2005).....................................................................................34

In re SINA Corp. Sec. Litig., No. 05 Civ. 2154, 2006 WL 2742048 (S.D.N.Y. Sept. 26, 2006) ...........................................19

In re Time Warner Sec. Litig., 9 F.3d 259 (2d Cir. 1993).........................................................................................................18


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In re UBS Auction Rate Sec. Litig., No. 08 Civ. 2967, 2009 WL 860812 (S.D.N.Y. Mar. 30, 2009) ...............................................2

JSMS Rural LP v. GMG Capital Partners III, LP, No. 04 Civ. 8591, 2006 WL 1867482 (S.D.N.Y. July 6, 2006) ..............................................27

Kainos Labs., Inc. v. Beacon Diagnostics, Inc., No. C-97-4618, 1998 WL 2016634 (N.D. Cal. Sept. 14, 1998) ..............................................32

Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001)............................................................................................... 24-26

Kemp v. Universal Am. Fin. Corp., No. 05 Civ. 9883, 2007 WL 86942 (S.D.N.Y. Jan. 10, 2007).................................................20

Ladmen Partners, Inc. v. Globalstar, Inc., No. 07 Civ. 0976, 2008 WL 4449280 (S.D.N.Y. Sept. 30, 2008) ...........................................20

Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147 (2d Cir. 2007).....................................................................................................14

LC Capital Partners, LP v. Frontier Ins. Group, Inc., 318 F.3d 148 (2d Cir. 2003).....................................................................................................30

Leeds v. Meltz, 85 F.3d 51 (2d Cir. 1996).........................................................................................................13

Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005).............................................................................................Passim

Mishkin v. Ageloff, No. 97 Civ. 2690, 1998 WL 651065 (S.D.N.Y. Sept. 23, 1998) .............................................29

Nielson v. Scott, 53 P.3d 777 (Colo. Ct. App., Div. II 2002)..............................................................................34

Norwest Mortgage, Inc. v. Superior Court, 72 Cal. App. 4th 214 (Cal. Ct. App. 4th 1999) ........................................................................32

Piper v. Chris-Craft Indus., Inc., 430 U.S. 1 (1977).....................................................................................................................23

Rich v. Maidstone Fin., Inc., No. 98 Civ. 2569, 2002 WL 31867724 (S.D.N.Y. Dec. 20, 2002)..........................................34

Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004).....................................................................................................29


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Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478 (2007) ................................................................................................................34

Sable v. Southmark/Envicon Capital Corp., 819 F. Supp. 324 (S.D.N.Y. 1993) ..........................................................................................21

San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801 (2d Cir. 1996).......................................................................................................25

Santa Fe Indus. v. Green, 430 U.S. 462 (1997).................................................................................................................16

Shah v. Meeker, 435 F.3d 244 (2d Cir. 2006).....................................................................................................31

Shazad v. H.J. Meyers & Co., No. 95 Civ. 6196, 1997 WL 47817 (S.D.N.Y. Feb. 6, 1997) ..................................................10

Starr ex rel. Estate of Sampson v. Georgeson Shareholder, Inc., 412 F.3d 103 (2d Cir. 2005).....................................................................................................24

Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857 (7th Cir. 1995) .....................................................................................................16

Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., 546 F.3d 196 (2d Cir. 2008).....................................................................................................21

Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., No. 05 Civ. 1898, 2006 WL 2161887 (S.D.N.Y. Aug. 1, 2006) .............................................21

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).......................................................................................................8, 12, 24

Teva Pharm. Indus. Ltd. v. Deutsche Bank AG, No. 09 Civ. 6205 (S.D.N.Y. Mar. 23, 2010)..............................................................................2

Titan Group, Inc. v. Faggen, 513 F.2d 234 (2d Cir. 1975), cert. denied, 423 U.S. 840 (1975).............................................22

Vacold LLC v. Cerami, 545 F.3d 114 (2d Cir. 2008).....................................................................................................19

Wentner v. Ridgewood Energy Corp., 62 F.3d 1427 (9th Cir. 1995) ...................................................................................................32

Wexner v. First Manhattan Co., 902 F.2d 169 (2d Cir. 1990).....................................................................................................24


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White v. H & R Block, Inc., No. 02 Civ. 8965, 2004 WL 1698628 (S.D.N.Y. July 28, 2004) ......................................18, 21

STATUTES

15 U.S.C. § 78u-4(b)(2) .................................................................................................................24

PERIODICALS

Harold Marsh, Jr. & Robert H. Volk, Practice Under the Calif. Sec. Laws, § 14.05[2][d] (2008).................................................................................................................33

Marie Leone, Auction-Rate Securities: Hold That Gave, CFO.com, Apr. 25, 2005l ......................8

Randall Smith and Shefali Anand, Bond Tumult Is Jostling Auction-Rate Securities – Demand Vanished For Issues Backed By Risky Assets, Wall Street Journal, Oct. 5, 2007.............................................................................................11

SEC’s Haines wants more muni auction-rate scrutiny, Reuters News, Sept. 29, 2006.................31

Susanne Walker, Auction-Rate Securities: Players: Heavier Retail Action Can Offset Strict View of FASB Rule, The Bond Buyer, Mar. 17, 2005....................................................31


1

Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, defendants Merrill

Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (collectively,

“Merrill Lynch”), by and through their undersigned counsel, Foley & Lardner LLP, submit this

Memorandum of Law in support of their motion to dismiss the First Amended Complaint (the

“Amended Complaint”) of plaintiff The Anschutz Corporation ( “Anschutz”).1

PRELIMINARY STATEMENT

Anschutz alleges that, from June 2004 through August 2007, it purchased various auction

rate securities (“ARS”) through its broker, Credit Suisse Securities (USA) LLC (“Credit

Suisse”). Anschutz alleges that it sold most of its ARS, but has been unable to sell its remaining

ARS since auctions for ARS began to fail in August 2007 as the broader financial crisis erupted.

In In re Merrill Lynch Auction Rate Sec. Litig., No. 08 Civ. 3037, slip op. (S.D.N.Y. Mar.

31, 2010) (Preska, J.) (Doc. No. 113) (hereafter, “Merrill Lynch ARS Litig.”), this Court recently

dismissed claims virtually identical to those made by Anschutz. Like the class action plaintiffs

there, Anschutz alleges that Merrill Lynch engaged in a scheme to create the appearance of a

functioning auction market in which ARS traded in accordance with actual supply and demand,

1 Merrill Lynch incorporates the arguments made by Merrill Lynch in In re Merrill Lynch

Auction Rate Sec. Litig., No. 08 Civ. 3037, as stated in its Memorandum of Law in Support of Defendants’ Motion to Dismiss Lead Plaintiffs’ First Amended Consolidated Class Action Complaint (Doc. No. 12), its Reply Memorandum (Doc. No. 19), and its Response to Lead Plaintiffs’ Surreply Memorandum of Law (Doc. No. 35), and the arguments made by Merrill Lynch in In re Merrill Lynch Auction Rate Sec. Litig., No. 09 Civ. 9887, as stated in its Memorandum of Law in Support of Defendants’ Motion to Dismiss Plaintiff’s First Amended Complaint (Doc. No. 119).


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secretly purchasing ARS for its own account in all auctions to prevent auction failures and

influence clearing rates. Merrill Lynch ARS Litig. is dispositive of Anschutz’s claims.2

Merrill Lynch ARS Litig. Holds That Merrill Lynch’s Disclosures Preclude Market Manipulation

This Court has already determined that Merrill Lynch’s website disclosures (“ARS

Practices and Procedures”) (Ex. A),3 “issued in the wake of the 2006 SEC Order, preclude the

Plaintiffs from pleading manipulative acts as a matter of law.” Merrill Lynch ARS Litig., slip op.

at 30. Indeed, this Court has addressed all of Anschutz’s allegations regarding undisclosed

manipulative conduct, holding that Merrill Lynch sufficiently disclosed its conduct related to the

ARS market (emphasis added):

Alleged Omissions

Merrill Lynch’s Public Disclosures Assessment in Merrill Lynch ARS Litig.

Merrill Lynch placed bids for its own account in all auctions for the Merrill Lynch Underwritten ARS. (Am. Compl. ¶¶ 44, 71(b), 71(j), 71(k).)

“Merrill Lynch is permitted, but not obligated, to submit orders in auctions for its own account either as a bidder or a seller, or both, and routinely does so in its sole discretion.” (Ex. A at 15.)

“Merrill Lynch plays multiple roles in the auction rate securities market, including . . . purchasing and selling as principal for Merrill Lynch’s own account.” (Id. at 4.)

Merrill Lynch’s disclosure that it “routinely” submitted support bids was sufficient to describe its conduct. Merrill Lynch ARS Litig., slip op. at 28-29.

2 Merrill Lynch ARS Litig. is consistent with the growing and unanimous body of law in

the Southern District of New York dismissing investors’ claims against ARS underwriters. See, e.g., Transcript of Oral Argument at 32-33, Teva Pharm. Indus. Ltd. v. Deutsche Bank AG, No. 09 Civ. 6205 (S.D.N.Y. Mar. 23, 2010) (dismissing claims after oral argument on motion to dismiss); In re Citigroup Auction Rate Sec. Litig., No. 08 Civ. 3095, 2009 WL 2914370, at *7 (S.D.N.Y. Sept. 11, 2009); see also Healthcare Fin. Group, Inc. v. Bank Leumi USA, 669 F. Supp. 2d 334 (S.D.N.Y. 2009) (failure to plead loss causation); Defer LP v. Raymond James Fin., Inc., 654 F. Supp. 2d 204 (S.D.N.Y. Sept. 17, 2009) (failure to meet heightened pleading standards); Aimis Art Corp. v. Northern Trust Secs., Inc., 641 F. Supp. 2d 314 (S.D.N.Y. 2009) (failure to plead damages); In re UBS Auction Rate Sec. Litig., No. 08 Civ. 2967, 2009 WL 860812 (S.D.N.Y. Mar. 30, 2009) (failure to plead damages).

3 The exhibits cited herein are transmitted with the Declaration of Barry J. Mandel.


3

Merrill Lynch submitted bids to prevent auction failures and to control the interest rate at which auctions would clear. (Id. ¶¶ 4, 60, 71(d), 71(f), 71(g).)

“Merrill Lynch may routinely place one or more bids in an auction for its own account to acquire auction rate securities for its inventory, to prevent auction failure . . . or an auction from clearing at a rate that Merrill Lynch believes does not reflect the market for the securities. Merrill Lynch may place such bids even after obtaining knowledge of some or all of the other orders submitted through it.” (Id. at 16.)

“Bids by Merrill Lynch or by those it may encourage to place bids are likely to affect the clearing rate, including preventing the clearing rate from being set at the maximum rate or otherwise causing bidders to receive a higher or lower rate than they might have received had Merrill Lynch not bid or not encouraged others to bid.” (Id.)

“The fact that Merrill Lynch could prevent failed auctions through the placement of support bids was disclosed in numerous publicly available documents.” Id. at 26.

“Merrill Lynch’s website disclosed that Defendants could engage in the very conduct of which Plaintiff[s] complain[], the advantages that Defendants would have if they did engage in such conduct, the ability of such conduct to affect clearing rates and the possibility that the auctions would fail if Defendants did not intervene in them. These disclosures negate the Plaintiffs’ claims that Merrill Lynch misled the market into believing that the price of the securities and the clearing rates set by the auctions were dictated by the natural interplay of supply and demand.” Id. at 27 (internal citations and quotation marks omitted).

“Merrill Lynch’s website disclosed the fact that Merrill Lynch might routinely submit support bids to prevent auction failures [and] that Merrill Lynch’s bidding could determine clearing rates . . . .” Id. at 30.


4

There was insufficient third-party demand in a significant number of auctions to avoid auction failures without bidding by Merrill Lynch and, in the absence of Merrill Lynch’s bids, there was no efficient liquid market for the ARS and the ARS were unsaleable. (Id. ¶¶ 6, 31, 44, 55, 59-60, 71(e), 71(l).)

“There may not always be enough bidders to prevent an auction from failing in the absence of Merrill Lynch bidding in the auction for its own account or encouraging others to bid. Therefore, auction failures are possible, especially if the issuer’s credit were to deteriorate, if a market disruption were to occur or if, for any reason, Merrill Lynch were unable or unwilling to bid.” (Id. at 18) “Demand for auction rate securities may change without warning, and declines in demand may be short-lived or continue for longer periods.” (Id. at 19.) “Because of these practices, the fact that an auction clears successfully does not mean that an investment involves no significant liquidity or credit risk.” (Id. at 16.)

“Investors should not assume that Merrill Lynch will [continue to place support bids] or that auction failures will not occur.” (Id.)

“Merrill Lynch may submit a bid in an auction to keep it from failing but it is not obligated to do so.” (Id. at 18.) “Holders who have submitted sell orders should be aware that, in the event of an auction failure, they will not be able to sell all, and may not be able to sell any, securities in the auction. . . . Specifically, if no buy orders are placed in an auction, holders will not be able to sell any of their securities in the auction.” (Id. at 11.)

“Merrill Lynch’s website disclosed that Defendants could engage in the very conduct of which Plaintiff[s] complain[], the advantages that Defendants would have if they did engage in such conduct, the ability of such conduct to affect clearing rates and the possibility that the auctions would fail if Defendants did not intervene in them. These disclosures negate the Plaintiffs’ claims that Merrill Lynch misled the market into believing that the price of the securities and the clearing rates set by the auctions were dictated by the natural interplay of supply and demand.” Id. at 27 (internal citations and quotation marks omitted). “Merrill Lynch also disclosed that the lack of auction failures was not indicative of the health of the ARS market.” Indeed, Merrill Lynch’s disclosures “necessarily implied that there might not be sufficient demand to support the auctions and to create liquidity.” Id. at 29. “Merrill Lynch’s website disclosed the fact that . . . auction failures were possible ‘especially if . . . Merrill Lynch were unable or unwilling to bid,’ and that failed auctions could result in investors’ not being able to sell any of their securities.” Id. at 30.


5

Given this Court’s findings regarding the adequacy of Merrill Lynch’s public disclosures,

Anschutz’ allegations of manipulative conduct cannot stand.

This Court’s Holding in Merrill Lynch ARS Litig. Also Precludes Any Disclosure Claim

This Court’s holding that Merrill Lynch’s disclosures preclude a market manipulation

claim also is dispositive of Anschutz’s attempt to state a claim for an actionable omission or

misrepresentation. The essence of Anschutz’s Rule 10b-5(b) claim is the allegation that Merrill

Lynch failed to disclose that it routinely bid (or misrepresented that it “may” routinely bid) on

ARS for its own account to, among other things, prevent auction failures, thereby inflating

apparent demand and creating the false perception that ARS were liquid, short-term investments.

But, as this Court recently held, Merrill Lynch disclosed the very information that Anschutz

alleges was omitted, and the alleged semantic difference between “routinely” and “may

routinely” was unpersuasive. Merrill Lynch ARS Litig., slip op. at 26-30, 37-41.

Anschutz’s 10b-5(b) claim also fails because the Amended Complaint does not identify

any duty owed by Merrill Lynch to Anschutz to disclose the allegedly omitted information.

“When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to

speak.” Chiarella v. United States, 445 U.S. 222, 235 (1980). Anschutz does not allege that it

purchased any ARS through Merrill Lynch, that Merrill Lynch provided any information about

ARS to Anschutz, or even that Merrill Lynch and Anschutz had any interaction. Accordingly,

Anschutz does not and cannot allege that Merrill Lynch had any obligation to Anschutz. This

lack of a duty to disclose provides an independent basis to dismiss Anschutz’s omissions claim.


6

Merrill Lynch ARS Litig. Holds That Merrill Lynch’s Disclosures Preclude Justifiable Reliance

This Court also held that the class action plaintiffs’ Rule 10b-5 claim fails because

Merrill Lynch’s disclosures preclude any presumption of reliance or showing of justifiable direct

reliance. Merrill Lynch ARS Litig., slip op. at 30-54. This holding is equally applicable here.

First, Anschutz is not entitled to a presumption of reliance because, as this Court

explained, “[t]he fraud on the market theory can only apply when a plaintiff alleges an efficient

market.” Id. at 34. Here, Anschutz does not allege that the ARS market was efficient. To the

contrary, Anschutz repeatedly alleges that the market was not efficient. (Am. Compl. ¶¶ 6, 31,

34, 94, 156.) Even if Anschutz had alleged an efficient market, this Court has held that Merrill

Lynch’s disclosures trigger the truth-on-the-market defense, precluding the presumption. Id. at

37. This Court also held that the Affiliated Ute rebuttable presumption is unavailable because

“Merrill Lynch’s ability to intervene in the ARS market to prevent auction failures and to set the

clearing rates was fully disclosed to the market.” Id. at 43-44.

Second, Anschutz cannot show direct reliance because, as this Court has held, Merrill

Lynch’s public disclosures render direct reliance on an assumption of efficiency unreasonable.

Id. at 49-54. In addition, like the plaintiffs in Merrill Lynch ARS Litig., Anschutz fails to plead

facts sufficient to support a belief in the efficiency of the ARS market. Id. at 47-49. Indeed,

Anschutz appears to confuse liquidity with efficiency, attempting to allege a factual basis for its

belief that the market was liquid (Am. Compl. ¶¶ 1, 3, 5, 57, 60), but failing to include even the


7

(insufficient) factual allegations regarding efficiency that the class action plaintiffs pleaded.4

Anschutz’s failure to plead justifiable direct reliance provides an independent basis for dismissal.

Anschutz’s Rule 10b-5 Claims Should Be Dismissed For Additional Reasons

Although this Court’s holding in Merrill Lynch ARS Litig. is dispositive of this action, the

Amended Complaint has additional deficiencies that warrant dismissal.

First, Anschutz fails to adequately allege scienter, asserting only that Merrill Lynch was

motivated by a desire to continue collecting fees. But the desire to obtain corporate profits is

universal—and thus not sufficient to meet the pleading requirements for scienter. Moreover, the

scheme proposed by Anschutz—that Merrill Lynch sought to profit by acquiring more and more

ARS that it knew would become worthless and on which it ultimately lost hundreds of millions

of dollars—is illogical and implausible on its face. In addition, Merrill Lynch’s repeated and

clear disclosures belie any claim that Merrill Lynch acted with intent to deceive.

Second, the Amended Complaint fails to allege that, even if Anschutz has suffered a loss,

such loss was caused by the conduct of Merrill Lynch rather than by the broader economic crisis,

the overall collapse of the auction market, or Credit Suisse’s conduct or representations.5

4 In Merrill Lynch ARS Litig., the plaintiffs alleged “that Merrill Lynch ARS were widely

held among numerous classes of investors, that the designation of ARS as ‘auction rate’ implied that the securities were traded on an arm’s-length basis, that the ARS market had existed since 1984 and had developed rapidly since then, that Merrill Lynch touted the longetivity, durability, liquidity, and safety of ARS in research reports, that research reports caused a run on, and then the stabilization of the ARS market, and that Merrill Lynch financial advisors misrepresented ARS as highly liquid, safe investments.” Merrill Lynch ARS Litig., slip op., at 47.

5 Also, Anschutz’s damages claim is based on the alleged illiquidity of the Ambac Auction Market Preferred Shares (“Ambac AMPs”) it now holds and which were exchanged by Ambac for the ARS originally purchased by Anschutz, not the ARS underwritten by Merrill Lynch. Anschutz does not allege that Merrill Lynch manipulated the market for Ambac AMPs or failed to disclose information regarding those securities. In other words, Anschutz fails to allege any factual basis for concluding that Merrill Lynch’s alleged misconduct caused any loss Anschutz may have suffered with respect to the Ambac AMPs.


8

Third, Anschutz’s claims are time-barred. The applicable statute of limitations for

Anschutz’s federal securities claims is two years, and Anschutz did not file this action until more

than two years after it had notice of the alleged misconduct—including the notice provided by its

inability to sell its own ARS due to an auction failure.

Anschutz’s Additional Claims Are Insufficiently Plead and Should Be Dismissed

The Amended Complaint also asserts claims for control person liability under Section

20(a), violations of California statutory law, and common law fraud. These claims suffer from

the same deficiencies as Anschutz’s Rule 10b-5 claims (among other deficiencies) and should

likewise be dismissed.

BACKGROUND FACTS6

I. Auction Rate Securities and Merrill Lynch’s Role in the ARS Market

The general characteristics of ARS are described in Merrill Lynch ARS Litig., slip op. at

4-6. With the exception of a handful of auctions which failed for reasons unique to their

particular circumstances, over twenty years of ARS auctions across the industry were

successfully concluded until the financial crisis beginning in August 2007. See Marie Leone,

Auction-Rate Securities: Hold That Gavel, CFO.com, Apr. 25, 2005 (Ex. B).

6 The Amended Complaint’s allegations of fact—and not its conclusory assertions—are

assumed to be true for purposes of this motion. In re Bristol-Myers Squibb Derivative Litig., No. 02 Civ. 8571, 2007 WL 959081, at *6 (S.D.N.Y. Mar. 30, 2007) (Preska, J.). The Court may consider “documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); see also ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). The matters of which a court may take judicial notice include newspaper articles, see, e.g., Condit v. Dunne, 317 F. Supp. 2d 344, 357-58 (S.D.N.Y. 2004), and market phenomena such as the financial crisis that began in August 2007, see, e.g., In re Merrill Lynch & Co. Research Reports Sec. Litig., 289 F. Supp. 2d 416, 421 n.6 (S.D.N.Y. 2003) (“The Court may take judicial notice of the existence of the internet bubble and its subsequent crash.”); First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 770 (2d Cir. 1994) (real estate market downturn).


9

Merrill Lynch served as an underwriter for numerous ARS offerings and thereafter

generally served as a broker-dealer for the ARS auctions with responsibility for receiving and

transmitting the various buy, hold or sell orders in the auctions. (Am. Compl. ¶ 30.) Merrill

Lynch, like other broker-dealers, also routinely placed bids for its own account to prevent

auction failures and to control the interest rate at which the auction cleared. (Id. ¶ 31.) The

essence of Anschutz’s claims is its allegation that Merrill Lynch withheld or misrepresented

information about these practices to “create[] the false impression that there was sufficient

liquidity in the auction process for any actual holder or potential purchaser of these securities to

be able to sell them at par through the auction process.” (Id. ¶ 73.)

II. The 2006 SEC Order

In 2004, the Securities and Exchange Commission (“SEC”) initiated an investigation into

the ARS market, culminating in a publicly available May 31, 2006 settlement agreement with

numerous broker-dealers, including Merrill Lynch (the “2006 SEC Order”). (Ex. C; Am. Compl.

¶ 37.) The 2006 SEC Order states that, “[w]ithout adequate disclosure,” broker-dealers were

placing bids to prevent failed auctions and to affect the clearing rate. (Ex. C at 6.) The Order

expressly states that it does “not prohibit broker-dealers from bidding for their proprietary

accounts when properly disclosed.” (Id. at 6 n.6) (emphasis added). Rather, the SEC required

broker-dealers to make a description of their auction practices and procedures publicly available


10

on their websites and to notify their own customers of the availability of the information. (Am.

Compl. ¶ 37.)7

III. Merrill Lynch’s Extensive Disclosures Regarding Its Intervention in ARS Auctions

Pursuant to the 2006 SEC Order, in August 2006—a full year before Anschutz alleges

that the markets for its ARS became illiquid—Merrill Lynch made comprehensive disclosures

regarding its ARS practices on its publicly available website. (Am. Compl. ¶ 56; Ex. A.) In

addition to publicly disclosing the ARS Practices and Procedures, Merrill Lynch also included

similar disclosures in the offering memoranda for Anschutz’s ARS. See Offering Memoranda

for Dutch Harbor Finance Sub-Trusts I-IV (Ex. D) and Anchorage Finance Sub-Trusts I-IV (Ex.

E).

IV. Anschutz’s ARS Purchases

Anschutz alleges that, from June 2004 to January 2007, it purchased Dutch Harbor

Finance Sub-Trusts II and III (“Dutch Harbor”) and Anchorage Finance Sub-Trust II

(“Anchorage”) ARS underwritten by Merrill Lynch. (Am. Compl. ¶¶ 1 n.2, 187, 189.) Notably,

Anschutz did not purchase any ARS through Merrill Lynch—it purchased these ARS through a

different broker-dealer, Credit Suisse. (Id. ¶¶ 2, 189.) From June 2004 to October 2005,

Anschutz purchased an aggregate of $27.5 million of Dutch Harbor and Anchorage ARS and

7 The Amended Complaint describes allegations made by others, including references to

investigations by the SEC and state securities regulators. (Am. Compl. ¶¶ 4 n.3, 32, 33, 34 n.5, 36, 37 (in part), 39, 43, 57, 62, 74-78.) The law is clear, however, that such allegations should be stricken from the Amended Complaint pursuant to Federal Rule of Civil Procedure 12(f). See Dent v. U.S. Tennis Assoc., No. CV-08-1533, 2008 WL 2483288, at *2-3 (E.D.N.Y. June 17, 2008) (“In addition to being inadmissible as hearsay, unproved allegations of misconduct are not proof of anything. Thus, courts have stricken allegations in complaints referring to investigations of allegations of wrongdoing, even when conducted by governmental agencies.”); In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 218 F.R.D. 76, 78-79 (S.D.N.Y. 2003); Shazad v. H.J. Meyers & Co., No. 95 Civ. 6196, 1997 WL 47817, at *13-14 (S.D.N.Y. Feb. 6, 1997); Gotlin v. Lederman, 367 F. Supp. 2d 349, 363 (E.D.N.Y. 2005).


11

sold all of them at par in successful auctions. (Id. ¶ 187.) In July 2006 and January 2007,

Anschutz purchased an aggregate of $18.95 million of additional Dutch Harbor and Anchorage

ARS through Credit Suisse. (Id. ¶ 189.)

In August 2007, the market for many ARS collapsed—not just those underwritten by

Merrill Lynch. (Id. ¶ 8); see also Randall Smith and Shefali Anand, Bond Tumult Is Jostling

Auction-Rate Securities – Demand Vanished For Issues Backed By Risky Assets, Wall Street

Journal, Oct. 5, 2007, at C2 (Ex. F). Anschutz alleges that it tried to sell its Dutch Harbor ARS

on August 16, 2007, but for the first time in its experience, the auctions failed, as did all

subsequent auctions for Anschutz’s ARS. (Am. Compl. ¶¶ 192-93.)

The Dutch Harbor and Anchorage granted Ambac Assurance (“Ambac”) a “put” option

whereby Ambac could acquire the commercial paper held in each Sub-Trust in exchange for

Ambac AMPs. (Id. ¶ 50.) On December 3, 2008, Ambac exercised its put rights to the Dutch

Harbor and Anchorage Sub-Trusts, as described in the offering circulars. (Am. Compl. ¶ 194.)

Consistent with the procedures plainly disclosed on the covers of the offering circulars, the

eligible assets of the Sub-Trusts were liquidated and the proceeds were paid to Ambac. (Id.) In

exchange, Anschutz received shares of Ambac AMPs. (Id.) Ambac AMPs are an auction rate

security that Anschutz alleges it has been unable to sell in any auction. (Id.) Anschutz also

alleges that, on or about August 1, 2009, Ambac stopped paying a dividend to shareholders of

Ambac preferred stock. (Id.)

V. Anschutz’s Claims Against Merrill Lynch

Notwithstanding Merrill Lynch’s extensive disclosures, Anschutz alleges that Merrill

Lynch’s practice of routinely submitting orders for its own account was a “secret” manipulation

of the ARS market designed to deceive investors by concealing that some of the demand for

ARS came from Merrill Lynch itself and to control clearing rates. (Id. ¶¶ 4, 6, 53, 56, 73, 209.)


12

Anschutz further claims that the ARS it continues to hold have a par value of $18.95

million, but are now worth only “a fraction” of that amount. (Id. ¶¶ 9, 211.) Despite the broader

economic turmoil and the widespread failures of auctions for non-Merrill Lynch underwritten

ARS, Anschutz alleges that its losses are due to Merrill Lynch’s alleged omissions,

misrepresentations, and manipulation. (Id. ¶ 211.)

Anschutz’s Amended Complaint asserts violations of Section 10(b) of the Securities

Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5, violations of Section 20 of the

Exchange Act, violations of Sections 25500, 25501, and 25504 of the California Corporate

Securities Law, and common law fraud.8

ARGUMENT9

“To survive a motion to dismiss, a complaint must contain sufficient factual matter,

accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 129 S.

Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see

also Tellabs, Inc., 551 U.S. at 319-24. To state a claim sufficiently, “bald assertions and

8 Anschutz filed this action in the Northern District of California on August 17, 2009. On October 15, 2009, pursuant to a stipulation, counsel for Merrill Lynch sent a fourteen-page letter to counsel for Anschutz outlining the deficiencies of the complaint. On October 22, 2009, Anschutz gave notice pursuant to the stipulation that it would amend its complaint. The claims relating to Merrill Lynch were transferred to this Court by the United States Judicial Panel on Multidistrict Litigation on December 1, 2009. (The claims relating to the Deutsche Bank-underwritten securities were remanded to the Northern District of California.) Anschutz filed its Amended Complaint on March 19, 2010.

9 The law of the Second Circuit applies to the motion to dismiss Anschutz’s federal securities law claims. See Desiano v. Warner-Lambert & Co., 467 F.3d 85, 90-91 (2d Cir. 2007) (“As to issues of federal law, we are permitted – indeed, required – to reach our own conclusions. . . . This obligation does not change in the context of transferred cases. . . . ‘We have previously held that a transferee federal court should apply its interpretations of federal law, not the constructions of federal law of the transferor circuit.’”) (citations omitted), aff’d, 552 U.S. 440 (2008). As to Anschutz’s state law claims, “a transferee court applies the substantive state law, including choice-of-law rules, of the jurisdiction in which the action was filed.” Id. at 91.


13

conclusions of law will not suffice.” Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996). Where

plaintiffs “have not nudged their claims across the line from conceivable to plausible, their

complaint must be dismissed.” Twombly, 550 U.S. at 547. Plaintiffs alleging securities fraud

must also meet the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil

Procedure, as “applied assiduously to securities fraud.” Lentell v. Merrill Lynch & Co., 396 F.3d

161, 168 (2d Cir. 2005). Likewise, under the Private Securities Litigation Reform Act of 1995

(“PSLRA”), 15 U.S.C. §78u-4, et seq., securities fraud claims must be pleaded with greater

specificity and supported by specific factual allegations. ATSI Commc’ns, Inc., 493 F.3d at 99.

The Amended Complaint fails to state a claim against Merrill Lynch. Anschutz’s Section

10(b) claim fails because Anschutz does not and cannot adequately allege a manipulative act or

an actionable misrepresentation or omission. It also cannot satisfy other critical components of a

10(b) claim including reliance, scienter, economic loss, or loss causation. Anschutz’s Section

20(a) claim is similarly inadequate in that Anschutz has failed to state a Section 10(b) claim and

has made virtually no effort to allege the necessary components for establishing control liability.

The common law and state law claims fail for the same reasons as its securities fraud claims,

among other reasons.

I. The Amended Complaint Fails To State a Claim Pursuant to Rule 10b-5.

Anschutz fails to state a Section 10(b) claim for either market manipulation or fraudulent

disclosure. To state a market manipulation claim, a plaintiff must allege: “(1) manipulative acts;

(2) damage (3) caused by reliance on an assumption of an efficient market free of manipulation;

(4) scienter; (5) in connection with the purchase or sale of securities; (6) furthered by the


14

defendant’s use of the mails or any facility of a national securities exchange.”10 ATSI

Commc’ns, 493 F.3d at 101; see also Merrill Lynch ARS Litig., slip op. at 17. To state a

disclosure claim, a plaintiff must allege (i) a misstatement or omission (ii) of material fact by a

defendant (iii) with scienter, (iv) in connection with the purchase or sale of a security, (v)

reasonable reliance by the plaintiff on the representation or omission, and (vi) that the

misstatement or omission proximately caused economic loss. See Dura Pharms., Inc. v. Broudo,

544 U.S. 336, 341-42 (2005); see also Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 153

(2d Cir. 2007). Failure to properly plead any one element necessitates dismissal of the claim.

See Good Hill Partners L.P. v. WM Asset Holdings Corp., 583 F. Supp. 2d 517, 520-21

(S.D.N.Y. 2008).

The Amended Complaint fails to satisfy these pleading requirements and, thus, whether

read as market manipulation, misrepresentation, or failure to disclose, Anschutz’s claims must be

dismissed. This Court’s holding in Merrill Lynch ARS Litig. that Merrill Lynch’s disclosures

preclude any manipulative act or reasonable reliance is dispositive of Anschutz’s market

manipulation claim, and likewise resolves Anschutz’s disclosure claim. In addition, Anschutz’s

claims should be dismissed because the Amended Complaint fails to adequately plead scienter,

economic loss, or loss causation.

A. Anschutz’s Market Manipulation Claim Should Be Dismissed Because the Amended Complaint Fails To Identify Any Manipulative Act.

To state a market manipulation claim, Plaintiff must show that the alleged manipulator

“engaged in market activity aimed at deceiving investors.” ATSI Commc’ns, 493 F.3d at 100.

“In identifying activity that is outside the ‘natural interplay of supply and demand,’ courts

10 “Because a claim for market manipulation is a claim for fraud, it must be pled with

particularity under Rule 9(b).” ATSI Commc’ns, 493 F.3d at 101.


15

generally ask whether a transaction sends a false pricing signal to the market.” Id. As this Court

held, “[t]he market is not misled when a transaction’s terms are fully disclosed.” Merrill Lynch

ARS Litig., slip op. at 24.

Here, this Court has already held that Merrill Lynch’s alleged bidding practices are legal

and cannot be deemed “manipulative” under Rule 10b-5 because Merrill Lynch’s conduct was

“disclosed in numerous publicly available documents.” Id. at 26-30. The 2006 SEC Order

“highlighted that auction dealers had placed support bids to prevent failed auctions and

specifically noted that the Order did not prohibit such conduct as long as it was properly

disclosed.” Id. at 26-27. Likewise, Merrill Lynch’s ARS Practices and Procedures and the

Dutch Harbor and Anchorage offering memoranda include express and specific warnings

regarding the possibility of auction failure and describe Merrill Lynch’s roles in the auction

process. See supra pp. 2-4.

This Court should reject Anschutz’s attempt to avoid the inevitable consequence of

Merrill Lynch’s disclosure by claiming that Merrill Lynch’s statement that it “may routinely”

submit bids for its own account in ARS auctions was misleading because Merrill Lynch did not

disclose that it did routinely submit bids for its own account. (Am. Compl. ¶¶ 38, 41, 53, 56.)

But this allegation is flatly contradicted by Merrill Lynch’s publicly disclosed ARS Practices and

Procedures, which disclosed, “Merrill Lynch is permitted, but not obligated, to submit orders in

auctions for its own account either as a bidder or a seller, or both, and routinely does so in its

sole discretion.” (Ex. A at 15) (emphasis added). In any event, this Court addressed this very

argument, holding that an ARS underwriter’s statement that it “may” buy ARS for its own

account was not false and misleading where the underwriter did so at every auction. Merrill

Lynch ARS Litig., slip op. at 28-29 (citing (Transcript of Oral Argument at 22-24, 28, 30, 33-34,


16

Teva Pharmaceutical Indus. v. Deutsche Bank AG, 09 Civ. 6205, Mar. 23, 2010)). Therefore,

“[t]hese disclosures, issued in the wake of the 2006 SEC Order, preclude the Plaintiffs from

pleading manipulative acts as a matter of law.”11 Merrill Lynch ARS Litig., slip op. at 30.

B. Anschutz’s Disclosure Claim Should Be Dismissed Because the Amended Complaint Fails To Identify an Actionable Omission or Misstatement.

This Court’s holding that Merrill Lynch’s conduct was publicly disclosed, Merrill Lynch

ARS Litig., slip op. at 26-30, 37-41, is dispositive of Anschutz’s disclosure claim. This claim

must be dismissed because the Amended Complaint fails to allege an actionable misstatement or

omission, fails to allege that Merrill Lynch owed Anschutz a duty to disclose, and the alleged

misstatements or omissions are protected by the “bespeaks caution” doctrine.

11 In addition, “market manipulation” generally refers to specific practices such as “wash

sales, matched orders, or rigged prices” that have been “deemed by the SEC” to be manipulative. Santa Fe Indus. v. Green, 430 U.S. 462, 476-77 (1997); see also GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 209-11 (3d Cir. 2001) (rejecting market manipulation claim on short-sale transactions because transaction is not “in and of itself unlawful and therefore cannot be regarded as evidence of market manipulation”); Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857, 864-65 (7th Cir. 1995) (holding that plaintiffs’ allegations lacked merit because conduct in question was legal and therefore not deceptive or manipulative). Here, the Amended Complaint fails to allege that Merrill Lynch engaged in such practices. Indeed, the 2006 SEC Order expressly stated that it did “not prohibit broker-dealers from bidding for their proprietary accounts when properly disclosed.” (Ex. C at 6 n.6.) Thus, Merrill Lynch’s bidding practices cannot be considered “manipulative” under Rule 10b-5.

Moreover, Anschutz has improperly attempted to re-label a claim based on alleged omissions or misrepresentations as a market manipulation claim, which is grounds for dismissal under established Second Circuit law. See Lentell, 396 F.3d at 177-78. As the 2006 SEC Order makes clear, in contrast to manipulative practices like wash sales, Merrill Lynch’s participation in auctions has been deemed permissible by the SEC provided it is properly disclosed. (Ex. C at 6 n.6.) Thus, this is not a case involving allegations of inherently improper practices that were enabled by alleged omissions or misstatements; rather, this is a case where the only alleged wrongdoing is the alleged omissions or misstatements themselves.


17

(1) The Amended Complaint Fails to Identify an Omission or Misstatement of Material Fact.

The crux of the Amended Complaint is the allegation that Merrill Lynch’s routine

intervention in ARS auctions was hidden from ARS investors.12 But, as discussed above, Merrill

Lynch’s extensive disclosures address the very information that Anschutz alleges was

concealed.13 See supra pp. 2-4. This Court’s finding that Merrill Lynch’s disclosures provided

sufficient notice of this conduct, see supra 2-4, is dispositive of Anschutz’s omissions claim. See

Merrill Lynch ARS Litig., slip op. at 26-30, 37-41; see also In re Citigroup, 2009 WL 2914370,

at *1-4, 7.

Anschutz also alleges that Merrill Lynch failed to disclose sufficient information about

the Ambac put agreement (Am. Compl. ¶¶ 50, 71(m)), but this put agreement is explained on the

cover of the Dutch Harbor and Anchorage offering circulars and described in great detail inside

12 The Amended Complaint also includes a non-specific allegation that Merrill Lynch

failed to disclose that it maintained “a substantial inventory of Merrill Lynch-underwritten securities.” (Am. Compl. 71(k).) But, having disclosed that it could purchase ARS for its own account, Merrill Lynch’s possession of ARS was neither material nor surprising.

13 A claim of fraud based on material omissions cannot be based on information that is publicly disclosed—even if it is not included in every public disclosure. See Hunt v. Alliance N. Am. Gov’t Income Trust, Inc., 159 F.3d 723, 730-31 (2d Cir. 1998) (holding that absence of information from certain advertising materials and annual reports was not misleading in light of other public disclosures containing that information); In re GlaxoSmithKline PLC Sec. Litig., No. 05 Civ. 3751, 2006 WL 2871968, at *11 (S.D.N.Y. Oct. 6, 2006) (Preska, J.) (alleged omissions were immaterial due to other disclosures).


18

the offering circulars.14 (Ex. D at cover, 3-5, 7, 15-16, 18-19, 31, 39, 43-57, 64-66; Ex. E at

cover, 3-5, 7, 15-16, 18-19, 31, 40, 44-58, 66-68.) Anschutz cannot claim ignorance of the facts

and risks that were publicly disclosed. See White v. H & R Block, Inc., No. 02 Civ. 8965, 2004

WL 1698628, at *12-13 (S.D.N.Y. July 28, 2004).

Anschutz also fails to identify any misstatement of material fact. Although Anschutz

includes a conclusory allegation that Merrill Lynch made “untrue statements of material fact”

(Am. Compl. ¶ 207), the only specific statement that Anschutz identifies is Merrill Lynch’s

disclosure that it “may routinely” intervene in auctions (Id. ¶¶ 38, 41, 56).15 As discussed above,

this disclosure is not misleading. See supra p. 15-16.

(2) The Amended Complaint Fails To Identify a Duty To Disclose the Allegedly Omitted Information to Anschutz.

Where “an allegation of fraud is based upon nondisclosure, there can be no fraud absent a

duty to speak.” Chiarella, 445 U.S. at 235; see also In re Time Warner Sec. Litig., 9 F.3d 259,

267 (2d Cir. 1993) (“[A]n omission is actionable under the securities laws only when the

[defendant] is subject to a duty to disclose the omitted facts.”). Even where the allegedly omitted

information is material, “there is no liability under Rule 10b-5 unless there is a duty to disclose

14 In grasping for straws to allege “failure to disclose,” Anschutz claims that, when Ambac first issued the ARS in 2001, five and six years before Anschutz bought the ARS that are the subject of this lawsuit, Ambac did so in order to “bolster its balance sheet by obtaining access to a guaranteed source of contingent capital,” which investment banks refused to provide. (Am. Compl. ¶ 71(m).) Anschutz, however, does not and cannot allege that Merrill Lynch was required in 2001 to disclose the alleged internal thought process of Ambac, particularly where, as here, the consequences and risks of the put agreement are so clearly set forth in the offering memoranda. Moreover, any such claim, even if it existed, has long expired beyond the five year statute of limitations. See In re GlaxoSmithkline PLC, 2006 WL 2871968, at *7. Finally, Anschutz does not claim any reliance on the offering memoranda and, as discussed infra pp. 21-22, such claim cannot be the basis for a “fraud on the market” claim.

15 The generic references to allegedly untrue statements of material fact fail to achieve the required specificity and, thus, any claim based on an alleged misstatement should be dismissed. ATSI Commc’ns, 493 F.3d at 99.


19

it.” Glazer v. Formica Corp., 964 F.2d 149, 156 (2d Cir. 1992); Vacold LLC v. Cerami, 545

F.3d 114, 121 (2d Cir. 2008) (holding that duty to disclose is distinct from materiality).

Here, Merrill Lynch owed no duty to Plaintiff to disclose the allegedly omitted

information. Anschutz does not allege that it purchased any ARS through Merrill Lynch. In

fact, the Amended Complaint does not even allege that Merrill Lynch and Anschutz ever

discussed ARS. Instead, Anschutz purchased its ARS through Credit Suisse without any

relationship with Merrill Lynch.16

(3) The Alleged Omissions and Misstatements Are Protected by the “Bespeaks Caution” Doctrine.

Any misrepresentations or omissions that could be attributable to Merrill Lynch are

protected under the “bespeaks caution” doctrine because they were accompanied by meaningful

cautionary language. In re SINA Corp. Sec. Litig., No. 05 Civ. 2154, 2006 WL 2742048, at *9

(S.D.N.Y. Sept. 26, 2006) (“Under the bespeaks caution doctrine, courts have held that

meaningful cautionary language can render omissions or misrepresentations immaterial.”)

(internal citation and quotation marks omitted). “[U]nder the well-established ‘bespeaks caution’

doctrine, an alleged misstatement is not actionable where investors were adequately warned of

16 Anschutz alleges that the Massachusetts Office of the Secretary of the

Commonwealth’s Securities Division alleged that Merrill Lynch marketed ARS as “safe, cash like, and liquid investments” and Merrill Lynch was “aware that downstream brokers and its distribution partners marketed auction rate securities in the same manner” (Am. Compl. ¶ 57). But Anschutz does not identify: (1) any particular omission that Merrill Lynch encouraged other broker-dealers to pass along, (2) which individual or individuals at Merrill Lynch made any such misrepresentation or omission, (3) who Merrill Lynch encouraged to convey the alleged misrepresentation or omission, or (4) when and how Merrill Lynch conveyed this alleged encouragement. Anschutz also does not allege that Merrill Lynch communicated the alleged misrepresentation or omission to Credit Suisse or to Anschutz. Anschutz’s general allegation not only fails to satisfy the heightened pleading requirement of Rule 9(b), but also fails to demonstrate the existence of any duty owed by Merrill Lynch to Anschutz. ATSI Commc’ns, 493 F.3d at 99.


20

the relevant investment risks.” Ladmen Partners, Inc. v. Globalstar, Inc., No. 07 Civ. 0976,

2008 WL 4449280, at *13 (S.D.N.Y. Sept. 30, 2008) (Preska, J.). Here, the abundant warnings

in Merrill Lynch’s publicly available ARS Practices and Procedures and in the ARS offering

circulars disclose the very risks of auction failure and illiquidity that Anschutz now alleges were

concealed.17 Indeed, Merrill Lynch even specifically warned that “the fact that an auction clears

successfully does not mean that an investment in [ARS] involves no significant liquidity or credit

risk.” (Ex. A at 16.)

C. Anschutz’s Market Manipulation and Disclosure Claims Should Be Dismissed Because the Amended Complaint Fails To Adequately Plead Reliance.

Market manipulation and disclosure claims must be dismissed if they do not plead facts

demonstrating reasonable reliance. In re Citigroup, 2009 WL 2914370, at *6, 8; Lentell, 396

F.3d at 172. This is particularly true for a sophisticated investor like Anschutz, which is a

“Qualified Institutional Buyer” under Rule 144A of the Securities Act of 1933 and is presumed

to understand the risks of the investments it makes. (See Ex. D at cover, 33, 55, 60-61, 64; Ex. E

at cover, 35-36, 55-56, 61-62, 66) (limiting eligible purchasers to qualified institutional buyers or

institutional accredited investors that are “knowledgeable, sophisticated and experienced in

business and financial matters”)); Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc.,

343 F.3d 189, 195-96 (2d Cir. 2003). Anschutz is not entitled to a presumption of reliance and

has utterly failed to allege direct reliance.

17 “The cautionary information need not be in the same document that contains the

forward-looking statement, but must instead be reasonably available to investors and affect the total mix of information.” Kemp v. Universal Am. Fin. Corp., No. 05 Civ. 9883, 2007 WL 86942, at *11 (S.D.N.Y. Jan. 10, 2007).


21

(1) The Fraud on the Market Presumption Is Not Applicable.

“The fraud-on-the-market doctrine, as described by the Supreme Court in Basic v.

Levinson, creates a rebuttable presumption that (1) misrepresentations by an issuer affect the

price of securities traded in the open market, and (2) investors rely on the market price of

securities as an accurate measure of their intrinsic value.” Hevesi v. Citigroup Inc., 366 F.3d 70,

77 (2d Cir. 2004). “The fraud on the market presumption applies only if the market for the

security is open and developed enough so that it quickly incorporates material information into

the price of the security, i.e., the market must be efficient.” Teamsters Local 445 Freight Div.

Pension Fund v. Bombardier, Inc., No. 05 Civ. 1898, 2006 WL 2161887, at *5 (S.D.N.Y. Aug.

1, 2006). If the market is not actually efficient, then the alleged misconduct is not presumed to

affect the price of ARS; the alleged “appearance of inefficiency” does not suffice.18 Here,

Anschutz repeatedly alleges that the market for ARS was not efficient. (Am. Compl. ¶¶ 6, 31,

34, 94, 156.) Thus, the fraud-on-the-market presumption is not available.

Even if Anschutz could allege an efficient market, it still could not allege reliance

because an efficient market would have assimilated Merrill Lynch’s extensive disclosures and

Anschutz would have received a rate of return that reflected those risks. See White, 2004 WL

1698628, at *13; Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 975-76 (9th Cir. 1999)

18 Anschutz alleges that it relied on the appearance of an efficient market (Am. Compl.

¶¶ 60, 211), which is not sufficient to trigger the fraud-on-the-market presumption. Indeed, although Anschutz alleges that the ARS market appeared to be liquid, it does not allege that the ARS market had the hallmarks of an efficient market, such as large volumes of shares, constant streaming quotes, extensive analyst coverage, and millions of shares trading daily. See Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., 546 F.3d 196, 200 (2d Cir. 2008); In re Initial Pub. Offering Sec. Litig., 227 F.R.D. 65, 107 (S.D.N.Y. 2004); see also Sable v. Southmark/Envicon Capital Corp., 819 F. Supp. 324, 339 (S.D.N.Y. 1993) (the fraud-on-the-market presumption does not apply to securities “not traded actively in a large public market”); In re Citigroup, 2009 WL 2914370, at *7.


22

(“In a fraud-on-the-market case, an omission is actionable under section 10(b) and Rule 10b-5

only if the [allegedly undisclosed] information has not already entered the market.”) (internal

citation and quotation marks omitted). As this Court held in Merrill Lynch ARS Litig., in an

efficient market, “the ARS market would have incorporated the 2006 SEC Order, Merrill

Lynch’s website disclosure, and the [offering circulars] for the ARS at issue. . . . Combined,

these materials preclude the Plaintiffs from establishing a presumption of reliance on the

efficiency of the ARS market.” Merrill Lynch ARS Litig., slip op. at 36-37. Therefore, “Merrill

Lynch’s participation in the ARS market was revealed to the public with the degree of credibility

and intensity necessary to counterbalance any misinterpretations resulting from the alleged

manipulation.” Id., slip op. at 37.

(2) The Affiliated Ute Presumption Is Not Applicable.

Plaintiff cannot rely on the presumption of reliance in Affiliated Ute Citizens of Utah v.

U.S., 406 U.S. 128 (1972) because, as this Court recently held, “Merrill Lynch’s ability to

intervene in the ARS market to prevent auction failures and to set the clearing rates was fully

disclosed to the market.” Merrill Lynch ARS Litig., slip op. at 43-44; see also Black v. Finatra

Capital, Inc., 418 F.3d 203, 209 (2d Cir. 2005) (citing duPont v. Brady, 828 F.2d 75, 78 (2d Cir.

1987)) (noting that Affiliated Ute presumption is rebuttable).

The Affiliated Ute presumption is inapplicable for the further reason that it applies only in

cases of total non-disclosure. See Titan Group, Inc. v. Faggen, 513 F.2d 234, 239 (2d Cir. 1975)

(cautioning that exception to requirement of pleading reliance for certain omissions claims is

limited to narrow class of cases involving “total non-disclosure”), cert. denied, 423 U.S. 840

(1975). Here, Anschutz alleges that Merrill Lynch made “untrue statements of material fact.”

(Am. Compl. ¶¶ 66, 74, 76, 207, 229.) In particular, it alleges that Merrill Lynch’s affirmative

statements that it “may routinely” intervene in auctions were misleading. (Id. ¶¶ 38, 41, 56.) In


23

addition, because Anschutz’s claims are “based on Merrill Lynch’s alleged market activity” and

“the alleged omissions have merely exacerbated the misleading nature of the alleged conduct[,] .

. . [t]he claims are therefore not primarily omission claims.” Merrill Lynch ARS Litig., slip op. at

43 (internal citation and quotation marks omitted).

Moreover, the Affiliated Ute presumption of reliance is not available for market

manipulation claims. See Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 53 n.2 (1977) (Blackmun,

J., concurring) (“The Rule 10b-6 violations do not raise the question of disclosure or

nondisclosure of material fact, since that Rule deals with market manipulation. Thus, on this

feature, the Mills-Affiliated Ute Citizens presumptions do not even enter the case.”).

(3) The Complaint Fails To Allege That Anschutz Directly and Reasonably Relied on an Assumption of the Efficiency of the ARS Market.

Not only is Anschutz not entitled to any presumption of reliance, but Anschutz has utterly

failed to allege direct, justifiable reliance. The Amended Complaint is devoid of any facts

supporting its conclusory allegations that it relied on the integrity of the ARS market. More

importantly, as this Court held in Merrill Lynch ARS Litig., “[t]he prospectuses for the ARS at

issue, the 2006 SEC Order, and the Merrill Lynch ARS website . . . render reliance

unjustifiable.” Merrill Lynch ARS Litig., slip op. at 51. The Court’s reasoning applies equally

here and, in light of Merrill Lynch’s extensive disclosures about the ARS market and its

participation in the market, Anschutz cannot allege that any purported reliance on the integrity of

the market was reasonable. To the contrary, any reliance by Anschutz on an assumption that the

market did not reflect Merrill Lynch’s participation would have been unreasonable as a matter of

law. See Emergent Capital, 343 F.3d at 195-96; In re Citigroup, 2009 WL 2914370, at *7


24

(holding that similar public disclosures “negate any inference that reliance . . . on such a view of

the ARS pricing mechanism was reasonable”).19

D. Anschutz’s Market Manipulation and Disclosure Claims Should Be Dismissed for the Additional Reasons That the Amended Complaint Fails To Adequately Allege Scienter, Economic Loss, or Loss Causation.

(1) The Amended Complaint Fails To Adequately Allege Scienter.

Under the PSLRA, plaintiffs are required to state “with particularity” facts giving rise to

“a strong inference” that each defendant acted with fraudulent intent. 15 U.S.C. § 78u-4(b)(2).

A “strong inference” of scienter may be established only through allegations “(1) showing that

the defendants had both motive and opportunity to commit the [alleged] fraud or (2) constituting

strong circumstantial evidence of conscious misbehavior or recklessness.” ATSI Commc’ns, 493

F.3d at 99; see also Kalnit v. Eichler, 264 F.3d 131, 138-39 (2d Cir. 2001). Mere speculation

and conclusory allegations are insufficient. See Wexner v. First Manhattan Co., 902 F.2d 169,

172 (2d Cir. 1990); Geiger v. Solomon-Page Group, Ltd., 933 F. Supp. 1180, 1188 (S.D.N.Y.

1996). Moreover, “a court must consider plausible nonculpable explanations for the defendant’s

conduct, as well as inferences favoring the plaintiff.” Tellabs, Inc., 551 U.S. at 324. The

PSLRA’s heightened pleading standard for scienter applies and, indeed, is particularly important

in market manipulation cases. ATSI Commc’ns, 493 F.3d at 102; see also In re Citigroup, 2009

WL 2914370, at *5. “A complaint will survive . . . only if a reasonable person would deem the

19 In addition, Anschutz cannot claim to have relied on allegedly misleading information

in the website disclosures or offering documents because Anschutz does not allege that it reviewed such information and a plaintiff cannot purport to have relied on information that it never received or read. See Adler v. Berg Harmon Assocs., 816 F. Supp. 919, 926 (S.D.N.Y. 1993). Nor can Anschutz base its claim on its own failure to review these documents. See Starr ex rel. Estate of Sampson v. Georgeson Shareholder, Inc., 412 F.3d 103, 109 (2d Cir. 2005) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”).


25

inference of scienter cogent and at least as compelling as any opposing inference one could draw

from the facts alleged.” In re Citigroup, 2009 WL 2914370, at *5 (internal citation and

quotation marks omitted).

(a) Legitimate Business Motivations, Including the Desire To Be Profitable and To Earn Fees, Do Not Create a Compelling Inference of Scienter.

In an effort to plead an inference of scienter, Anschutz alleges that Merrill Lynch was

motivated to commit fraud because its conduct “enabled [Merrill Lynch] to earn hundreds of

millions of dollars in underwriting fees.” (Am. Compl. ¶¶ 6, 46, 207.) These vague and

conclusory allegations, however, are insufficient to satisfy Rule 10b-5’s scienter requirement

because they merely recite the universal “motive” of corporations to improve their economic

prospects. See Kalnit, 264 F.3d at 139-42; Defer LP, 654 F. Supp. 2d at 217-18; In re Citigroup,

2009 WL 2914370, at *6. Nor are Anschutz’s allegations that Merrill Lynch sought to sell more

ARS or prevent auction failure sufficient to support an inference of scienter as these allegations

likewise present only legitimate business motives. See San Leandro Emergency Med. Group

Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 813-14 (2d Cir. 1996).

Indeed, to accept such generalized allegations of intent as sufficient would be akin to

“read[ing] the scienter element out of existence.” In re Merrill Lynch & Co., Research Reports,

289 F. Supp. 2d at 428. As the court made clear:

All firms in the securities industry want to increase profits and all individuals are assumed to desire to increase their compensation. Allegations such as these are inadequate to plead motive to commit a fraud on the market or the public under the securities laws and the Reform Act and will not be endorsed by this Court.

Id.

Because Anschutz has failed to allege that Merrill Lynch benefitted in some concrete and

personal way from the purported fraud—other than its mere desire to be profitable as a


26

business—its Section 10(b) claims must be dismissed for failure to plead scienter. See Defer LP,

654 F. Supp. 2d at 217-18.

(b) Anschutz Does Not Adequately Allege Conscious Misbehavior or Recklessness.

Where, as here, a complaint fails to allege motive adequately, “the strength of the

circumstantial allegations of conscious misbehavior or recklessness must be correspondingly

greater.” In re PXRE Group, Ltd., Sec. Litig., 600 F. Supp. 2d 510, 535 (S.D.N.Y. 2009).

Anschutz fails to allege that Merrill Lynch engaged in conduct that was “highly unreasonable

and which represents an extreme departure from the standards of ordinary care,” Defer LP, 654

F. Supp. 2d at 219, or that Merrill Lynch had “knowledge of facts or access to information

contradicting [its] public statements.” PXRE Group, 600 F. Supp. 2d at 535-36. Here, because

the facts about which Anschutz complains were disclosed by Merrill Lynch, see supra pp. 2-4

(detailing Merrill Lynch’s disclosure of the alleged omissions), “recklessness cannot be inferred

from the failure to disclose.” Kalnit, 264 F.3d at 143. Indeed, Merrill Lynch’s extensive

disclosures definitively refute any inference of scienter.

Moreover, the allegation that Merrill Lynch knew that, absent its participation, the ARS

auctions inevitably would fail is insufficient to establish scienter. Where “the alleged scheme

could not have succeeded, this alone precludes a finding of the required strong inference of

scienter . . . .” In re Geopharma Sec. Litig., 399 F. Supp. 2d 432, 451 (S.D.N.Y. 2005). Here,

the allegation that Merrill Lynch continued to accumulate ARS despite knowing that, unless

Merrill Lynch bid in the auction, there would be no market for them is illogical—acquiring

assets that it allegedly knew would become worthless is a scheme that could not have succeeded.

Merrill Lynch’s extensive ARS holdings belie a belief that the auctions would inevitably fail

absent its participation. See In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d 595, 621


27

(S.D.N.Y. 2005) (“It would have been unreasonable to conceal Enron’s financial weakness and

put billions at risk in furtherance of a fraud that garnered tens of millions in fees.”); Davidoff v.

Farina, 04 Civ. 7617, 2005 WL 2030501, at *11 n.19 (S.D.N.Y. Aug. 22, 2005) (“[I]t would

have made no economic sense for defendants to invest literally billions of dollars in a venture

that they knew would fail.”). Instead, the eventual collapse of the ARS market gives rise to a

“compelling inference that Defendants only engaged in bad (in hindsight) business judgments in

connection with ARS, and did not engage in the alleged conduct with an intent to deceive

investors.” In re Citigroup, 2009 WL 2914370, at *6.

(2) The Amended Complaint Fails To Adequately Allege Loss Causation.

To avoid dismissal, a complaint must allege loss causation—that plaintiff’s loss was

foreseeably caused by the materialization of the risk allegedly concealed by defendants. See

Lentell, 396 F.3d at 172-73; In re Citigroup, at *8. Here, the Amended Complaint fails to plead

loss causation for several reasons.20

First, the Second Circuit has explained that “when the plaintiff’s loss coincides with a

marketwide phenomenon causing comparable losses to other investors, the prospect that

plaintiff’s loss was caused by the fraud decreases, and a plaintiff’s claim fails when it has not

20 The Amended Complaint also fails to allege how temporary illiquidity has resulted in

any out-of-pocket economic loss. Similarly, punitive damages are not available for Rule 10b-5 claims. See Boguslavsky v. Kaplan, 159 F.3d 715, 721 (2d Cir. 1998) (“punitive damages are unavailable under the 1934 Act”). Nor is Anschutz entitled to rescissionary damages, which are not appropriate where plaintiffs cannot provide “any method by which a factfinder could determine what portion of [the alleged] loss is attributable to defendants’ fraud.” JSMS Rural LP v. GMG Capital Partners III, LP, No. 04 Civ. 8591, 2006 WL 1867482, at *4 (S.D.N.Y. July 6, 2006). Here, Anschutz cannot identify the portion of its alleged loss that is attributable to the alleged fraud, rather than to other causes such as the collapse of the broader ARS market, the general decline of the economy, or conduct or representations by Credit Suisse. Thus, permitting rescission “would almost certainly compensate [plaintiffs] for losses suffered for reasons other than the alleged fraud.” Id.


28

adequately ple[]d facts which, if proven, would show that its loss was caused by the alleged

misstatements as opposed to intervening events.” Lentell, 396 F.3d at 174-75 (internal citation

and quotation marks omitted). The Amended Complaint fails to plead with particularity that

Anschutz’s alleged loss was caused by the alleged fraud rather than by the general economic

collapse or the failure of all ARS markets (not only the ARS auctions managed by Merrill

Lynch). In fact, Anschutz’s alleged losses occurred in the context of the worst economic

environment since the Great Depression and would have occurred even without the misconduct

alleged by Plaintiff. On these facts, it will be impossible to prove loss causation. See In re

Merrill Lynch & Co. Research Reports Sec. Litig., 568 F. Supp. 2d 349, 363-64 (S.D.N.Y. 2008)

(holding that loss causation could not be proven where complaint did not account for broader

market downturn).

Second, Anschutz cannot allege that its alleged losses were caused by Merrill Lynch’s

alleged misstatements and omissions rather than the representations, omissions, or conduct of

Credit Suisse, through whom Anschutz purchased the Dutch Harbor and Anchorage ARS.

Anschutz does not allege that it purchased ARS through Merrill Lynch or even received

information regarding ARS from Merrill Lynch.21

21 In addition, the Amended Complaint alleges that Anschutz no longer holds the Dutch

Harbor and Anchorage ARS underwritten by Merrill Lynch. Instead, Anschutz alleges that it has suffered a loss because it has been unable to sell the Ambac preferred shares it now holds in any auction and because “Ambac discontinued payment of the dividends.” (Am. Compl. ¶ 194) (emphasis added). But Anschutz does not allege that Merrill Lynch manipulated the market for Ambac preferred shares or made any omissions with respect to those securities. Nor does Anschutz allege that Merrill Lynch was responsible for Ambac’s decision to discontinue its dividend payments. Thus, Anschutz has failed to allege that its losses were caused by Merrill Lynch’s alleged misconduct.


29

II. The Amended Complaint Fails To State a Claim for Control Person Liability Under Section 20(a).

“To establish a prima facie case of control person liability, a plaintiff must show (1) a

primary violation by the controlled person, (2) control of the primary violator by the defendant,

and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled

person’s fraud.” ATSI Commc’ns, 493 F.3d at 108. The Amended Complaint fails to establish a

prima facie case of control person liability because it fails to allege any primary securities

violation sufficiently. Rombach v. Chang, 355 F.3d 164, 177-78 (2d Cir. 2004).

In addition, despite its conclusory allegations that Merrill Lynch & Co., Inc. exercised

control over the alleged material omissions, the Amended Complaint fails to plead with

particularity any facts demonstrating conscious misbehavior by Merrill Lynch & Co., Inc. as a

culpable participant in the alleged fraud. See Mishkin v. Ageloff, No. 97 Civ. 2690, 1998 WL

651065, at *24-25 (S.D.N.Y. Sept. 23, 1998) (Preska, J.). The Amended Complaint merely

alleges that Merrill Lynch & Co., Inc. was motivated to allow material omissions regarding ARS

in order to earn corporate profits. (Am. Compl. ¶ 216.) As discussed above, however, such

motivation is shared by all companies and is insufficient as a matter of law to demonstrate the

requisite scienter. See supra p. 25.22

III. The Amended Complaint’s Securities Claims Are Time-Barred.

“[T]he statute of limitations period applicable to section 10(b) and Rule 10b-5 [is] the

earlier of ‘(1) two years after the discovery of the facts constituting the violation; or (2) 5 years

after such violation.’” In re GlaxoSmithkline PLC, 2006 WL 2871968, at *7 (internal citation

omitted). The limitations period begins upon inquiry notice (i.e., “storm warnings”) that a

22 In addition, as discussed above with respect to Anschutz’s disclosure claim, neither

punitive nor rescissionary damages are available. See supra note 20.


30

plaintiff does not investigate with reasonable diligence—that is, “when the circumstances would

suggest to an investor of ordinary intelligence the probability that she has been defrauded.” LC

Capital Partners, LP v. Frontier Ins. Group, Inc., 318 F.3d 148, 154 (2d Cir. 2003) (internal

citation and quotation marks omitted); Lentell, 396 F.3d at 168. When inquiry notice is apparent

from the complaint and papers “integral to the complaint,” the court “can readily resolve the

issue on a motion to dismiss.” Lentell, 396 F.3d at 168.

Because Anschutz filed this action on August 17, 2009, the statute of limitations bars its

federal securities law claims if any “storm warning” preceded August 17, 2007. On August 16,

2007, the previously disclosed risks of auction failure and illiquidity were realized when

Anschutz tried to sell Dutch Harbor ARS, but the auction failed. (Am. Compl. ¶ 192.) Because

Anschutz waited more than two years after this storm warning to file its action, its claims are

barred by the statute of limitations.

In addition, Anschutz received other storm warnings much earlier. As early as 2004,

information about the practice of submitting support bids in ARS auctions was publicly

available. (See Memorandum of Law in Support of Defendants’ Motion to Dismiss Lead

Plaintiffs’ First Amended Consolidated Class Action Complaint at 46-47, In re Merrill Lynch

Auction Rate Sec. Litig., No. 08 Civ. 3037 (Doc. No. 12)). The May 2006 SEC Order, which

was released to the public, further disclosed the role brokers played in affecting the auction

market. In August 2006, Merrill Lynch again put Anschutz on inquiry notice when it publicly

released the ARS Practices and Procedures. (Ex. A.) The offering circulars for the Merrill

Lynch Underwritten ARS similarly expressly put Anschutz on notice of Merrill Lynch’s role in

the ARS market, the possibility of illiquidity, and the risk of auction failures. (Exs. D, E.) In

addition, many publicly available articles described how the ARS auctions worked, including


31

that the auction manager could bid in the auctions, the auctions could fail, and the ARS market

could be rendered illiquid by such failures. See, e.g., Susanne Walker, Auction-Rate Securities:

Players: Heavier Retail Action Can Offset Strict View of FASB Rule, The Bond Buyer, Mar. 17,

2005 (Ex. G); Leone, supra, at 8 (Ex. B); SEC’s Haines wants more muni auction-rate scrutiny,

Reuters News, Sept. 29, 2006 (Ex. H). Such information has been deemed sufficient to provide

plaintiffs with inquiry notice as a matter of law. See, e.g., Shah v. Meeker, 435 F.3d 244, 249-

250 (2d Cir. 2006); Dodds v. Cigna Sec., Inc., 12 F.3d 346, 350-51 (2d Cir. 1993).

All of the information about which Anschutz now complains was available to the general

public, investors, and Anschutz more than two years before Anschutz filed this action on August

17, 2009. Because Anschutz was on inquiry notice before August 17, 2007, Anschutz’s federal

claims are barred by the two-year statute of limitations.

IV. The Amended Complaint Fails To State a Claim for Violations of California Corporate Securities Law.

Anschutz fails to state a claim against Merrill Lynch for violation of the California

Corporate Securities Law (“CSL”). As an initial matter, Anschutz does not allege that it was

injured in California from any conduct by Merrill Lynch. That is not surprising given that

Anschutz is based in Denver, Colorado and its only relevant contacts with California were its

dealings with its broker, Credit Suisse, which is not a party to this action. Moreover, Anschutz

does not allege that it communicated or interacted with anyone at Merrill Lynch in California (or

anywhere else) regarding the Merrill ARS or any other topic. Nor does Anschutz plead that

Merrill Lynch provided to Credit Suisse a contradictory or incorrect interpretation of the

Offering Materials or Merrill Lynch’s ARS Practices and Procedures, which Credit Suisse then

repeated to Anschutz in California. Absent any such well-pled allegations of California-based

conduct by Merrill Lynch, or allegations of an injury incurred by Anschutz in California as a


32

result of conduct by Merrill Lynch in California, as a matter of law, Anschutz cannot assert any

CSL claim against Merrill Lynch. See Norwest Mortgage, Inc. v. Superior Court, 72 Cal. App.

4th 214, 224-25 (Cal. Ct. App. 4th 1999) (non-California residents cannot assert California

statutory claims for injuries allegedly “caused by conduct occurring outside of California’s

borders, by defendants whose headquarters and principal places of operations are outside of

California”) (interpreting Diamond Multimedia Sys., Inc. v. Superior Court, 19 Cal. 4th 1036,

1063 (Cal. Sup. Ct. 1999) (“[S]ection 25400 regulates only manipulative conduct in California”)

(emphasis added)); see also, e.g., Churchill Village, L.L.C. v. General Elec. Co., 169 F. Supp. 2d

1119, 1126-27 (N.D. Cal. 2000) (“[B]eyond California’s presumption against the extraterritorial

application of its laws, a California court’s adjudication of non-residents’ claims that lack a

nexus with California ‘raises significant due process problems’”) (citing Norwest Mortgage, 72

Cal. App. 4th at 225).

Moreover, even if it were permitted to assert the claim, Anschutz’s allegations do not

state a CSL claim against Merrill Lynch. As an initial matter, Anschutz asserts that Merrill

Lynch violated CSL Sections 25500, 25501, and 25504 (Am. Compl. ¶¶ 225-235), and each

claim must meet the stringent pleading requirements of Rule 9(b). See, e.g., Wentner v.

Ridgewood Energy Corp., 62 F.3d 1427 (9th Cir. 1995) (dismissing CSL claims pursuant to Rule

9(b)); Kainos Labs., Inc. v. Beacon Diagnostics, Inc., No. C-97-4618, 1998 WL 2016634, at *12-

13 (N.D. Cal. Sept. 14, 1998) (same). The claims do not come close to meeting this high

pleading standard.

First, Section 25500 provides a claim against “[a]ny person who willfully participates in

any act or transaction in violation of Section 25400.” Here, Anschutz alleges that the underlying

Section 25400 violation is limited to subsections (b) and (d). (Am. Compl. ¶ 229.) Section


33

25400(b) prohibits effecting transactions to induce the purchase or sale of securities, and

25400(d) prohibits participating in any materially false or misleading statement to induce such

purchases or sales. Harold Marsh, Jr. & Robert H. Volk, Practice Under the Calif. Sec. Laws, §

14.05[2][d] (2008)). Moreover, the “purpose and intent of the willful participation requirement

is to clarify and underscore the high level of scienter required for a violation of section 25500.”

California Amplifier, Inc. v. RLI Ins. Co., 113 Cal. Rptr. 2d 915, 923 (Cal. Ct. App. 2d Dist.

2001) (emphasis added). As explained above, the Amended Complaint contains no

particularized allegations that Merrill Lynch engaged in any conduct to induce Anschutz to

purchase ARS, much less with a “high level of scienter.” As discussed in detail, Merrill Lynch

had no dealings with Anschutz whatsoever and publicly disclosed the risks about which

Anschutz complains. Anschutz has not alleged, and cannot allege, that Merrill Lynch induced its

investment.

Second, the Section 25501 claim, which provides for liability for violations of Section

25401, also is deficiently pled. Section 25401 is akin to Section 12(a)(2) of the Securities Act of

1933, in that it makes it “unlawful for any person to offer or sell a security in [California] . . . by

means of any written or oral communication which includes an untrue statement of a material

fact or omits to state a material fact necessary in order to make the statements made . . . not

misleading.” CSL § 25401. As discussed above, the Amended Complaint does not allege that

Merrill Lynch made any misleading statements to Plaintiff. Further, any claim under Sections

25401 and 25501 requires “strict privity” between the parties. See, e.g., Alameda v. Nuveen

Mun. High Income Opportunity Fund, No. C 08-4575, 2009 WL 1424529, at *11 (N.D. Cal.

May 20, 2009). Because Anschutz does not allege that it purchased any securities directly

through Merrill Lynch or that it otherwise lies in direct privity with Merrill Lynch, the claim


34

must fail.

Finally, Section 25504 provides for liability for persons or entities controlling those who

violate Sections 25401 and 25501. (Am. Compl. ¶ 235.) Because the underlying claims have

not been stated, the control-person claim fails as well.23

V. The Amended Complaint Fails To State a Claim for Common Law Fraud.

Plaintiff has not stated a common law fraud claim against Merrill Lynch, as the Amended

Complaint contains no particularized allegations of: (1) either a material omission coupled with a

duty to disclose or a fraudulent misrepresentation of material fact, (2) scienter, (3) reasonable

reliance, (4) proximate cause, or (5) damages. See Nielson v. Scott, 53 P.3d 777, 779-80 (Colo.

Ct. App., Div. II 2002). Common law fraud claims also must be pled with particularity pursuant

to Rule 9(b) and, thus, a plaintiff must allege facts that give rise to a strong inference of

fraudulent intent. Edison Fund v. Cogent Inv. Strategies Fund, Ltd., 551 F. Supp. 2d 210, 232

(S.D.N.Y. 2008). “Because [the elements of common law fraud] are substantially identical to

those governing § 10(b), the identical analysis applies.” Rich v. Maidstone Fin., Inc., No. 98

Civ. 2569, 2002 WL 31867724, at *13 (S.D.N.Y. Dec. 20, 2002) (internal citation omitted); see

also In re Qwest Commc’ns Int’l, Inc. Sec. Litig., 387 F. Supp. 2d 1130, 1153 (D. Colo. 2005).

Accordingly, Anschutz’s common law fraud claim must be dismissed for the reasons discussed

above.24

23 Also, for the reasons previously discussed, supra pp. 29-31, Anschutz’s CSL claims

are time barred. See CSL § 25506(b) (two year statute of limitations for CSL claims). 24 Punitive damages are not available for common law fraud unless a “defendant’s

wrongdoing is not simply intentional but evince[s] a high degree of moral turpitude and demonstrate[s] such wanton dishonesty as to imply a criminal indifference to civil obligations.” Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 489 (2007) (internal citations and quotations omitted). Anschutz has not alleged that those circumstances are met here and, thus, its request for punitive damages should be denied.


35

CONCLUSION

For the reasons set forth above, Merrill Lynch respectfully requests that the Court dismiss

the Amended Complaint in its entirety. Because Anschutz has already amended its complaint

after receiving letters from defendants enumerating the original Complaint’s deficiencies and

because the deficiencies discussed herein cannot be cured by further amendment, Merrill Lynch

respectfully requests that the dismissal of the Amended Complaint be with prejudice.

Dated: April 13, 2010 New York, New York s/ Barry J. Mandel Barry J. Mandel ([email protected]) Jonathan H. Friedman ([email protected]) Foley & Lardner LLP 90 Park Avenue New York, NY 10016 (212) 682-7474 (212) 682-2329 (facsimile) Attorneys for Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated


Documents

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF … -- motion dismiss.pdfunited states district court southern district of new york -----x in re merrill lynch auction : master case