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December 11, 2012


FRAUD AND MANIPULATION-2ndCir: Allegedly Secret "Put" Option Was Unambiguously Disclosed In Offering Documents

By Rodney F. Tonkovic, J.D.

In a ruling by summary order and without precedential effect, the Court of Appeals for the Second Circuit affirmed a district court (SD NY) judgment. The appeal arose from the latest decision in the multidistrict litigation concerning Merrill Lynch, Pierce, Fenner & Smith's (Merrill Lynch) practices with respect to auction rate securities (ARS). The complaint alleged that Merrill Lynch had made misrepresentations and omissions related to ARS suitability, liquidity, and safety. The plaintiff, Iconix Brand Group Inc., argued in particular that Merrill Lynch failed to disclose that it placed "support bids" at ARS auctions in order to prevent auction failure and conceal the illiquidity of the securities. (Iconix Brand Group Incorporated v. Merrill Lynch, Pierce, Fenner & Smith Incorporated, December 10, 2012, before Cabranes, J., Raggi, R., and Carney, S.)

The district court dismissed Iconix's Exchange Act fraud claims with prejudice. According to Chief Judge Preska, in prior cases, Merrill Lynch asserted that it had made disclosures on its website that relieved it of liability for misstatement and market manipulation claims based on purchases made after the website disclosure was posted, and the claims in this action were analogous to those in the earlier proceedings, which had been dismissed. The judge concluded further that Iconix had made no new arguments regarding the sufficiency of the disclosures or with respect to the other elements of a fraud claim.

On appeal, Iconix contended that the district court erred by failing to consider its allegations that Merrill Lynch misrepresented the collateral for the contested ARS issuance. Specifically, Iconix argued that Merrill Lynch made representations about the ARSs collateral but failed to disclose that the issuer retained a "put" option allowing it to liquidate the highly-rated collateral, receive the proceeds of that liquidation, and substitute its own preferred equity.

The appellate court declined to consider this argument because it was raised for the first time on appeal. Even if it were to consider the claim, the panel found that it would fail for lack of reasonable reliance. According to the panel, the allegedly secret "put" option was unambiguously disclosed on the first page of the relevant offering memorandum and then explained in greater detail in other parts of that document. "Reviewing the offering memorandum would have warned any minimally diligent investor of the risk that the auction rate securities could be transformed into preferred equity of the issuer and thus that the securities might be unsuitable for that reason," the panel stated. The panel then found Iconix's other arguments to be without merit and affirmed the judgment of the district court.

No. 12-2735-cv

Charles M. Miller (Kasowitz, Benson, Torres & Friedman LLP) for Iconix. Timothy P. Burke (Bingham McCutchen LLP) for Merrill Lynch.

FraudManipulation NewYorkNews

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