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From Securities Regulation Daily, April 18, 2014

Investor failed to show Bear Stearns brokers had duty to warn about liquidity problems

By Rodney F. Tonkovic, J.D.

A fraud action arising out of a purchaser's refusal to pay for shares of the Bear Stearns Company, Inc. (Bear Stearns) has been dismissed. The plaintiff bought shares in Bear Stearns on the same day that, unbeknownst to her, the company issued a press release announcing the deterioration of its liquidity position. The plaintiff brought state and federal fraud claims based on representations made to her by Bear Stearns employees (Wang v. Bear Stearns Cos., April 16, 2014, Sweet, R.).

Background. Plaintiff Vivine Wang purchased 150,000 Bear Stearns shares between March 6, 2008 and March 14, 2008 through a Bear Stearns brokerage account. In late February 2008, Wang and her husband, acting on the advice of Joe Y. Zhou, a Bear Stearns employee, opened an account at Bear Stearns. Wang's husband then began to place verbal orders for Bear Stearns common stock.

On March 11, 2008, Wang's husband attended a meeting with a senior managing director at Bear Stearns who told him that the company was financially sound and that the Wangs should buy as much Bear Stearns stock as possible. Around this time, rumors had begun to circulate regarding Bear Stearns's liquidity. Clients began to pull their funds, and on the evening of March 14, 2008, in order to have sufficient financing to open for business, Bear Stearns negotiated with JPMorgan for a $30 billion funding facility. The next day, Bear Stearns issued a press release announcing the deterioration of its liquidity position as well as the secured loan from JPMorgan.

On March 14, Wang's husband, unaware of the press release, placed a verbal order for 200,000 shares of Bear Stearns. The order was partially filled at $34 per share. Zhou did not caution or advise the Wangs against buying more stock. On March 16, 2008, Bear Stearns announced that it would be purchased by JPMorgan for the equivalent of $2 a share. The Wangs immediately stopped payment on the wire transfer for their final trades.

Wang's husband filed complaints in California state court and in the District Court for the Central strict of California. Both were transferred to the Southern District of New York and consolidated with related pending actions. Bear Stearns eventually settled with the class action plaintiffs. Vivine Wang chose to opt-out of the class action settlement, but her husband did not.

Fraud allegations fail. The court first found that the Exchange Act fraud allegations failed to allege fraud with the required particularity. According to the court, the complaint did not allege any affirmative misstatements by Zhou. The complaint alleged no duty on Zhou's part to advise or caution Wang about her purchases, and absent a duty to disclose, an omission is not misleading. Wang also maintained that Zhou should have warned her not to purchase stock on March 14, 2008, in light of the announcement earlier that day concerning Bear Stearns's liquidity. The court, however, pointed to the customer agreement signed by Wang, which disclaimed any fiduciary duties arising out of Bear Stearns's brokerage activities.

Next, Wang alleged that Zhou was motivated to commit fraud by the prospect of earning commission. The court found that there was no indication that Zhou earned any greater commissions from the trades at issue that from other transactions with Wang, and that the allegations was too generalized to give rise to a strong inference of scienter. Additionally, there were no allegations that Zhou possessed any material information about Bear Stearns's financial condition that had not been publicly disclosed.

The complaint also failed to allege that Zhou made any material omissions since the substance of the alleged omission had been disclosed to the market at the time of the purchases. Additionally, the court found that the statements made by the senior managing director were generic statements of opinion and inactionable corporate optimism. There was also no evidence from which to infer that the director did not believe what he said.

State law violations. Wang also asserted claims for securities fraud under the California Corporations Code. The court found, however, that these claims were barred by the relevant provisions' two-year statute of limitations. The court concluded that Wang discovered her claims on March 16, 2008, when Bear Stearns announced its merger with JPMorgan, but the complaint was not filed until March 29, 2011. Tolling did not apply because American Pipe is not the law in California and because Zhou and the director were not placed on notice by the filing of the class action.

Next, Wang's state law breach of fiduciary duty and common law fraud claims failed for the same lack of particularity as the federal fraud claims. The court similarly found that Zhou had no duty under California law to warn against additional purchases of stock. The complaint's conspiracy claims failed because they were time-barred and because they failed to state a claim.

The case is No. 11 Civ. 5643.

Attorneys: Jeremy A. Rhyne (Ghods Law Firm) for Vivine H. Wang. Brad Scott Karp (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for The Bear Stearns Companies LLC, JP Morgan Securities LLC and JP Morgan Clearing Corp. Antony L. Ryan (Cravath, Swaine & Moore LLP) for Deloitte and Touche LLP.

Companies: The Bear Stearns Companies LLC; JP Morgan Securities LLC; JP Morgan Clearing Corp.; Deloitte and Touche LLP

MainStory: TopStory FraudManipulation BrokerDealers InvestmentAdvisers CaliforniaNews NewYorkNews

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