The original Complaint alleges that Merrill Lynch violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by deceiving investors about the investment characteristics of auction rate securities and the auction market in which these securities traded. Auction rate securities are either municipal or corporate debt securities or preferred stocks which pay interest at rates set at periodic “auctions.” Auction rate securities generally have long-term maturities or no maturity dates.
The Complaint alleges that, pursuant to uniform sales materials and top-down management directives, Merrill Lynch offered and sold auction rate securities to the public as highly liquid cash-management vehicles and as suitable alternatives to money market mutual funds. According to the Complaint, holders of auction rate securities sold by Merrill Lynch and other broker-dealers have been unable to liquidate their positions in these securities following the decision on February 13, 2008 of all major broker-dealers including Merrill Lynch to “withdraw their support” for the periodic auctions at which the interest rates paid on auction rates securities are set.
The Complaint alleges that Merrill Lynch failed to disclose the following material facts about the auction rate securities it sold to the class: (1) the auction rate securities were not cash alternatives, like money market funds, but were instead, complex, long-term financial instruments with 30 year maturity dates, or longer; (2) the auction rate securities were only liquid at the time of sale because Merrill Lynch and other broker-dealers were artificially supporting and manipulating the auction rate market to maintain the appearance of liquidity and stability; (3) Merrill Lynch and other broker-dealers routinely intervened in auctions for their own benefit, to set rates and prevent all-hold auctions and failed auctions; and (4) Merrill Lynch continued to market auction rate securities as liquid investments after it had determined that it and other broker dealers were likely to withdraw their support for the periodic auctions and that a “freeze” of the market for auction rate securities would result.
On October 31, 2008, Judge Loretta A. Preska consolidated the actions under the caption In re Merrill Lynch Auction Rate Securities Litigation, Master Case File No. 08-cv-3037 (LAP). Further, Judge Preska appointed Gerald Wendel and Robert Berzin as lead plaintiffs and approved the lead plaintiffs' selection of Girard Gibbs LLP as lead counsel for the class. On December 10, 2008, the lead plaintiffs filed a Consolidated Class Action Complaint. The defendants responded by filing a motion to dismiss the Consolidated Class Action Complaint. Before any ruling, the plaintiffs again amended their complaint and filed a First Amended Consolidated Class Action Complaint. On June 12, 2009, the case was accepted as related and coordinated with Multidistrict Litigation, 1:09-md-02030-LAP. On June 19, 2009, Gerald Wendel and Robert Berzin withdrew as lead plaintiffs and were replaced with Plaintiffs Colin Wilson, Ronald Levy, and Michael Bonde. On July 24, 2009, the defendants filed a motion to dismiss the First Amended Consolidated Class Action Complaint. On March 31, 2010, Judge Loretta A. Preska granted the defendants’ motion to dismiss and dismissed the action with prejudice. The Clerk’s Judgment was entered and the case closed. All pending motions have been denied as moot.
On April 22, 2010, the plaintiffs filed a Notice of Appeal in the Second Circuit Court of Appeals.
According to a press release dated November 14, 2011, in the first decision of its kind stemming from class action litigation over the collapse of the auction-rate securities market, a federal appeals court panel in New York ruled Monday that Merrill Lynch & Co. had adequately disclosed to customers that it was preventing auctions from failing. The U.S. Court of Appeals for the Second Circuit rejected a bid to reinstate a securities fraud class-action suit filed by investors against Merrill Lynch, now Bank of America Merrill Lynch. A lower court dismissed the case last year after deciding Merrill’s disclosures were sufficient. The appeals court’s affirmation of the lower court’s ruling is a blow to the Securities and Exchange Commission, which had urged the suit be reinstated. The case had pitted the SEC against the Securities Industry and Financial Markets Association in friend-of-the-court briefs. But in its 33-page decision in Colin Wilson v. Merrill Lynch, the three-judge panel concluded “the conduct alleged to be manipulative was sufficiently disclosed to market participants so as to preclude plaintiff’s claim.”