12-2735-cv

Iconix Brand Grp. Inc. v. Merrill Lynch, Pierce, Fenner & Smith Inc.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A

SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY

FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN

CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE

EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION

“SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY

PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at

the Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New

York, on the 10th day of December, two thousand twelve.

PRESENT: JOSÀ A. CABRANES,

REENA RAGGI,

SUSAN L. CARNEY,

Circuit Judges.

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ICONIX BRAND GROUP INCORPORATED,

Plaintiff-Appellant,

v. No. 12-2735-cv

MERRILL LYNCH, PIERCE, FENNER & SMITH

INCORPORATED,

Defendant-Appellee.

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APPEARING FOR APPELLANT: CHARLES M. MILLER (Marc E. Kasowitz, on

the brief), Kasowitz, Benson, Torres & Friedman

LLP, New York, New York.

APPEARING FOR APPELLEES: TIMOTHY P. BURKE (Mary Gail Gearns, on the

brief), Bingham McCutchen LLP, Boston,

Massachusetts & New York, New York.

Appeal from a judgment of the United States District Court for the Southern District

of New York (Loretta A. Preska, Chief Judge).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND

DECREED that the judgment entered on June 7, 2012, is AFFIRMED.

This appeal arises from the latest decision, see In re Merrill Lynch ARS Litig. (Merrill

V), Nos. 09-MD-2030; 10-CV-0124, 2012 WL 1994707 (S.D.N.Y. June 4, 2012), by Chief

Judge Preska in Multidistrict Litigation concerning the activities of defendant Merrill Lynch,

Pierce, Fenner & Smith (“Merrill Lynch”) with respect to auction rate securities (“ARS”). 

See generally In re Merrill Lynch ARS Litig. (Merrill IV), 851 F. Supp. 2d 512 (S.D.N.Y.

2012); In re Merrill Lynch ARS Litig. (Merrill III), No. 09-MD-2030, 2011 WL 536437

(S.D.N.Y. Feb 9, 2011), aff’d by Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98 (2d

Cir. 2012); In re Merrill Lynch ARS Litig. (Merrill II), 758 F. Supp. 2d 264 (S.D.N.Y. 2010);

In re Merrill Lynch ARS Litig. (Merrill I), 704 F. Supp. 2d 378 (S.D.N.Y. 2010), aff’d in part

by Wilson v. Merrill Lynch & Co., 671 F.3d 120, 128 (2d Cir. 2011); In re Merrill Lynch

ARS Litig., No. 09-MD-2030, 2010 WL 532855 (S.D.N.Y. Feb. 8, 2010), aff’d by Louisiana

Stadium & Exposition Dist. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 626 F.3d 156, 157

(2d Cir. 2010).

Plaintiff Iconix Brand Group Inc. (“Iconix”) filed the instant action against Merrill

Lynch on January 7, 2010, asserting claims under Section 10(b) of the Securities Exchange

Act of 1934 (“Section 10(b)” or “§ 10(b)”) and corresponding Rule 10b-5 of the Securities

and Exchange Commission, see 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; and for common

law fraud and negligent misrepresentation. We review de novo these claims’ dismissal under

Rule 12(b)(6), “accepting all factual claims in the complaint as true, and drawing all

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reasonable inferences in the plaintiff’s favor.” Famous Horse Inc. v. 5th Ave. Photo Inc., 624

F.3d 106, 108 (2d Cir. 2010). “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.” Aschroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted). A

complaint alleging securities fraud must also satisfy the heightened pleading requirements

set forth in Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act of 1995, see

15 U.S.C. § 78u-4(b). We assume the parties’ familiarity with the underlying facts and

procedural history of the case, which we reference only as necessary to explain our decision

to affirm.

1. Section 10(b)

In its brief to the district court, Iconix supported its securities fraud claim by citing

alleged misrepresentations and omissions related to ARS suitability, liquidity, and safety.

This argument relied in part on allegations that Merrill Lynch did not disclose that it placed

“support bids” at ARS auctions which prevented auction failure and concealed the illiquidity

of the securities. Incorporating the “entirety [of] its misstatement/omission analysis” from

Merrill IV, see Merrill V, 2012 WL 1994707, at *3, Chief Judge Preska considered Iconix’s

securities fraud claims to be based on allegations that Merrill Lynch’s “market activities

created a false appearance of liquidity,” which “artificially inflated prices paid for ARS,”

Merrill IV, 851 F. Supp. 2d at 525. Chief Judge Preska noted that in prior cases, Merrill

Lynch asserted that it had made website disclosures that relieved it of liability against such

claims and that Iconix’s § 10(b) and Rule 10b-5 claims were “analogous in all material legal

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respects” to the situation presented in those earlier lawsuits, all of which had been dismissed. 

Merrill V, 2012 WL 1994707, at *3. In addition, Chief Judge Preska concluded that Iconix

made “no new argument[s] about the sufficiency of [Merrill Lynch’s] disclosures [or] with

respect to [other § 10(b) elements] scienter, reliance, or loss causation.” Id.; see generally

Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008) (listing

elements); Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333, 337 (2d Cir. 2011) (same). 

Accordingly, she dismissed Iconix’s § 10(b) and Rule 10b-5 claims with prejudice.

On appeal, Iconix disavows any claim based on the adequacy of Merrill Lynch’s

disclosures relating to ARS liquidity or its role in the auction process. Iconix now submits

that Chief Judge Preska erred by failing to consider its allegations that Merrill Lynch

misrepresented the collateral for the ARS issuance that is the subject of this lawsuit

(“Anchorage ARS”). Specifically, Iconix contends that Merrill Lynch represented that ARS

were collateralized by A1- and P1-rated short-term assets while failing to disclose that the

issuer of the Anchorage ARS retained a “put” option enabling it to liquidate this highly rated

collateral, receive the proceeds of that liquidation, and substitute its own preferred equity for

the purchased securities. Even if certain allegations in Iconix’s complaint might liberally be

construed to advance such a theory, this argument was not raised in Iconix’s brief before the

district court. We therefore decline to consider it now in the first instance. See In re Nortel

Networks Corp. Sec. Litig., 539 F.3d 129, 132 (2d Cir. 2008) (“It is a well-established

general rule that an appellate court will not consider an issue raised for the first time on

appeal.” (internal quotation marks omitted)); Caiola v. Citibank, N.A., 295 F.3d 312, 327–28

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(2d Cir. 2002) (holding argument that equity swaps were covered by § 10(b) and Rule 10b-5

forfeited because “issue was not properly raised below” and no injustice would result).1

Even if we were to consider this defaulted claim, however, it would fail on the merits

for lack of reasonable reliance. See Bertin v. United States, 478 F.3d 489, 491 (2d Cir. 2007)

(reiterating that we may “affirm on any basis for which there is a record sufficient to permit

conclusions of law, including grounds upon which the district court did not rely” (internal

quotation marks omitted)). It is undisputed that the purportedly secret “put” option is

unambiguously disclosed on the first page of the relevant offering memorandum and then

explained in greater detail throughout that document. Insofar as Iconix suggests it did not

receive the offering memorandum until after it purchased the Anchorage ARS, that raises,

at most, a question of actual reliance, but it hardly demonstrates that such reliance was

justifiable. To protect itself, Iconix simply had to request this important document before

acquiescing in a $13 million purchase of unregistered securities that it knew were salable

only to Qualified Institutional Buyers. See Emergent Capital Inv. Mgmt., LLC v. Stonepath

Grp., Inc., 343 F.3d 189, 195 (2d Cir. 2003) (discussing authority holding justifiable reliance

defeated where “buyer should have, and easily could have, protected itself from

misrepresentation by demanding that it see [a] report prior to a closing”).

The same result obtains regardless of whether Iconix may be deemed sophisticated

1

 Insofar as Iconix relies on Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308

(2007), to fault the district court for not “consider[ing] the complaint in its entirety,” id. at

322, that statement by the Supreme Court relates to assessing whether a plaintiff has

adequately pleaded scienter, not an actionable misrepresentation. 

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with respect to complex financial instruments. See Brown v. E.F. Hutton Grp., Inc., 991 F.2d

1020, 1032–33 (2d Cir. 1993) (holding § 10(b) plaintiffs’ “asserted reliance on the brokers’

alleged oral statements, without further inquiry, [to be] reckless and unjustifiable,”

notwithstanding assumptions that plaintiffs were “unsophisticated investors and that the

brokers initiated the transactions”). Reviewing the offering memorandum would have

warned any minimally diligent investor of the risk that the Anchorage ARS could be

transformed into preferred equity of the issuer and thus that the securities might be unsuitable

for that reason. Moreover, Iconix had already purchased ARS from Merrill Lynch in June

2007, nearly two months before the August 2, 2007 purchase in question. A review of

Merrill Lynch’s generic ARS disclosures at that time would have referred Iconix to the

relevant offering memorandum for details about a particular issuance. 

Accordingly, Iconix’s Section 10(b) claim was properly dismissed.

2. Common Law Fraud

Iconix also appeals the dismissal of its common law fraud claim. Because the parties

agree with Chief Judge Preska’s statement that the “elements of common law fraud 

essentially mirror those involved in [a] section 10(b) claim[],” Merrill V, 2012 WL 1994707,

at *3, we conclude that this claim also was properly dismissed.

3. Negligent Misrepresentation

Finally, Iconix appeals the dismissal of its common law negligent misrepresentation

claim. Adhering to the weight of authority at the time, Chief Judge Preska held that this

claim was preempted by New York’s Martin Act, see N.Y. Gen Bus. Law § 352-c (“Martin

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Act”), and dismissed it without reaching the merits, see Merrill V, 2012 WL 1994707, at

*6–7. The New York Court of Appeals recently held, however, that a common law claim

“that is not entirely dependent on the Martin Act for its viability” is not preempted by that

statute. Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., 18 N.Y.3d 341, 352

(2011). Accordingly, the parties agree that preemption does not apply here.

We need not decide whether Merrill Lynch had the type of “special” or fiduciary

relationship with Iconix that might predicate a negligent misrepresentation claim, cf. United

States v. Wolfson, 642 F.3d 293, 295 (2d Cir. 2011) (noting that “absence of a discretionary

account does not mean that no fiduciary duty exists”), because Iconix’s claim fails in any

event. A plaintiff claiming negligent misrepresentation under New York law must

adequately allege, among other elements, justifiable reliance. See Anschutz Corp. v. Merrill

Lynch & Co., 690 F.3d at 114. Iconix having not plausibly alleged this particular element,

its negligence claim fails for the same reason as do its fraud claims. 

4. Conclusion

We have considered Iconix’s other arguments and conclude that they are without

merit. The judgment of the district court is AFFIRMED.

FOR THE COURT: 

CATHERINE O’HAGAN WOLFE, Clerk of Court

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