Opinion ID: 617086
Heading Depth: 3
Heading Rank: 2

Heading: Wilson's Claim

Text: The district court held that the publicly disclosed information about Merrill's bidding practices was sufficient to defeat the allegation that these practices sent a false pricing signal to the market. Merrill, 704 F.Supp.2d at 391-93. On appeal, Wilson argues that Merrill's disclosures were incomplete or misleading and, as such, do not preclude his manipulation claim. Merrill's disclosures, according to Wilson, omitted the following material facts: First, Merrill did not periodically or even routinely submit support to prevent individual auctions from failing. Instead, it did so as a matter of course in every single auction in which it was the sole or lead auction dealer under a tacit or express understanding with the issuers of [Merrill] ARS that Merrill would systematically support the auction rate securities market. Second, Merrill knew with certainty that there was insufficient investor demand, and that the market would fail unless it placed support bids. Third, Merrill bid not out of a desire to increase its own inventory, but rather to create a false impression of demand. Fourth, Merrill's bids were not designed to reflect the market for [Merrill] ARS, but to sustain it, as Merrill increased interest rates to attract buyers, in a desperate attempt to keep the market afloat for as long as possible. Wilson Br. at 28-29 (citations omitted). [6] For the following reasons, we find no error in the district court's conclusion that Merrill's disclosures of its support bidding practices sufficed to preclude Wilson's claim that these practices were manipulative. As an initial matter, there can be no dispute that the general phenomenon of ARS dealers placing bids to prevent failed auctions ( i.e., support bidding) was publicly disclosed by the time that Wilson purchased his ARS in July 2007. The 2006 SEC Order, for example, noted that certain ARS dealers had submitted bids to ensure that all of the securities would be purchased to avoid failed auctions and thereby, in certain instances, affected the clearing rate. App. 117. The Order faulted the dealers for inadequate disclosures of their bidding practices, but made clear that dealers were permitted to bid for their own accounts as long as that bidding was properly disclosed. Pursuant to the 2006 SEC Order, Merrill posted on its website a document disclosing its then-current auction bidding practices. As noted above, this document included the disclosures that (1) Merrill is permitted, but not obligated, to submit orders in auctions for its own account; (2) Merrill routinely places such orders in its sole discretion; (3) Merrill may routinely place one or more bids in an auction for its own account for several purposes, including to prevent an auction failure; (4) due to the possibility that Merrill would place such bids for this purpose, the fact that an auction clears successfully does not mean that an investment in the securities involves no significant liquidity or credit risk; and (5) in the absence of Merrill. . . bidding in the auction for its own account or encouraging others to bid, there might not be sufficient demand to prevent auction failure. Id. at 102-05. These disclosures revealed, at the very least, the possibility that Merrill would place support bids in some auctions that it managed and that in the absence of these bids, some of these auctions might fail. Wilson nonetheless contends that these disclosures were incomplete and misleading because they failed to apprise investors of the extent to which the market for Merrill ARS was dependent on Merrill's continued placement of support bids. Wilson's argument in this regard has two related facets: first, that Merrill understated the likelihood that it would place support bids; and second, that Merrill should have made clear that in the absence of its placement of such bids, the market for Merrill ARS was certain to collapse. This argument, we conclude, goes beyond what the well-pleaded allegations in Wilson's complaint can sustain. As noted, Wilson's brief on appeal faults Merrill for not disclosing its intention to place support bids in every single auction in which it was the sole or lead auction dealer. Wilson Br. at 28. That formulation, however, is difficult to reconcile with what is alleged in Wilson's complaint. To be sure, the complaint does contain the allegation that Merrill had a policy of placing support bids in every auction for Merrill ARS, Compl. ¶ 5, and also sets forth certain other averments suggesting that Merrill's practice of support bidding was unqualified, e.g., id. ¶ 49 (Merrill failed to disclose to investors that it invariably placed support bids in every auction for which it was the sole or lead auction dealer during the Class Period to prevent auction failures.). However, other factual allegations regarding Merrill's support bidding practices are phrased in terms that limit the circumstances in which Merrill was said to have engaged in this alleged activity. See, e.g., id. ¶ 44 (Throughout the Class Period, Merrill used its own capital to routinely place `support bids' in every auction in which it served as the sole auction dealer or as the lead auction dealer in multi-dealer auctions. (emphasis added)); id. ¶ 46 (Until August 2007, Merrill followed a uniform policy of placing support bids if needed to prevent auction failures in every auction for which it was sole or lead auction dealer. (emphasis added)); id. ¶ 58 (during the Class Period, Merrill never disclosed that it maintained a policy of placing support bids as needed to suppress auction failures in every auction for which it served as sole or lead auction dealer (emphasis added)). The inconsistencies in the complaint as to this critical allegation undermine the force of Wilson's contention that the corresponding disclosures were misleading. Even if we were to construe the complaint as attempting to plead that Merrill, at least for a time, placed support bids in every single auction for Merrill ARS, we do not see how that allegation can be actionable given Merrill's disclosure that it may routinely place such bids. Merrill's statement that it may routinely place support bids is not inconsistent with the possibility that it would place such bids in every Merrill ARS auction that took place over a particular period. While Wilson reads the word may as speaking to the likelihood that Merrill would place support bids, an investor could more easily understand the word as disclosing merely that Merrill was permitted, but not required, to place bids for its own account to prevent an auction from failing. See Webster's Third New International Dictionary 1396 (2002) (defining may to mean, inter alia, have permission to, have liberty to, and be in some degree likely to). And the word routinely, which has been defined to mean of a commonplace or repetitious character, id. at 1981, is consistent with the frequency of intervention that Wilson alleges. Far from asserting that Merrill has invariably and at all times placed such bids, the complaint acknowledges that Merrill allowed a limited number of [Merrill] ARS auctions to fail in August 2007, Compl. ¶ 68, and that Merrill entirely withdrew its support of the ARS market in February 2008, id. ¶ 103. If Merrill's intention was, as Wilson alleges, to place support bids in every single auction unless it decided to let certain auctions fail or withdraw from the market altogether, we think that Merrill fairly disclosed that intention by stating that it may routinely place such bids. Similarly, the complaint fails to allege, as Wilson asserts on appeal, that Merrill knew with certainty that each Merrill ARS auction would fail if Merrill did not intervene. While the complaint recites that between January 3, 2006 and May 27, 2008, Merrill placed support bids to prevent more than 5,800 auctions from failing, id. ¶ 47, the complaint does not provide the total number of auctions of Merrill ARS that were held over that period so as to enable an inference to be drawn about the dependence of these auctions on support bidding. And although the complaint's allegation that 87% of ARS auctions failed following the withdrawal of support by Merrill and other ARS dealers certainly suggests that support bidding was significant to the overall viability of the ARS market, the corollary that 13% of auctions nonetheless succeeded is inconsistent with Merrill's alleged knowledge with certainty that support bids were necessary for the success of every auction. More generally, to the extent that Wilson's complaint includes allegations that Merrill knew that the ARS market was unsustainable, that knowledge is not alleged to have arisen until the fall of 2007, id. ¶ 135, i.e., after Wilson had purchased his ARS in July 2007, the credit market had deteriorated, and Merrill and other dealers had allowed some ARS auctions to fail. Taken together, these allegations do not support the inference that Merrill knew, at the time of Wilson's purchase, that the ARS market was certain to fail in the absence of its intervention. [7] We address next Merrill's alleged conduct in allowing the ARS trading desk to pressure the purportedly independent research department into publishing reports that downplayed the risks of ARS. Wilson does not claim that he relied on these research reports, nor does he assert that he was aware of any other statement attributable to Merrill regarding ARS at the time of his purchase. However, even in the absence of Wilson's direct reliance on Merrill's communications to ARS investors, these reports would lend support to his claim to the extent that they masked the dependence of the market on Merrill's continued interventions. Cf. Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d Cir.2000) (declining to affirm dismissal of Section 10(b) misrepresentation claim on basis that truthful information had been disclosed to the market where the record did not indicate whether those disclosures were conveyed with sufficient `intensity and credibility' as to dispel the false impression created by [the] alleged misrepresentations). But because all of Wilson's allegations regarding the research reports pertain to matters taking place in August 2007 and thereafter, these reports could not possibly have sent a false signal to the market as of Wilson's July 2007 purchase of securities. In any event, as the district court noted, some of these research reports actually disclosed that ARS dealers would typically enhance liquidity by engaging in market support activities, although the dealers were not required to do so. See Merrill, 704 F.Supp.2d at 401. Wilson's manipulation claim also appears to rest on his allegation that Merrill failed to disclose its true purposes for intervening in the auctions that it managed. Wilson avers that Merrill placed bids in its auctions not to reflect the market for the ARS or to increase its holdings of ARS, but rather to create a false impression of demand, to sustain the market as long as possible, and to meet certain limits on its own inventory. Relatedly, he faults Merrill for failing to disclose its internal assessment that the ARS market was collapsingalthough we note that Wilson does not claim that Merrill had come to this view by the time he purchased his securities in July 2007. We do not think these are the sorts of omissions that can sustain Wilson's claim that Merrill's support bidding was manipulative. Here, Merrill disclosed that it would routinely bid on its own account and that it may routinely place such bids for the purpose of preventing auctions from failing, and it warned investors that its bidding might affect the clearing rate or the success of particular auctions. These disclosures suffice, in the circumstances of this case and at times relevant to Wilson's allegations, to prevent Merrill's alleged policy of support bidding from sending a false signal to the ARS market. Given Merrill's statements that it believed itself to be at liberty to engage in this market activity and its discussion of the possible consequences of this activity on the price and liquidity of ARS, its alleged motivations for placing support bids and its internal assessment of the viability of the ARS market do not render the disclosed practices manipulative. [8] Finally, we note that our conclusion that Merrill's disclosures preclude Wilson's market manipulation claim is fully consistent with, if not compelled by, this court's decision in Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333 (2d Cir.2011). There, the plaintiffs (collectively, Ashland)a global chemical company that is a sophisticated investorpurchased student loan-backed ARS (SLARS) brokered by Morgan Stanley based on the allegedly misleading advice of a Morgan Stanley financial advisor. Ashland claimed that Morgan Stanley materially misrepresented the liquidity of the SLARS that Ashland purchased, thus violating Section 10(b) of the Exchange Act and Rule 10b-5. In particular, Ashland alleged that the financial advisor falsely assured it that SLARS were safe, liquid instruments and downplayed the possibility of auction failures. Id. at 335-36 (internal quotation mark omitted). Ashland also maintained that Morgan Stanley failed to disclose, inter alia, how often demand failed to meet supply in . . . auctions, and consequently, how often it had to step in to purchase the [securities], id. at 336, and that Morgan Stanley's `market making' activities were essential to avoiding total illiquidity of these securities, Ashland Inc. v. Morgan Stanley & Co., 700 F.Supp.2d 453, 459 (S.D.N.Y.2010). Morgan Stanley moved to dismiss in part based on website disclosures substantially similar to Merrill's. These disclosures revealed that Morgan Stanley routinely placed bids in its own auctions, in part to prevent auctions from failing, that it did so in its discretion, and that it was not obligated to intervene to ensure each auction's success. 652 F.3d at 338. The district court dismissed Ashland's complaint in its entirety. Our court affirmed the dismissal of Ashland's Section 10(b) claim on the ground that the SEC-mandated statement explicitly disclosed the very liquidity risks about which appellants claim to have been misled. Id. Even though Ashland alleged that it first purchased SLARS prior to receiving a copy of this disclosure, the panel charged Ashland with knowledge of the contents of that disclosure because the statement was also available online, and appellants could have easily discovered it through minimal diligence. Id. at 338 n. 4. There are, of course, certain differences between this case and Ashland. For example, while Ashland was a sophisticated investor, the complaint here does not provide reason to believe the same is true of Wilson. And whereas Ashland focused on the effect of Morgan Stanley's website disclosures on an investor's reasonable reliance on contrary representations, our own focus is on the effect of similar disclosures on whether a manipulative act can be sufficiently pleaded. But these distinctions, in our view, do little to blunt Ashland 's application to this case. Our assessment of whether Wilson has pleaded a manipulative act does not turn on how Wilson may have interpreted Merrill's disclosures; indeed, Wilson does not claim that he directly relied on any statement attributable to Merrill. Rather, in analyzing this claim, we look to whether Merrill's support bidding sent a false signal to the Merrill ARS market as a whole. For the same reasons that Ashland held that Morgan Stanley's website explicitly disclosed the very liquidity risks about which appellants claim to have been misled, it is difficult to see how investors in Merrill ARS, in light of Merrill's substantially similar website disclosures, could have reasonably assumed that the lack of auction failures was indicative of genuine market liquidity rather than Merrill's routine placement of support bids. Ashland 's holding therefore reinforces our conclusion that Wilson has failed to plead manipulative acts. [9]