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

Heading: Merrill's Disclosures

Text: In resisting Wilson's manipulation claim, Merrill relies on several public disclosures of its ARS auction practices. The first such disclosure arose from an SEC investigation resulting in a settlement with several ARS broker-dealers, including Merrill. This investigation, which began in 2004, concluded on May 31, 2006, when the SEC filed an Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 15(b) of the Securities Exchange Act of 1934 (the 2006 SEC Order). The 2006 SEC Order stated that certain ARS broker-dealers violated the securities laws by intervening in auctions without adequate disclosures. The Order noted that these interventions sometimes took the form of dealers' bidding for their proprietary accounts in order to prevent auctions from failing, and remarked that these interventions sometimes affected the securities' clearing rate. The Order further specified that this conduct was improper because it was not adequately disclosed, but clarified that the Order did not prohibit broker-dealers from bidding for their proprietary accounts when properly disclosed. App. 117 n. 6. Pursuant to the Order's remedial provisions, Merrill was required to pay a civil monetary penalty of $1,500,000 and to provide a written description of . . . material auction practices and procedures to ARS issuers, customers who held Merrill ARS, and first-time purchasers of Merrill ARS. Id. at 120-21. In addition, the Order required Merrill to at all times make a description of its then-current material auction practices and procedures available to (1) all customers and broker-dealers who are participating through [Merrill Lynch] in an [ARS auction] on the portion of its website that is accessible to such customers and broker-dealers and is related to such auction and (2) the general public on another portion of its website accessible to the general public. Id. at 122. Pursuant to the 2006 SEC Order, Merrill posted on its website a document describing its ARS practices and procedures. The disclosures in this document included the following statements:  Auction procedures generally permit auction dealers like Merrill Lynch to buy and sell, in their sole discretion, auction rate securities for their own account between auctions at any time. Id. at 102.  Merrill Lynch is permitted, but not obligated, to submit orders in auctions for its own account either as a bidder or a seller, or both, and routinely does so in its sole discretion. Id.  Merrill Lynch may routinely place one or more bids [1] in an auction for its own account to acquire auction rate securities for its inventory, to prevent an auction failure . . . or an auction from clearing at a rate that Merrill Lynch believes does not reflect the market for the securities. Id. at 103.  Bids by Merrill Lynch or by those it may encourage to place bids are likely to affect the clearing rate, including preventing the clearing rate from being set at the maximum rate or otherwise causing bidders to receive a higher or lower rate than they might have received had Merrill Lynch not bid or not encouraged others to bid. Id.  Because of these practices, the fact that an auction clears successfully does not mean that an investment in the securities involves no significant liquidity or credit risk. Merrill Lynch is not obligated to continue to place such bids . . . in any particular auction to prevent an auction from failing or clearing at a rate Merrill Lynch believes does not reflect the market for the securities. Investors should not assume that Merrill Lynch will do so or that auction failures will not occur. Id.  Merrill Lynch may submit a bid in an auction to keep it from failing, but it is not obligated to do so. There may not always be enough bidders to prevent an auction from failing in the absence of Merrill Lynch bidding in the auction for its own account or encouraging others to bid. Therefore, auction failures are possible, especially if the issuer's credit were to deteriorate, if a market disruption were to occur or if, for any reason, Merrill Lynch were unable or unwilling to bid. Id. at 105. Certain limited disclosures also appear in the prospectus for the ARS that Wilson purchased, which are shares of the BlackRock MuniHoldings Fund, Inc. Auction Market Preferred Stock Series A. This prospectus noted that the auction dealers for the securities may submit Orders for their own accounts and that the lack of sufficient clearing bids could affect the investment's liquidity. Id. at 178, 182. [2] While Wilson acknowledges the existence and public availability of these disclosures, he alleges that Merrill never provided him or other investors who purchased Merrill ARS from distributing firms such as ETrade with disclosures of any kind.