Opinion ID: 855529
Heading Depth: 2
Heading Rank: 1

Heading: Material Misrepresentation or Omission

Text: Cellular first contends that Merrill either materially misrepresented, or failed to disclose, the liquidity risk of investing in ARS. The Exchange Act makes it unlawful [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. SEC Rule 10b-5(b), 17 C.F.R. § 240.10b-5(b) (2012). To state a claim for misrepresentation, a plaintiff must allege that defendant: (1) misstated or omitted a material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) plaintiff relied on the misstatement or omission; (5) economic loss; and (6) reliance was the proximate cause of plaintiff's injury. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008). Generally, a complaint must plead sufficient facts to raise a right to relief above the speculative level and to state a claim to relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007). Because, however, Cellular alleges a 10b-5 misrepresentation claim, it -3- must plead any alleged false statements with particularity and, to the extent an allegation is made on information and belief, all facts on which that belief is formed must also be pleaded with particularity. 15 U.S.C. § 78u-4(b)(1) (2012). We recently decided a series of cases addressing ARS. See Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98 (2d Cir. 2012); Wilson v. Merrill Lynch & Co., 671 F.3d 120 (2d Cir. 2011); Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333 (2d Cir. 2011). Those cases addressed, inter alia, the adequacy of disclosures made by auction brokers in connection with purchases of ARS. In two of the cases, we held that the SEC cease and desist order dated May 31, 2006 (the SEC Order) and Merrill's online disclosure of its ARS practices and procedures (the Website Disclosure) sufficiently placed investors on notice of the liquidity risks inherent in ARS. See Anschutz, 690 F.3d at 108; Wilson, 671 F.3d at 131-32. The third case involved a similar disclosure made by Morgan Stanley; we also affirmed the dismissal of the complaint. See Ashland, 652 F.3d at 338. Here, Cellular alleges that, contrary to the investors at issue in the prior cases, it did not invest in ARS until after Merrill had made a Withdrawal Decision -- an alleged decision to exit the ARS market. To exit the market, Merrill allegedly knew that it had to convince investors that ARS remained liquid and continue to support the auctions until Merrill had sufficiently divested itself of its substantial ARS holdings. Thus, because Merrill purportedly went from a situation where it could refuse to support the market to a situation where it knew -4- that it would refuse to support the market upon selling off its inventory, Cellular contends that Merrill's prior disclosures were no longer adequate. See Rombach v. Chang, 355 F.3d 164, 173 (2d Cir. 2004) (Cautionary words about future risk cannot insulate from liability for the failure to disclose that the risk has transpired.). As the district court noted, however, Cellular made mere conclusory allegations; it failed to plead with particularity the facts surrounding the Withdrawal Decision, or the facts on which its belief that such a decision had been made was formed. See In re Merrill Lynch Auction Rate Sec. Litig., 2012 WL 3297732, at . As conclusory allegations that defendant's conduct was fraudulent or deceptive are not enough to state a claim, Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 114 (2d Cir. 1982), cited in Grandon v. Merrill Lynch & Co., 147 F.3d 184, 193-94 (2d Cir. 1998) (addressing claims under Rule 10b-5), the district court properly dismissed this claim. Cellular simply did not allege sufficient facts to differentiate this case from Ashland, Inc. v. Morgan Stanley & Co., 652 F.3d at 338.