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

Heading: The SEC Brief

Text: Prior to this appeal, the SEC had taken a number of regulatory actions with respect to ARS, including but not limited to the 2006 SEC Order and the 2008 preliminary settlement. In its amicus brief, TAC argues that the legal positions adopted by the SEC with respect to these actions are entitled to substantial deference, but in its responsive submissions, Merrill contests the notion that such regulatory actions merit deference. Mindful of the SEC's expertise in administering the securities laws, its ability to seek input from the public when crafting regulatory policy, and its relative political accountability, MSIF, 592 F.3d 347, 361 (2d Cir. 2010), we determined that the proper resolution of this appeal would be aided by learning the agency's considered views on the particular questions that this case presents. Accordingly, after hearing oral argument, we invited the SEC to submit a letter brief addressing these issues, including the adequacy of Merrill's disclosures. We have benefitted from the SEC's exposition of this and other issues in its brief (the SEC brief). As set forth below, although we accept that brief's articulation of the legal principles that govern the sufficiency of disclosures for purposes of a market manipulation claim, we cannot defer to the SEC's conclusion that Merrill's disclosures were inadequate. The SEC brief's discussion of market manipulation begins with two legal propositions. First, the SEC notes that [i]n certain circumstances, disclosure can prevent a false signal from being sent to the market, thereby undermining a claim of manipulation. SEC Br. at 11. Second, the SEC observes that [c]ourts have long recognized . . . that disclosure of a potential risk is insufficient when, in fact, the risk is much greater and/or is a known certainty. Id. These principles, which are not disputed by the parties, are also firmly rooted in our precedents. We therefore accept them without the need to consider the extent to which they are entitled to deference. [10] The SEC brief goes on to apply these legal principles to Merrill's disclosures. The SEC finds Merrill's disclosures to be misleading in imply[ing] that some auctions have sufficient independent demand to prevent failure. Id. at 12. The SEC asserts that Merrill's statement that it may routinely place support bids is inconsistent with Merrill's alleged practice of placing bids in every auction specifically for the purpose of preventing failure, in that this formulation misleadingly describe[s] as contingent something that plaintiff alleges was a certainty. Id. at 13. Although the SEC does not specifically provide an example of what an adequate disclosure of Merrill's bidding practices might resemble, it notes that there would be no inaccuracy . . . in disclosing that Merrill currently placed support bids in all of its auctions, that without such bids the auctions would fail, and that Merrill reserved the right not to bid in the future. Id. [11] The parties dispute the amount of deference that we owe to the SEC's views. Ordinarily, when an agency's regulation is ambiguous, courts will defer to an agency's interpretation of its regulation[], even in a legal brief, unless the interpretation is `plainly erroneous or inconsistent with the regulation' or there is any other `reason to suspect that the interpretation does not reflect the agency's fair and considered judgment on the matter in question.' Talk Am., Inc. v. Mich. Bell Tel. Co., ___ U.S. ___, 131 S.Ct. 2254, 2261, 180 L.Ed.2d 96 (2011) (quoting Auer v. Robbins, 519 U.S. 452, 461-62, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997)) (other internal quotation marks omitted). Here, Wilson and TAC contend that the SEC brief is entitled to controlling deference, Auer, 519 U.S. at 461, 117 S.Ct. 905. In response, Merrill offers several reasons why, in its view, the SEC brief does not merit substantial deference. First, Merrill notes that in the context of interpreting Rule 10b-5, the Supreme Court has recently reiterated its skepticism over the degree to which the SEC should receive deference regarding the private right of action that courts have implied thereunder. Janus Capital Grp., Inc. v. First Deriv. Traders, ___ U.S. ___, 131 S.Ct. 2296, 2303 n. 8, 180 L.Ed.2d 166 (2011); see also id. (recounting the Court's repeated disagreements with the SEC's broad view of Section 10(b) and Rule 10b-5); Pac. Inv. Mgmt. Co. LLC v. Mayer Brown LLP, 603 F.3d 144, 151 n. 3 (2d Cir.2010) (stating that the SEC's views on the scope of the judicially created implied right of action available under [Section] 10(b) and Rule 10b-5 are entitled to little or no deference). Second, Merrill observes that this court, although ultimately rejecting a proposed distinction between interpretations and applications of relevant agency promulgations in terms of how much deference such statements warrant, remains mindful that the institutional considerations that may lead us to defer to the SEC's views on the interpretation of its promulgations counsel a different course when the question presented calls for an assessment of the sufficiency of a complaint. MSIF, 592 F.3d at 363; see also id. (The task of construing a litigant's pleading rests firmly with the courts.). Third, Merrill asserts that because the SEC brief can be viewed as a continuation of the agency's litigation efforts regarding Merrill's alleged misrepresentations to its customers that culminated in the 2008 settlement, there may be reason to understand the agency's positions in this litigation as reflecting something less than its disinterested judgment. In the circumstances of this case, we see no need to fix the exact molecular weight of the deference that we owe to the SEC's position. Id. at 362 (internal quotation marks omitted). We readily acknowledge that at least some deference to the agency's position is appropriate given the SEC's expertise and accountability. Here, however, we are unable to agree with the SEC's application of the legal principles governing Merrill's disclosures even under the generous standard of deference that Wilson urges. As discussed above, we find the complaint to be inconsistent as to how often Merrill placed support bids during the relevant period, and view other allegations of the complaint as incompatible with the notions that every auction would fail in the absence of Merrill's intervention or that Merrill knew by July 2007 that the ARS market was unsustainable. Given our understanding of the complaint and this court's assessment of similar disclosures in Ashland, [12] we cannot adopt the SEC's characterization that Merrill disclosed only a potential risk when the true risk is much greater and/or is a known certainty. In parting ways with the SEC's evaluation of Merrill's disclosures, we emphasize the limited nature of our holding today. We conclude only that Merrill's particular disclosures sufficiently alerted investors in Merrill ARS of the likelihood that the interest rates and apparent liquidity of these ARS reflected Merrill's own interventions in these auctions rather than the natural interplay of supply and demand. Gurary v. Winehouse, 190 F.3d 37, 45 (2d Cir. 1999). Our holding rests in substantial part on the fact that Wilson's purchase of his securities antedated the time that Merrill was alleged to have learned that the ARS market was no longer viable and to have made statements directed at investors that were at odds with its internal understanding of the liquidity of these securities. Because Wilson's complaint lacks well-pleaded allegations that as of the time of Wilson's purchase, Merrill presently intended to place bids in every single auction, knew that each auction would fail if it did not place these bids, and signaled to its ARS investors that these securities were genuinely liquid, we have no occasion to address whether a hypothetical complaint containing such allegations would state a claim for market manipulation.