Opinion ID: 222037
Heading Depth: 3
Heading Rank: 2

Heading: Federal Securities-Law Claim

Text: Ashland first alleges that Oppenheimer violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. To state a securities fraud claim under Section 10(b), a plaintiff must allege, in connection with the purchase or sale of securities, the misstatement or omission of a material fact, made with scienter, upon which the plaintiff justifiably relied and which proximately caused the plaintiff's injury. Frank v. Dana Corp., 547 F.3d 564, 569 (6th Cir.2008) (internal quotation marks and citation omitted). Moreover, a misrepresentation or omission must pertain to material information that the defendant had a duty to disclose. City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 669 (6th Cir.2005) (emphasis added). Misrepresented or omitted facts are material only if a reasonable investor would have viewed the misrepresentation or omission as having significantly altered the total mix of information made available. In re Sofamor Danek Grp., Inc., 123 F.3d 394, 400 (6th Cir.1997) (internal quotation marks and citation omitted). Contrary to Ashland's allegations, many of Oppenheimer's purported misstatements and omissions are not actionable, either because they lacked materiality or because Oppenheimer had no duty to disclose them. For example, Ashland asserts it did not know that Oppenheimer's brokers received commissions only when clients bought and held ARS, a compensation structure that might place brokers' and investors' interests at odds. But [t]here is no duty [for a company] to disclose the incentives that [it] provides its own employees to encourage those employees to sell specific products. Hoffman v. UBS-AG, 591 F.Supp.2d 522, 533 (S.D.N.Y.2008); see also In re UBS Auction Rate Sec. Litig., No. 08-CIV-2967, 2010 WL 2541166, at  (S.D.N.Y. June 10, 2010) (collecting cases). Still other alleged omissionssuch as the correlation between ARS' credit ratings and low penalty ratesconsist of public information and constitute mere statements about financial causation and about the way various elements of the securities markets interact. See Ashland Inc. v. Morgan Stanley & Co., 700 F.Supp.2d 453, 470 (S.D.N.Y.2010). Finally, some of the alleged misstatements are too vague to qualify as material. For example, Ashland claims that Castner misrepresented the ARS as safe and secure, but such a soft description escapes objective verification. See In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 570 (6th Cir.2004). Recognizing that many of the purported misrepresentations and omissions that Ashland denounces lack Rule 10b-5 actionability, we look past these allegations and focus instead on its central claim: Oppenheimer peddled ARS to Ashland as liquid, short-term investments, all while withholding a crucial factor about the marketthat its continued health depended upon the intervention of underwriters, many of whom were abandoning ARS auctions. We assume that disclosure of this fact would significantly alter[] the total mix of available information about ARS, see In re Sofamor Danek Grp., Inc., 123 F.3d at 400, satisfying the materiality requirement, and therefore proceed to the issue of scienter. In the securities-fraud context, the Private Securities Litigation Reform Act of 1995 (PSLRA) imposes [e]xacting pleading requirements for pleading scienter, Frank, 547 F.3d at 570 (alteration in original) (internal quotation marks and citation omitted), which we define as knowing and deliberate intent to manipulate, deceive, or defraud, and recklessness, see Ley, 543 F.3d at 809. [3] Under the PSLRA, plaintiffs shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. 15 U.S.C. § 78u-4(b)(1). Additionally, plaintiffs shall, with respect to each act or omission alleged . . ., state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. Id. § 78u-4(b)(2). To qualify as `strong' . . ., an inference of scienter must be more than merely plausible or reasonableit must be cogent and at least as compelling as any opposing inference of nonfraudulent intent. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). In examining scienter, we must decide whether all of the facts alleged, taken collectively, meet the PSLRA's requirements. Id. at 322-23, 127 S.Ct. 2499. In Helwig v. Vencor, Inc., we laid out a non-exhaustive list of factors we deemed probative of scienter in securities-fraud cases. 251 F.3d 540, 552 (6th Cir.2001), abrogated on other grounds by Tellabs, Inc., 551 U.S. at 323-24, 127 S.Ct. 2499, as recognized in Frank, 547 F.3d at 571. The district court accordingly walked through the list step-by-step when considering Ashland's complaint. See Ashland Inc. v. Oppenheimer & Co., 689 F.Supp.2d at 886-88. The Supreme Court, however, has recently emphasized that the court's job is not to scrutinize each allegation in isolation but to assess all the allegations holistically. Tellabs, Inc., 551 U.S. at 326, 127 S.Ct. 2499; accord Matrixx Initiatives, Inc., 131 S.Ct. at 1324-25 (specifically endorsing, then engaging in, Tellabs 's holistic scienter examination). Following the Supreme Court's lead, our court eschewed Helwig 's checklist approach in favor of Tellabs 's and Matrixx 's entirely collective assessment. See Frank, 646 F.3d at 961 (In the past, we have conducted our scienter analysis in section 10(b) cases by sorting through each allegation individually before concluding with a collective approach. However, we decline to follow that approach in light of the Supreme Court's recent decision in [ Matrixx ]. (internal citations omitted)). In accordance with this new precedent, we forgo the itemized claim analysis conducted by the district court and conclude that Ashland's factual allegations, when considered together, do not give rise to a strong inference that Oppenheimer acted with scienter. Simply put, apart from conclusory allegations, Ashland fails to provide any facts explaining why or how Oppenheimer possessed advance, non-public knowledge that underwriters would jointly exit the ARS market and cause its collapse in February 2008thereby exposing Oppenheimer's deliberate intent to manipulate, deceive, or defraud. See Ley, 543 F.3d at 809. Nor does Ashland argue that the hazard facing the ARS market was one that any reasonable man would have known of. See PR Diamonds, Inc., 364 F.3d at 681. At best, the alleged facts suggest that a few Oppenheimer employees were aware of what might happen if the underwriters left the ARS market, a seemingly remote risk, given its past stability. See Vining v. Oppenheimer Holdings Inc., No. 08-CIV-4435, 2010 WL 3825722, at  (S.D.N.Y. Sept. 29, 2010) (The ARS market had allegedly existed for over twenty years with auction dealers following uniform policies of placing support bids in auctions as necessary to prevent auction failures. Simply knowing what would happen if those policies changed does not equate with knowing that they would change. (internal quotation marks and citation omitted)). But under the PSLRA, we need such detail if we are to credit Ashland's otherwise unfounded assertion that the liquidity problems in the ARS market were already well known to Oppenheimer. In essence, Ashland fails to state sufficient facts on which [its] belief is formed. See 15 U.S.C. § 78u-4(b)(1). While the existence of scienter is possible in this case, the more compelling explanation is that the near-spontaneous collapse of the ARS market caught Oppenheimer and its employees off guard. And though Oppenheimer may have engaged in bad (in hindsight) business judgments in connection with ARS, see In re Citigroup Auction Rate Sec. Litig., 700 F.Supp.2d 294, 305 (S.D.N.Y.2009), or may have been negligent in not detecting and disclosing the imminent market collapse, see Vining, 2010 WL 3825722, at -14, such actions fall short of scienter in the context of securities fraud, see, e.g., In re Comshare Inc. Sec. Litig., 183 F.3d 542, 550 (6th Cir.1999). Our survey of the ARS-related litigation landscape affirms our position. Since the ARS fallout in early 2008, dozens of plaintiffs have sued both investment banks and broker-dealers for purportedly covering up problems in the market. In the few fraudulent-misrepresentation cases surviving motions to dismiss, the plaintiffs sufficiently explained why or how the defendants knew about the ARS market's impending illiquidity. See, e.g., In re Merrill Lynch Auction Rate Sec. Litig., No. 09-MD-2030, 2011 WL 1330847, at  (S.D.N.Y. Mar. 30, 2011) (noting that defendants, as ARS auction managers, had exclusive access to supply and demand information and knew that the ARS market was teetering beginning in early 2007). Other viable complaints alleged market manipulationfor example, that defendants propped up a languishing ARS market in order to unload inventories on unsuspecting clients. See, e.g., Dow Corning Corp. v. BB & T Corp., No. 09-5637, 2010 WL 4860354, at  (D.N.J. Nov. 23, 2010); Defer LP v. Raymond James Fin., Inc., No. 08-CIV-3449, 2010 WL 3452387, at  (S.D.N.Y. Sept. 2, 2010). Conversely, among those cases involving only vague allegations that market participants knew of, yet failed to disclose, risks surrounding the ARS market, the courts have readily granted defendants' Rule 12(b)(6) motions. See, e.g., Oughtred v. ETrade Fin. Corp., No. 08-CIV-3295, 2011 WL 1210198, at  (S.D.N.Y. Mar. 31, 2011) (dismissing, for an inadequate showing of scienter, complaint alleging that defendant defrauded purchasers of auction rate securities by making misrepresentations and omissions of material fact about the risks, value, and liquidity of those securities); Ashland Inc. v. Morgan Stanley & Co., 700 F.Supp.2d at 468-69 (same). The distinctions among these decisions reinforce our conclusion that Ashland has insufficiently alleged scienter, and we thus affirm the district court's dismissal of its 10b-5 claim.