When the various broker dealers and investment banks recently announced their agreements with government regulators to buy back auction rate securities, the announcements raised questions about the continuing need for the pending auction rate securities litigation. But, at least based on a recently filed lawsuit, it now appears that the settlements may have opened the door for a whole new round of securities litigation related to the settlements themselves.


On October 3, 2008, plaintiffs’ lawyers initiated a securities class action lawsuit in New York (New York County) Supreme Court on behalf of investors who purchased bonds and preferred securities in various offerings conducted pursuant to Merrill Lynch’s March 31, 2006 shelf registration. A copy of the complaint can be found here. The complaint, which asserts claims under Sections 11, 12 and 15 of the ’33 Act, names as defendants Merrill Lynch and related entities; certain current and former Merrill Lynch directors and officers; the underwriters that conducted the various offerings; and Merrill Lynch’s auditor.


The complaint alleges that the offering documents "misstated Merrill’s financial condition and failed to disclose that the Company bore massive exposure to losses from investments tied to subprime and other mortgages, and was responsible for significant liability arising from its participation in the market for auction rate securities (ARS). Further Merrill improperly valued mortgage-backed assets on its books, and failed to account for its contingent obligations in the ARS market."


The complaint alleges that as a result of later disclosures about the company’s "true financial condition," the value of the securities sold in the referenced offerings declined materially. The complaint specifically refers to, regarding the company’s true financial condition, Merrill Lynch’s August 7, 2008 announcement (here) that "it would repurchase $12 billion in ARS from investors due to the failure of the ARS market."


Merrill Lynch previously was the target of what I will call a "conventional" auction rate securities lawsuit. Background regarding this prior lawsuit can be found here and regarding the prior auction rate securities lawsuits generally can be found here.


This new Merrill Lynch lawsuit complaint differs from the prior conventional auction rate securities lawsuit in a variety of ways. The most important distinction is who is represented in the plaintiff class. The prior auction rate securities lawsuits were brought on behalf of auction rate securities investors – that is, the people who bought the actual auction rate securities. The plaintiffs in the Merrill Lynch lawsuit are not persons who bought auction rate securities, but who bought Merrill Lynch’s own securities in the referenced offerings.


The misrepresentations alleged are different as well. In the conventional auction rate securities lawsuits, the allegation is that the risks of the auction rate securities were insufficiently disclosed. In this new lawsuit, the allegation is not about the risks of auction rate securities themselves, but rather that Merrill Lynch did not disclose its own susceptibility to contingent liability in connection with its issuance or sale of the auction rate securities.


One other peculiarity of the prior auction rate securities lawsuits is that those suits generally did not name any individual defendants. The new Merrill Lynch complaint names a couple of dozen individual defendants, as well as several dozen offering underwriters.


Given the number and identities of the various defendants, this lawsuit will keep a lot of lawyers employed for a long time. Among the preliminary issues on which the lawyers will be engaged is the court’s subject matter jurisdiction. The plaintiffs elected to file their lawsuit in state court pursuant to the concurrent jurisdiction provisions in Section 22 of the ’33 Act. The defendants undoubtedly will seek to remove the lawsuit to federal court, and the plaintiffs in turn will seek to have the case remanded to state court.


As I noted in a prior post (here), the Ninth Circuit recently upheld the decision of the district court in the Luther v. Countrywide case to remand a ’33 Act case back to state court, where it originally had been filed before being removed to federal court. However, as the 10b-5 Daily blog recently noted (here), a judge in the Southern District of New York refused to remand New Jersey Carpenters Vacation Fund v. Harborview Mortgage Loan Trust, which had been removed to federal court. Among other things the court in the Harborview case held that the provisions of the Class Action Fairness Act trumped the jurisdictional provisions of the ’33 Act.


In view of the fact that the new Merrill Lynch case likely will be remanded to the Southern District of New York (the same court in which the Harborview case is pending), it will be interesting to see whether the plaintiffs are able to have the case remanded back to the New York state court where they initially filed the new Merrill Lynch complaint.


As I have previously noted, along with the question whether or not a ’33 Act case properly can be removed to federal court is the more practical question of why the plaintiffs want to proceed in state court in the first place. Some day someone will explain to me why the plaintiffs’ bar suddenly has developed this fascination with pursuing ’33 Act claims in state court. Is it, as I have supposed, an effort to circumvent the procedural requirements of the PSLRA?


In any event, I have added the new Merrill Lynch complaint to my running tally of subprime and credit crisis-related securities lawsuits, which can be accessed here. With the addition of the new lawsuit, the current tally now stands at 125, of which 85 have been filed in 2008. Of these, 21, including the new Merrill Lynch lawsuit, are auction rate securities lawsuits.


Motion to Dismiss Granted in Subprime Securities Lawsuit: On September 29, 2008, Judge John Steele of the Middle District of Florida granted the defendants’ motion to dismiss, without prejudice, in one of the more unusual subprime related securities lawsuits. A copy of the opinion can be found here.


As detailed here, the plaintiffs allege that the defendants (First Home Builders of Florida and two residential real estate brokerage firms, as well as successor entities), in violation of the federal securities laws, had fraudulently induced plaintiffs to purchase real estate investment properties by promising that defendants would procure lease-to-own tenants for the investors’ properties; that the tenants rental payments would cover all of the investors’ out-of-pocket costs; and that investors would receive a guaranteed 14% return on the investment in the first year.


Judge Steele granted the defendants’ motion to dismiss, ruling that as a result of the plaintiffs’ failure "to allege who made what misrepresentations," the plaintiffs’ fraud allegations failed to meet the pleading requirements of Rule 9(b). Judge Steele declined to rule on the plaintiffs’ group pleading theory. He allowed plaintiffs 30 days to file an amended complaint.


I have added the First Home Builders of Florida dismissal to my table of subprime and credit crisis-related lawsuit case dispositions, which can be accessed here.


Special thanks to Adam Savett of the Securities Litigation Watch blog (here) both for the Merrill Lynch complaint and for the opinion in the First Home Builders of Florida case.


Note from Ohio: I want to know how the Saturday Night Live scriptwriters managed to get the whole  "Joe the Plumber" schtick inserted into tonight’s actual Presidential debate. But the one thing I do know is that after tonight’s debate, my fellow Ohioan, Joe the Plumber, is moving to Canada, where he will be left in peace because their national election is already finished.