Earlier this year, when the auction rate securities lawsuit against UBS was dismissed (refer here), the obvious question was whether the dismissal signaled the end of the auction rate securities litigation. Certainly, the growing number of companies that, like UBS, had entered regulatory settlements (the basis of the UBS dismissal) or otherwise agreed to redeem the ARS seemed to suggest that the auction rate securities lawsuits pending against other financial companies would suffer the same fate as the UBS suit.


But while this anticipated effect is now being realized in some cases, the end of at least a major chunk of the auction rate securities litigation may be nowhere near.


There are recent significant developments regarding the possibility that the ARS regulatory settlements and repurchase agreements may mean further auction rate securities lawsuits dismissals. Along those lines, on August 6, 2009, Southern District of New York Judge Victor Marrero granted the defendants’ motion to dismiss in the Northern Trust auction rate securities lawsuit. Judge Marrero’s opinion can be found here. Background regarding the case can be found here.


In granting the motions to dismiss, Judge Marrero ruled, citing the decision in the UBS auction rate securities lawsuit dismissal, that the plaintiff had "not alleged recoverable damages," owing to the fact that the plaintiff had "already received compensation for losses suffered as a result of the alleged misstatement or omissions." (In December 2008, the plaintiff had "received par value" for his ARS investments under Northern Trust’s ARS repurchase program.)


The UBS and Northern Trust dismissals do seem to suggest that the auction rate securities litigation could be coming to an end — at least for companies that have entered regulatory settlements or repurchase agreements.


But not all of the targeted firms have agreed to repurchase the ARS.


For example, as reflected in an August 1, 2009 New York Times article (here), Raymond James Financial is "among the holdouts." According to the article, the firm’s clients currently hold approximately $800 million (presumably, par value) of illiquid securities that the first sold them. The firm is working to try to reduce these investor holdings, primarily through issuer redemptions. However, the article, reports that the firm has stated in its disclosure documents that it does not "at present" have the "capacity" to redeem all of the securities.


As reflected here, Raymond James is the subject of a pending auction rate securities lawsuit in the Southern District of New York. However, without having made a redemption offer, Raymond James will not be in a position to seek dismissal on the same basis as did UBS and Northern Trust.


In addition to the firms that have not redeemed securities, there are the investors whose securities have not yet been redeemed.


For example, many of the regulatory settlements either do not extend to institutional investors or only provide for the redemption of institutional investors securities at a later date (in some cases, a much later date.) As a result of the continuing illiquidity of these investors’ securities, many of these investors have filed and are continuing to file lawsuits against the firms that sold them the securities.


A very recent example of this type of suit is the lawsuit filed on August 5, 2009 – the day before the Northern Trust dismissal – in the Southern District of New York, by Teva Pharmaceutical Industries and affiliated companies against Merrill Lynch and related entities. The complaint, which can be found here, alleges that Teva purchased CDO action rate notes and other auction rate securities that Merrill Lynch structured and underwrote. The complaint alleges that as a result of the failure of the ARS market, the plaintiffs now holds ARS for which it paid $273 million that now have a market value of less than $10 milllion. (Among the CDO auction rate notes in which Teva invested is the infamous Mantoloking CDO, about which I wrote here.)


Nor is Teva alone in its predicament. Teva is just one of several public companies cited in a July 15, 2009 CFO Magazine article entitled "Buyer’s Remorse" (here), which describes the continuing woes of many companies that invested in auction rate securities. Among other things, the article cites a source as saying that nonfinancial public companies still have $24 billion (par value) of ARS on their books. Many of these companies, like Teva, have sued the firms that sold them the securities. A prior post in which I discuss other recent examples of institutional investor auction rate securities litigation can be found here.


But a lawsuit by the company against the firm that sold them the securities is not the only litigation possibility involved here. As I previously noted (here), some public companies have been hit with lawsuits by their own investors who claim they were misled about the companies’ exposure to auction rate securities in which the companies had invested.


If nothing else, the recently filed Teva lawsuit signals that we may be nowhere near the end of the auction rate securities litigation, even if some of the cases (like those against UBS and Northern Trust) are dismissed. The continuing illiquidity of the securities, the complexity of the transactions and the sheer quantity of dollars involved suggest that at least some of the auction rate securities litigation could and probably will go on for some time to come.


I have in any event added the Northern Trust dismissal to my running register of credit crisis-related lawsuit resolutions, which can be accessed here.


An Interesting Note: According to his official biography, Judge Marrero filed the seat on the Southern District of New York previously occupied by the newly confirmed Supreme Court Justice, Sonia Sotomayor, prior to her appointment to the Second Circuit.