Even though substantial parts of the case have been knocked out, at least one part of the auction rate securities case filed against Raymond James Financial and related entities has survived a renewed dismissal motion, making it the first of the auction rate securities cases to survive the preliminary motions – even if it only did so in limited part.


The ruling came in a September 2, 2010 order (here) from Southern District of New York Judge Lewis Kaplan. A September 8, 2010 Bloomberg article by Thom Weidlich about the ruling can be found here.


As detailed here, the plaintiffs sued Raymond James and two of its operating subsidiaries alleging that the defendants engaged in a scheme to defraud auction rate securities investors by knowingly misrepresenting the securities as highly liquid investments. The plaintiffs purport to represent investors who purchased the securities between April 8, 2003 and February 13, 2008.


As discussed at length in a prior post, in September 2009, Judge Kaplan granted the defendants’ motions to dismiss the plaintiffs’ initial complaint, holding that that the plaintiffs had failed specifically to attribute the allegedly actionable statements to any defendant and to plead with particularity any defendants’ scienter. The dismissal was without prejudice, and the plaintiffs subsequently filed an amended complaint. The defendants renewed their dismissal motions.


In his September 2 order, Judge Kaplan granted the defendants’ renewed motions as to all of the plaintiffs’ renewed claims, with one exception. That is, he found that the plaintiffs had adequately alleged both scienter and misrepresentation with respect to part of the Section 10(b) claims against one of Raymond James’ operating units, Raymond James & Associates (RJA). The claims against Raymond James itself and the other operating unit defendant, as well as the other claims against RJA, were otherwise all dismissed.


In attempting to allege that RJA had acted with scienter, the plaintiffs had argued that the unit was motivated, following turmoil in the auction rate securities market in 2007, to try to unload its own inventory of the securities, and that in fact it had provided its broker with financial incentives to sell those securities. Judge Kaplan found that these allegations were insufficient to establish scienter prior to November 2007, but "the period November 2007 through February 2008 stands differently."


Judge Kaplan said, with respect to that later period, that "given the deterioration of the ARS market that began in August 2007 and RJA’s wish to reduce its own position from November 2007 forward, it is quite reasonable to infer that RJA then had a motive to conceal the ARS liquidity risk from customers to whom it hoped to sell ARS from its own portfolio." Judge Kaplan held that the plaintiffs had adequately alleged scienter as to RJA for the period November 2007 through the end of the class period in February 2008.


Judge Kaplan also found that actionable misrepresentations had been made to one of the plaintiffs by an RJA broker. The amended complaint alleged that the broker had told the plaintiff that ARS were safe, liquid investments. However, the amended complaint further alleges that the broker did not tell the plaintiff that the appearance of a liquid market for the securities was only maintained by "extensive and sustained" interventions in the market place by various broker dealers.


Judge Kaplan said that "a trier of fact would be entitled to find that it would have been important to a reasonable investor, in deciding whether to buy or sell ARS, that the ARS – supposedly liquid investments – were liquid only because auction brokers routinely intervened in the auctions to ensure their success. Accordingly, RJA was under a duty to disclose this information."


Judge Kaplan rejected the plaintiffs’ allegations that the specific alleged misrepresentations made by individual brokers to the named plaintiffs were part of a larger scheme to defraud. As Judge Kaplan noted, other than with respect to the two brokers who interacted with the named plaintiffs, the amended complaint "does not allege any specific statement made to any investor."


In the absence of scheme allegations, the claims on behalf of an investor class may prove challenging, as the only supposed misrepresentations that survived the motion to dismiss were made only to one of the named plaintiffs and not to the class the plaintiffs are purporting to represent. Accordingly, the plaintiffs may yet face significant challenges even on the claims that survived, particularly at the class certification stage.


Nevertheless, even if narrow, Judge Kaplan’s ruling is noteworthy, as it represents the first occasion in an auction rate securities case in which a court has held that a plaintiff has adequately alleged misrepresentation and scienter.


The case against Raymond James may be somewhat distinct from the cases that had been pending against other large investment banks. In many of those cases, the defendant firms had separately entered regulatory settlements for the benefit of many of their auction rate securities investors. These regulatory settlements had served as the basis for dismissal of the auction rate securities cases pending against these banks, including for example the cases pending against UBS (refer here) and Northern Trust (refer here).


Raymond James, by contrast to these other firms, had not entered a regulatory settlement involving its investors. Indeed, the firm has been the target of certain high profile criticism (refer here) as a "holdout" for its resistance to entry into a regulatory settlement. Without a regulatory settlement, Raymond James was not able to move for dismissal on the same "absence of recoverable damages" theory as did the defendants in the Northern Trust and UBS cases.


I have in any event added the Raymond James decision to my running tally of subprime and credit crisis-related lawsuit dismissal motion rulings, which can be accessed here.