SEC and SIFMA Divided Over Whether Merrill Lynch Can Be Held Liable for Alleged ARS Market Manipulation

In Wilson v. Merrill Lynch & Co. Inc., the Securities Industry and Financial Markets Association and the Securities and Exchange Commission have submitted separate amicus curiae briefs to the U.S. Court of Appeals for the Second Circuit that differ on whether Merrill Lynch can be held liable for allegedly manipulating the auction-rate securities market. While SIFMA argued that an SEC order from 2006 that settled ARS charges against 15 broker-dealers affirmed the legality of the auction practices when they are properly disclosed, the SEC said that Merrill did not provide sufficient disclosures about its conduct in the ARS market and therefore what they did reveal was not enough to “preclude the plaintiff from pleading market manipulation.”

It was last year that the U.S. District Court for the Southern District of New York dismissed an investor claim that Merrill Lynch, which was acting as underwriter, manipulated the ARS market to attract investment. The court said that the claimant “failed to plead manipulative activity” and agreed with the brokerage firm that adequate disclosures were made. After appealing to the Second Circuit, the investor requested that the SEC provide its thoughts on five court-posed questions about the adequacy of the financial firm’s disclosures and how they impacted allegations of reliance and market manipulation.

The SEC said that the plaintiff’s claim that Merrill manipulated ARS auctions don’t preclude him from pleading, for fraud-on-the-market reliance purposes, an efficient market. SIMFA, however, said the plaintiff was precluded from claiming “manipulative acts” because investors have been made aware through “ubiquitous industry-wide disclosures about auction practices” that broker-dealers’ involvement in ARS actions is impacted by the “natural interplay” of demand and supply.


Related Web Resources:

Auction-Rate Securities UPDATE: SEC Brief May Help ARS Investors, Business Insider, July 26, 2011

SEC Backs Investors in ARS Case, Squares Off With SIFMA Over Firm’s Liability, BNA Broker/Dealer Compliance Report, July 27, 2011


More Blog Posts:

Credit Suisse Ordered to Pay STMicroelectronics N.V. $404M Over Improper ARS Investment, Institutional Investor Securities Blog, June 15, 2011

Goldman Sachs and Wells Fargo Investments Repurchase $26.9M in Auction-Rate Securities from New Jersey Investors, Institutional Investor Securities Blog, May 25, 2011

District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011

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