Nathaniel M. Gorton United States District Judge.
This case arises out of unsuccessful investments made by defendant Banc of America Securities LLC ("BAS"), allegedly with the knowledge and acquiescence of co-defendant Bank of America, N.A. ("BANA"), on behalf of plaintiff Tutor Perini Corporation ("Tutor Perini") in a kind of security known as auction rate securities ("ARS").
Pending before the Court are defendants' motion for summary judgment and plaintiff's motion for partial summary judgment. For the reasons that follow, defendants' motion will be allowed and plaintiff's motion will be denied.
Tutor Perini is a building construction company incorporated in Massachusetts
Defendant BANA is a bank registered in Delaware with a principal place of business in North Carolina. It is a whollyowned subsidiary of Bank of America Corporation, a major global banking institution.
Defendant BAS, now known as Merrill Lynch, Pierce, Fenner & Smith, Incorporated, is also a wholly-owned subsidiary of Bank of America Corporation and was, at all relevant times, an investment banking company registered as a broker-dealer with the Securities and Exchange Commission.
ARS are a form of bond that have longterm maturity periods of up to 40 years. They pay interest at rates that are reset at regular intervals of, typically, 7, 28 or 35 days. That enables issuers to access longterm financing at short-term rates.
Interest rates for ARS are set by a "Dutch auction," wherein prospective purchasers submit bids through their brokerdealer to an auction agent. Each bid consists of the par value of the securities that the buyer wishes to purchase and the minimum interest rate that the buyer is willing to accept. Successively higher bids are then accepted until all the ARS for sale are covered. The interest rate of the highest bid necessary to cover all of the sell orders is known as the clearing rate.
Each ARS is subject to a cap on the highest possible clearing rate, also known as a maximum rate, which is either a fixed number or determined by a formula based upon indices such as the London Interbank Offered Rate ("LIBOR"). The ARS at issue in this case are student loan ARS ("SLARS") which did not have fixed maximum rates but rather maximum rates determined by a formula.
An auction is considered successful if there are sufficient bids below the maximum rate so as to allow for the sale of all of the outstanding securities. In contrast, a failed auction occurs when the number of bids below the maximum rate cannot guarantee the sale of all of the securities offered for sale. In such an event, holders of ARS who have offered to sell their shares must continue to hold those securities until the next successful auction.
Authorized broker-dealers have, however, the discretion to place "support bids," which are bids to purchase ARS for their own accounts to prevent auctions from failing. When auctions fail, holders of ARS continue to collect interest at the maximum rate.
In 2004, Tutor Perini opened a non-discretionary BAS investment-brokerage account. Plaintiff's Treasurer Susan Mellace ("Ms. Mellace") made daily investment decisions under the oversight of its President Robert Band and CFO Kenneth Burk. Lois McGrath ("Ms. McGrath") was the BAS account representative assigned to plaintiff's account.
In May, 2006, BAS published general ARS disclosures on its public website which 1) warned that auctions could fail, 2) explained that BAS "routinely" bids in auctions to prevent auction failures even though it is not obligated to do so and "[i]nvestors should not assume that BAS will place a bid ... or that Failed Auctions... will not occur" and 3) described
Plaintiff purchased its first SLARS in September, 2007 after which Ms. Mellace received 1) an email attaching "Important Auction Rate Securities Disclosures," 2) a trade confirmation noting that the SLARS have a 2036 maturity date and 3) a spreadsheet reflecting the specific maximum-rate formulas for various SLARS.
In December and January, 2007, after liquidating more than $100 million of ARS, plaintiff purchased the eight SLARS at issue in this case ("the eight SLARS"). The collateral underlying six of them was backed by the federal government while the other two were insured by Ambac, a monoline bond insurer ("Ambac-Wrapped SLARS"). The prospectuses of the eight SLARS warned that auction failures are especially likely
In the fall of 2007, interest rates for ARS increased due to reduced investor demand. At the same time, major indices upon which the maximum rates were based for the ARS at issue were trending downward. Because auction failure was more likely when maximum rates fell below market rates, many issuers implemented waivers to raise temporarily the maximum rates on their ARS. BAS and other broker-dealers also began placing support bids with increasing frequency.
In early 2008, Ms. McGrath alerted plaintiff to adverse Ambac-related news, such as the downgrade of Ambac's credit rating from AAA to AA and a report that the company had a likelihood of going bankrupt. Tutor Perini nevertheless placed hold orders for the Ambac-Wrapped SLARS on January 17 and February 5, 2008.
On February 6, 2008, certain executives at BAS prepared a memorandum seeking permission from management to increase ARS inventory levels in order to relieve some balance sheet pressure. BAS management assented to that request.
Between February 7 and February 12, 2008, however, seven prominent broker-dealers decided to withhold supporting bids in all SLARS auctions and allowed them to fail. On February 13, 2008, BAS followed suit and withdrew its support for SLARS as well.
At the time of the market collapse, Tutor Perini held in its account at BAS ARS with a face value of nearly $200 million. During the succeeding four years, plaintiff struggled to liquidate more than one half of its ARS portfolio at par value. It subsequently resorted to selling the eight SLARS on the secondary market for an average of 95% of par value for the six backed by the federal government and 37% of par value for the two Ambac-Wrapped SLARS.
Tutor Perini alleges that between September, 2007 and February, 2008, defendants made misrepresentations and material omissions with respect to, inter alia, 1) the state of the ARS market, 2) the frequency BAS obtained ARS maximum rate waivers and 3) the increased submissions of auction-support bids by BAS that led to a tripling of its ARS inventory by the end of 2007. Plaintiff contends that it was not properly informed of all material facts relating to the ARS market and was therefore misled about the risk of investing in SLARS during that time period.
Plaintiff initiated this lawsuit in May, 2011 asserting claims against defendants for 1) securities fraud, in violation of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) ("the Exchange Act") and Rule 10b-5 promulgated thereunder (Count I), 2) intentional misrepresentation (Count II), 3) fraudulent concealment (Count III), 4) negligent misrepresentation (Count IV), 5) violation of M.G.L. c. 93A ("Chapter 93A") (Count V), 6) civil conspiracy (Counts VI-VII), 7) violation of the Massachusetts Uniform Securities Act ("MUSA"), M.G.L. c. 110A (Count VIII), 8) breach of contract (Count IX) and 9) conversion (Count X).
In November, 2011, defendants moved to compel arbitration. That motion was referred to Magistrate Judge Judith G. Dein and in June, 2012, she denied defendants' motion.
In August, 2012, defendants filed a motion to dismiss which was referred to Magistrate Judge Dein for a Report & Recommendation ("R&R"). In July, 2013, Magistrate Judge Dein entered an R&R recommending the allowance of defendants' motion to dismiss with respect to Counts VI, VII, IX and X of plaintiff's complaint. The Court accepted and adopted the R&R in September, 2013.
Following comprehensive discovery, the parties filed their motions for summary judgment in May, 2015. Trial is currently scheduled to commence on September 14, 2015.
The role of summary judgment is "to pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial."
A fact is material if it "might affect the outcome of the suit under the governing law."
If the moving party satisfies its burden, the burden shifts to the non-moving party to set forth specific facts showing that there is a genuine, triable issue.
Defendants contend that BANA is entitled to summary judgment on every claim because all of the activity at issue occurred at BAS and plaintiff has failed to identify any misconduct by BANA. The Court agrees.
Accordingly, defendants' motion for summary judgment with respect to plaintiff's claims against BANA will be allowed.
Tutor Perini claims that BAS misrepresented 1) the long-term nature of ARS, 2) the effect of auction failures in August, 2007 on SLARS, 3) the reason that it sold ARS at a discount in late 2007 and 4) that it would continue to submit auction-support bids.
Plaintiff's opposition to defendants' motion for summary judgment does not, however, respond to defendants' arguments refuting the allegations of misrepresentation.
Plaintiff also fails to identify any false statements made by BAS,
Summary judgment in favor of defendants with respect to Counts II and IV will therefore be allowed. Furthermore, summary judgment in favor of defendants as to plaintiff's securities fraud claims in Counts I and VIII will be allowed to the
Section 10(b) of the Securities Exchange Act and Rule 10b-5 make it unlawful for any person 1) to employ any device, scheme or artifice to defraud, 2) to make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made not misleading or 3) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5.
In order to prevail under Section 10(b) and Rule 10b-5 based on misrepresentations and omissions, plaintiff must prove 1) a material misrepresentation or omission, 2) scienter, 3) a connection with the purchase or sale of a security, 4) reliance, 5) economic loss and 6) loss causation.
Plaintiff does not appear to pursue its misrepresentation argument and its omission claim is essentially that BAS materially omitted to disclose a number of facts relating to the ARS market that rendered plaintiff unable fully too appreciate the heightened risk of ARS auction failure. Tutor Perini contends that BAS concealed 1) the frequency of auction-support bids, 2) its rising ARS inventory, 3) the maximum rates of the eight SLARS and the difference between those rates and the securities' clearing rates, 4) that SLARS issuers obtained maximum-rate waivers, 5) other ARS auction failures between August, 2007 and February, 2008 and 6) its alleged mid-December, 2007 contingency plan to allow auctions to fail selectively.
The Court concludes that the alleged omissions were, in fact, disclosed to the plaintiff and/or in publicly available documents. "It is indisputable that there can be no omission where the allegedly omitted facts are disclosed."
With respect to the support bidding, it is undisputed that BAS disclosed that 1) it "routinely" placed bids that "may be designed to prevent a Failed Auction" and 2) it "may discontinue trading in the securities without notice for any reason at any time." Plaintiff also had access to information relative to the extent of BAS's ARS inventory levels and to the maximum rates and clearing rates of the eight SLARS through an online-banking platform and spreadsheets sent to plaintiff reflecting the par amount of all ARS in BAS's inventory. Although it might have been difficult to calculate the fluctuating maximum rates, federal securities laws require
Tutor Perini is, however, a sophisticated Qualified Institutional Buyer that received numerous written disclosures about the risks of auction failure. Because that risk was disclosed accurately, there is no duty to disclose all facts reflecting the degree of risk.
Plaintiff attempts to distinguish its case by claiming that the cases cited by BAS involved only misrepresentations by defendant rather than material omissions. That is incorrect. For example, in
Plaintiff's alternative theory for liability under Section 10(b) is that BAS sold securities that were unsuitable to Tutor Perini's conservative investment objectives. To prove that claim, plaintiff must show
As an initial matter, "[s]ophisticated investors have difficulty establishing suitability claims."
In any event, plaintiff cannot prove its unsuitability claim on the merits because 1) BAS provided prospectuses for the eight SLARS that specifically cautioned that ARS may be unsuitable "if you require a regular or predictable schedule of payments" and 2) the Court has already concluded, as a matter of law, that BAS did not make material misrepresentations or breach a duty to disclose material facts.
Accordingly, defendants' motion for summary judgment with respect to Count I will be allowed.
For substantially the same reasons underlying the Court's determination to allow summary judgment with respect to Count I, i.e., the failure to demonstrate the alleged omissions of material facts, the Court will allow defendants' motion for summary judgment as to plaintiff's claims for fraudulent concealment (Count III) and violation of Chapter 93A due to "unfair methods of competition and unfair or deceptive acts or practices" (Count V).
Section 410(a)(2) of MUSA imposes civil liability on any person who offers or sells a security "by means of any untrue statement of material fact" or statement that is misleading due to omissions of material facts. M.G.L. c. 110A, § 410(a)(2). In order to prevail under that statute, plaintiff must establish that
The parties dispute whether MUSA applies to the secondary market transactions at issue in this case. Even assuming that the statute does apply to secondary market transactions, plaintiff's MUSA claim cannot survive summary judgment because plaintiff has failed to offer evidence that BAS made "any untrue statement of material fact" or omitted a material fact that is necessary to make a prior statement not misleading.
Massachusetts law adheres to "a long standing rule of nonliability for bare nondisclosure."
Tutor Perini has not satisfied either prong of liability. Because the auction failure risk was disclosed accurately, there is no duty to disclose all facts reflecting the degree of risk.
Accordingly, defendants' motion for summary judgment with respect to Count VIII of plaintiff's complaint will be allowed.
Plaintiff has filed a cross motion for summary judgment with respect to the Massachusetts Uniform Security Act, M.G.L. c. 110A, § 410(a)(2) (Count VIII) and the Massachusetts Consumer Protection Act, M.G.L. c. 93A (Count V). Because the Court will allow summary judgment for the defendants on those claims, plaintiff's motion will be denied as moot.
For the foregoing reasons,