A Cascade of Subprime Securities Suit Dismissal Motion Rulings

A Cascade of Subprime Securities Suit Dismissal Motion Rulings

I was only away from the office for a few days last week, but while I was away, an absolute cascade of dismissal motion rulings in subprime and credit crisis-related securities cases arrived. A number of the rulings were sufficiently favorable to the defendants that Alison Frankel commented in an April 1, 2010 article in the AmLaw Litigation Daily that "it's been a truly lousy week for plaintiffs' lawyers in the securities bar."

 But while the defendants did indeed prevail in there motions to dismiss in a number of very high profile subprime and credit crisis-related securities lawsuits, not all of the rulings were favorable to the defendants. In several cases, the dismissal motions were denied, and in other cases enough of the case survived the dismissal motion rulings that the plaintiffs probably consider themselves to have been successful. As discussed further below, there arguably are certain discernable trends amongst all of these rulings.

 Dismissal Motions Granted

The dismissal motion rulings that are most favorable to the defendants undoubtedly are the highest profile cases amongst the latest rulings. Here is a brief summary of the defense friendly rulings:

American International Group Derivative Litigation: In a March 30, 2010 opinion, Southern District of New York Judge Laura Taylor Swain granted the motion to dismiss the shareholders' derivative suit that had been filed against American International Group and certain of its individual officers and directors. The plaintiffs claimed that the defendants had failed to properly oversee the company's credit default contracts and had made certain material misstatements and omissions regarding the company's financial health and risk management. The plaintiffs also allege waste and breach of fiduciary duty with regard to the company's dividend increase and share buybacks instituted in the month's preceding the company's near collapse and government rescue.

The defendants moved to dismiss on the grounds that the plaintiffs failed to make presuit demand. The plaintiffs contended that because it would have been futile, demand was excused.

Judge Swain granted the defendants' motion, concluding that because at least of five of the company's nine June 2009 directors were sufficiently disinterested and independent, demand was not excused.

Of particular interest, in granting the defendants' motion with respect to plaintiffs' allegations concerning the alleged failure to oversee the company's credit default swap exposures, the court specifically observed (in reliance on the Delaware Chancery Court's February 2009 dismissal of the subprime-related derivative suit filed against Citigroup) that a plaintiff "may not support a claim based on the duty of oversight...merely by identifying signs of general difficulty in the market in which the company participates and asserting that the defendants should be held liable for exercising their business judgment in a manner that appears to have been inconsistent with those indications." Rather a plaintiff must allege that the directors "knew they were not discharging their fiduciary obligations" or "demonstrated a conscious disregard for their obligations."

Merrill Lynch Auction Rate Securities Litigation: In a March 31, 2010 ruling, Judge Loretta Preska granted the motion of defendants to dismiss the auction rate securities litigation that had been filed against Merrill Lynch and related entities. Judge Preska's ruling is the latest in a series of auction rate securities lawsuit dismissals. However unlike many of the dismissals (for example, the dismissal of the UBS auction rate securities lawsuit), the dismissal did not depend alone on the Merrill Lynch's entry into a regulatory settlement. The dismissal was, rather, on the merits.

Specifically, Judge Preska held, citing the recent ruling in the Raymond James auction rate securities litigation, discussed here, that the plaintiffs had failed to allege with sufficient specificity, with respect to the allegedly misleading statements about the securities, "which financial advisors made such statements or when, where and to whom the statements were made."

Judge Preska also rejected the plaintiffs' arguments that the defendants had engaged in manipulative conduct, holding that as a result of the defendants' 2006 auction rate securities settlement with the SEC and related disclosures, the defendants' market-related conduct was fully disclosed. Judge Preska also found that the plaintiffs had not sufficiently pled reliance.

In addition to the ruling in the Merrill Lynch case, in a March 30, 2010 order, Southern District of New York Judge Robert Patterson granted the motion of defendant Morgan Stanley to dismiss the individual action Ashland Inc. and related entities had filed against the company, alleging securities violations in connection with the plaintiffs' purchase of over $66 million of auction rate securities. Judge Patterson found that certain allegations do not involve the "purchase or sale of securities," as they involved only the alleged inducement to hold securities. Judge Patterson also found that the plaintiffs' allegations failed to support a strong inference of scienter. He also held that the plaintiffs had failed to establish that they had reasonably relied on the supposedly misleading statements.

Read Cascade of Subprime Securities Suit Dismissal Motion Rulings in its entirety on The D&O Diary.