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