Circuit Courts Uphold Dismissal of Securities Claims Based on Alleged Fraud in Sale of Auction Rate Securities


Two recent opinions from separate federal courts of appeal upheld the dismissal of lawsuits by sophisticated investors that suffered losses in the auction rate securities ("ARS") market against the securities broker-dealers that allegedly fraudulently induced the purchase of the ARS.1

The plaintiffs in the two separate lawsuits were identical: Ashland, Inc., a diversified global chemical company, and AshThree LLC, the special purpose entity that the company solely owned and operated (collectively, the "Company"). The Company contended that the securities broker-dealers had assured it that the ARS were safe, liquid instruments suitable to the Company's conservative investment policies.2 Furthermore, the Company maintained that not only did the securities broker-dealers represent that auction failures were very rare, but also that, should the need arise, the broker-dealers would act to prevent auction failures by placing sufficient proprietary bids. When the ARS market collapsed in February 2008, the Company was left with millions of dollars in illiquid ARS and, unable to sell most of these holdings, discounted them by millions of dollars and lost similar amounts in the few sales it did execute.

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Published In: Business Torts Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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