Legal News

Judge to ARS Plaintiffs: ?You Already Recovered, Now Get Outta Here?

By Ashby Jones

This morning, at least one bank has at least one fewer headache to deal with. In a closely watched case, a federal judge in Manhattan, Lawrence McKenna, dismissed a suit brought by investors against UBS alleging the bank had misled them when it sold them auction-rate securities. Click here for the ruling, here for coverage from the NYT; here for Bloomberg’s story.

McKenna ruled that the investors were not entitled to continue their litigation because UBS had reached a $19.4 billion settlement in the matter in August with the SEC and regulators in several states. The bank agreed to buy back nearly that amount of securities as well as pay a fine.

The notable language from McKenna’s opinion:

Given that Plaintiffs have availed themselves of the relief provided for in the Regulatory Agreement, Plaintiffs cannot now allege out-of-pocket damages. When Plaintiffs elected to have UBS buyback their ARS at par value, they received a full refund of the purchase price. Therefore, Plaintiffs have already been returned to the position they were in before they purchased the ARS and before any fraud ensued. They paid $25,000 per share for ARS and have now received $25,000 per share plus the interest or dividends the ARS accrued during the period Plaintiffs held them.

And though Plaintiffs allege that they “overpaid” for the ARS, the full refund they received certainly accounted for an inflated purchase price. In sum, Plaintiffs’ out-ofpocket damages are necessarily zero because after choosing to rescind the ARS purchases, Plaintiffs have effectively paid nothing for their ARS.

Since the $330 billion market for auction-rate securities collapsed in February 2008, at least 39 proposed class-actions have been filed against 19 broker-dealers. The investors, who filed their complaint in March 2008, asserted that UBS had known that the market for the securities was collapsing amid the financial crisis.

McKenna's decision is the first to dismiss consolidated auction-rate-securities cases against banks. Other pending cases include those against Citigroup, JPMorgan Chase & Co. and Merrill Lynch.

According to the NYT, the dismissal could mean that similar lawsuits against other banks might also be dismissed.

Full post as published by Law Blog - WSJ.com on March 31, 2009 (boomark / email).