Broker-Dealer Litigation - Greenberg Traurig LLP

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Berman v. Morgan Keegan & Co., 2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011).
Using proceeds from the sale of stock, plaintiffs acquired floating rate notes with a
market value of approximately $8.3 million. Under section 1042 of the Internal Revenue Code,
the plaintiffs could defer capital gains tax on the sale of the stock as long as they did not sell the
replacement property, the floating rate notes. The plaintiffs participated in a 90% loan program,
which was run by two affiliated companies (the “Companies”). The Companies claimed that the
90% loan program would allow the plaintiffs to pledge their floating rate notes as loan collateral
and in return receive 90% of the collateral value in cash without selling the replacement property
and triggering the tax consequences. Instead of holding the collateral, the Companies
immediately sold the collateral upon receipt. The Companies had an account with defendant, a
securities broker-dealer. The collateral was deposited into the Companies’ account with
defendant, and the Companies instructed the defendant to direct a trader to sell the pledged
collateral. The defendant then wired the sale proceeds to the Companies’ bank account. The
Internal Revenue Service informed plaintiffs that because the replacement property was sold,
plaintiffs did not qualify for the deferred capital gains tax and were liable for taxes and penalties.
Plaintiffs alleged that defendant aided and abetted the Companies’ common law fraud. The court
found that plaintiffs pleaded the underlying fraud with the requisite particularity, but that
plaintiffs failed to plead facts with the requisite particularity to support their claim that defendant
had actual knowledge of the underlying fraud. Defendant did not know, nor was it responsible
for knowing how the 90% loan program was marketed to customers. Additionally, the “Know
Your Customer Rules” refer to what broker-dealers should know, but do not reflect actual
knowledge required for aiding and abetting fraud.
Fulton Bank v. UBS Securities, 2011 WL 5386376 (E.D. Pa. Nov. 7, 2011)
Fulton Bank (“Fulton”) brought a claim against UBS Securities (“UBS”) for (1) common
law fraud, and (2) aiding and abetting common law fraud. Fulton held institutional investment
accounts with two broker-dealers, PNC and NatCity. Using these accounts, Fulton purchased
Auction Rate Securities (“ARS”) at an auction managed by UBS. In its complaint, Fulton stated
that UBS was Fulton’s broker-dealer and improperly misled them by placing support bids that
artificially inflated the value of ARS. Fulton also alleged that had it known about the instability
of the ARS market, or been told that UBS supported the auctions despite insufficient investor
demand, it would not have continued investing in ARS. The court granted UBS’ motion to
dismiss. With respect to the common law fraud claim, the court concluded that the complaint did
not allege facts sufficient to establish that (1) UBS had a duty to disclose, (2) Fulton justifiably
relied on UBS’s omissions, or (3) UBS acted with scienter. In addition, the court found that
there was no allegation that UBS knew of any fraud being perpetuated by PNC or NatCity. The
only role UBS played in this transaction was running an auction at the request of issuers and
paying commissions to brokers, neither of which constituted aiding and abetting.
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