Broker-Dealer Litigation - Greenberg Traurig LLP

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Berman v. Morgan Keegan & Co., Inc., 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’ breach of fiduciary duty.
Under New York law, a claim for aiding and abetting a breach of fiduciary duty requires: (1) a
breach by a fiduciary of obligation to another, (2) that the defendant knowingly induced or
participated in the breach, and (3) that plaintiff suffered damage as a result of the breach. The
court found that plaintiffs failed to show that defendant had actual knowledge of the breach.
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 breach of
fiduciary duty. 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 dismissed and found that UBS did not breach any fiduciary duty
because “no such relationship developed between UBS and Fulton.” In order to prove that a
breach of fiduciary duty occurred, a party must show confidence reposed by one side and
domination and influence exercised by another. The court emphasized that it is not enough to
show that plaintiff reposed its trust in defendant. Instead, defendant must have accepted the
fiduciary relationship. Here, the court explained that Fulton’s interaction with UBS was solely
through its retail brokers. This indirect relationship was not enough to create any fiduciary duty.
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