Broker-Dealer Litigation - Greenberg Traurig LLP

f. Affirmative Defenses
Wilson v. Merrill Lynch & Co., Inc., 2011 WL 5515958 (2nd Cir. 2011).
C.1.f
Investors brought a class action against Merrill Lynch alleging securities fraud in
violation of the Securities Exchange Act of 1934 related to auction rate securities (“ARS”)
purchases. Plaintiffs alleged that defendant engaged in a scheme to manipulate the ARS market
by using its own capital to place bids in order to prevent auction failures. The district court
entered an order granting defendant’s motion to dismiss and investor appealed. On appeal,
defendant argued that it had made various public disclosures of its ARS auction practices,
several of which were the result of an SEC investigation. In evaluating plaintiffs’ market
manipulation claims, the court found that Second Circuit case law clearly required a showing
that an alleged manipulator engaged in market activity aimed at deceiving investors as to how
other market participants had valued a security. The case law was less clear as to when
disclosures were sufficient to negate a claim that a certain market practice is manipulative. In
addressing the disclosures, the court recognized the “bespeaks caution” doctrine, which provided
protection to someone who adequately warned investors of certain risks. However, the court
noted that cautionary words about future risk cannot insulate one from liability for the failure to
disclose that the risk has already transpired. Nonetheless, the court, in affirming the district
court, held that Merrill’s disclosures were adequate to defeat the allegation that its practices
amounted to a market manipulation.
U.S. v. Behrens, 2011 U.S. App. LEXIS 14294 (8th Cir. July 13, 2011).
C.1.f
Defendants pled guilty pursuant to a plea agreement to, inter alia, the violation of Rule
10b-5 of the Securities Exchange Act of 1934 brought in an enforcement action. Defendants
were sentenced to serve jail time. At the sentencing hearing, Defendants asserted the “noknowledge”
provision as an affirmative defense. Under the no-knowledge provision, a defendant
is not subject to imprisonment if he or she proves that he had no knowledge of such rule or
regulation. The district court held that, as a matter of law, pleading guilty to a statutory offense
prevents a defendant from asserting the no-knowledge defense. On appeal, the Eight Circuit
reversed and remanded, holding that the government must prove that a person “willfully”
violated Rule 10b-5 prior to that person being imprisoned. Pleading guilty does not, as a matter
of law, prevent a defendant from asserting the no-knowledge defense. Accordingly, the district
court erred by holding defendants could not have asserted the no-knowledge defense.
Goldenson v. Steffens, 802 F. Supp.2d 240 (D. Maine 2011).
C.1.f
Investors brought action against investment firms and managers for, inter alia, Section
10(b) and Rule 10b-5 violations arising out of recommendation made in connection with a hedge
fund. Defendants allegedly made these recommendations verbally and through confidential
offering memoranda. Plaintiffs alleged that the hedge fund was merely a feeder fund for the
Madoff fund. Defendants made a motion to dismiss on two grounds. First, defendants argued
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