Wednesday, March 28, 2012

Market Manipulation Not Shown in ARS Case

The 2nd Circuit found, in a summary order that a purchaser of auction-rate securities failed to state a manipulation claim against Citigroup. The market was not misled, concluded the court, because the transactions' terms were adequately disclosed. Finn v. Smith Barney.

The core allegation in the complaint was that the plaintiffs purchased Citigroup auction-rate securities based on their belief that auction clearing rates were determined solely by investor supply and demand when, in fact, the defendants were increasingly intervening in the ARS market without plaintiffs’ knowledge. Howver, the claims were not actionable in light of Citigroup's disclosures that "in its sole discretion” could routinely place one or more bids in an auction for its own account to prevent a failed auction. The disclosures noted that "bids by Citigroup...are likely to affect (i) the auction rate...and (ii) the allocation of ARS being auctioned.

Accordingly, the court found that the plaintiffs could not plausibly allege that Citigroup was intervening in the ARS market without their knowledge or that they reasonably believed that auction clearing rates were determined by “the natural interplay of supply and demand."

The court also rejected the purchasers' arguments that notwithstanding the disclosures, the conduct was misleading due to the increasing frequency with which Citigroup placed support bids. However, the Citigroup statement that it "may routinely" place support bids precluded recovery on the claims.

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