## Facts

- Investors brought a putative class action alleging losses from purchasing auction-rate securities (ARS) sold by UBS entities.
- ARS were long-term instruments whose rates reset through periodic auctions; investors expected liquidity through the ability to sell at auctions.
- UBS underwrote ARS and acted as auction dealer, including placing “support bids” to prevent auction failures and influence clearing rates.
- Plaintiffs alleged UBS’s support bidding created a false appearance of liquidity and that UBS downplayed the market’s dependence on dealer support and the low maximum rates on certain ARS.
- In 2007–2008, as credit markets deteriorated, UBS reduced and then stopped support bidding; in February 2008 many auctions failed, leaving investors unable to sell or selling at losses.
- The consolidated amended complaint asserted claims under Exchange Act § 10(b) and Rule 10b-5 (misrepresentation and scheme theories) and § 20(a) control-person liability against certain executives.
- Defendants moved to dismiss under Rule 12(b)(6), arguing disclosures and public information about ARS auction mechanics defeated the fraud theories.

## Issues

1. Whether alleged support bidding and related conduct stated a deceptive or manipulative act under Exchange Act § 10(b) and Rule 10b-5 where offering materials disclosed dealer bidding and the risk of failed auctions and illiquidity.
2. Whether alleged omissions about the extent and purpose of support bidding, and the market’s reliance on such bids, were materially misleading in light of written risk disclosures.
3. Whether plaintiffs adequately pled scienter, reliance, and loss causation for Rule 10b-5 misrepresentation and scheme liability theories.
4. Whether executives could be liable under § 20(a) absent a well-pled primary violation.

## Decision

- The court granted defendants’ motion to dismiss the federal securities claims.
- The court held plaintiffs failed to plead actionable deception or manipulation because offering materials warned that dealers could place bids, might stop doing so, and auctions could fail causing illiquidity.
- The court treated generalized statements characterizing ARS as safe or liquid as nonactionable in context of specific written cautions about auction failure and liquidity risk.
- Because the complaint did not plead a primary § 10(b) violation, the § 20(a) control-person claim was dismissed as derivative.

## Legal Principles

- Market manipulation under § 10(b) generally requires deceptive market activity that is concealed or creates a false signal; disclosed auction mechanisms and dealer intervention undermine a manipulation theory.
- Specific, written risk disclosures can defeat claims that investors were misled by contrary implications of guaranteed liquidity or continuing dealer support.
- General promotional statements about safety or liquidity are typically not actionable when contradicted or qualified by detailed risk warnings (including under “bespeaks caution” reasoning).
- Losses attributable to the materialization of disclosed risks are not plausibly pled as fraud-caused losses absent facts showing a corrective disclosure of a prior concealed fraud.
- § 20(a) control-person liability depends on a well-pled underlying securities-law violation.

## Conclusion

The court dismissed ARS investors’ Exchange Act claims against UBS and certain executives because the core practices and risks alleged to be fraudulent—dealer support bidding, the possibility of withdrawal of that support, auction failure, and resulting illiquidity—were disclosed in offering materials, defeating pleading of deception, reliance, and loss causation and thereby foreclosing derivative § 20(a) liability.


In re UBS Auction Rate Sec. Litig., 2010 U.S. Dist. LEXIS 59024 (S.D.N.Y. 2010)