Bass, Berry & Sims attorney Chris Lazarini discussed the heightened pleading standard for claims of fraud under Rule 9(b) in an auction rate securities case. 

Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication.

William Beaumont Hospital System vs. Morgan Stanley & Co., LLC, No. 16-1135 (6th Cir., 1/26/17) 

Under Rule 9(b)'s heightened pleading standard, claims of fraud must state with particularity: (1) the statements Plaintiff contends were fraudulent, (2) the identity of the speaker, (3) where and when the statements were made, and (4) an explanation of why the statements were fraudulent. 

In 2006, the parties entered into bond purchase agreements and an interest rate swap agreement for Plaintiff's auction rate securities ("ARS") issuance, which Defendants would underwrite and auction. In late 2007, the ARS market collapsed. Defendants initially submitted covering bids to support Plaintiff's ARS sales, but stopped doing so in early 2008. To avoid a failed auction, Plaintiff was forced to pay investors interest rates higher than anticipated. In 2014, Plaintiff sued, alleging that Defendants omitted material information about the ARS market, their cover bidding process and the availability of different interest rate structures, and failed to warn Plaintiff about the deteriorating ARS market in 2007 and 2008. The district court dismissed, finding Michigan's six-year statute of limitations on Plaintiff's common law fraud claims had run, and Plaintiff failed to state a claim for relief under FRCP 12(b)(6) (see SLA 2016-06).

Conducting a de novo review, the Sixth Circuit affirms the 12(b)(6) dismissal, because Plaintiff failed to meet FRCP 9(b)’s heightened pleading standards. First, the Court rejects Plaintiff's claim that Defendants failed to disclose their ability to stop making cover bids, pointing out that Plaintiff acknowledged Defendants' right to do so in its 2006 ARS Official Statement. Second, the Court finds Plaintiff's allegations regarding alternative interest rate structures too vague because Plaintiff failed to describe the time, place, speaker and content of the alleged fraud. Plaintiff's failure to warn claims, the Court concludes, fail for the same reason and because the volatility in the ARS market was "widely-known" in the financial markets. Finally, Defendants had no duty to provide ongoing disclosures about the ARS market, and without that duty, there can be no fraud by omission. Because the Court affirms on 12(b)(6) grounds, it declines to address the statute of limitations issues. 

Goldman Sachs was also a Defendant.