Posted On: April 7, 2011

Dow Corning Corp.’s $165M Securities Fraud Lawsuit Against Merrill Lynch & Co. Can Proceed, Says District Court Judge

The U.S. District Court for the Southern District of New York’s Chief Judge Loretta A. Preska says that Dow Corning Corp. can sue Merrill Lynch & Co. for securities fraud. Dow Corning is claiming $165 million in auction-rate securities losses. Dow Corning says that it still has not been able to sell its ARS. The company and two affiliates, its Devonshire Underwriters unit and Hemlock Semiconductor Corp., had filed their complaint against the Bank of America-owned Merrill for falsely misrepresenting the ARS, for which Merrill acted as managing broker and underwriter.

Preska denied Merrill’s motion to dismiss the complaint, noting that this securities fraud lawsuit is different from other ARS lawsuits, in which motions to the defendants' motions to dismiss were granted. Unlike other ARS cases, Dow Corning is challenging certain omissions and statements that Merrill allegedly made to reassure the company that the investments were safe even while knowing the ARS market was failing. The court says that for purposes of its ruling, it is taking the allegations to be true.

Dow Corning says Merrill’s actions violated the Michigan Uniform Securities Act, the 1934 Securities Exchange Act’s Section 10(b), and breached a number of common law duties. The contends that Merrill knew as far back as early 2007 that trouble was brewing with the ARS market yet the broker allegedly stepped up efforts to sell ARS to investors. Even though Dow Corning asked questions about possible issues with the market, the broker is accused of not revealing the information it had and, instead, making reassuring statements that were actually misleading misstatements. The court says Merrill was obligated to “speak truthfully.”

Related Web Resources:
Merrill Loses Bid to Throw Out Dow Corning Auction-Rate Lawsuit, Bloomberg, March 30, 2011

Dow Corning Suit Against Merrill Lynch Over ARS Losses Survives Motion to Dismiss, BNA Securities, April 4, 2011


More Blog Posts:
Akamai Technologies Inc’s ARS Lawsuit Against Deutsche Bank Can Proceed, Institutional Investor Securities Blog, March 4, 2011

Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund, Institutional Investor Securities Blog, November 11, 2010

Class Auction-Rate Securities Lawsuit Against Raymond James Financial Survives Dismissal, Stockbroker Fraud Blog, September 27, 2010

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