Federal Judge Says What She Means In ARS Case

November 30, 2016

Today's BrokeAndBroker.com Blog is a departure from our normal coverage. In fact, speaking of departures, let's immediately digress (and what better time to digress than at the start of things!) with one of my favorite quotes from Lewis Carroll's "Alice's Adventures in Wonderland":

"Come, we shall have some fun now!" thought Alice. "I'm glad they've begun asking riddles.--I believe I can guess that," she added aloud.

"Do you mean that you think you can find out the answer to it?" said the March Hare.

"Exactly so," said Alice.

"Then you should say what you mean," the March Hare went on.

"I do," Alice hastily replied; "at least--at least I mean what I say--that's the same thing, you know."

"Not the same thing a bit!" said the Hatter. "You might just as well say that 'I see what I eat' is the same thing as 'I eat what I see'!"

"You might just as well say," added the March Hare, "that 'I like what I get' is the same thing as 'I get what I like' ! "

"You might just as well say," added the Dormouse, who seemed to be talking in his sleep, "that 'I breathe when I sleep' is the same thing as 'I sleep when I breathe' '! "

As the wise March Hare admonished Alice, saying what you mean is not the same thing as meaning what you say. Not at all. Not the same thing a bit!

All of which ends this digression and returns us to our point of departure.

The rules, regulations, laws, decisions, and opinions of the financial services community are attempts at elucidation that yield only obfuscation. Those charged with drafting such materials should have the ability to write what they mean but seem capable of only meaning what they write . . . and the industry and the public are left as so many Hatters, March Hares, and Dormouses to figure out what the hell was written and what the hell it means.

It is with great pleasure, therefore, that I introduce you to the online biography of Judge O. Rogeriee Thomspon of the United States Court of Appeals for the First Circuit ("1Cir"):

Judge Thompson was appointed to the First Circuit Court of Appeals in March 2010. She graduated from Brown University in 1973 and Boston University School of Law in 1976. She worked as a Staff Attorney at Rhode Island Legal Services from 1976 to 1979. From 1979 to 1988, she worked in private practice, and she served as an Assistant City Solicitor in Providence, Rhode Island from 1980 to 1982. She served as a Judge on the Rhode Island District Court from 1988 to 1997, and as a Justice on the Rhode Island Superior Court from 1997 to 2010. Chambers phone number: (401) 272-2960.

Class, please take your seats. Quiet everyone.

Let's Judge Thompson's "Overview":

Today's dispute is part of the fallout from the financial system's near meltdown in the late 2000s. On one side of this dispute is Tutor Perini Corporation ("Tutor Perini"). On the other side is Banc of America Securities LLC and Bank of America, N.A. ("BAS" and "BANA," respectively). To hear Tutor Perini tell it, BAS - acting as its broker-dealer, and with BANA's knowledge and acquiescence - sold it auction-rate securities ("ARS") without disclosing that the ARS market was heading for a spectacular crash.1 But to hear BAS and BANA tell it, BAS actually disclosed the risks that later materialized. An obviously unconvinced Tutor Perini sued BAS and BANA in federal district court, alleging securities fraud under state and federal law, as well as a medley of other state-law claims. On cross-motions for summary judgment, the district judge sided with and BANA. Concluding that triable claims exist worthy of a jury's time and attention, we - for reasons recorded below - affirm in part, vacate in part, and remand.


Footnote:  1 We apologize for all the acronyms - they seem to go with the territory in cases like this, however.

Page 2 of the Opinion

My, my, my . . . isn't that a refreshing bit of judicial composition? It's an understandable introduction to what is going to be a very complicated case. Judge Thompson is quite adept at the use of English rather than Legalese.  She paints a picture with her words. She injects some humor and a touch of sarcasm . . . do I detect a dash of humor?

I am not going to steal Judge Thompson's thunder and present you with Bill Singer's regurgitation of the facts in dispute and the procedural issues under consideration in Tutor Perini. Usually, I do but not today. I can't reduce things down to a better essence than what Judge Thompson did. She authored a devastatingly effective and cogent explanation about the Auction Rate Securities market and the specific issues of this lawsuit. I'm not going to gild that lily.

After setting the stage as to why Tutor Perini is on appeal before the 1Cir, Judge Thompson embarks upon about a 30-page explanation of what the federal appellate court found to be the facts and the law, and the rationale for each determination. This Opinion is a phenomenal primer on ARS and how the Great Recession hammered that market into a pulp.

As seems to be her penchant, Judge Thompson eschews the conventions of composing an Opinion and opts for plain-speaking. Consider her folksy heading for that point where she proceeds to detail 1Cir's findings: "OUR TAKE ON THE CASE":

(a) Bana Stays Out

Stressing that Tutor Perini failed to identify any misconduct on its part, BANA asked the judge to jettison all claims against it. Not so fast, said Tutor Perini: federal and state securities laws "extend liability to control persons," and, the argument continued, BANA is on the hook as a "controlling person," given the actions of two BANA employees and two dual BAS/BANA employees who had "analyzed maximum rate waivers and liquidity risks for deciding which auctions to fail." Unfazed, BANA shot back that Tutor Perini never pled "federal and state control person claims . . . in four years of litigation" and could not debut those new claims in its summary-judgment submissions. The judge thought BANA had the better of the argument. And so do we, because Tutor Perini alleged zero facts indicating that BANA actually exercised control over BAS. See Aldridge v. A.T. Cross Corp., 284 F.3d 72, 85 (1st Cir. 2002) (emphasizing that "the alleged controlling person must not only have the general power to control the company, but must also actually exercise control over the company"). Seeking a way around that problem, Tutor Perini now says that BAS needed BANA's blessing to expand its ARS inventory in February 2008 - surely that shows control, Tutor Perini insists. But Tutor Perini waived that point by not bringing it to the district judge's attention, and Tutor Perini makes no argument that any exception to the raise-or-waive rule applies. See, e.g., Ouch v. Fed. Nat'l Mortg. Ass'n, 799 F.3d 62, 67 n.5 (1st Cir. 2015) . . .

Pages 24 -25 of the Opinion

Bill Singer's Comment

Today's BrokeAndBroker.com Blog is a homage to a sitting Judge who truly understands that she is not merely writing for an audience of corporate lawyers but is also writing to inform the public, to document what a court found, and to explain why the court ruled as it did. You may think that's a simple task. Think again. Do yourself a favor: read Judge Thompson's Opinion in Tutor Perini.