Bank of America Snuffs Market Manipulation Suit

(CN) - Investors lost their fourth attempt to sue Bank of America for allegedly manipulating the $330 billion Auction Rate Securities market from 2006 until its February 2008 collapse, which left investors holding billions of dollars in essentially worthless securities. A San Francisco federal judge dismissed the suit with leave to amend for a fifth round.

Auction Rate Securities (ARS) are bonds based on underlying assets that have an interest rate determined by Dutch auction where the securities are sold to the investor willing to accept the lowest rate of return on the bonds being issued.

The class-action suit, originally filed in May 2008 by investors, alleged that Bank of America bought billions of dollars worth of ARS underwritten by an affiliate to prop up the market that was already collapsing. Investors were concerned about the risk of the underlying assets being traded, including tranches of student and home mortgage loans.

If there are insufficient buyers interested in the lowest rate being offered on the bonds in the auction, underwriters usually step in to offer the sellers participating in the auction a minimum-rate return.

The bank asked U.S. District Judge Jeffery White to dismiss the suit. It claimed that the investors could not allege fraudulent market manipulation because B of A, and other market makers and ARS issuers advised investors that they did intervene in auctions to meet prearranged minimums with ARS sellers.

White agreed in an unpublished opinion Thursday, quoting a document Bank of America posted on its website in 2006 after the Securities and Exchange Commission began to require greater disclosure of the mechanics of auctions to investors:

"In connection with any particular auction, [Bank of America] is permitted, but is not obligated to submit orders for its own account either as a bidder or as a seller, and routinely does so in its sole discretion; even after obtaining knowledge of some or all of the other orders submitted through it."

The judge dismissed the market manipulation claims with leave to amend, but he said the class cannot pursue claims that the bank made material misrepresentations and omissions in connection to the sale of ARS. Those claims "are not seperable from the manipulative conduct," White found.

"Although this is the fourth iteration of lead plaintiffs' complaint, it is the first time the court has ruled on the sufficiency of the allegations," the ruling states. "The court cannot say that lead plaintiffs could not remedy the defects identified herein, and the court shall permit Lead Plaintiffs one final opportunity to amend the market manipulation claims."

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