(CN) - An investor's claim that Merrill Lynch & Co. Inc. manipulated auction rate securities has bit the dust, the 2nd Circuit ruled, finding that the financial firm's announcement of its auction practices before the $330 billion market collapsed precludes the claim.
     Between January 2006 and May 2008, the broker-dealer rescued more than 5,800 auctions by placing "support bids" with its own money in order to keep the auctions from failing, the ruling says.
     Investor Colin Wilson filed suit after Merrill Lynch and other large financial firms stopped supporting the auctions and the market collapsed, leaving him holding onto almost $125,000 in illiquid auction rate securities, according to the ruling.
     "Wilson claims that the support bids 'masked the liquidity risks inherent in [Merrill] ARS' and created the false impression that the lack of auction failures reflected investor demand and that Merrill ARS could readily be liquidated if needed," Circuit Judge Robert Katzmann states.
     The U.S. District Court for the Southern District of New York dismissed Wilson's claims that Merrill Lynch manipulated the market, finding that the broker-dealer's public disclosures concerning its auction rate policies precluded the claims, the ruling says.
     Katzmann agreed, writing that Merrill Lynch posted information on its website that detailed its "routine" practice of placing support bids to prevent auction failure.
     The broker-dealer announced its policies after the Securities and Exchange Commission investigated several firms in 2006 for participating in the auctions, the ruling says.
     Although the SEC found that the broker-dealers, including Merrill Lynch, were allowed to place support bids, the firms were required to reveal these practices to their investors.
     Merrill Lynch announced its support bid practices in 2006, one year before Wilson purchased his auction rate securities, the ruling says.
     Wilson argues that Merrill Lynch "knew with certainty" that the auctions would fail without its help and failed to tell investors how dependent the auctions were on its support, according to the ruling.
     "Although the complaint's allegation that 87 percent of ARS auctions failed following the withdrawal of support by Merrill and other ARS dealers certainly suggests that support bidding was significant to the overall viability of the ARS market," the judge states, "the corollary that 13 percent of auctions nonetheless succeeded is inconsistent with Merrill's alleged knowledge with 'certainty' that support bids were necessary for the success of every auction."
     The circuit invited the SEC to lend its expertise to the case, but finds that it does not deserve "'controlling' deference."
     The SEC found that Merrill Lynch did not adequately describe its practices when the firm said that it "may routinely" place support bids, according to the ruling.
     "We are unable to agree with the SEC's application of the legal principles governing Merrill's disclosures even under the generous standard of deference that Wilson urges," Katzmann writes.
     "We find the complaint to be inconsistent as to how often Merrill placed support bids during the relevant period, and view other allegations of the complaint as incompatible with the notions that every auction would fail in the absence of Merrill's intervention or that Merrill knew by July 2007 that the ARS market was unsustainable," the judge writes.