(CN) - The Delware Chancery Court dismissed a shareholder suit alleging BlackRock damaged its common shareholders by buying back its own auction rate securities from its preferred shareholders.
     Lead plaintiff Sydell Protas claimed that under pressure from its lead underwriter Merrill Lynch, BlackRock bought back auction market preferred stock in one of it funds, after auctions for the securities began to fail in February 2008.
     When the market for all auction rate securities disintegrated in early 2008, it left investors holding illiquid securities that they had bought on the recommendation of brokers who stressed their liquidity, and Protas claimed that Merrill Lynch which sold shares in many of BlackRock's investment funds threatened to stop representing the funds if BlackRock didn't buy back the securities Merill had bought from its own customers irate about their sudden illiquidity.
     Protas claimed that the $462 million BlackRock spent redeeming all of the outstanding securities was wasteful because a secondary market in auction rate securities had sprung up trading the shares at a severe discount to face value.
     Setting aside the fact that Protas only cited one example of the securities selling in a secondary market, Judge Sam Glasscock said Protas couldn't make the waste argument because she failed to raise "a reasonable doubt that the decisions of BlackRock's trustees [to buy the preferred shares] were taken honestly and in good faith."
     Protas also claimed that the buyback directly injured common share holders in the fund because they were not offered the ability to redeem their shares at the same premium of their alleged market value.
     Glasscock dismissed this argument calling it "the type of bootstrap allegation that this Court has consistently rejected," because it "attempts to equate any injury to a specific class of stockholders with... a direct injury to the plaintiff 'independent of any alleged injury to the corporation.'"