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Second Circuit Provides Guidance on the Nature of Disclosures That Will Avoid Liability for Market Manipulation

In Wilson v. Merrill Lynch & Co., Inc., ___ F.3d ___, 2011 WL 5515958 (2d Cir. Nov. 14, 2011), the Second Circuit examined an investors securities class action complaint arising from the widespread disruption of the auction rate securities markets in February 2008. Echoing Section 10(b) claims asserted separately against virtually all of the major investment banks that participated in the auction rate securities markets, the plaintiff claimed that Merrill Lynch & Co., Inc. manipulated auctions for which it served as a dealer through its practice of placing support bids for the securities. In a unanimous opinion, the Second Circuit upheld dismissal of the case on a motion to dismiss, finding that where the conduct alleged to be manipulative is fairly disclosed to the market, a plaintiff is precluded from pleading the manipulative acts element of a market manipulation claim. The Wilson case stands for the proposition that, in order to plead the manipulative acts element of a market manipulation claim under Section 10(b), a plaintiff must plead facts sufficient to establish that disclosures a defendants market activity were materially false or misleading.

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