Northern California Judges Rule in Securities Cases

Two securities cases in the U.S. District Court for the Northern District of California recently received rulings on motions to dismiss.

Davoodi v. Imani appears to be a business deal gone bad.  Mr. Davoodi sought to invest in a holding company created with Mr. Amani where the former agreed to pay $500,000 on a payment schedule and the latter agreed to issue stock and reserve a seat on the board of directors for the holding company and each of its subsidiaries.  Court documents are unclear about what these companies did.  Neither party performed the contract.  Mr. Davoodi paid about $267,000 and Mr. Imani never issued the stock or seat on any company's board.  Now they are before Judge Saundra Brown Armstrong on a motion for a preliminary injunction.  Mr. Davoodi does not want Mr. Imani to sell or encumber the shares under the purchase agreement that he has not yet paid for (the shares he has paid for are presently in trust).

Judge Armstrong denied the motion because Mr. Davoodi failed to plead that his non-performance was excused.  The plaintiff responded that his performance was excused because Mr. Imani failed to perform.  However, the contract specified that a non-breaching party does not waive its right to sue by accepting non-conforming performance.  So, by accepting payments, Mr. Imani did not waive his right to sue and therefore Mr. Davoodi's breach is not excused.  Judge Armstrong denied the motion for a preliminary injunction.

In re Bank of America Corp. Auction Rate Securities Marketing Litigation is a class action regarding securities fraud by BOA in marketing auction rate securities (ARS).  ARS is a bond or preferred stock that pays interest or dividends at rates set at period auctions.  The plaintiffs allege that BOA manipulated the ARS market by:

1) placing support bids for the entire notional amount of the securities in every auction for which it was the sole or lead broker-dealer to prevent auction failures; (2) systematically intervening in auctions to set the clearing rate; and (3) obtaining temporary rate cap waivers.

As Judge Jeffery S. White noted, nothing prohibits brokers from bidding on their own securities as long as this process is disclosed. However, it is not clear that the rate cap waivers were disclosed:

The Court, however, does not find persuasive BofA’s argument that it fully disclosed its conduct with respect to rate cap waivers. In contrast to the allegations regarding the placement of support bids and the impact of BAS’ actions on the clearing rate, neither the website disclosure nor the offering memoranda contain any specific disclosures about the ratecap waivers. 

[However] 

Lead Plaintiffs have not alleged that every BA ARScontained interest rate caps. [Additionally] Lead Plaintiffs do not allege that any of the specific BA ARS they purchased contained interest rate caps and do not set forth specific dates on which BAS obtained rate cap waivers.

That failure in pleading lead judge White to grant the motion to dismiss with leave to amend.