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Kassover v. UBS AG

December 19, 2008


The opinion of the court was delivered by: Lawrence M. McKENNA, D.J.


Plaintiffs Ronald D. Kassover, Chris Jones, Stephen M. Mittman, Ronald E. Klokke, Jan Schneider, Marjorie Elliott, Mark Theissman, Rita Tubis and Helena Tubis (collectively "Plaintiffs") on behalf of themselves and others similarly situated brought the present action against UBS Financial Services, Inc. ("UBS FS") and UBS AG (collectively "Defendants" or "UBS") for federal securities law and state statutory and common law violations stemming from Defendants' conduct in the marketing and sale of auction rate securities ("ARS") and in their failure to continue to provide liquidity in the ARS market. Plaintiffs assert claims against UBS FS for violations of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq., and the New York General Business Law § 349 and common law claims for negligent misrepresentation, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and negligence. Plaintiffs assert claims against UBS AG for aiding and abetting UBS FS' alleged breach of fiduciary duty.

Defendants here move to dismiss all Plaintiffs' claims pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted and for failure to plead fraud with particularity.


The following recitation of facts reflects Plaintiffs' allegations, as pleaded in the Amended Class Action Complaint. The allegations are taken as true for purposes of this motion, but do not constitute this Court's factual determinations.

ARS are long-term debt securities that offered investors the liquidity of short-term investments through regularly scheduled auctions where ARS could be sold, if demand for the securities was sufficient. (Complaint ¶¶ 2, 3.) ARS were considered conservative investments--usually preferred stock or bonds issued by municipalities, public funds or otherwise creditworthy institutions. (Complaint ¶ 32.) The liquidity of these investments proved to be illusory because a successful auction, one where investors could sell their ARS, depended upon sufficient demand in the ARS market. (Complaint ¶ 2.) Though not disclosed to Plaintiffs, successful auctions were entirely dependent upon certain financial institutions' support of the ARS market, including that of UBS FS. (Id.) UBS was one of the largest underwriters of ARS and garnered significant fees for managing the auctions for ARS that they sold. (Complaint ¶ 33.)

UBS FS financial advisors*fn1 engaged in a campaign designed to induce Plaintiffs to purchase ARS for which UBS was a primary auction participant by falsely marketing them as higher-yield cash equivalents. (Complaint ¶¶ 3, 34, 55.) Plaintiffs' financial advisors failed to inform them about potential illiquidity that would result from failed auctions and encouraged Plaintiffs to invest without advising them to review prospectuses or registration statements filed with the SEC. (Complaint ¶¶ 3, 34.) UBS FS financial advisors also did not inform Plaintiffs of the substantial revenue UBS garnered from auction-related fees or the resulting conflict of interest. (Id.)

Beginning in February of 2008, UBS FS determined that it was no longer in its financial interest to continue to support ARS auctions and ceased its participation. (Complaint ¶ 5.) As a result, an increasing number of ARS auctions failed, which prevented clients from liquidating their ARS holdings. (Complaint ¶¶ 5, 40, 41.) The ARS market collapsed, and Plaintiffs' only option was to sell their ARS in the secondary market at substantial discounts. (Complaint ¶ 41.)


A. Motion to Dismiss Standard

A complaint should be dismissed if it "fail[s] to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). "In deciding a motion to dismiss, the Court ordinarily accepts as true all well-pleaded factual allegations and draws all reasonable inferences in the plaintiff's favor." In re Parmalat Sec. Litig., 501 F.Supp.2d 560, 560 (S.D.N.Y. 2007). "To survive dismissal, the plaintiff must provide the grounds upon which his claim rests through factual allegations sufficient'to raise a right to relief above the speculative level.'" ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007)).

Plaintiffs claims are also subject to the heightened pleading standard of Rule 9(b). "By its terms, Rule 9(b) applies to'all averments of fraud.'" Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004) (quoting Fed. R. Civ. P. 9(b)). The alleged conduct, and not the terms in which a plaintiff's allegations are denominated, governs whether Rule 9(b) applies. See id. Because the conduct complained of in this action is based on alleged deceptive and fraudulent practices, Rule 9(b) applies. See id. Under Federal Rule of Civil Procedure 9(b), allegations of fraud must be stated with particularity. Fed. R. Civ. P. 9(b).

Generally, "the court is not permitted to consider factual matters submitted outside of the complaint unless the parties are given notice that the motion to dismiss is being converted to a motion for summary judgment under Rule 56 and are afforded an opportunity to submit additional affidavits." Campo v. 1st Nationwide Bank, 857 F.Supp. 264, 269 (E.D.N.Y. 1994). However, "[i]n certain circumstances, the court may permissibly consider documents other than the complaint in ruling on a motion under Rule 12(b)(6). Documents that are attached to the complaint or incorporated in it by reference are deemed part of the pleading and may be considered." Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007) (citing Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 71 (2d Cir. 1998), cert. denied, 525 U.S. 1103, 119 S.Ct. 868, 142 L.Ed.2d. 770 (1999)). See also ATSI Commc'ns, 493 F.3d at 98 (citing Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (In evaluating a 12(b)(6) motion, a court "may consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.")).

B. Advisers Act Claim

Plaintiffs allege that UBS FS violated § 80b-6(2) of the Investment Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. §§ 80b-1 et seq., which provides:

It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly... to engage in any transaction, practice, or course of business which operates ...

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