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Second Circuit Affirms Dismissal of Two Class Actions Against Morgan Stanley
- Client News
- January 28, 2010
Practices
On January 25, 2010, the Court of Appeals for the Second Circuit affirmed the dismissal by Judge Barbara Jones of two class actions against our client, Morgan Stanley, as well as two Morgan Stanley mutual funds and their underwriters, advisors and distributors. The court declined to expand liability under the Securities Act of 1933 to require funds to disclose information regarding alleged misconduct by investment banking and broker-dealer affiliates of the fund's investment adviser.
Plaintiffs alleged that the Funds' offering documents failed to disclose that (1) the breakdown of the Information Barrier between the investment banking and research analyst divisions of the Morgan Stanley broker-dealers affiliated with the Funds tainted the objectivity of the analysts' stock research; (2) that the Funds' advisers had an economic incentive to invest assets in public companies for which Morgan Stanley performed investment banking services and (3) the Funds invested in many of the companies that were the subject of these biased research reports, thus increasing the risk that the Funds were purchasing securities at artificially inflated prices.
Prior to the oral argument, the court asked the SEC to file an amicus brief setting forth the Commission's position on the scope of obligations imposed by Form N-1A, which governs disclosure in mutual fund registration statements and prospectuses.
Deferring to the SEC's interpretation, the Second Circuit held that nothing in either the general instructions or the specific requirements of Form N-1A imposes a duty on funds to disclose the kinds of information plaintiffs demanded. In particular, the court found that the risk plaintiffs complained of was a "generic" and "systemic" risk that is common to all mutual funds in the marketplace. The court noted that plaintiffs did not allege that the "Funds' managers breached their legal duties to the Funds' shareholders by blindly and uncritically following [the analysts'] potentially tainted recommendations," that the Funds' managers "knew that [Morgan Stanley's] analysts had breached their professional obligations by disseminating biased or false research," or that they otherwise "made investment decisions under circumstances that gave rise to unique, undisclosed risks relating to the Funds."
The Paul, Weiss team included partners Richard Rosen (who argued the appeal) and Walter Rieman, associates Gayle Gerson and Nader Hasan, and paralegal Paula Lopez.