A federal judge in the United States District Court for the Southern District of Florida recently issued findings of fact and conclusions of law following a bench trial in favor of Wachovia in a suit brought by investors who were unable to liquidate certain Auction Rate Securities (“ARS”) originally purchased through Wachovia.  Click here to view the Findings of Fact and Conclusions of Law.  This case presented an interesting twist on the fact pattern typically present in ARS suits because the plaintiffs had actually terminated their client relationship with Wachovia and transferred to Smith-Barney several months prior to the collapse of the ARS market.  The judge found not only that Wachovia owed no duty to its former clients, but also that Wachovia’s original recommendation to invest in ARS was not a breach of its fiduciary duty because “ARS were widely-used as short-term investments, and were widely-regarded as safe, liquid and appropriate investments.”

In 2006, Plaintiffs had invested with Wachovia’s Wealth Management Group.  Plaintiffs gave Wachovia absolute discretion over their investments, the proceeds of a real estate deal, with the understanding that Wachovia was aware that plaintiffs were only interested in “safe, highly liquid investments of a short-term nature.”  Wachovia primarily invested the plaintiffs’ money in ARS.  While plaintiffs were customers of Wachovia, they were able to freely sell their ARS.

Plaintiffs, however, were unhappy with the fees charged by Wachovia in comparison to the return on their investments and decided to switch to Smith-Barney in June of 2007.  Rather than liquidating their ARS upon the transfer, however, the plaintiffs merely notified the necessary broker-dealers that the ARS had been transferred from Wachovia to Smith-Barney.

After the transfer, Smith-Barney recommended that the plaintiffs liquidate their ARS, and the plaintiffs agreed.  Plaintiffs and Smith Barney, however, believed that they required further information from Wachovia in order to liquidate some of the remaining ARS.  Plaintiffs requested information from Wachovia in order to liquidate the remaining ARS.  Wachovia provided some information to the plaintiffs, but Smith-Barney believed that they did not receive all of the information necessary to liquidate the remaining ARS.  By the end of 2007, Wachovia had liquidated all of the ARS held by its Wealth Management Group customers.  Plaintiffs, however, did not liquidate their ARS because they continued to believe that they needed further information in order to do so.

The only claims that remained for the bench trial were breach of fiduciary duty and negligent misrepresentation.  Essentially, plaintiffs’ breach of fiduciary duty claims against Wachovia were that it had: engaged in self-dealing by placing its own interests before plaintiffs and not acted in plaintiffs’ best interests; failed to make appropriate investment recommendations; and failed to disclose the risks associated with ARS to plaintiffs.

The judge, however, found that Wachovia’s fiduciary duties ceased upon the termination of plaintiff’s relationship with Wachovia (pursuant to the terms of their contract).  Furthermore, the judge emphasized that even if Wachovia had a duty to the plaintiffs, “given the fact that the possibility of the ARS market failing was deemed to be highly remote and speculative, the mere fact of a fiduciary relationship would not transform Wachovia into an ultimate insurer for any unforeseen events.”

As to plaintiffs’ claim that Wachovia had breached a fiduciary duty by recommending  ARS in the first place, the court again relied on the testimony showing that the likelihood of the collapse of the ARS market was highly remote.  According to the court, “[t]o hold otherwise, would impose a fiduciary duty upon Wachovia to be clairvoyant in its investment recommendations and require Wachovia to be an insurer of all the plaintiff’s investments.”

Similarly, with respect to negligent misrepresentation, the court noted that throughout the plaintiffs’ client relationship with Wachovia, plaintiffs were able to obtain cash and had access  to liquid assets.  The court again reiterated that it was widely accepted in the industry that ARS were safe, liquid investments, just as Wachovia had represented to plaintiffs.  Accordingly, the court also found that plaintiffs had not proven that Wachovia’s actions constituted negligent misrepresentation.