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Miller Investment Trust v. Morgan Stanley & Co., Inc.

Superior Court of Massachusetts, Suffolk

June 21, 2019

MILLER INVESTMENT TRUST et al.
v.
MORGAN STANLEY & CO., Incorporated

          MEMORANDUM AND ORDER DENYING DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT

          Kenneth W. Salinger Justice

         Morgan Stanley & Co. sold Plaintiffs millions of dollars’ worth of notes issued by Shengdatech, which later defaulted. Plaintiffs claim that Morgan Stanley sold those debt securities by means of misleading statements and is therefore liable under the Massachusetts Uniform Securities Act, G.L.c. 110A, § 410 (the "MUSA").

         Morgan Stanley has moved for summary judgment. It argues that the undisputed material facts demonstrate that none of the challenged sales were made "by means of" the alleged misrepresentations, because Plaintiffs purportedly cannot establish any connection between the allegedly misleading private placement memorandum issued by Morgan Stanley and Plaintiffs’ purchases.

         The Court is not convinced that Morgan Stanley is entitled to judgment in its favor as a matter of law. A reasonable jury might find, based on the facts in the summary judgment record, that Morgan Stanley did in fact sell Shengdatech debt securities to Plaintiffs "by means of" the private placement memorandum. The Court will therefore DENY the motion for summary judgment.

         1. Undisputed Factual Background

         The following are undisputed facts, as demonstrated in the evidentiary materials submitted by the parties or reasonable inferences that one could draw from those facts. The Court "must ... draw all reasonable inferences" from the evidence presented "in favor of the nonmoving party," as a jury or judicial fact finder would be free to do at trial. Godfrey v. Globe Newspaper Co., Inc., 457 Mass. 113, 119 (2010). It has done so.

         Between December 2010 and February 2011, Plaintiffs collectively bought net $8.7 million worth of 6.5% Shengdatech Senior Convertible Notes due 2015 (the "New Bonds") from Morgan Stanley, which was the lead underwriter for the issuance of those securities. A private placement memorandum (the "PPM") was prepared in connection with the issuance of the New Bonds by Morgan Stanley, Shengdatech, and KPMG Hong Kong (which was Shengdatech’s independent auditor).

         Plaintiffs had previously bought 6% convertible bonds issued by Shengdatech (the "Old Bonds"). Morgan Stanley was not involved in the issuance of the Old Bonds.

         In December 2010, the Plaintiffs’ investment advisor (Wellesley Investment Advisors, or "WIA") decided to sell at least part of the Old Bonds owned by the Plaintiffs and to purchase some of Shengdatech’s New Bonds on their behalf. It made that decision after reviewing Shengdatech’s financial statements, as disclosed by Shengdatech in filings with the Securities and Exchange Commission, and other publicly-available information regarding Shengdatech’s finances.

         By the morning of Thursday, December 9, 2010, WIA had decided that it wanted to buy New Bonds on behalf of the Plaintiffs. It did so before it ever communicated with Morgan Stanley about the New Bonds. That morning, WIA spoke by telephone with someone working on Morgan Stanley’s convertible bond trading desk to place an order for the New Bonds. There is no evidence in the summary judgment record that the Morgan Stanley employee accepted that oral offer. WIA then sent a confirming email to Morgan Stanley at 10:00 a.m. on December 9, saying that they wanted to purchase $6.0 million of the new Shengdatech convertible bond that would be issued that day. WIA had not yet received the preliminary version of the PPM. But by this time WIA knew that Morgan Stanley, a well-respected underwriter, was underwriting the New Bonds and would be issuing a PPM in connection with the private placement.

         Morgan Stanley did not respond until the next morning, when it sent WIA a preliminary PPM for the New Bonds. Morgan Stanley emailed the preliminary PPM to WIA on Friday, December 10, 2010, at 8:37 a.m. That email did not say that Morgan Stanley was accepting, or whether Morgan Stanley planned to accept, WIA’s offer to purchase New Bonds.

         The PPM that Morgan Stanley sent to WIA repeated the same Shengdatech financial statements that WIA had already reviewed online, word-for-word and number-for-number. Plaintiffs contends that the financial information circulated by Morgan Stanley in the PPM was false and that it materially misstated Shengdatech’s sales, income, cash on hand, and other assets, among other things.

         Two minutes later, at 8:39 a.m. on December 10, Morgan Stanley sent WIA a term sheet setting forth the final terms of the purchase, including the final price that Morgan Stanley would charge for the notes. Once again, that email did not say that Morgan Stanley was accepting, or whether Morgan Stanley planned to accept, WIA’s offer to purchase New Bonds.

         On Monday, December 13 at 3:33 p.m., Morgan Stanley sent WIA a form by email, asking WIA to confirm in writing that it was a "Qualified Institutional Buyer" or a "Qualified Purchaser." The email said "[w]e need this doc signed off on to settle the [Shengdatech] allocation from Friday." Although this email suggests that at some point on Friday December 10 Morgan Stanley decided to allocate part of the New Bond issuance to WIA (acting for the Plaintiffs), there is no evidence in the summary judgment record that Morgan Stanley informed ...


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