Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

Merrill Lynch, Pierce, Fenner & Smith, Inc., through coordination with wholly owned subsidiary Merrill Lynch Money Markets, Inc. (collectively, Merrill) (defendants), developed a program to market certificates of deposit (CDs) to investors. In 1982, Gary Plastic Packaging Corporation (Gary) (plaintiff) ordered twelve $100,000 CDs from Merrill. After receiving the order, Merrill contacted various banks throughout the country, purchased the CDs, and provided Gary with a confirmation slip specifying the principal and interest due. The actual CDs were held by a third-party delivery agent. On May 20, 1983, Gary filed an action in federal district court against Merrill. Gary claimed that Merrill violated the antifraud provisions of federal securities laws by misleading investors, including Gary, as to the terms of the CDs. Specifically, Gary alleged that Merrill collected payments on the actual CDs higher than what was paid under the confirmation slips given to the investors. Gary further alleged that Merrill violated federal securities law by selling CDs without a registration statement in effect. Through subsequent meetings among the parties, Gary learned that the CD program operated slightly differently from the manner originally alleged. It became clear that the interest rates on each confirmation slip and corresponding CD were identical, thereby undercutting Gary’s theory of the case. The district court dismissed the action without allowing Gary leave to amend its complaint. Gary appealed. On appeal, Merrill argued that CDs were not securities under federal securities law and, therefore, any amendment of the complaint would be insufficient. Merrill relied primarily on the United States Supreme Court’s decision in Marine Bank v. Weaver, in which the Court held that a conventional CD purchased from an issuing bank was not a security under federal securities laws. In response, Gary argued that Marine Bank was fact-specific and that the determination of whether a CD was a security needed to take context into account.