United States: Second Circuit Summarily Affirms Grant Of Summary Judgment In Section 11 Securities Class Action, Finding That Defendants-Appellees Established Negative Causation As A Matter Of Law

On November 19, 2018, the United States Court of Appeals for the Second Circuit summarily affirmed the grant of summary judgment in a securities class action in favor of a financial institution (the "Company"), several of its officer and directors, and the underwriters of the Company's April 2008 offering.  In re Barclays Bank PLC Sec. Litig., No. 17-3293-CV, 2018 WL 6040846 (2d Cir. Nov. 19, 2018), as amended (Nov. 20, 2018).  Plaintiff, on behalf of purchasers of the Company's April 8, 2008 Series 5 offering of American Depository Shares ("ADS"), alleged that those securities were issued pursuant to materially false and misleading offering materials, and brought claims against a group of defendants under Sections 11 and 15 of the Securities Act of 1933 ("Securities Act").  Judge Paul A. Crotty of the United States District Court for the Southern District of New York granted summary judgment in favor of defendants-appellees, finding that (i) the Company had no duty to disclose the allegedly omitted information and (ii) the Company established its negative causation affirmative defense—i.e., that the alleged omissions did not cause plaintiff's losses.  Plaintiff appealed and the Second Circuit affirmed in a summary order.   Summary orders do not have binding precedential effect. 
Plaintiff argued on appeal that the Company violated Section 11 of the Securities Act through two material omissions.  First, plaintiff argued that the Company concealed its exposure to billions of dollars in risky assets by failing to disclose in its offering documents the notional amount of its exposure to monoline insurers.  Second, plaintiff argued that the Company failed to disclose that it had become subject to an ongoing "directive" from the United Kingdom's Financial Services Authority ("FSA") to maintain a Tier 1 Equity ratio above a threshold of 5.25%.
With respect to the first purported material omission, the Second Circuit rejected the District Court's finding that "as a matter of law [the Company] had no duty to disclose the notional amount of monoline exposure" in the offering documents.  According to the Second Circuit, the District Court's reliance on IBEW Local Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383 (2d Cir. 2015) ("RBS"), was misplaced, as that decision did not set forth a "categorical rule that an issuer will never have a duty under Section 11 to disclose the notional amount of its exposure to monoline insurers."  Noting that its RBS decision was "a ruling heavily limited by context," the Second Circuit stated that district courts must consider on a "case-by-case basis" whether "in the totality of the circumstances, the allegedly omitted disclosure was 'necessary to prevent existing disclosures from being misleading.'"  The Court noted, however, that this clarification was no help to plaintiff because the Company "resoundingly established" its negative loss causation affirmative defense.  The Court was persuaded by an "event study" conducted by the Company's expert in which the expert demonstrated that the disclosure of the allegedly omitted information did not trigger a statistically significant market reaction.  Thus, the Second Circuit ruled that the Company satisfied its negative causation burden and affirmed the District Court's decision to grant defendants' motion for summary judgment regarding this theory of Section 11 liability.
With respect to the second purported material omission, the Second Circuit agreed with the District Court that the record presented no genuine dispute of material fact as to the existence of any "mandate" or "directive" by the FSA regarding the Company's capital and equity ratios.  Plaintiff argued that during two meetings held between the FSA's chairman and the Company's chairman in March 2008, the FSA expressed particular concern over the Company's Tier 1 equity ratio being 4.6% and only being forecasted to be at or above the Company's target of 5.25% in two of the next twenty-four months.  According to plaintiff, the Company had a duty to disclose the substance of these meetings in the offering materials.  Noting that the parties agreed that "at the relevant time, the United Kingdom's regulatory minimum Tier 1 Equity ratio was 2%, and that [the Company's] ratio was well above this minimum," the Court found that no fact-finder could reasonably construe a regulator's expressions of concerns about a bank's financial status and requests to be kept apprised of the bank's contingency plans as a "directive" or "mandate" with the force of law. 
The Second Circuit thus affirmed the District Court's grant of summary judgment on plaintiff's Section 11 claims against Barclays because either the Company "had no duty to disclose the information plaintiff specified or because [the Company] established that the failure to disclose did not cause plaintiff to suffer any loss."

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