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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