On August 25, 2021, the United States Court of Appeals for the Second Circuit unanimously affirmed the dismissal of a putative class action against a Danish bank (the "Company") and certain of its former officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.  Plaintiffs alleged misstatements and omissions concerning the Company's anti-money laundering ("AML") controls and protocols.  Plumbers & Steamfitters Local v. Danske Bank, No. 20-3231 (2d Cir. Aug. 25, 2021).  The Second Circuit affirmed the dismissal for failure to allege an actionable misrepresentation or a scheme to defraud investors.

In 2016, the Danish financial regulator announced that it had fined the Company for AML deficiencies at its Estonian branch.  This announcement garnered significant press and triggered investigations by European regulators.  In 2017, the Company announced that deficiencies in controls and governance had made it possible to use its Estonian branch for money laundering.  In September 2018, the Company, following an independent investigation, announced that the volume of suspicious transactions through the Estonian branch was higher than previously known and renounced all profits derived from these transactions.

Plaintiffs purchased the Company's American Depositary Receipts ("ADRs") between March and June 2018.  Plaintiffs alleged five categories of misstatements or omissions:  (i) the Company's financial statements, which allegedly included revenue derived from illegal transactions, (ii) the Company's statements about a goodwill impairment related to its Estonian branch in 2014, (iii) the Company's statement about its whistleblower reporting system in 2015, (iv) the Company's statement that it did not expect the outcomes of related lawsuits or inspections to materially impact its financial position, and (v) the Company's statements about its AML compliance.

The Court rejected plaintiffs' argument that the Company misled investors by releasing financial statements that included revenue from allegedly ill-gotten profits from the Estonian branch without also disclosing what it knew about possible money laundering.  According to the Court, "companies do not have a duty to disclose uncharged, unadjudicated wrongdoing," and "accurately reported financial statements do not automatically become misleading by the company's non-disclosure of suspected misconduct that may have contributed to the financial results."  The Court also rejected the claim that the financial statements were per se misleading because they violated international accounting standards by including revenue derived from unenforceable contracts with clients who allegedly used the Estonian branch to launder money.  Because plaintiffs "identif[ied] no law or contractual provision that would render the deposit contracts unenforceable," plaintiffs failed to allege a violation of international accounting standards.  The Court also held that statements that the Company strove to conduct its business "in accordance with internationally recognise principles in the area[] of . . . anti-corruption" and "condemn[ed] . . . money laundering" were puffery, and too vague to be actionable.  The Court noted that the Company "claimed no particular acts of compliance" and that no reasonable investor would "weigh these generic statements in its investment calculus."

The Court rejected arguments that the Company misled investors (i) by describing its 2014 goodwill impairment write-down as "purely technical" when it was allegedly related to the decision to wind down the Estonian branch's non-resident portfolio, and (ii) by stating, in a 2015 corporate responsibility report, that three whistleblower cases reported through an anonymous system were appropriately concluded, although the independent investigation concluded that a whistleblower report made directly to executives was handled improperly.  The Court held that even if these statements were misleading, they would have been immaterial because the Company made the statements several years before plaintiffs purchased the Company's ADRs.  Prior to plaintiffs' purchase of the ADRs, the Company repeatedly disclosed AML deficiencies at its Estonian branch and financial regulators announced investigations into the Estonian branch's activities.  Given these intervening disclosures, the Court found it implausible that the alleged omissions "significantly altered the total mix of information."  Similarly, the Court held that the Company's statement that it did not expect Estonia-related investigations and lawsuits to materially impact its financial position was inactionable because plaintiffs purchased ADRs three weeks before the statement was made.

Finally, the Second Circuit considered plaintiffs' claim that the Company violated subsections (a) and (c) of Rule 10b-5, which prohibit "employ[ing] any device, scheme, or artifice to defraud," and "engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit."  To maintain a such claim, the Court noted that a plaintiff must specify "what deceptive or manipulative acts were performed, which defendants performed them, when the acts were performed, and the effect the scheme had on investors in the securities at issue."  Plaintiffs failed to do so because "money-laundering at a single branch in Estonia cannot alone establish" a deceptive scheme.  A connection to the purchase or sale of securities at a minimum also is required but was not alleged.

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