In a January 5, 2011 order, Southern District of New York Judge Paul Crotty granted the defendants’ motions to dismiss the consolidated Barclays Bank subprime-related securities class action lawsuit. A copy of Judge Crotty’s order can be found here. Although Judge Crotty’s order is in many respects just the latest in the series of subprime-related securities lawsuit dismissal motion rulings, there are a number of interesting things about this ruling, as discussed below.
Between April 2006 and April 2008, Barclays completed four American Depositary Shares offerings through which it raised total proceeds of $5.45 million. The four offerings were dated April 21, 2006 (the Series 2 offering), September 10, 2007 (the Series 3 offering), November 30, 2007 (the Series 4 offering) and April 8, 2008 (the Series 5 offering).
These offerings were presented in reliance on two Shelf Registration statements, dated September 14, 2005 and August 31, 2007, as well as Supplemental Prospectuses dated as of the offering date of each of the four offerings.
On November 15, 2007, the company issues an unscheduled "Trading Update" in which it disclosed the company’s exposure to U.S. subprime mortgages and mortgage backed securities. In a series of subsequent disclosures the company disclosed various write-downs of these assets, culminating in significant impairments and write-downs disclosed in its 2008 interim results and 2008 annual report.
As detailed here, in March 2009, investors who had purchased securities in one or more of the four offerings filed the first of several securities class action lawsuits against the company, certain of its directors and officers, and its offering underwriters. The lawsuits, which ultimately were consolidated, alleged the offering documents contained materially misrepresentations in violation of the Securities Act of 1933.
In the plaintiffs’ consolidated amended complaint (here), the plaintiffs essentially alleged that Barclays had failed to disclose and properly account for the risky real estate business in which it was engaged.
Specifically, the plaintiffs alleged that the company had failed to timely and adequately disclose and write down its exposure to risky credit assets; had failed to comply with applicable accounting standards and SEC requirements; and misleadingly assured investors that Barclays’ risk management practices helped the company avoid the worst credit market risks.
The defendants moved to dismiss.
The January 5 Order
After first ruling that the plaintiffs lacked standing to bring claims under Section 12(a)(2) (because the plaintiffs had not alleged that they had purchased their shares directly from the defendants), Judge Crotty then ruled that the Securities Act claims of the plaintiffs that had purchased their shares in the first three of the four offerings were time barred.
Judge Crotty ruled that the Series 2 and Series 3 plaintiffs were on inquiry notice of their claims at least as of the November 15, 2007 Trading Update, which Judge Crotty said disclosed "precisely the information that Lead Plaintiffs claim Barclays should have disclosed earlier." Because these plaintiffs filed their claims more than a year after the Trading Update, Judge Crotty held their claims were untimely.
Similarly, Judge Crotty ruled the Series 4 plaintiffs were on inquiry notice of their claims on February 19, 2008, the date Barclays release its 2007 annual results. As the Series 4 plaintiffs also did not file their claims within a year of that release, Judge Crotty held that the Series 4 plaintiffs claims were also time barred.
Interestingly, Judge Crotty held that the U.S. Supreme Court’s ruling in Merck (about which refer here) was not controlling on the statute of limitations issues, but he went on to find that even if it did apply that the Merck standard had been satisfied.
Judge Crotty did reach the pleading sufficiency of the Series 5 plaintiffs’ allegations. However, Judge Crotty held that the Series 5 plaintiffs’ allegations were insufficient.
With respect to the plaintiffs’ allegations regarding the defendants’ alleged failure to timely disclose and write down the impaired real estate assets, he held that the plaintiffs had failed to allege "that Barclays did not truly believe its subjective valuations."
With respect to the plaintiffs allegations that Barclays had failed to adequately itemize the company’s mortgage-related assets exposures, Judge Crotty held that the company had not duty to further itemize its mortgage asset exposure.
Finally Judge Crotty held that the plaintiffs had not adequately alleged that the defendants’ did not comply with applicable accounting standards or that the company’s disclosures regarding its risk management practices were actionable.
Even though Judge Crotty’s opinion does not contain any express statements on the subject, the opinion does seem to reflect a subterranean skepticism – Judge Crotty does, in fact, quote prior opinions for the propositions that Section 11 claims many not be pled "with the benefit of 20/20 hindsight" and that "a backward-looking assessment of the infirmities of mortgage-related securities… cannot help plaintiffs’ case."
Judge Crotty does not affirmatively state that he things the plaintiffs’ claims represent "misrepresentation by hindsight" allegations, but his reference to these propositions and this overall approach to the plaintiffs’ allegations could be interpreted to suggest that that is his view.
Notwithstanding Judge Crotty’s apparent predispositions, there are a number of features about his opinion.
First, his ruling on the statute of limitations issues could be instructive in connection with the many other offering-related securities class action lawsuits that have been filed as part of the subprime and credit crisis-related litigation wave. Many of these cases, like this case, were filed in 2009, well after the mortgage meltdown had already unfolded and well after the first of many disclosures about the problems that many companies were having with their mortgage related assets. Judge Crotty’s statute of limitations rulings suggest that many of these cases may fact strict timeliness scrutiny, particularly where the lag between the time of the offering and the initial filing date is the longest.
Second, the other things about Judge Crotty’s ruling is that, even though the Series 5 plaintiffs’ claims under the ’33 Act did not depend on scienter allegations, he nevertheless had little apparent difficulty concluding that those plaintiffs’’ allegations were insufficient. That is, many of the other subprime related securities cases that have failed to survive initial dismissal motions have failed due to the insufficiency of the plaintiffs’ scienter allegations. Here, even though the claims the Series 5 plaintiffs asserted did not require them to satisfy scienter requirements, their allegations nevertheless were found to be insufficient.
One final observation about this case is that it involves a foreign-domiciled company. This consideration is not mentioned in Judge Crotty’s opinion. I am sure that the possible effect of the Morrison v. National Australia Bank case was not addressed because this case involved only claims under the ’33 Act and Morrison was addressed only the question of extraterritorial application of Section 10(b) under the ’34 Act.
Even though Morrison was addressed only to the ’34 Act, it would not surprise me if defendants in a similar case, involving a foreign domiciled defendant, might not try to argue that Morrison’s territorial limitations on the ambit of Section 10(b) are also relevant to claims under the "33 Act. There may be considerations specifically relevant to the ’33 Act that might militate against this argument, but absent some absolutely preclusive consideration, it seems to me that defendants would have an incentive to try to extend Morrison in this type of context. Defendants certainly have not been hesitant to urge the applicability of Morrison in a wide variety of kinds of cases.
I have in any event added the Barclays dismissal to my running tally of subprime and credit crisis related lawsuit dismissal motion rulings, which can be accessed here.
David Bario’s January 6, 2011 article on Am Law Litigation Daily about the case can be found here.
Special thanks to the several readers who sent me copies of the Barclays opinion.
Anticipated Developments in Antibribery-Related Litigation Activity and D&O Insurance Coverage: Because of the Dodd-Frank Act’s whistleblower provisions and the coming changes under the UK Bribery Act, there could be significant amounts of antibribery-related enforcement and litigation activity ahead. For that reason, it is a good idea for companies to review their D&O insurance in light of these concerns, as discussed in a January 2011 memo from the Squire Sanders law firm entitled "Directors’ and Officers’ Insurance Policies Should Be Reviewed in Light of Anticipated Increase in Whistleblowing Activity Instigated by Dodd-Frank Act and the UK Bribery Act." (here).
The memo contains a number of helpful considerations public companies should take into account in connection with their next D&O insurance renewal.