Securities fraud litigation based on regulatory mishaps, environmental disasters, data breaches, sexual harassment revelations, the COVID-19 pandemic and other well-publicized events that affect stock prices has been on the rise in recent years, overtaking more traditional securities claims arising from accounting scandals and corporate fraud.¹ Such “event-driven” securities litigation often relies on the theory that a company downplayed or failed to disclose known risks, and thereby inflated the value of its securities, only to see that value dissipate when a particular event occurs and the risk materializes.

The Second Circuit Court of Appeals’ recent decision in Plumber & Steamfitters Loc. 773 Pension Fund v. Danske Bank A/S, issued on Aug. 25, 2021, provides helpful guidance for practitioners and companies defending such claims and sets out limiting principles that will potentially check meritless litigation.²

Danske Bank affirmed a district court decision dismissing a securities class action complaint premised on revelations of money laundering. In an opinion by Judge Dennis G. Jacobs, the unanimous three-judge panel observed that securities fraud statutes were “not designed to regulate corporate mismanagement,” and held that plaintiffs had failed to plead an actionable misstatement or omission of material fact. In so concluding, the court reaffirmed several important securities law principles:

• Companies do not have a duty to self-disclose uncharged or unadjudicated wrongdoing.
• Alleged misstatements and omissions must be temporally linked to securities purchases to be material so that materiality can have a “half-life” in light of intervening events.
• Generalized statements of corporate responsibility are not an actionable fraud.

Background of the Case

Plaintiffs alleged that the defendant bank covered up or minimized a money laundering scandal involving accounts in a Non Resident Portfolio (NRP) at the bank’s Estonia branch. Branch employees staffed on the NRP accounts purportedly declined to perform basic customer due diligence and failed to adhere to anti-money laundering (AML) regulations, despite red flags about ongoing laundering activity. Plaintiffs alleged the bank knew of the issues as early as 2009 when the first of several regulatory measures were taken against it.

The scandal emerged publicly over a period of years. News of the bank’s regulatory failures was first publicized in 2016 when Danish financial authorities fined the bank for AML violations. Over the next two years, the media reported that the bank’s money laundering activity may have exceeded $20 billion. The full scope of the scandal was revealed in September 2018 when the bank released a report disclosing that the money laundering implicated over $200 billion in transactions. The price of the bank’s securities fell during the course of these revelations.

The plaintiff pension funds had acquired Danske securities between March and June 2018, just before the full scope of the scandal emerged. They filed suit in January 2019 representing a class of plaintiffs who purchased Danske securities between January 2014 and April 2019. The funds based their securities fraud claims on alleged material misstatements and omissions relating to the AML scandal in the bank’s financial statements and other corporate releases.

The Court’s Findings

The court of appeals concluded none of the alleged misstatements or omissions was actionable as fraud.³ In doing so, the court reaffirmed several key securities law principles:

• Accurately reported financial results are not actionable. The court rejected the plaintiffs’ contention that the bank’s financial reporting should have disclosed what the bank knew of the branch’s money laundering issues and was misleading for including tainted profits. Noting that “companies do not have a duty to disclose uncharged, unadjudicated wrongdoing,” and observing that the plaintiffs did not allege the bank’s financial statements were manipulated, the court explained that accurately reported financial statements “do not automatically become misleading by virtue of the company’s nondisclosure of suspected misconduct that may have contributed to the financial results.” Otherwise, the court wrote, “every company whose quarterly financial reports include revenue from transactions that violated AML regulations could be sued for securities fraud.”4

• Time may render statements immaterial. The court rejected allegations that statements by the bank in 2014 and 2015 — concerning a $326 million goodwill impairment relating in part to its Estonian operations and its whistleblower program compliance — were materially misleading in connection with the funds’ 2018 purchases. Noting that “[o]ld information tends to become less salient to a prospective purchaser,” the court explained, “the further in time a purchase is removed from a misstatement and the more that updated related information reaches the market,” the less likely it is the misstatement will be material, as it will have been “superseded or rendered stale by intervening events.” In short, “materiality can have a half-life.” The court observed that in the more than three years between the 2014 statements and the lead plaintiffs’ purchase of Danske securities in 2018, a host of revelations had emerged concerning the Estonia branch’s AML issues. It concluded this “outpouring of information” rendered the earlier statements “stale and immaterial” at the time the funds invested.⁵

• Securities fraud plaintiffs cannot rely exclusively on alleged misstatements post-dating their purchase. Plaintiffs alleged that a July 2018 statement that the bank did not expect the resolution of its AML issues to have a material effect on its financial condition was misleading. But as the court explained, “Plaintiffs alleging that they were damaged by purchasing securities at an inflated price cannot maintain a securities fraud claim premised exclusively on statements made after  the plaintiff’s final purchase of securities,” since the statement “could not have influenced the price of a purchase that had already been made.”⁶ Plaintiffs could not rest their claim on the fact that other class members may have relied on the statement when purchasing, because, the court explained, “a plaintiff must state a claim in its own right to survive a motion to dismiss.”7

• Vague and general statements of regulatory compliance are not actionable. Finally, the court of appeals rejected allegations that various generic statements the bank had made relating to its compliance with AML laws and regulations were misleading. Among other statements, plaintiffs pointed to a number of vague disclosures, including statements that the bank acts “in accordance with internationally recognised principles . . . of . . . anti-corruption,” “condemns . . . money laundering,” complies “with internationally recognised standards, including Know Your Customer procedures,” and has procedures for “customer due diligence, reporting, . . . and communications.” The court wrote that statements of regulatory compliance could be materially misleading “if the descriptions of compliance efforts are detailed and specific,” but held here that Danske’s statements simply recited “some AML buzzwords” and thus were no more than inactionable puffery that no investor would take seriously.⁸

The Danske Bank decision follows similar rulings in other “event-driven” securities fraud cases. For instance, in Singh v. Cigna Corp., the Second Circuit Court of Appeals affirmed the dismissal of securities fraud claims premised on general puffing statements concerning corporate compliance despite an ongoing enforcement proceeding against Cigna.⁹ And in Carvelli v. Ocwen Fin. Corp., the Eleventh Circuit Court of Appeals affirmed the dismissal of securities fraud claims alleging that Ocwen’s shareholders were damaged when the company’s stock price dropped following announcements concerning regulatory measures taken against it. The court concluded that the statements at issue were either inactionable puffery, statements of opinion, forward-looking or not alleged to be false, and held that no statement “rises to the level of an actionable misrepresentation of material fact.”¹⁰

The Danske Bank decision and predecessors underscore that alleged corporate mismanagement should not routinely be transformed into securities fraud and provide valuable precedent and guidance in analyzing the viability of “event-driven” securities class action complaints.

Footnotes

^1. _{See Event Driven Securities Litigation, Harvard Law School Forum on Corporate Governance, Dec. 18, 2020, available at https://corpgov.law.harvard.edu/2020/12/18/event-driven-securities-litigation/.}

² _{No. 20-3231, 2021 WL 3744894 (2d Cir. Aug. 25, 2021).}

³ _{The court also affirmed the dismissal of plaintiffs’ claim under Rule 10(b)-5(a) and (c) alleging scheme liability for failure to satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). The court explained that plaintiffs failed to enumerate any specific acts purportedly constituting an alleged scheme to defraud investors, as Rule 9(b) requires, instead simply resting the claim on incorporation of the complaint’s prior allegations. Id. at *9.}

⁴ _{Id. at *4.}

⁵ _{Id. at *5-*6.}

⁶ _{Id. at *8-*9.}

^7. _{Id. at *6.}

⁸ _{Id. at *7-*8.}

⁹ _{918 F.3d 57 (2d Cir. 2019).}

^10. _{934 F.3d 1307, 1319 (11th Cir. 2019). Kramer Levin Naftalis & Frankel LLP successfully represented Ocwen Financial Corp. in this litigation.}