The decision in Plumber & Steamfitters Local 773
Factual Background
The
The plaintiffs purchased Danske Bank ADRs between March and
The Second Circuit's Decision
Accurately Reported Financial Results Not Actionable
The Second Circuit first held 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." The bank had "no obligation to self-report its growing suspicions regarding" the money-laundering issues in
The court also rejected the plaintiffs' argument that the financial reports were per se misleading by allegedly failing to comply with applicable accounting standards. The plaintiffs had contended that contract revenues are reportable only if the underlying contracts are "enforceable" and that illegal contracts are not enforceable. But the Second Circuit held that the plaintiffs had "conflate[d] the distinct concepts of illegality and unenforceability" and had not established that the deposit contracts were unenforceable under foreign contract law.
Immateriality of Statements Made Long Before Plaintiffs' Purchases
The Second Circuit next rejected the argument that alleged misstatements about the 2014 goodwill impairment could have been material in 2018, when the plaintiffs purchased their ADRs. Although recognizing that materiality "involves a fact-specific inquiry" that "can be decided on a motion to dismiss only if reasonable minds cannot differ on the question of materiality," the court nevertheless held that "[l]ogic compels the conclusion that time may render statements immaterial." "Here, almost 39 months intervened between the 2014 announcement of the goodwill impairment and the [plaintiffs'] purchases of Danske ADRs. Over that time, the Estonian Branch was the subject of intervening events and disclosures. . . . In this case, the outpouring of information about the Estonian Branch between 2016 and 2018 compels the conclusion that the 2014 statements about the goodwill impairment were too remote in time to have assumed actual significance in the deliberations of a purchaser in 2018."
The court reached the same conclusion about the alleged misstatement in 2015 concerning whistleblower reports.
Immateriality of Statements Made After Plaintiffs' Purchases
Conversely, the Second Circuit held that alleged misstatements made in
Immateriality of General Statements About Corporate Responsibility
The Second Circuit also held that Danske's general statements about "striving" to conduct its business in accordance with legal standards, "condemn[ing] money laundering," and "tak[ing] the steps necessary to comply with internationally recognised standards" were not actionable. The statements were the type that "almost every bank . . . makes"; "[g]eneral declarations about the importance of acting lawfully and with integrity are inactionable puffery, especially when expressed in aspirational terms."
The court acknowledged that "[a]ssertions of satisfactory regulatory compliance can be materially misleading if the descriptions of compliance efforts are detailed and specific." But here, "[a]lthough Danske averred that it took steps to comply with AML protocols and vaguely recited some AML buzzwords, it claimed no particular acts of compliance." Moreover, Danske had made those statements in 2013 and 2014 - more than three years before the plaintiffs purchased their ADRs. The statements thus were immaterial for that reason as well.
Implications
The Second Circuit's ruling that accurately reported financial results are not actionable is a welcome published decision from that court and will undoubtedly be used in the many cases where securities plaintiffs contend that a company's financial performance was infected by underlying alleged misconduct. The ruling on corporate-governance statements and puffery adds to the growing line of cases rejecting securities claims based on such generalized, aspirational statements.
Perhaps the most interesting aspect of the Danske decision is the holding that alleged misstatements can be immaterial as a matter of law if too much other information has entered the market after those statements and before the plaintiff's stock purchases. The ruling does not draw a bright line about materiality's "half-life," and its applicability to other fact patterns likely will be heavily litigated in the future. But the decision frames the issue and provides some guidance to plaintiffs and defendants.
The decision also highlights the question whether a particular plaintiff is an appropriate class representative for a long class period (here, purportedly more than five years). The lead plaintiffs bought their ADRs much too late to challenge the early alleged misstatements - and too early to challenge the last alleged misstatement. Plaintiffs' counsel will need to consider how to balance these considerations in proposing lead plaintiffs, and defendants might explore similar issues at the class-certification stage.
Second Circuit Holds That Accurately Reported Financial Statements Are Not Actionable And That Materiality Has A Half-Life
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr
Eleven
(
10036-8299
Tel: 2129693000
Fax: 2129692900
E-mail: gpolk@proskauer.com
URL: www.proskauer.com
© Mondaq Ltd, 2021 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source