(Article from Securities Law Alert, April 2015)
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On April 15, 2015, the Second Circuit affirmed dismissal of a securities fraud action against the Royal Bank of Scotland (“RBS”). IBEW Local Union No. 58 Pension Trust Fund & Annuity Fund v. Royal Bank of Scotland Grp., 2015 WL 1653788 (2d Cir. 2015) (Chin, J.). The court determined that RBS’s positive statements concerning its acquisition of ABN Amro were inactionable expressions of “general corporate optimism.” In addition, the court held that RBS’s alleged understatement of its subprime exposure by less than 5% was immaterial pursuant to the guidance set forth in the SEC’s Staff Accounting Bulletin (“SAB”) No. 99. Finally, the Second Circuit also found immaterial RBS’s representation that the United Kingdom’s Financial Services Authority (“FSA”) had “encouraged,” rather than “required,” RBS to raise additional capital in April 2008.
Second Circuit Holds Optimistic Statements Concerning the ABN Amro Acquisition Were Not Actionable Because Those Statements Were Not Worded as Guarantees, Nor Was There Any Allegation That RBS Did Not Believe the Statements at the Time They Were Made
Plaintiffs contended that RBS had “made [a number of] false statements” regarding its April 2007 acquisition of ABN Amro, a Dutch bank. For example, RBS had stated that “[t]he integration of ABN Amro [was] off to a promising start” and that RBS’s “positive view” of the transaction had “been confirmed.” Plaintiffs claimed that these statements “were misleading” because, in plaintiffs view, “ABN Amro was suffering significant losses and the acquisition [had been] ‘an unmitigated disaster for RBS.’”
The Second Circuit found that RBS’s positive statements concerning the ABN Amro acquisition were nothing more than “inactionable puffery.” The court explained that “[s]tatements of general corporate optimism, such as these, do not give rise to securities violations.” The Second Circuit recognized that “[s]tatements of corporate optimism may be actionable if ‘they are worded as guarantees or are supported by specific statements of fact, or if the speaker does not genuinely or reasonably believe them.” Here, however, the court determined that RBS’s statements were “not worded as guarantees” and “there [were] no allegations that defendants did not reasonably believe” the statements at the time they were made.
Second Circuit Finds RBS’s Alleged Understatement of Its Subprime Exposure Immaterial Under SAB No. 99
With respect to plaintiffs’ claims that had “RBS [had] understated its [subprime] exposure in its December 2007 press release,” the Second Circuit found that the “allegedly undisclosed” amount “constitute[d] less than 4% of RBS’s total asset backed securities exposure, and less than 1% of its total assets.” The Second Circuit explained that this alleged understatement was “presumptively immaterial” under SAB No. 99, which “provides that a misstatement related to less than 5% of a financial statement carries a preliminary presumption of immateriality.” The court further found that the “qualitative factors” enumerated in SAB No. 99 did “not favor treating [RBS’s] presumptively immaterial statements as material statements.” The Second Circuit noted that plaintiffs did “not allege that the amount of exposure could have been calculated precisely, mask[ed] a change in earnings, change[d] a loss into income or vice versa, or involve[d] an unlawful transaction, or that the misstatements resulted in a significant positive market reaction.”
Second Circuit Determines RBS’s Representation That the FSA “Encouraged” Rather Than “Required” RBS to Raise Additional Capital Was Not a Material Misstatement
Plaintiffs alleged that RBS had misrepresented the reasons for its £12 billion Rights Issue in April 2008. According to RBS, the FSA had “encouraged” RBS to raise capital. However, RBS made it clear that RBS had not been “‘asked to raise capital by anyone,’ including the FSA.” Plaintiffs claimed that RBS’s “statements were false” because the FSA’s CEO had in fact “‘specifically required’ [RBS] to conduct a Rights Issue to ‘raise as much capital as possible.’”
Following a review of “[t]he timeline of events leading up to RBS’s allegedly false statement,” the Second Circuit determined that plaintiffs had “fail[ed] to plead the basis for a securities fraud claim.” First, the court found that RBS “had already started preparations for the Rights Issue” five days before the FSA’s CEO “purportedly ‘specifically required’ RBS to conduct a Rights Issue.” Second, the court explained that “critical facts were already known to the investing market: RBS needed an infusion of capital; it was taking additional write-downs; the FSA was closely monitoring RBS’s situation and encouraging a Rights Issue; and there was generally a steep deterioration in market conditions and credit market outlooks.” Finally, the court found it significant that there was no determination that RBS had “violated [the] FSA’s minimum capital guidelines.” Given “these contexts,” the Second Circuit held that “a reasonable investor would have deemed the difference between ‘encouraged’ and ‘required’ to be immaterial.”
Judge Leval issued an opinion concurring in part, but dissenting from the majority’s decision with respect to RBS’s alleged misstatements concerning the Rights Issue. In Judge Leval’s view, “[t]he fact that RBS had decided to raise capital before being told by the FSA that it had to do so [did] not change the fact that it was required to raise capital.” Moreover, Judge Leval disagreed with the majority’s view that “a reasonable investor would see no material difference between the acknowledged fact that RBS had been ‘encouraged’ by the FSA to raise capital and a further statement that it had been ‘required’ by the FSA to do so.” Judge Leval opined that “the difference is substantial” and found that a “reasonable investor would [have] want[ed] to know” that the FSA had “required” RBS to raise capital.