Publications

(Article from Securities Law Alert, March 2018) 

For more information, please visit the Securities Law Alert Resource Center

On March 8, 2018, the Southern District of New York dismissed without leave to amend a securities fraud action alleging that a group of Brazilian entities failed to disclose that the value of certain notes could fall if the market discovered that defendants were allegedly involved in an illegal bid-rigging scheme. Banco Safra S.A. — Cayman Islands Branch v. Andrade Gutierrez Int’l, 2018 WL 1276847 (S.D.N.Y. 2018) (Furman, J.).[1] The court found “no reasonable investor could have been misled about the nature of the risk” because the Offering Memorandum included cautionary language that “addressed the relevant risks directly.” The court further held that a representation concerning the alignment of business practices with international standards was too aspirational and generalized to support a securities fraud claim.

Defendants Disclosed the Specific Risks That Allegedly Materialized

The court explained that “[w]here, as here, the alleged deceptive act is a failure to disclose uncharged criminal conduct, the critical consideration is whether the alleged omissions are sufficiently connected to defendants’ existing disclosures to make those public statements misleading.” Courts in the Second Circuit “have found a sufficient connection in three circumstances: (1) when a corporation puts the reasons for its success at issue, but fails to disclose that a material source of its success is the use of improper or illegal business practices; (2) when a defendant makes a statement that can be understood, by a reasonable investor, to deny that the illegal conduct is occurring; and (3) when a defendant states an opinion that, absent disclosure, misleads investors about material facts underlying that belief.”

Here, plaintiffs alleged that defendants failed to disclose “that an investigation into [d]efendants’ business might reveal that they rigged bids for public projects in Brazil, causing the market value of the [notes at issue] to fall precipitously.” The court held that plaintiffs’ “claims fail as a matter of law” because “[d]efendants adequately disclosed the ongoing investigations into their bid-rigging scheme.” The court noted that the Offering Memorandum stated as follows:

[W]e are currently subject to claims alleging irregularities in certain bidding processes and public contracts for which we were awarded construction works. … In case decisions are issued against us, we could suffer a material adverse effect.

The court found “[t]his cautionary language addressed the very risks that [p]laintiffs claim were later realized.”

The court also rejected plaintiffs’ contention that “[d]efendants’ disclosure was deceptively broad.” The court explained that “where there is disclosure that is broad enough to cover a specific risk, … the disclosure is not misleading simply because it fails to discuss the specific risk.” The court found similarly meritless plaintiffs’ claim that “[d]efendants were required in the Offering Memorandum to estimate potential fines and penalties to which [the entity offering the notes] could be subjected.” The court observed that plaintiffs “cite[d] no authority for the proposition that such a specific (and usually unknowable) disclosure is required.”

Statements Concerning Alignment with International Standards Were Too Aspirational to Support  a Securities Fraud Claim

Plaintiffs also challenged as misleading a statement in the Offering Memorandum that one of the defendants “aligns its corporate practices to standards issued by international entities, such as the International Finance Corporation” and other lenders that provide funding for the company’s projects. The court noted that plaintiffs did not cite to the specific standards themselves, nor did plaintiffs allege that many of the lenders had even “established relevant standards.” The court concluded that a representation concerning alignment with such standards was “both too general and too aspirational to support a securities-fraud claim.”