Second Circuit Court Of Appeals Articulates Important Limitations On Pleading Fraud In 'Event-Driven' Securities Class Actions

• Published date: 06 September 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Class Actions, Trials & Appeals & Compensation, Securities
• Law Firm: Kramer Levin Naftalis & Frankel LLP
• Author: Mr Arthur Aufses III, Alan R. Friedman, Michael J. Dell, Kerri Ann Law, Jonathan M. Wagner, Gary P Naftalis, Jason M. Moff and Eric H. Rosoff

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...