Plumbers & Steamfitters Local 773 Pension Fund v. Danske Bank A/S

Background

The plaintiffs brought a proposed securities-fraud class action against Danske Bank A/S and former officers and board members. They sued under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and related regulations. The plaintiffs had purchased the bank’s American Depositary Receipts, which represent beneficial ownership interests in a foreign company’s shares.

The claims concerned alleged misstatements about Danske Bank’s financial condition and anti-money-laundering controls at its Estonian branch. The alleged class period ran from January 9, 2014, through April 29, 2019. The plaintiffs relied substantially on an independent investigative report published in September 2018. The complaint alleged that regulators, auditors, and whistleblowers had raised concerns about the branch’s controls; that the bank did not close its non-resident portfolio department until the end of 2015; and that later investigations revealed additional problems. The complaint also alleged that the estimated value of funds laundered through the department increased from $8.3 billion in July 2018 to $230 billion in February 2019, and that the bank’s American Depositary Receipts declined in value.

The defendants moved to dismiss the Third Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. On that motion, the court accepted well-pleaded factual allegations as true and drew reasonable inferences for the plaintiffs, but it did not have to accept legal conclusions presented as facts.

Pleading requirements

A claim under Section 10(b) and Rule 10b-5 generally requires allegations of a material misrepresentation or omission, the defendants’ fraudulent state of mind, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Securities-fraud complaints must also satisfy Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. Those rules require the complaint to identify the allegedly fraudulent statements, their speakers, where and when they were made, why they were misleading, and particular facts supporting a strong inference that the defendants acted with an intent to deceive or with sufficiently reckless disregard for the truth.

Why the complaint was dismissed

The court first held that the complaint failed to plead fraud with the required particularity. The complaint quoted 36 pages of alleged misstatements across 83 paragraphs but used only two brief paragraphs to explain generally why the statements were false or misleading. The court concluded that the complaint left readers to guess what parts of the statements were false and why. The plaintiffs identified only a small portion of the quoted statements in their opposition papers, and the court declined to allow those papers to cure the complaint.

The court also held that the plaintiffs had not adequately pleaded a material misrepresentation or omission. It rejected the theory that Danske Bank improperly reported revenue from the non-resident portfolio because the plaintiffs had not alleged that the underlying deposit contracts were unenforceable or that the defendants knew, when the financial statements were published, that the revenue came from money-laundering transactions. The court also found no plausible allegation that the bank had not concluded whistleblower investigations or implemented what it then believed were appropriate actions.

The court rejected the challenge to a statement describing a goodwill impairment charge as technical and not affecting the bank’s strategy. It found that the plaintiffs had not adequately alleged that the charge itself affected strategy and had drawn only a conclusory connection between the charge and plans to close or change the non-resident portfolio department.

The court further held that statements about contingent liabilities, possible fines, and the financial effect of anti-money-laundering investigations were not adequately alleged to be misleading. The statements did not describe the amount of profits from the activity, the bank had disclosed an estimated amount of revenue from the department, and the plaintiffs did not allege that this estimate was knowingly false when made. The court also held that later, larger-than-expected fines did not by themselves make earlier statements about expected consequences misleading. Finally, the court characterized the challenged corporate-governance and compliance statements as general statements, or “puffery,” too vague to support a securities-fraud claim.

State of mind and other issues

The court held that the plaintiffs had not alleged a strong inference of fraudulent intent. They did not identify a motive to deceive and did not specifically allege that the defendants had access to information contradicting particular statements when those statements were made. The court concluded that the alleged slow response to compliance problems could support an inference of mismanagement, but not necessarily fraudulent intent. It also found that the plaintiffs had not connected the reports received by the bank or its employees to particular statements by particular defendants during the relevant periods.

The court declined to decide the defendants’ argument that claims based on statements before February 2016 were impermissibly extraterritorial because the other defects independently required dismissal. The court also stated that, for substantially the same reasons, the plaintiffs failed to plead a scheme-liability claim under Rule 10b-5(a) and (c).

Disposition

Judge Valerie Caproni granted the defendants’ motion to dismiss. Because the plaintiffs had already amended their pleadings once in response to a motion to dismiss and their opposition did not indicate that the defects could be fixed, the court denied leave to amend. The Third Amended Complaint was dismissed with prejudice, and the Clerk was directed to close the open motions and the case.