Plaintiffs Score Major Victory in Barclays Second Circuit Appeal

August 19, 2013

On August 19, 2013, the Second Circuit Court of Appeals in Manhattan revived a significant portion of a complex securities lawsuit brought against Barclays Bank PLC and various underwriters. The appellate decision overturned several rulings by a federal judge from the Southern District of New York and allowed lead plaintiffs and a putative class to move forward on claims concerning $2.5 billion in American Depository Shares. Major news outlets, including Reuters and The American Lawyer, reported on the decision as a noteworthy victory for plaintiffs.

Investors had sued London-based Barclays and its co-defendants in 2009, alleging that, over the course of four multi-billion dollar securities offerings, they had misled the market about Barclays’s risk-management practices and failed to adequately disclose the bank’s exposure to the credit markets. Between April 2006 and April 2008, Barclays completed the four offerings (known as the Series 2, 3, 4, and 5 Offerings) from which lead plaintiffs and class members purchased hundreds of millions of shares at $25 per share – yielding proceeds of $5.45 billion to Barclays. The final Series 5 Offering involved the sale of 100 million shares for proceeds of $2.5 billion.

Just months after the Series 5 Offering, Barclays disclosed that it had taken a £2.8 billion ($5.5 billion) writedown on credit-related assets, and commenced a several-month binge of private issuances that raised additional billions of dollars. Barclays also set up a hedge fund to buy £7.5 billion of its polluted credit-market assets, allowing it to avoid having to mark-to-market those toxic assets on its balance sheet. Investors in the four offerings were not as fortunate, however; their securities purchased for $25 apiece plummeted nearly 75% in value.

Investors in the offerings filed suit under §§11, 12(a)(2), and 15 of the Securities Act of 1933, alleging material misstatements and omissions in the offering materials. The district court dismissed all claims with prejudice, however, finding them either (i) time-barred under the statute of limitations, (ii) inadequately pleaded, or (iii) lacking an adequate lead plaintiff who had purchased in a particular offering.

Following the dismissal, lead plaintiffs sought reconsideration and leave to file an amended complaint to address the pleading deficiencies identified by the district court – particularly as to claims concerning the $2.5 billion Series 5 Offering. They offered allegations showing that the defendants disbelieved the subjective valuations contained in the offering materials and proffered additional named plaintiffs.

The district court denied reconsideration and leave to amend, reasoning that such amendment would be “futile.” It said that the amended allegations of subjective disbelief “would clearly suggest fraud,” but that those allegations could not be used, in light of plaintiffs’ earlier disavowal of fraud. That ruling ended the case and left plaintiffs only one avenue – an appeal to the Second Circuit.

Following Second Circuit briefing and oral argument, at which Robbins Geller appellate partner Joseph D. Daleysquared off against defense attorneys representing Barclays and the underwriters, the Second Circuit reversed in significant part. Although the panel affirmed the dismissal of claims relating to the first three offerings as time-barred, it reversed, and upheld as a matter of law, plaintiffs’ allegations concerning the $2.5 billion Series 5 Offering: “We conclude, however, that Lead Plaintiffs’ amended allegations regarding the Series 5 Offering did state claims under §§11 and 12(a)(2) and leave to amend should not have been denied as futile.” As to Barclays’s subjective disbelief in its valuations, the panel noted that although the original complaint contained no such allegations, the “Proposed Complaint that Lead Plaintiffs later submitted adequately” pleaded them. The panel also reversed the district court’s finding that such allegations rose to actual “fraud.” The panel noted that subsequent to the district court’s decision, the Second Circuit had decided Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011), holding that allegations of disbelief of subjective opinions could be brought under §§11 and 12(a)(2) “in certain circumstances” – and this was one of them. The panel also found that other defects identified by the district court would be remedied through the proposed complaint. In light of the foregoing, the court reversed the judgment dismissing the Series 5 Offering claims and remanded the case to the district court.

Truly the result of a team effort, the Barclays win represents the culmination of litigation strategies in the district court by Robbins Geller partners Andrew J. Brown and Lucas F. Olts and associates Eric I. Niehaus and Christopher D. Stewart, with partner Joseph D. Daley briefing and arguing the matter before the Second Circuit.

Freidus v. Barclays Bank PLC, 734 F.3d 132 (2d Cir. 2013).

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