Although a district court may have erred in ruling that Barclays Bank did not have a duty to disclose its exposure to risky financial instruments, the Second Circuit decided this did not matter because Barclays "resoundingly" established its affirmative defense of negative loss causation, entitling it to summary judgment. Similarly, even if Barclays had a duty to disclose its declining capital ratios, event studies showed negligible market response to corrective disclosures, so concealment of this information did not cause investor losses (In re Barclays Bank PLC Securities Litigation, November 19, 2018, per curiam).
On behalf of a certified investor class, the plaintiff alleged that Barclays omitted to disclose key facts regarding its financial condition, in violation of Sections 11 and 15 of the Securities Act. The district court granted summary judgment to Barclays, holding as a matter of law that Barclays did not have a duty to disclose this information and that the omissions did not cause investor losses.
Exposure to risky financial instruments. First, the plaintiff argued that Barclays "hid" its exposure to billions of dollars in risky assets by failing to disclose in 2008 offering materials the notional amount of its exposure to monoline insurers. The sole business of monoline insurers is to issue financial guaranty insurance instruments, including credit-default swaps.
The three-judge panel disagreed that Barclays did not have a duty as a matter of law to disclose this information, finding that the district court had interpreted its ruling in IBEW Local Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC (2015) too broadly. It was not the case that an issuer will never have a duty under Section 11 to disclose the notional amount of its exposure to monoline insurers, said the panel; it depends on a case-by-case analysis. But the panel found it did not need to decide the issue of omission, because Barclays had satisfactorily demonstrated negative loss causation, and so was entitled to summary judgment in any case.
The court noted that a Section 11 defendant can avoid liability by proving "negative loss causation," i.e., that the alleged misstatement or omission did not lead to a decline in its share price. Here, Barclays provided an event study that showed virtually no market reaction to the revelation of over 21 billion pounds of the controversial assets. The court rejected the plaintiff’s contention that the disclosure was not fully corrective, saying the disaggregation of assets was clear. Accordingly, Barclays satisfied its negative causation burden on this theory of liability.
Capital ratios. The plaintiff also argued a second theory of liability, that Barclays failed to disclose that it was not meeting a capital ratio required by the U.K. Financial Services Authority (FSA), and that its capital ratios declined. In meetings in March 2008, the FSA chairman expressed sharp concern that Barclays’ Tier 1 equity ratio was only 4.6 percent and wanted to know what Barclays’ plans were for raising it to the bank’s own target ratio of 5.25 percent. However, the panel held that this record did not show that FSA had issued any sort of mandate or directive for Barclays to reach the target ratio, nor that Barclays undertook a formal commitment to do so. The panel concluded that Barclays had no legal duty to disclose the substance of its March 2008 conversations with the FSA in the offering materials.
The panel also determined that it did not need to decide whether Barclays’ decline in capital ratios should have been disclosed, because here too, Barclays met its negative causation burden. On June 25, 2008, about ten weeks after the offering, Barclays disclosed an additional 4.5-billion-pound capital raise, which increased its Tier 1 capital and equity ratios to 7.9 percent and 5.0 percent, respectively. Barclays’ ADS share price rose very slightly in response, by an amount the expert witness found statistically insignificant.
The panel found that this disclosure broke any chain of causation that might have existed connecting any failure to report declining capital ratios in the months between December 2007 and April 2008, and any losses the plaintiff may have suffered after June 25, 2008. Accordingly, Barclays conclusively proved that the subject of the misstatements and omissions was not the cause of any actual loss suffered, and was entitled to summary judgment on the "material decline in capital ratios" theory as well.
The case is No. 17-3293-cv.
Attorneys: Joseph D. Dale (Robbins Geller Rudman & Dowd LLP) for Dennis Askelson. Michael T. Tomaino (Sullivan & Cromwell LLP) for Barclays Bank PLC. Jay B. Kasner (Skadden, Arps, Slate, Meagher & Flom LLP) for Citigroup Global Markets Inc. and Wachovia Capital Markets, LLC.
Companies: Barclays Bank PLC; Citigroup Global Markets Inc.; Wachovia Capital Markets, LLC
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