in re royal bank of scotland group plc securities...
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
-----------------------------x In Re ROYAL BANK OF SCOTLAND GROUP PLC
SECURITIES LITIGATION,
-----------------------------x
j
v:r
DEBORAH A. BATTS, United States District Judge.
Lead Plaintiff the Freeman Group brings this action on
behalf of a putative class of Plaintiffs who purchased or
otherwise acquired Royal Bank of Scotland Series 0, R, 5, T
and/or U Non-cumulative Dollar Preference Shares (the "Preferred
Shares") Plaintiffs filed this consolidated securities class
action against Defendants The Royal Bank of Scotland plc ("RBS");
Sir Thomas McKillop; Sir Frederick Goodwin; Guy Whittaker; John
Cameron; Lawrence Fish; Gordon Pell; Cohn Buchan; Sir Stephen
Robson; Robert Scott; Peter Sutherland; Archibald Hunter; Joseph
MacHale (collectively, the "Individual Defendants"); Merrill
Lynch, Pierce, Fenner & Smith Inc.; Greenwich Capital Markets,
Inc. (n/k/a aBS Securities Inc.); Wachovia Capital Markets LLC
(n/k/a Wells Fargo Securities LLC); Morgan Stanley & Co. Inc.;
UBS Securities LLC; Banc of America Securities LLC; RBC Dam
Rauscher Inc. (n/k/a RBC Capital Markets Corporation); Citigroup
Global Markets Inc.; A.G. Edwards & Sons Inc.; and Goldman, Sachs
& Co. (collectively, the "Underwriter Defendants").
Plaintiffs assert claims for violations of Sections 11,
12(a) (2) and 15 of the Securities Act, 15 U.S.C. 5§ 77k,
771(a) (2), and 77o (the "Securities Act"). Plaintiffs bring these
claims individually and on behalf of all persons and entities,
except Defendants and their affiliates, who purchased or
otherwise acquired the Preferred Shares issued by RBS pursuant or
traceable to RES's April 8, 2005 Registration Statement.
Generally, Plaintiffs allege that the offering materials for the
Preferred Shares were materially false and misleading because
they did not disclose the extent of RBS's subprime exposure,
misrepresented the veracity of RBS internal controls, and
provided an inaccurate assessment of RBS's acquisition of Dutch
banking giant ABN ANRO. Plaintiffs assert that they and all other
purchasers of the Preferred Shares in the proposed Class have
suffered significant losses as a result of Defendants' materially
false and misleading statements and omissions of material fact.
On July 15, 2009, Plaintiffs filed their Consolidated
Amended Complaint ("CAC"). On October 23, 2009, the Underwriter
Defendants and the RES Individual Defendants filed Motions to
Dismiss the CAC pursuant to Fed. R. Civ. P. 12(b)(1), 12(b)(2)
and 12 (b) (6), as well as for for non conveniens. On June 24,
2010, the United States Supreme Court issued its decision in
Morrison v. National Australia Bank Ltd., 130 S.Ct 2869 (2010),
2
which addressed the extent of the extraterritorial reach of U.S.
securities laws. In September 2010, the Parties fully
supplemented their previous submissions in light of Morrison. In
an Order dated January 11, 2011 this Court dismissed with
prejudice Counts One, Two, Six, Seven, Eight Nine and Ten of
Plaintiffs' CAC. Following the Court's Order, Lead Plaintiff the
Freeman Group filed a Second Consolidated Amended Complaint
("SAC") on March 18, 2011. This matter is now before the Court on
Motions to Dismiss the SAC filed separately by the Underwriter
Defendants and the RBS Individual Defendants pursuant to Fed. R.
Civ. P. 12(b) (1), 12(b) (2) and 12(b) (6) , as well as for forum non
conveni ens.
For the reasons below, the Motions to Dismiss filed by the
Underwriter Defendants and the Individuals Defendants are GRANTED
in their entirety, with prejudice.
I. BACKGROUND
This is a class action on behalf of investors who purchased
or otherwise acquired RBS Series Q, R, S, T and U Preferred
Shares issued by RBS pursuant or traceable to RBS's April 8, 2005
Registration Statement. (SAC ¶ 1.) For purposes of this Motion,
the Court assumes all of Plaintiffs' factual allegations in the
3
SAC are true. State Employees Bargaining Agent Coal. v. Rowland,
494 F.3d 71, 77 (2d Cir. 2007). The Court assumes the Parties'
familiarity with the factual background of this matter as set
forth in the Court's January 11, 2011 order at pages 5-14.
A. RBS's Subprime Exposure and Subsequent Near Collapse
Defendant 1(85 is a British banking and insurance holding
company based in Edinburgh, Scotland. (SAC ¶ 12.) According to
the SAC, PBS was a conservative regional Scottish bank before
Defendant Goodwin became CEO in 2001. (SAC ¶ 63.) Under Goodwin's
leadership, RBS completed twenty-six acquisitions between 2001
and 2007 and rapidly grew to become the tenth largest company in
the world, with operations in Europe, the United States and Asia.
(4) Throughout this period, PBS's SEC filings represented that
its business philosophy was to maintain a strong capital base
that balanced the underlying risks of the business and optimized
return to shareholders. BBS claimed to have extensive internal
control procedures in place at the Board and senior executive
levels to authorize, manage, oversee, assess, and report on PBS's
exposure to credit risk. (SAC ¶ 64.)
Tn 2006 and 2007, as concern of banks' "subprime" exposure
grew, P.85 senior executives were questioned by securities
4
analysts about RBS's exposure to subprime loans and related
trading activity. RES executives responded that investors had no
reason to be concerned about subprime exposure; they told
investors that RBS had a "longstanding aversion to subprime
lending, wherever we do business," that it has "always been very
risk averse," and it does not "do sub-prime." (SAC ¶ 71.)
Plaintiffs allege that these statements were false and
misleading as RBS had in fact accumulated billions of pounds of
risky subprime assets. (SAC ¶ 70.) Beginning in 2003, RBS's
Connecticut-based investment bank Greenwich Capital Markets
("Greenwich") generated vast profits by selling mortgage debt to
the financial markets as asset-backed securities ("ABS") and
packaging them together into collateralized debt obligations
("CDO"). (SAC ¶f 65-66.) These investment vehicles, created by
buying various kinds of debt, pooling them together and using
them to back the issuance of bonds, were in large part based on
mortgage-backed securities ("MBS"), including securities backed
by subprime and other high-risk residential mortgages. Another
U.S. subsidiary of RES, Citizens Financial Group, Inc.
("Citizens"), also took on significant exposure to su.bprime
loans. (SAC 9 68-69.)
Unbeknownst to investors, however, as the market for
mortgage-backed securities became increasingly illiquid, RBS was
5
forced to retain interests in many of the CDOs and assume the
risks associated with them. By the summer of 2007, PBS's subprime
exposure had reached at least £34 billion. (SAC 11 72.)
In April 2007 RBS announced that, as part of a three-member
consortium, it was submitting a proposal for the acquisition of
the Dutch bank ABN ANRO. Under the offer, PBS would acquire 38
percent of ABN AMRO for approximately $38 billion in cash and
securities. (SAC ¶ 73.) RBS told investors that the acquisition
would result in profitable "synergies" between the companies.
(SAC ¶ 74.)
In December 2007, PBS announced that PBS and ASK ANRO would
be taking writedowns of £950 million and €300 million,
respectively, attributable to exposure to U.S. subprime mortgage
markets. Nonetheless, RBS minimized the associated credit risks
and represented that the integration of AEN ANRO was progressing
well and that transaction benefits were higher than forecast.
(SAC ¶ 78.) In April 2008, PBS announced additional writedowns of
€5.9 billion (nearly $12 billion) due to exposure to subprime
assets, and also announced a £12 billion Rights Issue to increase
PBS's capital base. RBS management continued to tell investors
that the businesses acquired in the ABN AMRO acquisition were
good, synergized well with PBS's business, and improved RBS's
opportunities going forward. (SAC ¶ 79.)
In October 2008, RBS confined that it would receive a
bailout from the British government. (SAC ¶ 80.) Then, on January
19, 2009 RBS admitted that due to the volume of subprime exposure
the Company had taken on between 2005 and 2008 and the failure of
the ABN AMRO acquisition, it would report a loss of £28 billion
($41.3 billion) for 2008. (SAC ¶ 81.)
B. Plaintiffs' Claims
In Counts One, Two and Three of the SAC (which mirror Counts
Three, Four and Five of the previously filed CAC), Plaintiffs
allege claims for violations of Sections 11, 12 (a) (2), and 15 of
the Securities Act, 15 U.S.C. § 771(a) (2), 15 U.S.C. fl 77k,
771(a) (2), and 77o, against certain Defendants. They bring these
claims individually and on behalf of all persons and entities,
except Defendants and their affiliates, who purchased or
otherwise acquired Preferred Shares. The Preferred Shares were
issued pursuant to the following Preferred Share Offerings:
Series Q, effective May 22, 2006; Series R, effective December
18, 2006; Series B, effective June 26, 2007; Series T, effective
September 24, 2007; and Series U, effective September 28, 2007
(collectively, the "Preferred Share Offerings"). (SAC ¶ 2.)
WI
RBS raised more than $5.3 billion from the Preferred Share
offerings in 2006 and 2007. The Series Q, R, S and T Preferred
Shares were offered at $25 per share and initially traded at that
amount after the offerings. The Series U Preferred Shares were
offered at $100,000 per share and initially traded at that amount
after the Series U offering. (SAC It 5, 89.) By January 19, 2009,
the Series Q, It, S and T Preferred Shares had lost approximately
80 percent of their value, while the Series U Preferred Shares
had lost 61 percent of their value, (SAC ¶ 89.)
Plaintiffs allege that the offering materials for the
Preferred Share offerings (the "Preferred Share Offering
Documents" or the "Offering Documents") 1 contained materially
false and misleading statements and omissions, including: RBS's
representations about its business philosophy of maintaining a
1 The Preferred Share Offering Documents include the April 8, 2005 Registration Statement which incorporated RBS's comprehensive annual reports on Form 20-F and certain of its periodic Font 6-K updates into each Preferred Share Offering as follows: 1) Series Q: Annual Report on Form 20-F for 2005, Form 6-K filed May 24, 2006; 2) series It: Annual Report on Form 20-F for 2005, Annual Report on Form 20-F/A for 2005 (as restated), Form 6-K filed November 9, 2006, Interim Report on Form 6-K for first six months of 2006, Form 6-K filed December 21, 2006; 3) Series 8: Annual Report on Form 20-F for 2006, Form 6-K filed June 27, 2007; 4) Series T: Annual Report on Form 20-F for 2006, Interim Report on Form 6-K for the first six months of 2007, Form 5-K filed September 27, 2007; 5) Series U: Annual Report on Form 20-F for 2006, Interim Report on Form 6-K for the first six months of 2007, Form 6-K filed September 25, 2007, Form 6-K filed October 4, 2007, Form 6-K filed February 28, 2008. (SAC 1 91.)
strong capital base (SAC ¶ 4); RES failed to disclose the extent
to which it had subprime assets in its portfolio (SAC 111 96-97,
123, 132-33), which created undisclosed material concentrations
of risk (SAC It 98-99, 103-05, 123, 134, 142-43); RES's internal
risk control procedures were incapable of accurately reviewing,
monitoring or managing RBS's exposure to credit risk (103-08,
110, 123, 139, 140-44, 146, 148); RBS's financial statements were
not fairly presented under applicable accounting standards (SAC
¶ 98, 109-10, 146, 159-62); BBS failed to disclose it would take
on billions of dollars of additional subprime assets when it
acquired ABN ANRO (SAC ¶ 126, 132-33, 138, 142-43); BBS's
representations concerning the economic and strategic benefits of
the ABN ARO acquisition(SAC 9 126, 158).
BBS and the Individual Defendants argue that the SAC fails
to plead a material misstatement or omission because Plaintiff's
base their claims on generalizations, on statements of corporate
optimism that are not actionable, and on a backward-looking
assessment of disclosures made in 2006 and 2007. They argue that
the SAC puts forth no factual allegations that contradict the
information provided by Defendants at the time it was released,
and instead relies on subsequent disclosures. In the alternative,
the RBS and Individual Defendants argue that Plaintiffs' claims
are time-barred, or that the case here should be dismissed on the
grounds of forum non conveniens. The Underwriter Defendants join
the motion of the RBS and Individual Defendants, and argue
separately the Plaintiffs lack standing to assert Section 12
claims.
II. DISCUSSION
A. Motion to Dismiss Standard
For a complaint to survive dismissal under Rule 12 (b) (6),
the plaintiff must plead "enough facts to state a claim to relief
that is plausible on its face." Bell Ati. Corp. v. Twombly, 550
U.S. 544, 570 (2007). "A claim has facial plausibility," the
Supreme Court has explained,
when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of 'entitlement to relief.'
Ashcroft v, labal, 129 S.Ct. 1937, 1949-50 (2009) (quoting
Twombly, 550 U.S. at 556-57). "[A] plaintiff's obligation to
provide the grounds of his entitlement to relief requires more
than labels and conclusions, and a formulaic recitation of the
we
elements of a cause of action will not do." Twombly, 550 U.S. at
555 (internal quotation marks omitted). "In keeping with these
principles," the Supreme Court has stated,
a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.
Icibal, 2009 WL 1361536, at *13.
In ruling on a 12(b) (6) motion, a court may consider the
complaint as well as "any written instrument attached to the
complaint as an exhibit or any statements or documents
incorporated in it by reference." Zdenek Marek v. Old Navy
(Apparel) Inc., 348 F. Supp. 2d 275, 279 (S.D.N.Y. 2004) (citin:
Yak v. Bank Brussels Lambert, 252 F.3d 127, 130 (2d Cir. 2001)
(internal quotations omitted)).
Since Plaintiff's allegations and claims sound in strict
liability, not fraud, 2 the SAC is subject to the standards of
2 "The Counts set forth below are not based on and do not sound in fraud. Any allegations of fraud or fraudulent conduct and/or motive are specifically excluded from these Counts. For purposes of asserting these claims under the Securities Act, Plaintiffs do not allege that the Defendants acted with scienter or fraudulent intent. Plaintiffs expressly exclude and disclaim any allegation that could be construed as alleging fraud or
Rule 8(a), not to the heightened pleading requirements of Rule
9 (b) * Rule 8(a) provides that a pleading must "contain a short
and plain statement of the claim showing that the pleader is
entitled to relief." Fed. R. Civ. P. 8(a)(2). Rule B does not
require "detailed factual allegations," but it demands more than
an "unadorned, the-defendant-unlawfully-harmed-me accusation."
Igbal, 129 S.Ct. at 1949. A pleading that offers "labels and
conclusions" or "a formulaic recitation of the elements of a
cause of action will not do." Id. does a complaint suffice
if it tenders "naked assertion[s]" devoid of "further factual
enhancement." Id. While legal conclusions can form the
framework of a complaint, they must be supported by factual
allegations. Id.
B. Claims pursuant to Sections 11 and 12(a) of the Securities Act
Plaintiffs allege violations of Sections 11 and 12 (a) (2) of
the Securities Act against all Defendants. In particular,
Plaintiffs allege that the Preferred Share Offering Documents
contained numerous material misstatements and omissions because
they did not disclose the extent of RBS's subprime exposure,
intentional or reckless misconduct, as these Counts are based solely on claims of strict liability and/or negligence under the Securities Act." (SAC 1 174.)
HN
misrepresented RBS's capital base policy and the veracity of RBS
internal cQntrols, and prQvided an inaccurate assessment of RBS's
acquisition of Dutch bank ABN AMRO.
Defendants argue that Plaintiffs' SAC fails to allege any
actionable statement or omission because it does not contain any
factual allegations that contradict the information provided by
Defendants at the time it was released, and instead relies on
subsequent disclosures. Defendants, in essence, claim that
Plaintiffs' reliance on hindsight alone is fatal to their claims
under Sections 11 and 12 (a) (2) of the Securities Act.
To state a claim under Section 11, a plaintiff must allege
that: (1) it purchased a registered security; (2) the defendant
participated in the offering in a manner giving rise to liability
under Section 11; and (3) the registration statement "contained
an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading." 15 U.S.C. S 77k(a). A
claim under this section may be asserted against every person who
signed the registration statement, the directors of the issuer
and the underwriter of the securities. Id.
Liability under Section 12(a) (2) arises when a person offers
or sells a security by means of a prospectus or oral
communication that includes a material misrepresentation or
omission. 15 U.S.C. § 771(a) (2). claims under Sections 11 and
12(a) (2) of the Securities Act have "roughly parallel elements."
In re Morgan Stanley Info. Fund Sec. Litig,, 592 F,3d 347, 359
(2d Cir. 2010). Section 11 imposes liability on issuers and other
signatories of a registration statement, while Section 12 (a) (2)
imposes liability under similar circumstances with respect to,
inter alia, prospectuses. See Iowa Pub. Emps. Ret. Sys. v. MF
Global, Ltd., 620 F,3d 137, 141 (2d Cir. 2010).
Plaintiffs argue that RBS: 1) misled investors about its
capital base policy; 2) failed to disclose its holding of
subprime assets and the associated concentration of risk;
3) failed to adhere to alleged internal control and credit
management procedures: 4) failed to present financial statements
under applicable accounting standards; 5) failed to disclose the
subprime exposure of ABN ANRO when it acquired the Dutch bank;
and 6) misrepresented the economic and strategic benefits of the
AEN ANRO acquisition. They allege that as a result of these
failed disclosures and misrepresentations, the statements in the
Preferred Share Offering Documents were materially untrue and
omitted material facts necessary to make them not misleading.
14
1. RBS's Capital Base Policy
Plaintiffc elatin that flsfsndantg misThd investors becus
RBS's annual report stated "it was RBS's policy to 'maintain a
strong capital base, to expand it as appropriate and to utilize
it efficiently throughout its activities to optimize the return
to shareholders while maintaining a prudent relationship between
the capital base and the underlying risks of the business." (SAC
¶J 100 (quoting RBS 2005 Annual Report, at 37), 136 (quoting RBS
2006 Annual Report, at 38.)) Plaintiffs claim that this statement
was false because during the Preferred Share Offerings, RES was
accumulating exposure to subprine loans and retaining interests
in CDOs and other asset-backed securities that were classified as
subprime. In light of the risks presented by this subprime
exposure, Plaintiffs argue, RBS's representations about its
policy of maintaining a strong capital base were false and
misleading.
In evaluating claims of securities misstatements, statements
must be read "in their entirety to determine whether a reasonable
investor would have been misled. The touchstone of the inquiry is
whether Defendants' representations or omissions,
considered together and in context, would affect the total mis of
information and thereby mislead a reasonable investor." Rombach
v. Chang, 355 F.3d 164, 173 (2d Cir. 2004). Here, however,
15
Plaintiffs have extracted a single sentence regarding Defendants'
capital base policy and presented it in a vacuum. The statement
to which Plaintiffs point merely introduces a discussion of RBS's
compliance with government capital adequacy regulations, and has
nothing to do with its securitization business. The section that
follows contains numerous charts detailing RBS's calculation of
its capital base, and the ratio of that base to weighted risk
assets. Plaintiffs do not claim that CDOs were improperly
included in the weighted risk asset calculation, nor that the
numbers regarding RBS's capital base calculations were inaccurate
or incomplete. Plaintiffs' allegations regarding PBS's capital
base policy take a single sentence and read it out of context and
in isolation. These allegations are insufficient to state an
actionable misstatement or omission under the Securities Act.
Ronbach, 355 F.3d at 173.
Accordingly, to the extent that Defendants' Motion to
Dismiss is based on Plaintiffs' allegations concerning RBS's
capital base policy, the Motion is GRANTED.
2. Failure to Disclose Subprime Holdings and Risk Concentrations
Plaintiffs allege that RES's statements about credit risk
misrepresented and omitted facts concerning its "subprime
BE
exposure." Specifically, Plaintiffs allege that the following
statements in the Preferred Share Offering Documents were
material misstatements or omissions of fact: "Overall credit
quality remained strong in 2005"; "Risk elements in lending and
potential problem loans represented [less than 2%] of gross loans
and advances to customers excluding reverse repos"; portfolio
risk remained stable and the corporate credit environment
remained benign; lending growth was centered on high quality
residential mortgages and small business loans; Citizens was not
active in subprime lending, its consumer lending was to prime
customers, and low impairment losses reflected the prime quality
of Citizens' portfolio. (See Preferred Share Offering Documents,
e.g., 2005 Form 20-F (Series Q, R), 2006 Form 20-F (Series 5, T,
U), August 16, 2007 Form 6-K Interim Report, Forms 6-K.)
Plaintiffs allege that these statements were false because they
failed to disclose that RBS had accumulated subprime assets which
created material concentrations of risk. Plaintiffs claim that
PBS was required to disclose such concentrations of risk in the
Preferred Share Offering Documents.
Plaintiffs' allegations, however, fail to state an
actionable claim under the Securities Act. There is "no
obligation for an issuer to identify specifically every type of
asset or liability it possesses, so long as its disclosures are
17
'broad enough to cover' all instruments that are in fact relevant
to the value of the issuer's securities." Plumbers' Union Local
No. 12 Pension Fund v. Swiss Reinsurance Co., 753 F.Supp. 2d 166,
181 (S.D.N,Y, 2010). Here, the Offering Documents contained
extensive disclosure regarding RBS's securitization and lending
business. The 2005 Form 20-F, for example, explains that RES
"engages in securitization transactions of its financial assets
including commercial and residential mortgage loans, commercial
and residential mortgage related securities, US Government agency
collateralized mortgage obligations, and other types of financial
assets." (2005 Form 20-F, at 108.) It explains further that "[i]n
such transactions, the assets, or interests in the assets, are
transferred generally to a special purpose entity which then
issues liabilities to third parties." (4)
RBS disclosed that it engaged in securitization of
residential mortgages and other types of financial assets.
Plaintiffs admit that the COOs held by RBS typically held AAA
ratings at the time that the alleged misstatements were made.
(See SAC ¶ 59,) Plaintiffs allege no contemporaneous facts to
support the allegation that at the time of the relevant Offering
Documents the AAA-rated COs presented credit risks would have
been deemed material information by investors. Instead, with the
benefit of hindsight, Plaintiffs now point to the collapse of the
W.
iiiti Fl V ISI
mortgage-backed security market in an attempt to frame past
statements as false or misleading. However, in evaluating claims
under the Securities Act, the tstruth of a statement
adjudged by the facts as they existed" at the time of the
statement. In re Flag Telecom Holdings, Ltd. Sec. Litig., 352 F.
Supp. 2d 429, 447 (S.D.N.Y. 2005). Accordingly, "[a] backward-
looking assessment of the infirmities or mortgage-related
securities . . . cannot help plaintiffs' case." Yu v. State
Street Corp., 686 F. Supp. 2d 369, 377 (S.D.N.Y. 2010).
The alleged failed disclosure of subprime exposure and risk
concentration do not amount to a material misstatement or
omission under the Securities Act. Accordingly, to the extent
that Defendants' Motion to Dismiss is based on these claims, it
is GRANTED.
3. Failure to Adhere to Internal Control and Credit Management
Procedures
Plaintiffs also allege that EBS's description in its annual
reports of its internal controls and risk management system was
misleading because, given BBS's subprime exposure, those controls
and systems either did not exist, or were not being followed. The
Preferred Share Offering Documents stated that all credit
19
exposures "were effectively monitored, managed and reviewed
periodically against approved limits, with lower quality
exposures being subject to a greater frequency of analysis and
assessments." The Offering Documents also explained that RBS had
an extensive governance framework at the Board and senior
executive levels, that portfolio analysis and reporting were used
to identify and manage credit risk concentrations, and than an
executive level committee would undertake regular assessment of
11135 credit risk management by division to ensure it complied with
RBS's overall standards. (See Offering Documents, e.g., 2005 Form
20-F (Series Q, R), 2006 Form 20-F (Series 5, T, U,))
In support of their assertions that 113$ failed to adhere to
its own internal control and credit management procedures,
Plaintiffs cite RBS's subprime holdings and subsequent write-
downs in 00 valuations during the credit crisis. However, "a
plaintiff challenging a defendant's disclosures regarding its
risk management processes must allege facts 'showing that the
descriptions of the processes were false or misleading at the
time they were included in the public statements, [or] facts
showing that the processes were not followed." In re Barclays
Bank Plc Sec. Litig., No. 09 Civ. 1989 (PAC), 2011 WL 31548
(S.D.N.Y. Jan. 4, 2011) (quoting In re Citigroup, Inc. Sec.
Litig., 330 F.Supp.2d 367, 379 (S.D.N.Y. 2004)). Here, Plaintiffs
fail to cite any contemporaneous support to show that the credit
management prgceures were not tollowed. Pointing to the
subsequent subprime market collapse and alleging that RBS must
therefore have failed to follow its internal control procedures
is not sufficient. The alleged misstatements concerning internal
control and risk management procedures are not actionable, and
Defendants' Motion to Dismiss is GRANTED to the extent that
Plaintiffs' claims are based on those allegations.
4. Failure to Present Financial Statements According to
Applicable Accounting Standards
Plaintiffs allege that RBS's financial statements were not
fairly presented under applicable accounting standards. They
claim that RBS did not present the financial statements that
formed part of the Preferred Share Offering Documents in
accordance with International Financial Reporting Standards
("IFRS"), including International Accounting Standards ("lAS")
and the International Accounting Standards Board Framework. (SAC
¶ 4(d).) specifically, they allege that RBS's interim 2007
financial statements failed to provide information about the
financial position, performance and change in financial position
useful to users and failed to provide information that was free
4!
from material error and bias. (SAC TT 110, 146, 159.) Plaintiffs
further allege that RBS's interim 2006 financial statements
violated lAS because they did not disclose that liDS's portfolio
of subprime assets increased during the relevant time period
resulting in a corresponding increase in credit risk and
concentration of risk. (SAC ¶ 160.) Finally, Plaintiffs claim
that the statements violated lAS because they failed to properly
mark-to-market the true value of liDS's portfolio of subprime
assets. (SAC ¶ 162.)
Defendants argue that they were under no duty to disclose
exact details concerning liES's subprime exposures because those
exposures amounted to only a very small percentage of liDS's
holdings of more than $1 trillion in assets. They note that the
statements challenged here were largely made in later 2005 and
early 2006, before the subprime crisis began to seriously affect
CO holders. Defendants argue that any undisclosed information
about RBS's subprime holdings would not have been material to
investors when such holdings formed a small part of RES's overall
portfolio and the subprinie market had not yet collapsed.
Plaintiffs have failed to allege sufficiently that the lAS
requirements gave rise to a duty to disclose detailed information
about RBS's subprime exposure. The liDS statements at issue
reported on liDS's entire asset portfolio of over $1 trillion. The
22
exposures in question amounted to less than one percent of these
asaeta, (See 2006 Annual Report, at 4; December 6 1 2007 trading
statement, at *7,) Plaintiffs have pointed to no authority that
requires disclosure of such relatively minor holdings.
Freidus v, INC Croep N.V., 736 F. Supp. 2d 816, 833 (S.D.N.Y.
2010) (no duty to disclose subprime holdings constituting two
percent and 0.24 percent of overall assets). Such holdings cannot
reasonably be characterized as creating a "concentration of
risk." 34 This is particularly true where, as here, RES's CDO
holdings were highly rated by independent credit rating agencies
in 2006 and 2007. Plaintiffs' conclusory assertions to the
contrary are unavailing. In re Duke Energy Corp. Sec. Litig., 282
F. Supp. 2d 158, 160 (S.D.N.Y. 2003) (dismissing conclusory
allegations of improper accounting practices where complaint
failed to allege "in any cognizable respect [] how the mark-to-
market accounting practices were improper"), aff'd 113 F. App'x
427 (2d Cir. 2004).
Plaintiffs allegations that RBS financial statements did not
provide sufficiently detailed or accurate information, did not
disclose the extent of or increase in RES's subprime holdings,
and did not properly mark-to-market the value of RBS's portfolio
are insufficient to state a claim of material misstatement or
23
omission under the Securities Act. Defendants' Motion to Dismiss
these claims is therefore QRMflP.
5. Failure to Disclose Subprime Exposure of ASK AMRQ
Plaintiffs allege that Dutch bank ABN AMRO had billions of
dollars of subprime assets on its books, and that RBS failed to
disclose that it would take on those subprime assets when it
acquired ABN ANRO. Plaintiffs claim this failure was misleading
because the ABN ANRO acquisition would materially increase RBS's
existing concentration of subprime assets.
As discussed supra, there is "no obligation for an issuer to
identify specifically every type of asset or liability it
possesses, so long as its disclosures are 'broad enough to cover'
all instruments that are in fact relevant to the value of the
issuer's securities." Plumbers' Union v. Swiss, 753 F.Supp. 2d at
181. Here, RBS made numerous disclosures as to the limited scope
of its pre-acquisition diligence review. The Series S Prospectus
Supplement warned investors that "[i]nformation in respect of
each of the ABN AMRO Businesses is . . based on publicly
available information and limited information provided to [RBS]
by ABN A14R0." (Series S Prospectus Supplement, at S-9.) RBS
further disclosed that "[t]he Banks have conducted only a limited
ffj
review of ABN AKRO arid, therefore, we may become subject to
un}cnQvm liabj.].itieg of ABW MRQ, which may have an adverse effect
on our financial condition and results of our operations." (July
20, 2007 Form F-4, at 46; see also Series U Prospectus
Supplement, at S-li.) While Plaintiffs claim that RBS should
have disclosed that AEN AMRO had subprime exposure, they do not
identify any basis for alleging that RBS knew of ABN's subprime
exposure prior to the completion of the acquisition. Moreover,
Plaintiffs' allegations are undermined by REVs express
disclosures, in describing the potential acquisition, that it had
been given very limited access to ABN ANRO's records during the
diligence process and that RES may therefore "become subject to
unknown liabilities of ABN AMRO, which may have an adverse effect
on [RBS's] financial condition." (July 20, 2007 Form F-4, at 46.)
In light of Defendants' extensive disclosures concerning the
risk associated with the ANT AMRO acquisition, the alleged
failure to disclose the subprime holdings of AEN ANRO does not
amount to a material misstatement or omission under the
Securities Act, Plaintiffs' allegations are thus insufficient to
state a claim and Defendants' Motion to Dismiss is GRANTED in
this regard.
25
6. Misrepresentation of Benefits of ABN ANRO Acquisition
P1n'int4ffa n1a nh1AA hnt pg twiled invecorrs w11t
statements expressing undue optimism about anticipated benefits
from the potential acquisition of AEN AMRO. Plaintiffs contend
that this optimism lacked a reasonable basis due to AEN ANRO's
holdings of subprime assets. In support of their allegations,
Plaintiffs point to the following alleged misstatements in the
Preferred Share Offering Documents: "the acquisition would result
in profitable 'synergies' between the companies"; the acquisition
would prove beneficial for BBS and its shareholders; the
acquisition would create a "leading corporate and institutional
business with both scale and global reach" and would be a strong
strategic fit; BBS maintained that it had developed a detailed
roadniap for the integration of ABN AMRO's business and BBS
expected to generate significantly higher revenues from ABN
AMRO's business. (See Preferred Share Offering Documents, e.g.,
Series S Prospectus, Series T Prospectus, Series U Prospectus,
Forms 6-K (5, T, U.))
The statements that Plaintiffs challenge, however, amount to
nothing more than corporate optimism. "vague and non-specific
pronouncements on the success of integrating acquisitions are
inactionable puffery." In re Tower Auto Sec. Litia., 483 F. Supp.
2d 327, 336 ($.D.N.Y. 2007). RBS's statements here as to the
anticipated benefits of the ABN ANRO acquisition were no more
than "optimistic future projections that do not purport to
guarantee future outcomes." In re NBTY, Inc. Sec. Litig., 224 F.
Supp. 2d 482, 494 (E.D.N.Y. 2002). As a result, they "are not
misleading; and cannot support a securities fraud cause of
action." Id. Defendants' Motion to Dismiss is therefore GRANTED
as to the allegedly misleading expressions of optimism regarding
RES's acquisition of ABN ANRO.
***
Defendants' Motion to Dismiss Plaintiffs' claims pursuant to
Sections 11 and 12(a) (2) of the Securities Act are hereby
GRANTED, and those claims are hereby DISMISSED, with prejudice.
C. Claims pursuant to Section 15 of the Securities Act
Plaintiffs also allege violations of Section 15 of the
Securities Act against each of the Individual Defendants. They
allege that at all relevant times, the Individual Defendants were
controlling persons of RES within the meaning of Section 15 of
the Securities Act because each of the Individual Defendants
served as an executive officer and/or director of RBS prior to
and/or at the time of the Preferred Share Offerings. (SAC 11 196-
97.) Plaintiffs claim that because of their positions of control
27
and authority as officers and directors of RBS, the Individual
Defendants were able to, and did, control the contents of the
Preferred Share Offering Documents, which contained materially
untrue information in violation of Section 15 of the Securities
Act. (SAC ¶1! 198-99.)
To plead a claim under Section 15, "a plaintiff must allege
(1) a primary violation by a controlled person and (2) direct or
indirect control by the defendant of the primary violator." In re
Global Crossing, Ltd. Sec. Litiç, 322 F. Supp. 2d 319, 349
(S.D.N.Y. 2004). "Culpable participation" by the controlling
person is not an element of a Section 15 claim, Id. "A signature
on an SEC filing containing the misrepresentations that are the
subject of a claim is suggestive of control . . . allegations
that [the individual] was directly involved in its day-to-day
operations, including financial reporting and accounting
suffices as an allegation of control." In re Refco, Inc. Sec.
Litic., 503 F. Supp. 2d 611, 638 (S.D.N.Y. 2007).
"Section 15 merely creates a derivative liability for
violations of Sections 11 and 12." Dodds v. Cigna Sec., Inc., 12
F.3d 346, 349 n.1 (2d Cir. 1993). Therefore, "[i]n order to
establish a prima facie case of controlling-person liability, a
plaintiff must show a primary violation by the controlled
person." ECA v. 3? Morgan Chase Co., 553 F.3d 187, 206-07 (2d
fr1J
Cir. 2009) * Here, the Court has dismissed the Section 11 and 12
claims against all Defendants. Because the Court has found that
Plaintiffs' Section 11 and 12 claims cannot be sustained, there
is no primary violation and no claims under Section 15 can
proceed. In re Morgan Stanley, 592 F.3d at 358.
Accordingly, the claims against the Individual Defendants
pursuant to Section 15 of the Securities Act are hereby
DISMISSED, with prejudice.
III. CONCLUSION
For the reasons stated above, the Motions to Dismiss filed
by RBS and the Individual Defendants, and by the Underwriter
Defendants, are hereby GRANTED. The SAC is with
prejudice, in its entirety. The Clerk of Court is directed to
close the docket in this case.
SO ORDERED.
Dated: New York, New York
1. 2D13.
United States District Judge