Barclays' Subprime Related Securities Suit Dismissed

Barclays' Subprime Related Securities Suit Dismissed

In a January 5, 2011 order, Southern District of New York Judge Paul Crotty granted the defendants' motions to dismiss the consolidated Barclays Bank subprime-related securities class action lawsuit. A copy of Judge Crotty's order can be found here. Although Judge Crotty's order is in many respects just the latest in the series of subprime-related securities lawsuit dismissal motion rulings, there are a number of interesting things about this ruling, as discussed below.

Background

Between April 2006 and April 2008, Barclays completed four American Depositary Shares offerings through which it raised total proceeds of $5.45 million. The four offerings were dated April 21, 2006 (the Series 2 offering), September 10, 2007 (the Series 3 offering), November 30, 2007 (the Series 4 offering) and April 8, 2008 (the Series 5 offering).

These offerings were presented in reliance on two Shelf Registration statements, dated September 14, 2005 and August 31, 2007, as well as Supplemental Prospectuses dated as of the offering date of each of the four offerings.

On November 15, 2007, the company issues an unscheduled "Trading Update" in which it disclosed the company's exposure to U.S. subprime mortgages and mortgage backed securities. In a series of subsequent disclosures the company disclosed various write-downs of these assets, culminating in significant impairments and write-downs disclosed in its 2008 interim results and 2008 annual report.

As detailed here, in March 2009, investors who had purchased securities in one or more of the four offerings filed the first of several securities class action lawsuits against the company, certain of its directors and officers, and its offering underwriters. The lawsuits, which ultimately were consolidated, alleged the offering documents contained materially misrepresentations in violation of the Securities Act of 1933.

In the plaintiffs' consolidated amended complaint (here), the plaintiffs essentially alleged that Barclays had failed to disclose and properly account for the risky real estate business in which it was engaged.

Specifically, the plaintiffs alleged that the company had failed to timely and adequately disclose and write down its exposure to risky credit assets; had failed to comply with applicable accounting standards and SEC requirements; and misleadingly assured investors that Barclays' risk management practices helped the company avoid the worst credit market risks.

The defendants moved to dismiss.

The January 5 Order

After first ruling that the plaintiffs lacked standing to bring claims under Section 12(a)(2) (because the plaintiffs had not alleged that they had purchased their shares directly from the defendants), Judge Crotty then ruled that the Securities Act claims of the plaintiffs that had purchased their shares in the first three of the four offerings were time barred.

Judge Crotty ruled that the Series 2 and Series 3 plaintiffs were on inquiry notice of their claims at least as of the November 15, 2007 Trading Update, which Judge Crotty said disclosed "precisely the information that Lead Plaintiffs claim Barclays should have disclosed earlier." Because these plaintiffs filed their claims more than a year after the Trading Update, Judge Crotty held their claims were untimely.

Similarly, Judge Crotty ruled the Series 4 plaintiffs were on inquiry notice of their claims on February 19, 2008, the date Barclays release its 2007 annual results. As the Series 4 plaintiffs also did not file their claims within a year of that release, Judge Crotty held that the Series 4 plaintiffs claims were also time barred.

Interestingly, Judge Crotty held that the U.S. Supreme Court's ruling in Merck (about which refer here) was not controlling on the statute of limitations issues, but he went on to find that even if it did apply that the Merck standard had been satisfied.

Judge Crotty did reach the pleading sufficiency of the Series 5 plaintiffs' allegations. However, Judge Crotty held that the Series 5 plaintiffs' allegations were insufficient.

With respect to the plaintiffs' allegations regarding the defendants' alleged failure to timely disclose and write down the impaired real estate assets, he held that the plaintiffs had failed to allege "that Barclays did not truly believe its subjective valuations."

With respect to the plaintiffs allegations that Barclays had failed to adequately itemize the company's mortgage-related assets exposures, Judge Crotty held that the company had not duty to further itemize its mortgage asset exposure.

Finally Judge Crotty held that the plaintiffs had not adequately alleged that the defendants' did not comply with applicable accounting standards or that the company's disclosures regarding its risk management practices were actionable.

Read the article in its entirety at the D&O Diary, a blog by Kevin LaCroix.