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Second Circuit Revives Putative Class Action Against Construction Company
10/15/2025On October 6, 2025, the United States Court of Appeals for the Second Circuit reinstated a putative class action asserting claims under the Securities Act of 1933 and the Securities Exchange Act of 1934 against a Spanish construction company, its former CEO, and the underwriters of its initial public offering of American Depository Shares (“ADSs”). Sherman v. Abengoa, S.A., ––F.4th––, 2025 WL 2825369 (2d Cir. 2025). Plaintiffs alleged that the company engaged in accounting fraud to manipulate its financial records and conceal a liquidity crisis, which allegedly contributed to the company’s bankruptcy. The district court dismissed the action, but the Second Circuit reversed and reinstated the claims. The Court held that the Securities Act claims were timely, and that plaintiffs adequately alleged certain misrepresentations as to the company with respect to both the Securities Act and Exchange Act claims, based on allegations drawn from confidential witnesses and Spanish criminal proceedings. Because the district court did not consider those allegations in evaluating plaintiffs’ allegations of scienter, the Second Circuit vacated the dismissal of the Exchange Act claims against the company and remanded for further proceedings.
Claims under the Securities Act are subject to a one-year statute of limitations which begins to run upon the discovery of the untrue statement or omission, or after such discovery should have been made by the exercise of reasonable diligence. 15 U.S.C. § 77m. The Court first explained that plaintiffs’ Securities Act claims were timely in light of their allegations regarding the revelation of the misstatements being sued upon. Although the company had revealed in November 2014 that it needed to reclassify certain of its debt, id. at *5, the Court explained that this disclosure did not relate directly to plaintiffs’ allegations of fraudulent accounting practices. Id. Instead, the Court explained that investors’ concerns about the company’s liquidity were triggered by the company’s announcement in August 2015 that it would be pursuing a massive capital increase and asset divesture. Id. The Court determined that, because plaintiffs filed their Securities Act claims within one year of that disclosure, those claims were timely. Id. The Court also rejected defendants’ argument that plaintiffs’ claims in their amended complaint did not “relate back” to the original complaint (i.e., to be considered to have been brought as of the date plaintiffs commenced the action). The Court held the allegations in the amended complaint did relate back because they arose out of the same conduct alleged in the initial complaint. Id. at *6.
In addition, the Court explained that plaintiffs adequately alleged misrepresentations with respect to the Securities Act claims, although it agreed with the district court that certain statements plaintiffs challenged in the company’s offering documents were inactionable. Specifically, the Court held that the company’s statements that it “enforce[d] strict financial discipline” through a “robust project management and control system” were puffery and thus reasonable investors could not rely on them. Id. at *7. The Court found, however, that the company’s statements about how it measured the completion of its projects for purposes of revenue calculation were adequately alleged to be false. Id. The Court disagreed with the district court’s rejection of the allegations made by confidential witnesses, concluding that those witnesses were described in the amended complaint with sufficient particularity to support the probability that a person in the position occupied would possess the information alleged. As a result, the Court concluded that plaintiffs had raised sufficiently detailed allegations based on statements from confidential witnesses to plausibly allege accounting fraud, including inflating profit margins and manipulating how costs were recorded. Id. at *9.
The Court further determined that the district court erred in not crediting allegations drawn from criminal proceedings against the company pending in Spanish courts. Id. The Court explained that there is no blanket rule that “foreclose[s]” plaintiffs “from relying on facts and allegations incorporated in another proceeding.” Id. While observing that this is a case-specific inquiry and that conclusory allegations from other proceedings are insufficient, the Court held that “the allegations relied on by [p]laintiffs in the [complaint] here were detailed, independently corroborated, and the product of an independent investigation.” Id. at *8.
The Court then rejected the district court’s conclusion that the offering materials contained meaningful cautionary language about how the company measured the completion of various projects. Id. at *10. While the offering documents noted that the company’s revenue calculation method relied on the “use of estimates,” the Court concluded “it strains credulity to suggest that such a tepid warning about the use of estimates was enough to put investors on notice” that company “was deliberately manipulating the percentage of completion to inflate its revenues.” Id.
Finally, the Court reversed the district court’s finding that the complaint failed to adequately allege the materiality of the alleged misrepresentations. The Second Circuit held that plaintiffs’ allegations sufficiently alleged the impact of the alleged misconduct on the company as a whole, and that the materiality of an alleged misrepresentation “will rarely be dispositive” unless the allegations are “so obviously unimportant to a reasonable investor that reasonable minds could not differ.” Id.
With respect to the Exchange Act claims, the Court observed that the district court’s conclusion that scienter was not adequately alleged as to the company was largely based on disregarding the allegations drawn from confidential witnesses and Spanish criminal proceedings. Id. at *11. The Court therefore remanded with instructions for the district court to fully consider those allegations. Id.
However, the Court held that the district court did not err in denying plaintiffs leave to amend their Exchange Act claims with respect to the company’s former CEO because those amendments would be futile in alleging his scienter. The Court rejected plaintiffs’ argument that the timing of the former CEO’s retirement—around the same time that the company needed to borrow from its majority shareholder and six months before the company filed for creditor protection—would be sufficient to allege scienter. Id. at *12. Rather, the Court observed that a resignation can only support the required “strong inference” of scienter if supported by compelling circumstantial allegations “corroborating that the employee who resigned held a culpable state of mind,” which were absent here. Id.
