Southern District Of New York Declines To Dismiss Putative Class Action Against Financial Institution Regarding Alleged Misstatements About Internal Controls
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  • Southern District Of New York Declines To Dismiss Putative Class Action Against Financial Institution Regarding Alleged Misstatements About Internal Controls


    On February 23, 2024, Judge Katherine Polk Failla of the United States District Court for the Southern District of New York largely denied a motion to dismiss a putative class action asserting claims under the Securities Exchange Act of 1934 against a financial institution and certain of its executives. In re Barclays PLC Sec. Litig., 2024 WL 757385 (S.D.N.Y. Feb. 23, 2024). Plaintiff alleged that the company had issued securities in excess of what it had registered for with the U.S. Securities and Exchange Commission, which allegedly rendered misleading certain of its statements regarding compliance with securities laws and internal controls. Id. While the Court held that certain alleged misrepresentations were adequately pleaded to survive a motion to dismiss, the Court dismissed claims as to statements made after the alleged over-issuances were disclosed and rejected plaintiff’s control person liability theory as to certain defendants.

    The Court first considered the company’s general statements relating to internal controls before the alleged over-issuances were revealed, including that the company was “committed to operating within a strong system of internal control” and had “frameworks, policies and standards” that enabled the company “to meet regulators’ expectations relating to internal control and assurance.” Id. at *11. The Court rejected defendants’ argument that these statements were too “simple and generic” to be actionable, explaining that, according to the complaint’s allegations, the company allegedly did not have any control mechanism in place to prevent the over-issuance of securities and the supposed omission of this lack of a control system was adequately alleged to be material. Id. at *12. The Court stressed that, in its view, the allegations were not merely that the company’s systems underperformed; rather, the allegations were that no system for tracking the company’s securities issuances existed at all. The Court further held that because it concluded that these statements were actionable, plaintiff could also pursue claims challenging the company’s Exchange Act compliance certifications. Id. at *13.

    However, the Court rejected plaintiff’s challenges to statements made after the alleged over‑issuances were publicly disclosed. First, the Court held that the company’s statements regarding its initial assessment of the impact of the alleged over-issuances—which allegedly turned out to be an underestimate—were not actionable. Id. at *14. The Court observed that there were no allegations that, at the time these statements were made, the company had discovered information that contradicted its statements. Id. The Court also determined that these statements were not adequately alleged to be materially false, given that these statements, according to the Court, “underscored the [c]ompany’s lack of a system” for tracking the securities at issue and also expressly disclosed that the assessment reflected the company’s “best estimate” at the time. Id. at *14–15. Second, the Court held that the company’s statement announcing the results of an investigation by outside counsel—which allegedly failed to disclose that the company’s board had yet to issue its final report—was not actionable. Id. at *15. The Court concluded that the company did inform investors that the outside counsel report would be used by the company to determine whether action should be taken against company executives, and that the alleged omission of other information was not materially misleading. Id.

    In addition, the Court determined that plaintiff adequately alleged, for the challenged statements made before the alleged over-issuances were revealed, that defendants acted with scienter on a theory of recklessness. In reaching this conclusion, the Court emphasized that, according to the complaint’s allegations, the company allegedly acknowledged in prior correspondence sent to the SEC that its status as a Well-Known Seasoned Issuer (“WKSI”)—which allowed it to issue securities subject to “more lenient communications and registration rules and regulations” (id. at *2)—was “importan[t]” to the company “in meeting its capital and funding requirements” and that losing this status would “curtail important channels of communication to investors,” hurt the company’s ability to respond to “current regulatory and market conditions and uncertainties that are significantly transforming the landscape for financial institutions like [the company],” and harm “the speed at which [the company] could strengthen its capital position if require[d] to do so” by a regulator. Id. at *18. Thus, the Court concluded that, in its view, defendants were adequately alleged to be reckless in failing to implement controls regarding shelf issuances after the company lost its WKSI status. Id. at *18. The Court further explained that its conclusion in this regard was supported by the complaint’s allegations regarding the supposed magnitude of the alleged over‑issuances and the allegation that they were supposedly discovered through a basic inquiry made to the company’s legal department by a low-level employee. Id. at *19.

    The Court also held plaintiff had adequately pleaded loss causation because the emergence of the company’s allegedly inadequate controls was plausibly alleged to have caused the company’s stock price to fall. Id. at *21.

    Finally, the Court dismissed plaintiff’s control person claims against the company’s board chair and against the company’s subsidiary that was allegedly responsible for the alleged over‑issuances. As for the chair, the Court held that his status as chair did not “demonstrate actual control over the company and the incident in question,” nor was he adequately alleged to have been culpable in the alleged over-issuances. Id. at *22. As for the corporate subsidiary, the Court concluded that plaintiff alleged no facts suggesting the subsidiary exerted control over its corporate parent or that it had any control over the statements the Court held were actionable. Id.

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