Plumbers & Steamfitters Local v. Danske Bank

20-3231
Plumbers & Steamfitters Local v. Danske Bank
United States Court of Appeals
for the Second Circuit
AUGUST TERM 2020
No. 20-3231
PLUMBER & STEAMFITTERS LOCAL 773 PENSION FUND, BOSTON RETIREMENT SYSTEM,
TEAMSTERS LOCAL 237 ADDITIONAL SECURITY BENEFIT FUND AND TEAMSTERS
LOCAL 237 SUPPLEMENTAL FUND FOR HOUSING AUTHORITY EMPLOYEES,
individually and behalf of all others similarly situated,
Plaintiffs-Appellants,
v.
DANSKE BANK A/S, THOMAS F. BORGEN, HENRIK RAMLAU-HANSEN, JACOB AARUP-
ANDERSEN, ESTATE OF OLE ANDERSEN,
Defendants-Appellees.
ARGUED: MAY 17, 2021
DECIDED: AUGUST 25, 2021
Before: LIVINGSTON, Chief Judge, JACOBS, and MENASHI, Circuit Judges.
Three pension funds bring this putative securities class action on behalf of
themselves and all others who purchased Danske Bank American Depositary
Receipts (ADRs) between January 9, 2014 and April 29, 2019. The Funds allege
1
that Danske Bank and several of its corporate officers made materially
misleading statements about a money laundering scandal that was perpetrated
through the Bank’s branch in Estonia. The United States District Court for the
Southern District of New York (Caproni, J.) dismissed the Funds’ claims
pursuant to Federal Rule of Civil Procedure 12(b)(6) for, inter alia, failure to
plead actionable misstatements or omissions. We AFFIRM.
____________________
CAROL C. VILLEGAS (Alec T. Coquin, Christine M. Fox,
on the brief), Labaton Sucharow LLP, New York, NY,
for Plaintiffs-Appellants.
Samuel H. Rudman, David A. Rosenfeld, William
Geddish, Robbins Geller Rudman & Dowd LLP,
Melville, NY (on the brief), for Plaintiffs-Appellants.
BRIAN T. FRAWLEY (Katherine Bagley, Amanda Shami,
on the brief), Sullivan & Cromwell LLP, New York, NY,
for Defendants-Appellees Danske Bank A/S and Jacob
Aarup-Andersen.
Bruce E. Yannett, Helen V. Cantwell, Debevoise &
Plimpton LLP, New York, NY and Jonathan R. Tuttle,
Debevoise & Plimpton LLP, Washington, DC
(on the brief), for Defendant-Appellee Ole Andersen.
2
Edmund Polubinski III, Patrick W. Blakemore, Davis
Polk & Wardwell LLP, New York, NY (on the brief), for
Defendant-Appellee Thomas F. Borgen.
Daniel J. Kramer, Shane Avidan, Katherine Warren
Gadsden, Paul, Weiss, Rifkind, Wharton & Garrison
LLP, New York, NY (on the brief), for Defendant-
Appellee Henrik Ramlau-Hansen.
DENNIS JACOBS, Circuit Judge:
This securities fraud class action, brought by three pension funds
(collectively, “the Funds”) against Danske Bank (“Danske” or “the Bank”) and
four of its former executives, principally alleges that the Bank covered up a
money-laundering scandal. Between 2007 and 2015, a failure to follow anti-
money laundering (AML) protocols in the Bank’s Estonian Branch allowed
suspicious transactions of approximately $230 billion to flow through that
branch. News of the scandal first broke in 2016 when the Danish Financial
Supervisory Authority (DFSA) reprimanded and later fined Danske Bank for
compliance shortcomings. But it became clear over the next two years that the
amount of money laundered through the Estonian Branch was far greater than
originally thought. As the scope of the scandal came to light, the price of
Danske Bank securities declined.
3
In 2018—well after news of the Estonian Branch’s AML issues became
public, but before its full breadth was revealed—the Funds purchased Danske
Bank American Depositary Receipts (ADRs) and now seek to represent a class of
ADR investors who purchased between January 9, 2014 and April 29, 2019. The
Funds claim that the Bank failed to supervise the Estonian Branch, reacted slowly
once it became aware of the AML issues, and made a series of misstatements and
omissions along the way. During the relevant time period, Defendant Thomas
Borgen was Danske’s CEO, Defendants Henrik Ramlau-Hansen and Jacob
Aarup-Andersen both served as its Chief Financial Officer, and Defendant Ole
Andersen was the Chairman of its Board of Directors.
We conclude that none of the misstatements or omissions identified by the
Funds are actionable. One of the Funds’ misstatement theories improperly
faults the Bank for its nondisclosure of “uncharged, unadjudicated wrongdoing.”
See City of Pontiac Policemen’s and Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173,
184 (2d Cir. 2014). Two more fail in light of the Funds’ reliance on statements
that were made more than three years before their first purchase of ADRs and
that—in light of intervening events—cannot reasonably be said to have
4
significantly altered the mix of information available to reasonable investors at
that later date. Another statement, conversely, is not actionable because it was
made well after the Funds last purchased ADRs. See Denny v. Barber, 576 F.2d
465, 468–69 (2d Cir. 1978). And the remaining statements are too generic to
induce reliance.
All told, the allegations do not move the claims outside the realm of
corporate mismanagement and into the realm of securities fraud. See Acito v.
IMCERA Grp., Inc., 47 F.3d 47, 53 (2d Cir. 1995) (“It is well settled that section
10(b) was not designed to regulate corporate mismanagement.” (internal
quotation marks omitted)). Accordingly, we AFFIRM the district court’s
dismissal of this action.
BACKGROUND
A. The Estonian Branch
Danske Bank, the largest financial institution in Denmark, acquired its
Estonian Branch by way of a 2006 merger with Sampo Bank. Problems soon
emerged. In 2009, the Estonian Financial Supervisory Authority (EFSA)
censured the branch for failing to comply with Know Your Customer (KYC)
5
rules, which, inter alia, obligate banks to verify the identity of a customer before
opening an account. An internal audit conducted in 2012 reported that branch
personnel sometimes failed to screen incoming payments. That same year, the
DFSA approached Danske about “serious AML . . . issues in the Estonian
branch.” App’x at 49. The Funds allege that, despite these cautions, Danske
failed to strengthen compliance measures at the branch that would have
impaired profitability.
Central to the Estonian Branch’s AML issues was its Non-Resident
Portfolio (“NRP”), which it inherited from Sampo. The NRP was managed by a
designated group of employees and was composed of 3,000 to 4,000 foreign
clients at any given time, most of them corporate entities based in Russia, the
United Kingdom, and the British Virgin Islands, with little apparent reason for
doing their banking in Estonia. Although just 2–4 percent of the branch’s
customers were part of the NRP, the portfolio accounted for an average of 56
percent of the branch’s pre-tax profits between 2011 and 2015.
The Funds allege that many NRP customers were intermediaries who used
the branch to launder money. Many of them should have set off alarms. Some
6
shared addresses with other NRP customers; others processed transactions
incommensurate with their purported size. But Estonian Branch employees
tended not to ask questions about their clients’ financial motives.
In late 2013, a whistleblower named Howard Wilkinson emailed four of
his superiors in Copenhagen to report “a near total process failure” at the
Estonian Branch, accusing branch employees of “knowingly dealing with
criminals.” App’x at 94–95. Following an investigation, many of Wilkinson’s
allegations were substantiated by the Bank’s Internal Audit Group, which found
(inter alia) that branch employees were lax when inquiring into new NRP clients,
apparently to avoid “caus[ing] problems” for them. App’x at 54. CEO Borgen
was informed of these findings in early 2014 and recommended “an immediate
stop of all new business and a controlled winding-down of all existing business”
within the NRP. App’x at 372. Around that same time, the EFSA censured the
branch for its AML shortcomings, and Danske informed the regulator of its plan
to shut down the NRP completely in the coming months.
Wilkinson’s allegations prompted changes. Danske ceased opening new
NRP accounts, terminated all accounts suspected of being operated by an
7
intermediary, hired an independent consultant to assess AML policy in Estonia,
and began considering the outright sale of the branch. One board member
recommended getting out of Estonia immediately, but Borgen expressed concern
that a precipitate exit could negatively impact the sales price of the branch.
In December 2014, Danske reported a goodwill impairment related to its
operations in Estonia amounting to DKK 2.1 billion (about $326 million)
alongside substantial impairments in Finland and Northern Ireland. 1 The Bank
explained that these write-downs were “based on long-term assessments” as
opposed to “short-term developments at the individual business units.” App’x
118. Ramlau-Hansen stressed that the write-down “will not affect [the Bank’s]
ongoing business or the strategy for the involved units.” App’x 58.
Over the next few months, the NRP was gradually shut down. The
branch sent termination notices to 2,261 NRP customers in 2015, and anticipated
that by late that year, 77 percent of NRP accounts would be closed. The NRP was
1 If a company purchases assets at more than fair market value, it can record the
difference as goodwill on its balance sheet. But if the value of the assets
subsequently declines, the company may be required to record a goodwill
impairment.
8
completely dissolved by early 2016.
B. The scandal becomes public
News of the Estonian Branch’s AML violations emerged over the next few
years. In March 2016, the DFSA publicly reprimanded and fined the Bank for
failing “to identify material money laundering risks at its branch in Estonia” and
for not implementing “risk-mitigating measures.” App’x at 68. A year later,
Berlingske, a Copenhagen newspaper, detailed how $20 billion was laundered out
of Russia between 2011 and 2014 via several banks, including $1.2 billion
through Danske. A few months later, Berlingske reported that four UK-based
shell companies controlled by Azerbaijani elites had used Danske’s Estonian
Branch to launder $2.9 billion.
These news stories provoked further scrutiny from Danish and French
regulators. Danske responded with a September 2017 press release
acknowledging that significant sums had been laundered through its Estonian
Branch due to that branch’s “major deficiencies in controls and governance.”
App’x at 322. Around that same time, the Bank hired Bruun & Hjejle (B&H), a
Copenhagen law firm, to conduct an independent investigation.
9
The bad press continued unabated, however. Bloomberg reported in
mid-2018 that Danish authorities sought to investigate $8 billion that had
allegedly been laundered through the Estonian Branch between 2007–2015.
Two weeks later, Danske voluntarily promised to renounce its profits from all
illegal transactions from the Estonian Branch. Nevertheless, the Bank assured
investors in July 2018 that it “does not expect . . . the dialogue with public
authorities or the inspection of compliance with anti[-]mon[e]y laundering
legislation to have any material effect on its financial position.” App’x at 83.
In September 2018, Danske released the B&H Report, which observed that
the scandal was much larger than initially anticipated and reported for the first
time that over $200 billion worth of branch transactions were suspect. The B&H
Report faulted the Bank for its “manifestly insufficient and inadequate” AML
procedures in Estonia but concluded that “[t]he main responsibility for these
shortcomings lies with the first line of defence at the Estonian branch.” App’x
at 397. Borgen resigned as CEO that day, notwithstanding B&H’s finding that
he had breached no legal obligation. As the bad news accumulated, the price of
Danske Bank’s securities sank.
10
C. Procedural History
The Funds, which purchased Danske Bank ADRs amid the AML fallout
between March and June of 2018, commenced this action in January 2019—
seeking to represent a class of ADR investors who purchased between January 9,
2014 and April 29, 2019—and were appointed lead plaintiffs. The operative
pleading (the Third Amended Complaint) asserts claims under: (1) Section 10 of
the Exchange Act and Rule 10b-5(b); (2) Rule 10b-5(a) and (c); and (3) Section
20(a) of the Exchange Act.
After several amended pleadings, the district court granted Defendants’
motion to dismiss with prejudice, concluding, inter alia, that the Funds failed to
sufficiently allege any materially misleading statements or omissions. 2 This
appeal followed.
DISCUSSION
The core claim is brought under Section 10(b) of the Securities Exchange
2 The district court also concluded that the operative pleading failed to state a
claim because it did not sufficiently allege fraud with particularity or scienter.
Because we agree that the Funds failed to plead actionable misstatements or
omissions, we do not consider these alternate grounds for dismissal.
11
Act of 1934, 15 U.S.C. § 78j(b), and its implementing regulation, Rule 10b-5(b), 17
C.F.R. § 240.10b–5(b). To state a claim under those provisions, a plaintiff must
plead six familiar elements: (1) a misstatement or omission of material fact;
(2) scienter; (3) a connection with the purchase or sale of securities; (4) reliance;
(5) economic loss; and (6) loss causation. Kleinman v. Elan Corp., plc, 706 F.3d
145, 152 (2d Cir. 2013).
This appeal turns on the first element: whether the Funds sufficiently
alleged that Danske made actionable misstatements or omissions. Though the
144-page Third Amended Complaint recounts in fulsome detail all that went
wrong at the Estonian Branch over an eight-year period, the Exchange Act claim
is premised on five particular categories of alleged misstatements and omissions:
(1) the Bank’s 2013–2015 financial statements, which allegedly incorporated
revenue from illegal transactions; (2) statements surrounding the 2014 goodwill
impairment; (3) a 2015 statement regarding the Bank’s new anonymous
whistleblower reporting system; (4) corporate governance statements discussing
the Bank’s compliance with AML; and (5) the Bank’s assertion that it did not
expect the AML scandal to materially impact its financial position. None of the
12
challenged statements are actionable by the Funds. 3
A. The Financial Statements
Danske Bank routinely released financial results throughout the class
period, each time summarizing its year-over-year net profits and revenues. The
Funds observe that, in all these reports, the allegedly ill-gotten profits from the
Estonian Branch were baked into the bank-wide numbers. They go on to argue
that it was misleading for Danske to release those numbers without
simultaneously disclosing what it knew about possible money laundering at the
branch. We disagree.
Generally speaking, “disclosure is not a rite of confession,” so “companies
do not have a duty to disclose uncharged, unadjudicated wrongdoing.” City of
Pontiac, 752 F.3d at 184 (internal quotation marks, citations, and alteration
omitted). As a corollary of that rule, accurately reported financial statements do
not automatically become misleading by virtue of the company’s nondisclosure
of suspected misconduct that may have contributed to the financial results. As
3 The failure to sufficiently plead actionable misstatements or omissions is fatal to
the Funds’ § 10(b) claim. Because their § 20(a) claim depends on a viable § 10(b)
claim, the § 20(a) claim fails as well.
13
the Sixth Circuit concluded in a related context, “[i]t is clear that a violation of
federal securities law cannot be premised upon a company’s disclosure of
accurate historical data.” In re Sofamor Danek Grp., Inc., 123 F.3d 394, 401 n.3
(6th Cir. 1997); cf. City of Pontiac, 752 F.3d at 184 (rejecting the contention that
the defendant bank was required to disclose in offering materials its suspicion
that some employees were involved in a tax evasion scheme).
Critically, the Funds do not allege that the financial numbers Danske
disclosed were manipulated in any way—just that they failed to simultaneously
disclose the AML issues in Estonia. But because Danske was under no
obligation to self-report its growing suspicions regarding those issues, its
“disclosure of accurate historical data,” standing alone, is not actionable. See
Sofamor, 123 F.3d at 401 n.3; see also Fogel v. Vega, 759 F. App’x 18, 24 (2d Cir.
2018) (accurate financial statements do not “become actionable simply because
companies do not simultaneously disclose some wrongdoing that may have
contributed to the company’s financial performance”). Otherwise, every
company whose quarterly financial reports include revenue from transactions
that violated AML regulations could be sued for securities fraud. Such a rule
14
would “bring within the sweep of federal securities laws many routine
representations made by [companies].” ECA & Loc. 134 IBEW Joint Pension Tr.
of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 206 (2d Cir. 2009).
Relatedly, the Funds allege that Danske Bank’s financial reports were
per se misleading by reason of their alleged noncompliance with standards
promulgated by the International Accounting Standards Board (IASB).
According to the Funds, the International Financial Reporting Standards (IFRS)
permit contract revenue to be reported only if the underlying contract creates
“enforceable rights and obligations.” App’x at 40 (citing IFRS 15). So, the
Funds say, Danske violated those standards by including revenue derived from
unenforceable contracts with NRP clients who were using the branch to launder
money.
When a securities fraud claim is premised on the defendant’s predicate
violations of law or accounting standards, the facts of that underlying violation
must be pled with particularity. See Gamm v. Sanderson Farms, Inc., 944 F.3d
455, 464 (2d Cir. 2019); see also City of Sterling Heights Police & Fire Ret. Sys. v.
Vodafone Grp. Pub. Ltd. Co., 655 F. Supp. 2d 262, 270 (S.D.N.Y. 2009) (dismissing
15
securities fraud claim premised on accounting violations when the plaintiff did
not “plead with particularity that [the defendant] fraudulently violated
accounting standards”). In other words, the plaintiff must specify what law or
standard the defendant violated and how the alleged violation occurred. See
ECA, 553 F.3d at 199–200 (agreeing that plaintiff sufficiently alleged GAAP
violation with particularity).
The operative pleading does not satisfy this heightened pleading
requirement. The Funds baldly state that the challenged deposit contracts are
unenforceable because some of the NRP clients were illegally laundering money
through the Branch. This claim conflates the distinct concepts of illegality and
unenforceability. As the district court pointed out, whether the deposit
contracts are actually unenforceable turns on foreign contract law. But the Funds
identify no law or contractual provision that would render the deposit contracts
unenforceable. Instead, they posit that “it is reasonable to infer that illicit
transactions do not give rise to enforceable rights.” Reply Br. at 4–5. But
under the applicable heightened pleading requirement, the Funds must come
forth with more than a generality with surface appeal. See 15 U.S.C. § 78u-
16
4(b)(1); In re Fannie Mae 2008 Sec. Litig., 742 F. Supp. 2d 382, 408 (S.D.N.Y. 2010)
(dismissing claims premised on alleged GAAP violations because the plaintiffs
failed to plead “facts sufficient to identify any violations of GAAP”).
B. The Goodwill Impairment
Danske Bank announced the results of its annual goodwill impairment
testing in late 2014. The Bank disclosed that it was taking a write-down of
approximately DKK 9 billion (approximately $1.4 billion) on its assets in Finland,
Northern Ireland, and Estonia due to “assumptions about weaker long-term
macroeconomic developments.” App’x at 59. Ramlau-Hansen explained on a
conference call that “this is primarily a technical accounting exercise,” that “[t]he
goodwill calculation is not related to expected short-term performance of the
affected business areas,” and that the write-down “will not affect Danske Bank’s
ongoing business or the strategy for the involved units.” App’x at 58.
The Funds allege that it was materially misleading to characterize the
write-down as “purely technical” and unrelated to short-term strategy because
the goodwill impairment in Estonia was the direct consequence of the Bank’s
decision to eliminate the NRP.
17
Insofar as Ramlau-Hansen advised that the impairment “will not affect
Danske Bank’s . . . strategy for the involved units,” App’x at 58, the Funds have
not alleged that those “factual assertions . . . were false when the statements were
made.” See In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 266 (2d Cir. 1993). To
the contrary, the Funds’ theory (that the strategic winding down of the NRP
prompted the impairment) depends on the opposite causal relationship: that the
Bank had already decided to wind down the NRP before announcing the
goodwill impairment. If that is so, the impairment could not have “affected”
strategy in Estonia; the strategic change had already been implemented.
Ramlau-Hansen’s statement that the impairment “is not related to
expected short-term performance” of the affected areas raises a different issue.
App’x at 58. The Funds argue that because the decision to wind down the NRP
prompted the write-down, it was inaccurate and misleading to characterize the
two events as unrelated. Danske Bank, meanwhile, maintains that that write-
down had nothing to do with the NRP but was instead caused by
macroeconomic factors, modest growth projections, low short-term interest rates,
and deflationary pressures in the Eurozone. The Bank’s annual report, which
18
was released less than two months after the goodwill impairment and explained
that the impairment was the result of “a worsening of the long-term economic
outlook in Estonia and the planned repositioning of the personal banking
business in 2015” lends support to the Bank’s contention. App’x at 122–23, 681.
Nonetheless, this dispute is inconsequential. Even if the Funds could show that
the planned NRP closure prompted the write-down, that fact would still not be
material to a reasonable investor who purchased ADRs when the Funds did.
Whether a misstatement is material “depends on whether there is a
substantial likelihood that a reasonable shareholder would consider it important
in deciding how to act.” ECA, 553 F.3d at 197 (internal quotation marks
omitted). To be material, “a statement must, in the view of a reasonable
investor, have ‘significantly altered the total mix of information made
available.’” Singh v. Cigna Corp., 918 F.3d 57, 63 (2d Cir. 2019) (footnotes and
internal quotation marks omitted) (quoting Basic Inc. v. Levinson, 485 U.S. 224,
231–32 (1988)). Because materiality involves a “fact-specific inquiry,” Basic, 485
U.S. at 240, it can be decided on a motion to dismiss only if “reasonable minds
19
cannot differ on the question of materiality,” TSC Indus. Inc. v. Northway, Inc.,
426 U.S. 438, 450 (1976) (citation omitted).
“[L]ogic compels the conclusion that time may render statements
immaterial.” Ross v. A. H. Robins Co., Inc., 465 F. Supp. 904, 908 (S.D.N.Y.
1979), rev’d on other grounds, 607 F.2d 545 (2d Cir. 1979). Old information
tends to become less salient to a prospective purchaser as the market is
influenced by new information that is related or of overriding impact. Cf. In re
Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1432 (3d Cir. 1997)
(recognizing that there is no duty to update unless a factual representation
“remain[s] alive in the minds of investors” (internal quotation marks omitted)).
And the further in time a purchase is removed from a misstatement and the more
that updated related information reaches the market, the less likely it is that—in
the view of a reasonable investor—the misstatement will alter the total mix of
relevant information available at the time of the purchase. The misstatement
will have been superseded or rendered stale by intervening events, not to
mention memory. In other words, materiality can have a half-life.
20
Here, almost 39 months intervened between the 2014 announcement of the
goodwill impairment and the Funds’ 2018 purchases of Danske ADRs. Over
that time, the Estonian Branch was the subject of intervening events and
disclosures. Twenty-seven months after the impairment announcement, in
March 2017, Danske admitted that AML processes at its Estonian Branch were
“insufficient to ensure that we could not be used for money laundering.” App’x
at 68. Six months after that, in September 2017, Danske disclosed the broad
scope of the problem, admitting in a press release that “several major
deficiencies” rendered the Bank unable to prevent money laundering “in the
period from 2007 to 2015.” App’x at 70. Around that same time—but still well
before the Funds decided to invest—a Danish newspaper reported that Danske
was enmeshed in a “gigantic money-laundering scandal” involving more than
DKK 7 billion. App’x at 68–69. Meanwhile, numerous financial regulators
(Danish, French, Estonian) publicly launched investigations into the Estonian
Branch; and the DFSA levied a substantial fine. In response, Danske admitted
that the NRP was principally responsible for its AML shortcomings and
disclosed that the portfolio had since been terminated.
21
In light of these intervening revelations, it is implausible that the fine
points of a technical accounting exercise conducted back in 2014 “significantly
altered the total mix of information” available to the Funds in 2018. See TSC
Indus., 426 U.S. at 449 (internal quotation marks omitted). And for the
purposes of adjudicating the Bank’s motion to dismiss, it does not matter that the
Funds seek to represent a class of ADR purchasers dating back to January 2014.
As the Funds conceded at oral argument, a plaintiff must state a claim in its own
right to survive a motion to dismiss. See Vanskike v. Peters, 974 F.2d 806, 813
(7th Cir. 1992) (“[A] class representative must have a cause of action in his own
right in order to bring a class action.”); Britt v. McKenney, 529 F.2d 44, 45 (1st
Cir. 1976) (“If none of the named plaintiffs may maintain this action on their own
behalf, they may not seek such relief on behalf of a class.”); In re Initial Pub.
Offering Sec. Litig., 214 F.R.D. 117, 122 (S.D.N.Y. 2002) (“If the named plaintiffs
have no cause of action in their own right, their complaint must be dismissed,
even though the facts set forth in the complaint may show that others might have
a valid claim.” (quoting Goldberger v. Bear, Stearns & Co., Inc., 2000 WL
1886605, at *1 (S.D.N.Y. Dec. 28, 2000)).
22
Obviously, not all statements become immaterial after a similar or set
length of time. Whether the influence of a misstatement or omission survives
will depend on its nature and the intervening load of information on the subject,
and on other developments affecting the market and the enterprise. In this case,
the outpouring of information about the Estonian Branch between 2016 and 2018
compels the conclusion that 2014 statements about the goodwill impairment
were too remote in time to have “assumed actual significance in the
deliberations” of a purchaser in 2018. See Folger Adam Co. v. PMI Indus., Inc.,
938 F.2d 1529, 1533 (2d Cir. 1991) (internal quotation marks omitted); In re Time
Warner Inc. Sec. Litig., 794 F. Supp. 1252, 1260 (S.D.N.Y. 1992), aff’d in part, rev’d
in part on other grounds, 9 F.3d 259 (2d Cir. 1993) (determining that a statement
made ten months before the plaintiff’s purchase, “even if utterly false and
fraudulently made, cannot have formed a basis for plaintiffs’ expectations”
because “innumerable intervening factors could have changed the company’s
value” in the interim); Rand v. Cullinet Software, Inc., 847 F. Supp. 200, 210 (D.
Mass. 1994) (reasoning that allegedly misleading statements had “lost any
possible materiality” by the time the plaintiff purchased stock seven months later
23
given the “intervening time” and new “information . . . enter[ing] the market”).
Accordingly, the challenged statements were stale and immaterial to a
reasonable investor in the Funds’ position by the time they invested in Danske
Bank in 2018.
C. The Whistleblower Comment
The Funds next challenge the following statement from the Bank’s 2015
Corporate Responsibility Report: “In 2014, three cases were reported in the
whistleblower system. All the cases were concluded, and the appropriate
actions were implemented.” App’x at 121. According to the Funds, this
statement was materially misleading because the B&H Report concluded years
later that the whistleblower report made by Wilkinson was handled improperly.
The challenged statement is unfairly abstracted from the Corporate
Responsibility Report. Read in context, nothing in that statement is false. The
paragraph in which it appears discusses only the Bank’s new reporting system
for anonymous whistleblowing. It explains: “[i]n 2013, [Danske] implemented a
new reporting system that enables employees to report such information online
anonymously,” and that in 2014, “three cases were reported” through that new
24
anonymous system. App’x at 121. The paragraph goes on to say that those
three cases “were concluded, and the appropriate actions were implemented.”
App’x at 121.
It therefore matters that Wilkinson did not report his concerns about the
Estonian Branch through the new anonymous system discussed in the Corporate
Responsibility Report. He emailed the executives directly. The finding that
Wilkinson’s allegations had not been handled appropriately therefore does not
render the Corporate Responsibility Report—which discussed a distinct subset of
whistleblower complaints—false when made. See In re Time Warner, 9 F.3d at
266 (agreeing that no affirmative misrepresentation was alleged where the
factual assertions were not false when made).
In an attempt to circumvent this defect, the Funds recast this claim as one
of misstatement by omission. Under that theory, Danske misled investors by
touting its new anonymous whistleblower system while failing to
simultaneously discuss the issues raised by Wilkinson’s allegations. Even
assuming that this statement was misleading by omission, it cannot support the
25
Funds’ claims for the same reason as the goodwill impairment. 4 The Bank
issued this statement in 2015, three years before the Funds purchased any ADRs.
Whatever impact this statement might have had on an investor at that time,
intervening events made it such that no “reasonable” investor contemplating
purchasing Danske ADRs in 2018 “would consider it important in deciding how
to act.” ECA, 553 F.3d at 197 (internal quotation marks omitted). No
reasonable investor would discount all of the more recent news about AML
failures at the Estonian branch on the basis of this years-old boast about three
whistleblower complaints handled through the Bank’s anonymous reporting
system.
D. The Corporate Responsibility Statements
The Funds allege that certain statements made in Danske’s 2013 and 2014
Corporate Responsibility Reports were misleading given the state of things then
4 On its merits, the Funds’ omission-based theory is strained because the
connection between the topic Danske chose to discuss (a new anonymous
reporting system) and the allegedly omitted information (Wilkinson’s
allegations) is fairly attenuated. See In re Morgan Stanley Info. Fund Sec. Litig.,
592 F.3d 347, 365–66 (2d Cir. 2010) (making one statement about a topic “did not
trigger a generalized duty requiring defendants to disclose the entire corpus of
their knowledge regarding” that topic).
26
prevailing in the Estonian Branch.
First, they allege that Danske misled them by claiming that it “strive[s] to
conduct our business in accordance with internationally recognised principles in
the area[] of . . . anti-corruption.” App’x at 113. But “[n]o investor would take
such statements seriously in assessing a potential investment” because “almost
every . . . bank makes these statements.” ECA, 553 F.3d at 206. “General
declarations about the importance of acting lawfully and with integrity” are
inactionable puffery, especially when expressed in aspirational terms. See
Singh, 918 F.3d at 63. Danske’s bromides about being good and upright are
plainly puffery.
The Funds next take aim at the Bank’s assertions that it “condemns . . .
money laundering,” “takes the steps necessary to comply with internationally
recognised standards, including Know Your Customer procedures,” and has
procedures for “customer due diligence, reporting, . . . and communications.”
App’x at 113. These vague statements are similarly unactionable. Assertions
of satisfactory regulatory compliance can be materially misleading if “the
descriptions of compliance efforts” are “detailed” and “specific.” Singh, 918
27
F.3d at 63. For example, in Meyer v. Jinkosolar Holdings, a company touted its
environmental compliance efforts in an SEC filing by referencing specific
pollution-abatement equipment, 24-hour monitoring teams, and the fact that it
had never been fined for regulatory violations. See 761 F.3d 245, 247–48 (2d Cir.
2014). We held that in light of these detailed disclosures, it was misleading for
the company to omit the existence of “serious ongoing pollution problems” at the
plant. Id. at 250.
By contrast, in ECA, we held that the defendant’s averment that it had
“risk management processes [that] are highly disciplined” and “set the standard
for integrity” were too general to induce reliance. See 553 F.3d at 205–06
(internal quotation marks omitted). We came to the same conclusion in Singh
when confronted with a corporation’s statement that it “established policies and
procedures to comply with applicable requirements” mandated by specific
federal and state regulations. 918 F.3d at 60, 63. Danske’s statements are of the
same order. Although Danske averred that it took steps to comply with AML
protocols and vaguely recited some AML buzzwords, it claimed no particular
acts of compliance. No reasonable investor—especially one who purchased
28
ADRs more than three years after the Reports were published and was well aware
of a gigantic AML scandal at the Estonian Branch—would weigh these generic
statements in its investment calculus.
E. The 2018 Contingencies Footnote
Finally, the Funds challenge a footnote contained in the Bank’s 2018
second quarter financial results. The footnote, which was first published on
July 18, 2018, states: “[Danske Bank] does not expect the outcomes of pending
lawsuits and disputes, the dialogue with public authorities or the inspection of
compliance with anti[-]mon[e]y laundering legislation to have any material effect
on its financial position.” 5 App’x at 83. The Funds contend that this statement
was misleading because the Bank then knew that the scope of the scandal far
5 Although the Funds argue in their brief that Borgen made misleading
statements about Danske’s potential liability during a July 2018 earnings call,
these statements do not appear in the operative pleading and therefore cannot
form the basis of an actionable misstatement. See Brass v. Am. Film Techs., Inc.,
987 F.2d 142, 150 (2d Cir. 1993). The Funds argue that the conversation was
incorporated into the pleading by reference but fail to specify which of the
pleading’s 349 paragraphs accomplished this incorporation.
29
exceeded what had been publicly reported and was therefore likely to materially
undermine its financial position.
The timing of the Funds’ purchase frustrates this claim as well. The
Funds last purchased Danske Bank ADRs in late June 2018, about three weeks
before the challenged statement was made. Plaintiffs alleging that they were
damaged by purchasing securities at an inflated price cannot maintain a
securities fraud claim premised exclusively on statements made after the
plaintiff’s final purchase of securities. See Denny v. Barber, 576 F.2d 465, 468
(2d Cir. 1978). The plaintiff in Denny challenged a series of statements, some
made before his purchase, some after. See id. We reasoned that “the
complaint must be dismissed if it did not adequately allege the issuance of
fraudulent misleading statements prior to [the plaintiff’s] purchase,” given that
he “cannot share in any recovery” based solely on statements made after the date
of purchase. See id. at 468–69. We went on to affirm the dismissal of the
complaint, considering only those statements made prior to purchase. Id.The self-evident principle in Denny controls the result here. The Funds
allege that Danske’s misstatements caused them to pay an inflated price for their
30
ADRs. App’x at 159. However, the Funds have failed to make actionable
claims regarding statements made before their purchase of ADRs. They
therefore cannot rely on the challenged footnote, which could not have
influenced the price of a purchase that had already been made. See Gross v.
Summa Four, Inc., 93 F.3d 987, 993 (1st Cir. 1996) (“[B]ecause [the defendant]
issued the letter after [the plaintiff] had purchased his stock, the statements in the
letter could not possibly have inflated the market price that he paid for those
shares.”). Accordingly, the Funds cannot premise a Rule 10b-5(b) claim on the
alleged misstatement in the footnote.
F. The Scheme Liability Claim
The Funds add a claim under subsections (a) and (c) of Rule 10b-5, which
prohibit (respectively) “employ[ing] any device, scheme, or artifice to defraud,”
and “engag[ing] in any act, practice, or course of business which operates or
would operate as a fraud or deceit.” 17 C.F.R. § 240.10b–5. Unlike the better-
known subsection (b), these subsections do not require the defendant to make a
misstatement or omission; they require only deceptive conduct. See Lorenzo v.
31
SEC, 139 S. Ct. 1094, 1098, 1102 (2019). 6 To state a scheme liability claim, a
plaintiff must show: “(1) that the defendant committed a deceptive or
manipulative act, (2) in furtherance of the alleged scheme to defraud, (3) with
scienter, and (4) reliance.” In re Mindbody, Inc. Sec. Litig., 489 F. Supp. 3d 188,
216 (S.D.N.Y. 2020) (quoting Menaldi v. Och-Ziff Cap. Mgmt. Grp. LLC, 164 F.
Supp. 3d 568, 577 (S.D.N.Y. 2016)). And, of course, the deceptive or fraudulent
scheme or activity must have occurred “in connection with the purchase or sale
of a[] security.” 17 C.F.R. § 240.10b–5. Because scheme claims sound in fraud,
they are subject to the heightened pleading requirements of Federal Rule of Civil
Procedure 9(b). To maintain a 10b–5(a) or (c) claim, a plaintiff must specify
“what deceptive or manipulative acts were performed, which defendants
6 The Funds argue that Lorenzo requires us to reexamine our precedents insofar
as they require scheme claims to be premised on deceptive acts that are distinct
from misstatements and omissions that underlie an accompanying Rule 10b-5(b)
claim. See, e.g., Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 177 (2d Cir.
2005) (dismissing scheme liability claims “where the sole basis for such claims is
alleged misrepresentations or omissions”). Several district courts have adopted
this interpretation of Lorenzo. See Puddu v. 6D Glob. Techs., Inc., 2021 WL
1198566, at *10–11 (S.D.N.Y. Mar. 30, 2021); SEC v. SeeThruEquity, LLC, 2019 WL
1998027, at *5 (S.D.N.Y. Apr. 26, 2019). We need not address that issue here,
however, because the scheme claim is deficient for a more fundamental reason.
32
performed them, when the acts were performed, and the effect the scheme had
on investors in the securities at issue.” In re Parmalat Sec. Litig., 383 F. Supp. 2d
616, 622 (S.D.N.Y. 2005).
The Funds fail to surmount this heightened pleading standard. At no
point do they articulate with precision the contours of an alleged scheme to
defraud investors, or which specific acts were conducted in furtherance of it.
Instead, the claim rests upon the incorporation of the previous 140 pages of the
pleading paired with the conclusory assertion that “Defendants carried out a
common plan, scheme, and unlawful course of conduct that was intended to . . .
deceive the investing public” and “artificially inflate the market price of Danske
Bank ADRs.” App’x at 160. Money-laundering at a single branch in Estonia
cannot alone establish that Danske Bank itself carried out a deceptive scheme to
defraud investors. Absent some sort of enumeration of which specific acts
constituted an alleged scheme in connection with the purchase or sale of
securities, the Funds’ claim does not comply with the applicable heightened
33
pleading standard and cannot go forward.
CONCLUSION
For the reasons stated above, the district court’s dismissal of this action is
AFFIRMED.
34