Several of our posts (here, here and here) have discussed the challenges in asserting fraud claims under Section 10(b) of the 1934 Securities Exchange Act. But, it’s not easy to bring negligence and strict liability claims under Section 11 and 12(a)(2) of the 1933 Securities Act either, as Judge Crotty points out in a clear and crisp opinion in In re Barclays Bank Plc Secs. Litig. 09 Civ. 1989 (S.D.N.Y. January 5, 2011).
Barclays made four public offerings of securities as the sub-prime market was collapsing between 2006 and 2008. Plaintiffs claimed that Barclays’ offering materials and public statements failed to adequately disclose and account for its exposure to sub-prime related real estate risk, and that Barclays misleadingly assured investors that its “extensive risk management practices” helped it avoid credit market risks. Needless to say, Barclays’ losses as the real estate market collapsed (to the tune of £30-36 billion) were much higher than it predicted.
Judge Crotty rejected plaintiffs’ claim that Barclays’ sales materials were misleading because they did not timely recognize the mortgage crisis and disregarded other less optimistic (and more accurate) public ratings of Barclays’ sub-prime real estate assets. According to Judge Crotty, Barclays disclosed that its valuations were matters of judgment and opinion, and plaintiffs did not make a fraud based allegation that Barclays did not believe its valuations at the time it made them. As to the other publicly available valuations that Barclays ignored, the Court found that “[p]laintiffs cannot state a claim that defendants misled them as to information readily available in the public domain because the law imputes knowledge of such market trends to the reasonable investor.” Similarly, Barclays’ statements about its risk management practices were too generalized to state a claim, and “expressions of “corporate optimism” are not securities violations because ‘[u]p to a point, companies must be permitted to operate with a hopeful outlook.’” As put bluntly by Judge Crotty, a “plaintiff may not plead Section 11 or 12(a)(2) claims with the benefit of 20/20 hindsight.”
There is much to chew on in Judge Crotty’s opinion, including an important analysis of the difference between the measurement of the statute of limitations applicable to Section 10(b) claims, and to Section 11 and 12 claims in the S.D.N.Y. In short, a stringent “inquiry notice” limitations standard still applies to Section 11 and 12 claims, although the Supreme Court has recognized that for 10(b) claims, “the ‘discovery’ of facts that put a plaintiff on ‘inquiry notice’ does not automatically begin the running of the limitations period.”