U.S. Court of Appeals for the Second Circuit

Second Circuit Affirms Dismissal of Class Action Alleging That RBS Mislead Investors About RMBS Exposure

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On April 15, 2015, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a putative investor class action against the Royal Bank of Scotland (RBS).  The plaintiffs had brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that RBS induced them into buying American Depository Shares (ADSs) of RBS between October 2007 and January 2009 by misrepresenting the scope of RBS’s investment exposure to subprime mortgage-backed securities at that time.

The Second Circuit affirmed the District Court’s dismissal on all grounds, holding that certain of the alleged misstatements could not serve as the basis for the investors’ claims because they were made in August 2007, before the class period began, and that other alleged misstatements, concerning RBS’s acquisition of Dutch Bank ABR AMRO, likewise could not sustain a claim because they constituted inactionable puffery.  Opinion.

Second Circuit Affirms Dismissal of Rating Agencies in RMBS Suit

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On May 11, 2011, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of credit rating agencies from three different RMBS actions, finding that the rating agencies could not be held liable as underwriters or control persons under Sections 11 and 15 the ’33 Act for alleged misstatements or omissions in securities offering documents. Plaintiffs had argued that the rating agencies acted as underwriters of the RMBS securitizations by giving the underwriters preliminary credit ratings and suggestions for credit enhancements to improve the securities’ ratings. The Second Circuit rejected this argument, finding that the statutory definition of “underwriter” did not include parties who provided services to facilitate a securities offering, but did not themselves participate in the distribution of those securities to the public. The Second Circuit also affirmed that the allegations were insufficient to establish control person liability for the rating agencies because they failed to raise an inference that the rating agencies could “direct, rather than merely inform” the alleged primary violators’ actions. Decision.