On July 16, 2014, a three-judge Second Circuit panel affirmed the dismissal of a securities class action against Deutsche Bank AG and several underwriters. The case was brought on behalf of investors who purchased approximately $5.5 billion in preferred Deutsche Bank shares in 2007, and who alleged that defendants misled them about the bank’s exposure to mortgage-backed securities and other risks in a registration statement filed in October of 2006. Plaintiffs alleged that the registration statement omitted details about Deutsche Bank’s business, including that the company failed to properly record provisions for RMBS, commercial real estate loans and exposure to monoline insurers.
Initially, Judge Deborah Batts of the Southern District of New York ruled that the case could proceed, but changed course after the Second Circuit issued its August 2011 decision in Fait. As a refresher, the Second Circuit in Fait v. Regions Bank Corp. ruled that plaintiffs asserting Section 11 claims under the Securities Act of 1933 have to establish that defendants made statements in offering documents that were “both objectively false and disbelieved by the defendant at that time.” In other words, unless investors can show that defendants knew their offering materials were false, they’re out of luck after Fait. Citing Fait, Judge Batts held that Deutsche Bank’s optimistic statements about its exposure to RMBS amounted to opinions, not objective misstatements of fact. The Second Circuit affirmed, saying that “there are no allegations in the [amended complaint] that Deutsche Bank disbelieved its own disclosures.”
This decision is of particular interest now because the Supreme Court is preparing to consider next term whether the Sixth Circuit erred in splitting from the Second Circuit’s Fait ruling in a case against Omnicare Inc. In that case, the Sixth Circuit in Omnicare v. Laborers District Council Construction Industry Pension Fund split from the Second, Third, and Ninth Circuits, holding that Section 11 plaintiffs need only plead that defendants made objectively false statements in offering materials, not that they knew that the statements were false. The Supreme Court granted certiorari in that case in March, and oral arguments will likely take place in the fall. If the Supreme Court upholds the Omnicare decision, it would in effect relax the standards required of Section 11 plaintiffs to assert a claim based on allegedly misleading opinions made by issuers of securities, and could potentially lead to an increase in Section 11 filings under the Securities Act of 1933.