It may go too far to say things are looking up for Danske Bank, but the institution was handed a significant victory when the Southern District of New York dismissed an investor lawsuit on August 24, 2020. As we blogged about here, here, here, and here, Danske Bank has been the subject of significant regulatory oversight, which has resulted in a foreseeable onslaught of investor lawsuits.

One such class action securities suit was brought by purchasers of DB American Depository Receipts against Danske and its former officers and board members over alleged misrepresentations about the bank’s financial condition in light of the now well-known anti-money laundering (AML) deficiencies in its Estonia branch, as well as the subsequent fallout. The suit relies heavily on the September 19, 2018 Bruun & Jhejle investigative report, which outlined various internal whistleblower complaints about the Estonia branch’s AML controls that were confirmed by a published audit by the Danish Financial Supervisory Authority. Subsequent investigations followed, including by U.S. authorities, resulting in significant financial blows to the bank.

The Court found that the plaintiffs not only had failed to meet the heightened pleading requirements regarding mental state for securities fraud claims, but had not even alleged facts sufficient to allege a material misrepresentation.  The decision reflects the potential difficulty of alleging (much less proving) a successful securities fraud claim based on alleged AML failures, particularly because it arises out of the globe’s largest and most notorious money laundering scandal.

Plaintiffs brought suit under Section 10(b) of the Securities Exchange Act, as enforced by Rule 10b-5, which prohibits “mak[ing] any untrue statement of a material fact or . . . omit[ting] [] a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5. Section 10(b) claims require evidence of six elements: 1) a material misrepresentation; 2) scienter; 3) a connection between the misrepresentation and security sale; 4) reliance upon the misrepresentation; 5) economic loss; and 6) causation.

Securities fraud claims also must satisfy the heightened pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”), which require the plaintiff to state “with particularity the circumstances constituting fraud,” including the who, what, where and when of the alleged misrepresentations, as well as an explanation of why the statements were fraudulent and facts sufficient to strongly infer the defendant acted with the required state of mind. The Court granted Danske’s motion to dismiss, finding plaintiffs failed to meet the heightened pleading requirements, and had not alleged facts sufficient to allege a material misrepresentation or scienter.

As to Rule 9(b) and the PSLRA’s pleading standards, the Court chastised plaintiffs for “implicat[ing] less than a third of the Complaint’s 83 paragraphed quotations” in the attempts to identify which statements were false and why. The Court additionally found the impact of the single sufficiently pled allegation was de minimis, and served to show “only that Plaintiffs know how to allege fraud with specificity and yet have chosen not to do so with the bulk of the Complaint.”

Additionally, the Court ruled that plaintiffs had not even successfully pled a materially false or misleading statement in its six claims. Plaintiffs alleged:

  • Danske improperly reported revenues in financial statements and falsely asserted those financial statements were prepared in accordance with international accounting standards because Danske reported revenues from the money laundering transactions, which were not “legally enforceable rights and obligations.” This theory failed since plaintiff did not allege that the contracts themselves were unenforceable or that at the time the financial statements were published, defendants knew that the revenue reported included revenue derived from money laundering transactions.
  • Danske misled investors by reporting in a February 2015 Corporate Responsibility report that three reported 2014 whistleblower cases had been concluded and appropriate actions implemented. The Court disagreed because there was no “plausible allegation that DB had not, in fact, concluded the three whistleblower cases in 2013 or implemented what it believed at the time were appropriate actions.”
  • A December 2014 statement that a goodwill impairment charge related to Estonian operations was “of a purely technical nature and [did] not affect [DB’s] strategy or business” was misleading. The Court similarly dismissed this claim as conclusory since “Plaintiffs have not alleged that the write-down itself affected DB’s strategy.”
  • A contingent liability footnote in Danske’s 2018 second quarter financial statements, and subsequent related comments by Thomas Borgen (the former CEO of Danske, charged last year by Danish authorities) misrepresented the extent of profits derived from the branch’s money laundering activities. The footnote provided: “Danske Bank does not expect the outcomes of pending lawsuits and disputes, its dialogue with public authorities or the inspections of compliance with anti-money laundering legislation to have any material effect on its financial position.” Borgen stated he had “no insights into any potential fine” relating to the Estonian branch’s AML compliance failures. The Court found this claim wanting, since the statements did not even comment on the extent of profits from money laundering.  Further, an accompanying press release disclosed the estimated extent of revenue derived from the problematic branch during the relevant time.
  • The contingent liability footnote was misleading because Danske knew but failed to disclose the volume of laundered funds, and omitted the potential vulnerability to a probe by United States authorities that could result in material fines. This claim similarly failed for lack of any allegations that Danske knew the exact volume of laundered funds at the time, or that the risk of a United States inquiry meant potential material finds.
  • Corporate governance and compliance statements were false and misleading. The Court simply characterized the identified statements as “inactionable generalizations or puffery.”

Plaintiffs also failed to adequately allege scienter by failing to identify any motive to deceive or defraud, or that defendants had access to or received information contradicting their representations. The Court wrote: “Although Plaintiffs allege that Defendants’ responses were sluggish, sluggishness does not give rise to a strong inference of fraudulent intent.”

Since this was plaintiffs’ third bite at the apple, the Court dismissed the suit with prejudice. The implications of this decision on ongoing and future investor suits remains yet to be seen, but this clearly this is a win for Danske Bank amid three years of turmoil involving government inquiry, expensive litigation, and disastrous reputational implications.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.