Danske Bank (Danske) recently secured a big victory in the United States Court of Appeals for the Second Circuit. On August 25, 2021, the appellate court unanimously affirmed the Southern District of New York’s dismissal of an investor lawsuit brought by purchasers of DB American Depository Receipts (ADR) against Danske and its former officers and board members over alleged misrepresentations about Danske’s financial condition. We previously blogged about the lower court’s decision here. As we have blogged about here, here, here, and here, Danske Bank has been the subject of significant regulatory oversight due to its alleged AML failures of historical proportions, which has resulted in a foreseeable onslaught of investor lawsuits.
Although much of the Second Circuit’s opinion is focused on timing issues relevant to almost any investor lawsuit based on material misstatements and omissions, portions of the opinion are particularly relevant to investor claims resting on alleged AML failures and money laundering by financial institution customers. Importantly, neither knowledge of potential misconduct by customers gained by an institution from either its AML-related monitoring or whistleblower reporting, nor generalized claims to investors by an institution of robust AML compliance, will – standing alone – result in liability.
As a recap, the class action sought relief for Danske’s alleged failure to follow AML protocols in regards to its Estonian Branch—a scandal that first surfaced in 2016, eventually shedding light on approximately $230 billion in alleged suspicious transactions. The lawsuit alleged that Danske failed to supervise the Estonian Branch, responded poorly to AML issues, and made several misstatements and omissions. Among several claims, the plaintiffs brought suit under Section 10(b) of the Securities Exchange Act, as enforced by Rule 10b-5. The appeal focused on the first element required under the provision—the existence of a material misrepresentation, misstatement, or omission.
The plaintiffs alleged five categories of misstatements and omissions. In affirming the lower court’s decision, the appellate court held that none of the alleged misstatements or omissions were actionable—“the allegations [did] not move the claims outside of the realm of corporate mismanagement and into the realm of securities fraud.” The five at-issue categories and the court’s reasoning as to why they were not actionable are listed below.
- Financial Statements. The plaintiffs argued that Danske’s 2013 to 2015 financial statements included revenue from the illegal transactions without a disclosure of possible money laundering activity. The court, however, emphasized that financial disclosures are not automatically misleading “by virtue of the company’s nondisclosure of suspected misconduct that may have contributed to the financial results.” The court stressed that an alleged failure to disclose in financial statements “uncharged, unadjudicated wrongdoing” generally cannot form the basis for a viable misstatement theory. This finding is potentially quite helpful and important for financial institutions in regards to investor lawsuits based on alleged AML violations – because, almost invariably, a financial institution’s AML compliance program will identify, and therefore put the institution “on notice,” of potential misconduct (and uncharged) by customers. Indeed, that is one of the main goals – if not the main goal – of maintaining an AML compliance program.
The court also rejected a related argument that Danske’s financial reports were per se misleading because of alleged noncompliance with standards promulgated by the International Accounting Standards Board – specifically, because Danske purportedly “violated those standards by including revenue derived from unenforceable [deposit] contracts” with clients using the Estonian branch to launder money. However, whether the contracts were actually unenforceable turned on foreign contract law, and the plaintiffs failed to identify any law or contract provision rendering the contracts unenforceable.
- Goodwill Impairment. The plaintiffs claimed that it was misleading for Danske in 2014 to characterize its goodwill impairment write-down as a “technical” accounting matter when the impairment was really a consequence of Danske’s decision to eliminate its Non-Resident Portfolio (NRP) that was the source of the suspicious activity. The court disagreed, stating that “materiality can have a half-life.” Because of the passage of time between the statement and the purchase of shares and the scrutiny Danske faced for its AML noncompliance, the goodwill statements “were too remote in time to have ‘assumed actual significance.’”
- Whistleblower Comment. Danske’s 2015 statement regarding a new whistleblower reporting system was purportedly materially misleading by omission, because “Danske misled investors by touting its new anonymous whistleblower system while failing to simultaneously discuss the issues raised” by the whistleblower who had emailed Danske executives directly about his concerns regarding money laundering in the Estonian branch. Significantly, like the goodwill statements, the whistleblower comment was made three years before the plaintiffs purchased any ADRs, which significantly diminished this statement’s impact on investors in 2018. This timing issue doomed the claim, even if Danske’s statement and alleged omission was assumed to be misleading.
- Corporate Responsibility Statements. The plaintiffs claimed that corporate governance statements related to Danske’s AML compliance were misleading. The court held that the general statements about the importance of acting lawfully and with integrity were mere puffery, not actionable, and not likely to have impacted investors three years after the AML scandal surfaced. More specifically, statements by Danske that it complied with internationally-recognized Know Your Customer procedures and customer due diligence standards were insufficiently detailed and specific to support a claim. Likewise, “[a]lthough Danske averred that it took steps to comply with AML protocols and vaguely recited some AML buzzwords, it claims no particular acts of compliance.” Therefore, no reasonable investor – particularly one who purchased the ADRs years after the “gigantic” AML scandal at Danske had surfaced – would rely on such statements when investing.
- 2018 Contingencies Footnote. Finally, plaintiffs asserted that Danske’s statement that it did not expect the scandal to materially impact its financial position was misleading because Danske knew that the scope of the scandal exceeded what had been reported. The plaintiffs, however, purchased the ADRs about three weeks before this statement was made; therefore, the statement could not have influenced the price of a purchase that plaintiffs already made.
All in all, this decision is a positive result for financial institutions, as it provides several key takeaways for what a court considers to be actionable misrepresentations and omissions in the context of alleged AML violations – even in the specific context of the greatest AML scandal to date, at least in regards to sheer volume and monetary value of the alleged suspicious transactions.
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.