In Ross v. Lloyds Banking Group, PLC, Nos. 12‒4600-cv(L), 13‒729‒cv(Con), 2013 WL 5273067 (2d Cir. Sept. 19, 2013) (unpublished), the Second Circuit Court of Appeals affirmed the dismissal of the plaintiff’s claims under § 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 for failure to meet the heightened pleading standards demanded by Fed. R. Civ. P. 9(b) as well as the Private Securities Litigation Reform Act (“PSLRA”). Finding no § 10(b) and Rule 10b-5 violations, the court also disposed of the plaintiff’s control-person claim under § 20(a) of the Exchange Act.
According to the allegations, Albert Ross was a holder of more that 10,000 American Depository Receipts in Lloyds Banking Group, PLC (“Lloyds”). In 2008, Lloyds acquired Halifax Bank of Scotland (“Halifax”).
Ross filed a putative class action against Lloyds, Lloyds’s Chairman Sir Victor Blank, and Lloyds’s CEO Eric Daniels (collectively, “Defendants”), for allegedly misleading shareholders by inflating Halifax’s perceived financial condition. Specifically, Ross averred Defendants: (1) falsely stated Halifax would contribute £60B in “highly liquid near cash” reserves to the combined entity; (2) falsely stated that Halifax had “meaningful incremental available assets” to submit to the Bank of England’s Special Liquidity Scheme (“SLS”); (3) falsely stated Lloyds would acquire £30B in net assets for £14B; and (4) failed to disclose that Halifax was actively participating in the Bank of England’s Emergency Liquidity Assistance (“ELA”) program.
Prior to addressing Ross’s alleged misrepresentations and omissions, the court noted that Fed. R. Civ. P. 9(b) requires that securities fraud, including scienter, be pled with particularity. Similarly, the PSLRA requires that the complaint state with particularity facts that give rise to a “strong inference” of scienter.
First, as to Ross’s claim concerning “highly liquid near cash” reserves, the court concluded that the facts as plead failed to demonstrate the falsity of the statement. Ross pointed to a letter from Lloyds’s counsel in 2011 explaining that the £60B was made up of “government-issued debt, residential mortgages, and personal and commercial loans,” assets he asserted could not be considered “liquid” or “near cash.” Nonetheless, the transcript of the conference call “ma[de] clear that the terms ‘liquid’ and ‘near cash’ were being used to refer to government-issued debt.”
Second, the court discounted Ross’s claim that Defendants misled shareholders concerning the amount of Halifax’s assets available for the SLS. The court found that the use of lower-quality assets by Halifax to participate in ELA did not give rise to an inference that Halifax lacked higher-quality assets to submit to the SLS. Nor could scienter be inferred from a report from the U.K. Financial Services Authority concluding that 75% of Halifax’s Corporate Division loan portfolio was sub-investment grade. “[T]he report concludes only that a portion of the Corporate Division’s assets were sub-investment grade; it does not conclude that the Corporate Division, or HBOS for that matter, had no assets of sufficient quality to submit to SLS, and thus it does not demonstrate the falsity of Tookey’s statement.”
Third, the court found that Defendants’ statements concerning the positive net effect of the acquisition were not misleading. Although Daniels publically stated that Halifax’s pro forma net assets equated to £31.5B, he qualified that statement by disclosing that “material negative adjustments” may be required in the future.
Fourth and finally, the court concluded that Defendants’ failure to specifically disclose Halifax’s participation in the ELA was not actionable. Although Defendants did not explicitly disclose such facts, disclosure was made that both Lloyds and Halifax were dependent upon ELA to meet funding obligations. This disclosure “preclude[s] a strong inference” that the lack of direct disclosure was intended to “deceive, defraud, or manipulate.”
As a final effort to revive his claim, Ross contended that the district court improperly denied his request to amend his complaint. Reviewing the district court’s decision for an abuse of discretion, the court explained that Ross had already been afforded the opportunity to amend once, and further, that he had not alleged any additional facts that would “cure the deficiencies.”
The primary materials for this case may be found on the DU Corporate Governance website.