(AP/Kirsty Wigglesworth)

Plaintiffs alleging the belated revelation that Barclays bank overstated its creditworthiness in submitting information on borrowing costs to LIBOR had their claim reinstated Friday.

The U.S. Court of Appeals for the Second Circuit said it had been premature for a district judge to dismiss claims brought by aggrieved stockholders who saw Barclays American Depository Shares drop 12 percent on the 2012 admission that the bank had submitted lending rates to LIBOR that were false from 2007 to 2009.

The bank had claimed the misrepresentations were “stale” by the time of the disclosure and Southern District Judge Shira Scheindlin (See Profile) agreed when she dismissed the shareholder claims in 2013. Scheindlin found a temporal “disconnect” between the false submissions and the revelations three years later, and thus concluded that the plaintiffs had failed to plead loss causation.

Friday, the circuit upheld Scheindlin’s dismissal of claims based on Barclays statements about maintaining “minimal control requirements” at the bank but vacated her dismissal on loss causation in Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 13-2678.

Judges Robert Katzmann (See Profile), Jose Cabranes (See Profile) and Southern District Judge Richard Berman (See Profile), sitting by designation, made that decision after hearing oral argument on Feb. 14. Berman wrote for the court.

The plaintiffs alleged the bank and several of its former officers understated its borrowing costs by submitting false information to the benchmark LIBOR (the London Interbank Offering Rate), including a comment by then-bank President Robert Diamond in a 2008 conference call that Barclays was “categorically not paying higher rates in any currency.”

But on June 27, 2012, the manipulation of the data was disclosed in a settlement and non-prosecution agreement among Barclays and prosecutors and regulators in the United States and United Kingdom. As part of the settlement, the bank had to admit to underreporting its perceptions of its borrowing costs and agreed to pay $450 million in fines.

The next day, the bank’s stock price dropped 12 percent and investor pension funds followed by filing suit in the Southern District, where Barclays is also the target, along with 37 other banks, of a U.S. Federal Deposit Insurance Corporation lawsuit alleging the banks “fraudulently and collusively suppressed” the U.S. dollar LIBOR rate from August 2007 to at least mid-2011.

Scheindlin dismissed the investors lawsuit on May 13, 2013, finding that alleged internal control misrepresentations were mere “puffery,” and the investors had failed to show loss causation.

Scheindlin wrote that it was implausible that an efficient market “would fail to digest three years of non-fraudulent Submission Rates and other more detailed financial information, and would instead leave intact artificial inflation as a result of fraudulent Submission Rates” from 2007-2009.

In his opinion Friday, Berman said the plaintiffs had alleged losses stemming from the “corrective disclosure” of the fraud and it was their burden, ultimately, to prove that the market reacted negatively to that disclosure.

But, he said, “plaintiffs need not demonstrate on a motion to dismiss that the corrective disclosure was the only possible cause for the decline in the stock price,” he said.

Without making any determinations about the strength of the plaintiffs’ claims, he said the lower court reached its conclusions “prematurely.”

“The complaint plausibly alleges that submission rates are non-cumulative—that is, that each day’s submission rates reveal information about a bank’s borrowing costs for that particular day,” he said. “Thus, while Barclays’s 2009-2012 submission rates may have provided accurate information about the company’s borrowing costs and financial condition for the period 2009-2012, they did not correct the earlier year’s misstatements.”

Berman said the court could not conclude “as a matter of law and without discovery, that any artificial inflation of Barclays’s stock price after January 2009 was resolved by an efficient market prior to June 27, 2012.”

“The efficient market hypothesis, premised on the speed (efficiency) with which new information is incorporated into the price of a stock, does not tell us how long the inflationary effects of an uncorrected misrepresentation remain reflected in the price of a security,” he said.

Susan Alexander, partner at Robbins Geller Rudman & Dowd, argued for the plaintiffs.

Jeffrey Scott, partner at Sullivan & Cromwell, argued for Barclays. The bank declined comment.

Cheryl Krause, partner at Dechert, argued for Diamond. Krause is awaiting a vote by the full U.S. Senate on her nomination to the U.S. Court of Appeals for the Third Circuit.