The U.S. Court of Appeals for the Second Circuit affirmed Wednesday that its 2011 decision in Fait v. Regions Financial dooms a major securities class action against Deutsche Bank AG and several underwriters. The case was brought on behalf of investors who purchased about $5.5 billion in preferred Deutsche Bank shares in 2007, and who alleged that the defendants misled them about the bank’s exposure to toxic mortgage-backed securities and other risks.
Monday’s ruling is a win for Cahill Gordon & Reindel, which represents Deutsche Bank, and for lawyers at Skadden, Arps, Slate, Meagher & Flom who represent a half-dozen big underwriting banks. The decision comes as the U.S. Supreme Court prepares to consider next term whether the Sixth Circuit erred in splitting from the Second Circuit’s Fait ruling in an unrelated case against Omnicare Inc.
As we’ve reported, U.S. District Judge Deborah Batts in Manhattan dismissed the proposed Deutsche Bank class action in August 2012. Batts had previously allowed the case to proceed, but she changed course after the Second Circuit issued its August 2011 decision in Fait. In that case, the appeals court 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 the time.” In other words, unless investors can show that defendants knew their offering materials were bogus, they’re out of luck.
Citing Fait, Batts concluded that Deutsche Bank’s overly optimistic statements about its exposure to residential mortgage-backed securities amounted to opinions, not objective misstatements of fact. The Second Circuit affirmed on Wednesday, ruling that “there are no allegations in the [amended complaint] that DB disbelieved its own disclosures.”
Steven Hubachek of Robbins Geller Rudman & Dowd argued the appeal for the plaintiffs on June 3. Charles Gilman of Cahill Gordon argued for Deutsche Bank, and Skadden’s Gary Hacker argued for underwriters UBS Securities LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC, Morgan Stanley & Co. and Banc of America Securities LLC.
Robbins Geller has had a particularly big stake in how the courts determine liability in Section 11 class actions—and not just because the firm files so many cases. In addition to striking out in the Deutsche Bank case on Wednesday, the firm was on the losing side in Fait three years ago.
Now, meanwhile, Robbins Geller is fighting to preserve the only existing appellate counterpoint to Fait: the Sixth Circuit’s January 2013 ruling in Omnicare v. Laborers District Council Construction Industry Pension Fund. The Sixth Circuit 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 the statements were false. The Supreme Court granted certiorari in the case in March, pitting Omnicare’s lawyers at Williams & Connolly and Winston & Strawn against Robbins Geller’s Darren Robbins in the biggest securities case teed up for the upcoming term.
Cahill’s Gilman had no immediate comment on the decision. Robbins Geller’s Hubachek didn’t return a call seeking comment.