Four years after Barclays Bank PLC announced it had inadvertently issued securities in excess of the amount registered on a shelf registration statement, it secured a victory in the U.S. Court of Appeals for the Second Circuit in the last of the actions targeting the over-issuance.
In a March 24 published decision, the Second Circuit resolved two issues of first impression and affirmed the dismissal of the second of two putative securities class actions, each seeking billions in damages.
The plaintiffs had purchased Barclays exchange-traded notes that were involved in the over-issuance. Although plaintiffs bought their notes on the secondary market, which ordinarily would preclude their claims for sale of unregistered securities under Section 12(a)(1) of the Securities Act, they argued that a reverse split consolidating four notes into one qualified as a statutorily defined “sale.” In deciding this issue of first impression, the Second Circuit disagreed, holding that this “is exactly the kind of nonsubstantive exchange that will not be treated as a sale.” Agreeing with S&C’s argument, the court added: “The design of [the Securities Act] is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions. But when an issuer announces a mandatory split, as happened here, investors have no choice and make no investment decision.”
The Second Circuit also affirmed dismissal of the investors’ Section 11 misstatement claim, addressing for the first time the Supreme Court’s decision in Slack Techs., LLC v. Pirani, which held that plaintiffs must “plead that they acquired securities ‘traceable to [the] allegedly defective . . . statement.’” On this issue of first impression, the Second Circuit again agreed with S&C’s argument, holding that the ETNs the plaintiffs acquired in the reverse split did not trace back to the allegedly misleading registration statement that Barclays Bank issued on the day the reverse split took effect, because that registration statement “does not cover those ETNs, but rather governs the initial sale of post-split ETNs that Barclays still held in inventory.”
Last December, the Second Circuit dismissed a related putative securities fraud action brought by traders that shorted the same notes, holding that the complaint failed to plead a strong inference of scienter.
The S&C team representing Barclays included Jeff Scott, Matt Porpora (who argued the appeal), Jacob Cohen, Julia Malkina and Stephen Clarke.