Puchtler v. Barclays PLCPuchtler v. Barclays PLC
OPINION AND ORDER
LEWIS J. LIMAN, United States District Judge:
This is a companion case to May v. Barclays, Case No. 23-cv-2583-LJL (S.D.N.Y.), and In re Barclays PLC Securities Litigation, 22-cv-8172-KPF (S.D.N.Y.). Lead Plaintiff Michael Puchtler (“Plaintiff”) brings claims for violations of
Defendants1 move to dismiss Plaintiff‘s Amended Complaint in its entirety, alleging that it fails to allege an actionable misstatement or omission, scienter, or loss causation. Dkt. No. 46. For the reasons that follow, the motion to dismiss is granted with prejudice.
BACKGROUND
The Court accepts as true for purposes of this motion the well-pleaded allegations of the Amended Complaint as supplemented by the documents incorporated by reference. The Court
A. VXX and The Relevant Parties
BPLC is a bank holding company headquartered in London, United Kingdom. Dkt. No. 45 ¶ 19. Through its subsidiaries, it provides global banking and other financial services, including investment banking and sponsoring structured products. Id. Barclays Bank, a wholly-owned subsidiary of BPLC, is a bank that provides various financial services, including the creation, issuance, and sale of structured notes, exchange traded notes (“ETNs”), and other new derivative securities. Id. ¶ 20.
Staley, Morzaria, and Venkatakrishnan are officers or directors of BPLC. Staley was Chief Executive Officer (“CEO”) of BPLC, a member of its Executive Committee, and a director on its Board of Directors from December 2015 through October 31, 2021. Id. ¶ 23. Staley also served as the CEO of Barclays Bank and as a director on its Board of Directors from March 2019 through October 31, 2021. Id. Venkatakrishnan has been the CEO of BPLC, a member of its Executive Committee, and a director on its Board of Directors since November 1, 2021. Id. ¶ 25. He has also served as the CEO of Barclays Bank and a director on its Board of Directors since November 1, 2021. Id. Venkatakrishnan served as BPLC‘s Chief Risk Officer from May 2017 through May 2020 and as the Co-President of Barclays Bank from October 2020 to October 2021. Id. During all relevant times, Morzaria served as BPLC‘s Group Finance Director, a member of BPLC‘s Board of Directors, and as a director on the Board of Directors of Barclays Bank. Id. ¶ 27.
The VXX has several mechanisms that are designed to ensure that its price is correlated with real-time market changes to VIX futures. Id. ¶¶ 36–40. The notes come with a redemption right that enables certain holders to put the note to the issuer and redeem it for the closing indicative value, which serves to keep the market price from falling below its indicative value. Id. ¶ 38. Market buyers will keep the price of the VXX ETNs from trading below the value that mimics the VIX futures because they know they can make a profit whenever the price of the security falls below the published indicative value simply by buying the note at the lower value and then putting it to Barclays at the indicative value, thereby driving up demand. Id. To ensure that the VXX ETNs do not trade above the indicative value because of the forces of supply and demand, Barclays maintains a shelf capacity to issue and sell new VXX securities. Id. ¶ 39. If there is excess demand, Barclays can satisfy that demand and increase supply by the simple expedient of issuing additional securities. Id. Indeed, the mere threat of Barclays issuing new securities disincentivizes buyers from bidding the price of the security above its indicative value to squeeze short sellers—any
The ability of an ETN issuer to sell new securities into the market is of paramount importance to short sellers of ETNs and particularly of ETNs such as VXX that are heavily shorted. Id. ¶ 42. Because the security is already hard to borrow, short sellers of ETNs that are heavily shorted are particularly dependent upon the ETN issuer to maintain appropriate shelf capacities to issue further securities to ensure that the price of ETNs do not rise above their indicative value. Id. The abilities to redeem and issue new securities are standard pricing mechanisms employed by ETN issuers to ensure that the price of the ETN remains “in-line” with their indicative value. Id. ¶ 41.
The VXX pricing supplement warns that “We Have No Obligation to Issue Additional ETNs, and We May Cease or Suspend Sales of the ETNs.” Dkt. No. 48-1 at 27.3 It states:
Any limitation or suspension on the issuance or sale of the ETNs may materially and adversely affect the price and liquidity of the ETNs of that series in the secondary market. Alternatively, the decrease in supply may cause an imbalance in the market supply and demand, which may cause the ETNs of that series to trade at a premium over their indicative value. Any premium may be reduced or eliminated at any time.
Id.
Michael Puchtler (“Plaintiff”) is an individual investor who invested in short positions on VXX securities. Dkt. No. 45 ¶¶ 3, 18.
B. WKSI Status
Historically, Barclays Bank offered VXX and other structured notes and ETNs to the public as a Well-Known Seasoned Issuer (“WKSI”) pursuant to a shelf registration offering. Id. ¶ 52. WKSI status permits an issuer to dispense with the requirements applicable to non-WKSI issuers
On May 10, 2017, Barclays Bank lost its WKSI status after the SEC instituted a public administrative cease-and-desist proceeding against its subsidiary, Barclays Capital Inc. Id. ¶ 60. As a result, Barclays was required to define and designate the specific dollar amount of securities it planned to register and issue and pay the registration fee up front before selling them. Id. ¶¶ 61–62. Barclays also needed to monitor how many securities had been issued so as not to exceed the limit. Id. ¶¶ 62–63.
In January 2018, Barclays Bank convened a working group to determine how it would conduct its securities offerings going forward as a non-WKSI. Id. ¶ 67. The working group consisted of the trading desk heads from Barclays Bank’s structured products group, product origination personnel, a compliance officer, and an in-house attorney. Id.
The working group converted Barclays Bank’s pending WKSI shelf into a non-WKSI, 2018 shelf registration (“2018 Shelf”) that authorized Barclays Bank to sell up to $21.3 billion worth of securities over the following eighteen months. Id. Barclays Bank also filed a 2019 shelf
Despite having become an ineligible issuer in March 2017, BPLC initially misrepresented that status on its Form 20-F filed on February 22, 2018, by self-identifying as a WKSI. Id. ¶ 64. On March 19, 2018, BPLC filed a post-effective amendment to its 2017 Form 20-F that acknowledged its non-WKSI status, stating that it understood the additional responsibilities of its new status. Id. ¶¶ 65–66.
C. Suspension of Issuances
On or around March 8, 2022, BPLC discovered that there were no internal controls in place necessary to track its issuances and sales of securities from the shelf registration statements. Id. ¶ 132. On March 9, 2022, Barclays senior managers were informed of the company’s failure to track sales and issuances off its shelf registrations, and that it had issued and sold billions of unregistered securities, including VXX ETNs. Id.
Barclays alerted regulators about the over-issuance on March 14, 2022. Id. BPLC also disclosed the over-issuance to the market on March 14, 2022, shortly before the VXX market opened. Id. ¶ 133. The disclosure stated that Barclays was “immediately suspending until further notice, any further sales from inventory and further issuances” of securities, specifically including “VXX ETNs” because “Barclays does not currently have sufficient issuance capacity to support further sales from inventory and any further issuances of ETNs.” Id.
Barclays’ announcement that it was suspending any further issuances and sales of new VXX ETNs caused a significant short squeeze in the market. Id. ¶¶ 8–10, 134–136. When the market became aware that Barclays could no longer issue new VXX ETNs into the market, the
On July 25, 2022, Barclays announced that it would be commencing a rescission offer for eligible purchasers. Id. ¶ 139. The rescission offer expired on September 12, 2022. Id.
D. Subsequent Disclosures
In the months following the March 14, 2022 disclosure, Defendants issued a series of admissions relating to their lack of internal controls and their issuances of unregistered securities. On April 28, 2022, Barclays Bank filed its First Quarterly Report for 2022 in which it disclosed that Barclays Bank began selling in excess of the $20.76 billion maximum issuance capacity as early as February 18, 2021, and that “securities issued in excess of the limit are considered to be ‘unregistered securities’ for the purposes of US securities law.” Id. ¶ 143(a). That report also stated that “management has concluded that, by virtue of the fact that the over-issuances occurred and was not immediately identified, both BPLC and Barclays Bank had a material weakness in relation to certain aspects of their internal control environment and, as a consequence, their internal control over financial reporting for the year ended 31 December 2021 was not effective.” Id. ¶ 143(b).
At Barclays annual general meeting on May 4, 2022, its Chairman, Nigel Higgins, stated:
. . . we do not get everything right. Let me say a few words about our recently reported failure to comply with SEC registration requirements, a failure which has cost us hundreds of millions of pounds, and more in reputation. . . . This is not rocket science and we can and will do better, learning from this particular issue and applying discipline across all our controls.
On May 23, 2022, BPLC amended its Form 20-F annual statement “to reflect management’s conclusion that the Company’s internal control over financial reporting and disclosure controls and procedures were not effective under the applicable [COSO] Framework as of 31 December 2021 due to a material weakness in the Company’s internal control over financial reporting identified subsequent to the Original Filing Date as a result of the Over-issuance of Securities having occurred and not been immediately identified.” Id. ¶ 143(c) (emphasis omitted).
BPLC stated in a Form 6-F filed for the Second Quarter of 2022 on July 28, 2022, that:
[M]anagement has concluded that, by virtue of the fact that there was a weakness in controls over the identification of external regulatory limits related to securities issuance and monitoring against these limits, the Barclays Bank Group had a material weakness in relation to certain aspects of its internal control environment, and as a consequence, its internal control over financial reporting and disclosure controls and procedures as at 31 December 2021 were not effective.
Id. ¶ 143(g). Moreover, the Form 6-F stated that as a result of the weakness, Barclays Bank had issued securities in excess of the amount permitted under the 2018 and 2019 Shelves, id. ¶ 143(h), and that the issuance of securities in excess of the maximum permitted under the shelf “resulted from a failure to monitor issuances during the period in which Barclays Bank PLC’s status changed from a ‘well-known seasoned issue’ to an ‘ineligible issuer’ for U.S. securities law purposes,” id. ¶ 143(i) (emphasis omitted).
In a form 6-K filed on September 30, 2024, Defendants stated that “among the principal causes of the over-issuance were, first, the failure to identify and escalate to senior executives the
BPLC stated that it would claw back compensation from Venkat and Morzaria by a combined £1 million due to regulatory errors and oversights, including the over-issuance. Id. ¶¶ 157–158.
E. The SEC Order
The SEC pursued an enforcement action against Barclays for Barclays’ alleged “failure to put into place any internal control around the real-time tracking of securities being offered or sold off of its Commission-registered shelf registration statements” which led to Barclays Bank selling “an unprecedented amount of securities—cumulatively totaling approximately $17.7 billion in excess of what it had registered with the Commission, in violation of
On or about September 29, 2022, the SEC ordered cease-and-desist proceedings against Barclays concerning “BBPLC’s failure to put into place any internal control around the real-time tracking of securities being offered or sold off of its Commission-registered shelf registration statement.” Id. ¶ 145. The SEC found that “[a]t the time of the registration of both the 2018 Shelf and the 2019 Shelf, certain [Barclays Bank] personnel recognized the need to accurately record relevant information about securities that were offered or sold so as to be able to track the aggregate amount of securities that were cumulatively offered and sold from each respective [s]helf on a real-time basis,” and that such tracking would have ensured that Barclays Bank did not offer or sell any securities in excess of what had been registered. Id. ¶ 146. But it found that “no internal control was established” and “the amount of securities that were offered and sold was not tracked.” Id. The SEC concluded that, beginning on or around June 26, 2019, Barclays Bank offered and
The SEC required BPLC to implement remedial reforms, to complete an audit of its internal controls relating to compliance with
The SEC order does not allege that BPLC or Barclays Bank violated any fraud- or negligence-based provision of the securities laws.
F. The Alleged Misrepresentations and Omissions
Plaintiff alleges that Defendants’ SEC filings contain material misrepresentations and omissions as to (1) whether Defendants would “only” issue VXX in registered form and (2) the strength and effectiveness of Defendants’ internal controls and procedures.
On May 9, 2019, Barclays Bank filed a Form 8-A12B Registration Statement for securities, including VXX. Id. ¶¶ 46–49. In an attached exhibit to the Form 8-A12B, Barclays Bank stated that “[t]his Security, and any other Securities of this series and of like tenor, are issuable only in registered form without coupons in denomination of any multiple of $50.” Id. Plaintiff alleges that this statement is false because Barclays Bank did not “only” issue the ETNs in registered form, but also in unregistered form. Id. ¶ 49.
Barclays Bank’s 2019 Form 20-F states that “Audit, Risk and Internal Control” is one of the Board’s core principles and that the “[e]ffectiveness of risk management and internal controls is reviewed regularly by the Risk Committee (responsible for providing oversight on current and potential future risk exposures) and the Audit Committee (responsible for controls, including reviewing audit reports, internal controls and risk management systems).” Id. ¶¶ 82–83. It further stated that Barclays Bank “is committed to operating within a strong system of internal control that enables business to be transacted and risk taken without exposure to unacceptable potential losses or reputational damage” and that “[a] framework of disclosure controls and procedures is in place to support the approval of the financial statements of the Barclays Bank Group.” Id. ¶ 84. Like BPLC’s filing, Barclays Bank’s Form 20-F stated that management had assessed the internal
BPLC’s 2020 Form 20-F stated the company had “robust internal controls” and highlighted that BPLC had “successfully completed” BICEP, leaving the Group’s control environment “now in a much stronger position.” Id. ¶ 94. The 2020 Form 20-F also stated that management had assessed the internal control over financial reporting as of December 31, 2020, using the 2013 COSO framework, and had concluded that the internal control over financial reporting was effective. Id. ¶ 95. The 2020 Form 20-F included a Board Audit Committee report which concluded that “the Group has operated a sound system of internal control that provides a reasonable assurance of financial and operational controls and compliance with laws and
Barclays Bank’s 2020 Form 20-F stated that “[t]he Company is committed to operating within a strong system of internal control” and that “[p]rocesses are in place for identifying, evaluating and managing the Principal Risks facing the Company.” Id. ¶ 102. It concluded that “[t]hroughout the year ended 31 December 2020 and to date, the Company has operated a system of internal control that provides reasonable assurance of effective operations covering all controls, including financial and operational controls and compliance with law and regulations.” Id. ¶ 103. It also stated that “management utilised the criteria set out in the 2013 COSO framework and concluded that, based on its assessment, the internal control over financial reporting was effective as of 31 December 2020” and that no material changes had been made to the Group’s control over financial reporting. Id. According to the 2020 Form 20-F, the CEO and CFO had assessed the company’s controls and found them effective. Id. ¶ 104.
In BPLC’s announcement of its Q1 2021 results on April 30, 2021, it stated that “Barclays remain[s] in a strong capital position.” Id. ¶¶ 108–109. BPLC’s Q1 2021, Q2 2021, and Q3 2021 results all incorporated its 2020 Form 20-F by reference. Id. ¶¶ 110, 112, 114.
Barclays Bank’s 2021 Form 20-F once again stated that the Audit Committee was charged with “[o]verseeing the integrity of our financial disclosures and the effectiveness of the internal control environment,” was “[k]eenly focused on the Group’s internal control environment,” and “continued to oversee the ongoing evolution and enhancement of the internal control environment.” Id. ¶ 117. It also represented that “[t]he Group is committed to operating within a strong system of internal control,” “[p]rocesses are in place for identifying, evaluating and managing the Principal Risks facing the Group in accordance with the ‘Guidance on Risk
The Individual Defendants provided SOX certifications that accompanied Barclays Bank’s and BPLC’s Form 20-F filings, stating that the signer was responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting. Id. ¶¶ 78–79, 90–91, 98–99, 105–106, 120–121, 129–130.
PROCEDURAL HISTORY
This case was initiated by complaint filed on March 12, 2024. Dkt. No. 1.
On June 3, 2024, the Court signed an order, pursuant to the Private Securities Litigation Reform Act (“PSLRA”),
On August 26, 2024, Plaintiff filed the First Amended Complaint. Dkt. No. 45. The Amended Complaint contains two counts: (1) a claim for violations of
On Friday, March 14, 2025, the Court heard oral argument from the parties as well as from the parties in related case May v. Barclays, No. 23-cv-2583 (S.D.N.Y.).
STANDARD OF REVIEW
On a 12(b)(6) motion to dismiss, the court must accept as true all factual allegations in the complaint and draw all possible inferences from those allegations in favor of the plaintiff. See York v. Ass‘n of the Bar of the City of N.Y., 286 F.3d 122, 125 (2d Cir. 2002), cert. denied, 537 U.S. 1089 (2002). This requirement “is inapplicable to legal conclusions.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Thus, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id.
A complaint must offer more than “labels and conclusions,” or “a formulaic recitation of the elements of a cause of action” or “naked assertion[s]” devoid of “further factual enhancement” in order to survive dismissal. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 557 (2007). The ultimate question is whether “[a] claim has facial plausibility, [i.e.] the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. “Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679. Put another way, the plausibility requirement “calls for enough fact to raise a reasonable expectation that discovery will reveal evidence
A claim for fraud is subject to the particularity requirements of
The Private Securities Litigation Reform Act (“PSLRA”) imposes additional requirements on a plaintiff bringing a private securities fraud action. Plaintiff must “specify each statement alleged to have been misleading” and “the reason or reasons why the statement is misleading.”
DISCUSSION
I. Section 10(b)
To plead a claim for damages under
A. Material Misrepresentation or Omission
Plaintiff states that “Defendants’ Class Period statements concerning (a) the strength and effectiveness of Defendants’ internal controls and procedures, and (b) that they would ‘only’ issue registered securities were materially false and misleading because, [a] undisclosed to investors, Defendants had failed to implement any internal controls and procedures to track and monitor their
“‘The test for whether a statement or omission is materially misleading’ . . . is not whether the statement is misleading in and of itself, but ‘whether the defendants’ representations, taken together and in context, would have misled a reasonable investor.’” In re Vivendi S.A. Sec. Litig., 838 F.3d 223, 250 (2d Cir. 2016) (quoting Rombach, 355 F.3d at 172 n.7). This test is objective and looks to the understanding of the “ordinary investor.” Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 187 (2015). Moreover, under the federal securities laws, “literal accuracy is not enough.” Id. at 192. “An issuer must also desist from misleading investors by saying one thing and holding back another.” Id. Companies have a duty of disclosure “only when necessary ‘to make . . . statements made, in light of the circumstances under which they were made, not misleading.’” Matrixx, 563 U.S. at 44 (quoting
At the outset, Defendants invoke Fershtman v. Schectman to argue that none of the alleged misrepresentations and omissions could be material in light of its contractual right to suspend ETN issuances. Dkt. No. 47 at 1–2, 10 (citing Fershtman v. Schectman, 450 F.2d 1357 (2d Cir. 1971) (Friendly, J.)); Dkt. No. 50 at 3 (citing same). In Fershtman, the Second Circuit affirmed the dismissal of a suit brought individually and derivatively by a set of limited partners against their general partners under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. See Fershtman, 450 F.2d 1357. The limited partners challenged the invocation by the general partners of a clause in the partnership agreement that allowed the general partners to terminate the partnership by repaying the limited partners’ contributions in full. Id. at 1358–60. The plaintiffs
There is some lack of clarity regarding whether the Fershtman holding turns on materiality or causation. Judge Meskill issued a concurring opinion in Goldberg v. Meridor, 567 F.2d 209 (2d Cir. 1977), which Judge Friendly did not join, in which Judge Meskill read the Fershtman dictum to speak to materiality. Id. at 223 (Meskill, J., concurring). But materiality turns on whether the mispresented fact would have been significant to the hypothetical reasonable investor in making an investment decision and not on whether it was important to the actual investor bringing suit. See Vivendi, 838 F.3d at 250; cf. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (Section 14(a)). Thus, the fact that the misrepresentation would have made no difference to the individual plaintiff would not alone defeat materiality. Other courts have understood Fershtman to speak to loss causation. See, e.g., Benson v. RMJ Sec. Corp., 683 F. Supp. 359, 368–69 (S.D.N.Y. 1988) (reading Fershtman to support the conclusion that when the plaintiff is required to sell pursuant to a valid shareholders agreement, there is no loss causation, because the plaintiff would have suffered the same loss regardless whether misrepresentations were made).
Many of the alleged statements concern optimistic statements of Defendants’ commitments or values. See, e.g., Dkt. No. 45 ¶¶ 75, 84, 95, 102, 116, 118, 124 (stating that Barclays is “committed to operating within a strong system of internal control”), 82 (naming “Audit, Risk and Internal Control” as a “core principle”). Such “simple and generic assertions” regarding Defendants’ commitment to compliance are “not materially misleading absent significantly more detailed assurances of actual compliance.” In re Citigroup Sec. Litig., 2023 WL 2632258, at *14 (S.D.N.Y. Mar. 24, 2023) (punctuation omitted); see also Mucha v. Volkswagen Aktiengesellschaft, 540 F. Supp. 3d 269, 297 (E.D.N.Y. 2021) (references to the company’s “goals” and “guiding principles” were not actionable), aff’d sub nom. Mucha v. Winterkorn, 2022 WL 774877 (2d Cir. Mar. 15, 2022); In re Sanofi Sec. Litig., 155 F. Supp. 3d 386, 401–02
Even Defendants’ less aspirational backwards-looking statements that Barclays’ “frameworks, policies and standards enable Barclays to meet regulators’ expectations relating to internal control and assurance,” Dkt. No. 45 ¶¶ 75, 84, 89, 95, 97, 102, 116, 118, 119, 125, and that “[Defendants have] operated a sound system of internal control that provides reasonable assurance of financial and operational controls and compliance with laws and regulations,” id. 76, 86, 96, 103, 116, 118–119, 124, 126, are too general to be materially false and misleading, see Sanofi, 155 F. Supp. 3d at 401–02 (holding that statements about the company‘s maintenance of an “effective compliance organization” are too general to cause a reasonable investor to rely on them). The Second Circuit has held “simple and generic assertions about having ‘policies and procedures’ and allocating ‘significant resources‘” to regulatory compliance to be insufficient to give rise to a Section 10(b) claim. Singh v. Cigna Corp., 918 F.3d 57, 64 (2d Cir. 2019). “No investor would take such statements seriously in assessing a potential investment, for the simple fact that almost every investment bank makes these statements.” ECA, Loc. 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 206 (2d Cir. 2009); see also Singh, 918 F.3d at 63. Accordingly, “numerous district courts in this Circuit have found general policy- and compliance-related statements, such as those at issue here, to be unactionable.” In re Telefonaktiebolaget LM Ericsson Sec. Litig., 675 F. Supp. 3d 273, 290 (E.D.N.Y. 2023) (collecting cases), aff‘d sub nom. Bos. Ret. Sys. v. Telefonaktiebolaget LM Ericsson, 2024 WL 4023842 (2d Cir. Sept. 3, 2024). Those alleged statements are nothing more than “milquetoast corporate-speak” that fail to provide any description of specific initiatives or assurances of efficacy upon
In holding Defendants’ statements about Barclay‘s internal controls to be nonactionable, the Court departs from Judge Failla‘s holding in In re Barclays PLC Securities Litigation.5 There, Judge Failla held that “Defendants’ statements were not materially misleading because they misrepresented the strength of the Company‘s internal controls[;] [r]ather, Defendants’ statements were materially misleading because they omitted the Company‘s failure in the first instance to create a means of tracking the issuance of securities from the Shelves.” Barclays PLC Sec. Litig., 2024 WL 757385, at *12; see also id. at *13 (“Stated differently, the dueling assertions that (i) Barclays ‘operated a sound system of internal control’ and (ii) Barclays had no system of
Defendants additionally argue that the statements at issue cannot be read to provide reassurance as to Barclays’ controls over VXX issuances as they spoke generally to efforts to strengthen “the internal control environment across the Group.” Dkt. No. 47 at 11 (quoting Dkt. No. 45 ¶ 94). The Second Circuit‘s holding in Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, is instructive. 750 F.3d 227 (2d Cir. 2014). That case centered in part on allegations that Barclays had misrepresented that “minimum control requirements had been established for all key areas of identified risk” when in fact Barclays “had no specific systems or controls for its LIBOR and EURIBOR submissions process until December 2009,” leading to the
Finally, Plaintiff argues that Defendants’ alleged statement on May 9, 2019 in the Registration Statement, that VXX ETNs “and any other Securities of this series and of like tenor, are issuable only in registered form without coupons in denomination of any multiple of $50” were misleading because Barclays “knew, or should have known, that it had already issued unregistered securities and lacked appropriate controls to ensure the accuracy of its statements.” Dkt. No. 49 at 19 (quoting Dkt. No. 45 ¶¶ 46–49). In the Form F-3 Barclays Bank filed on June 14, 2019,
“The duty to correct applies when a company makes a historical statement that at the time made, the company believed to be true, but as revealed by subsequently discovered information actually was not.” In re Int‘l Bus. Machs. Corp. Sec. Litig., 163 F.3d 102, 109 (2d Cir. 1998) (quotation omitted). For the duty to correct to apply, the statement must have been false at the time it was made, though the defendant only later learned of the statement‘s falsity or was reckless in not learning that the earlier statement was false or misleading. See id. (“IBM‘s statements were not misleading when made and therefore we reject any claim by plaintiffs that IBM was under a
“A duty to update may exist when a statement, reasonable at the time it is made, becomes misleading because of a subsequent event.” Int‘l Bus. Machs., 163 F.3d at 110; accord Pipefitters Union Loc. 537 Pens. Fund v. Am. Express Co., 773 F. App‘x 630, 632 (2d Cir. 2019) (summary order); see, e.g., Tecku v. Yieldstreet, Inc., 2022 WL 1322231, at *10 (S.D.N.Y. May 3, 2022) (holding that even if the company‘s statements concerning its diligence process were accurate when made, the company‘s later divergence from the process “rendered the statements false, requiring Defendants to at least update investors that the diligence process differed from the process outlined in the document“). Once Defendants issued unregistered securities, the statement that VXX ETNs “and any other Securities of this series and of like tenor, are issuable only in registered form” became misleading. According to the complaint, Barclays’ offer and sale of unregistered shares began on or around June 26, 2019. Dkt. No. 45 ¶ 147. Defendants nonetheless argue that no duty to update arose at that time and that it was not until Barclays knew about the over-issuances that it became subject to the duty. Dkt. No. 50 at 7 (citing Tecku, 2022 WL 1322231, at *10; SEC v. SolarWinds Corp., 741 F. Supp. 3d 37, 95 (S.D.N.Y. 2024); In re Ferrellgas Partners, L.P., Sec. Litig., 2018 WL 2081859, at *11 (S.D.N.Y. Mar. 30, 2018) (Sullivan, J.), aff‘d, 764 F. App‘x 127 (2d Cir. 2019)).
Although the duty to correct hinges on a defendant‘s knowledge and thus is somewhat coextensive with scienter, see Int‘l Bus. Machs., 163 F.3d at 109 (“[I]f and when a speaker learns that a prior statement was misleading when made, a duty to correct arises.“), the Second Circuit
The speaker‘s knowledge is not necessarily determinative of the statement‘s falsity when made or at a later date; a statement or omission may be materially false even where it is not made
Defendants’ motion to dismiss for failure to plead a material misrepresentation or omission accordingly may be granted with respect to the statements concerning Barclays’ internal controls but not with respect to the statement that the notes were issuable only in registered form.
B. Scienter
Plaintiff‘s failure to sufficiently plead scienter provides independent grounds to grant the motion to dismiss in full.
To plead scienter under the PSLRA, a plaintiff must allege “with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” JP Morgan Chase Co., 553 F.3d at 198 (quoting
“When the defendant is a corporate entity, the pleaded facts must create a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter.” Teamsters Loc. 445 Freight Div. Pension Fund v. Dynex Cap. Inc., 531 F.3d 190, 195 (2d Cir. 2008). “[I]t is possible to plead corporate scienter by pleading facts sufficient to create a strong inference either (1) that ‘someone whose intent could be imputed to the corporation acted with the requisite scienter’ or (2) that the statements ‘would have been approved by corporate officials sufficiently knowledgeable about the company to know’ that those statements were
As he concedes, Plaintiff does not allege facts that would give rise to a motive to defraud. Dkt. No. 49 at 2–3, 20 & nn.9–10. There is no allegation that any Individual Defendant or person whose intent could be ascribed to Barclays benefitted in any “concrete and personal way” from concealing the defect in Barclays’ internal controls or the fact that Barclays had exceeded the amount of securities permitted under the registration statement. JP Morgan Chase Co., 553 F.3d at 198 (quoting Novak v. Kasaks, 216 F.3d 300, 307–08 (2d Cir. 2000)). Indeed, there is no allegation that any Individual Defendant or person whose intent could be ascribed to Barclays had so much as a generic profit motive that might show some benefit derived from turning a blind eye to Barclays’ internal control failures. Had the executives at Barclays known or intended at the time of the registration statements that they were going to issue more shares than permitted under those statements, they would have had every interest in seeking to register those shares. There was no limit on the amount of securities Barclays was permitted to register under a registration statement. Had Barclays’ executives known that the bank had over-issued, they would have been incentivized to address the problem by registering more shares rather than letting the problem grow. An alleged scheme that defies common sense or economic reason “does not yield a reasonable inference of fraudulent intent.” Kalnit, 264 F.3d at 140–41; see also Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir. 1994); Medis Inv. Grp. v. Medis Techs., Ltd., 586 F. Supp. 2d 136, 147 (S.D.N.Y. 2008), aff‘d, 328 F. App‘x 754 (2d Cir. 2009). Courts may reject a scienter argument resting on allegations that the defendant made deliberate decisions contrary to its interests. See, e.g., Kraft v. Third Coast Midstream, 2021 WL 860987, at *25 (S.D.N.Y. Mar. 8, 2021).
To show conscious misbehavior or recklessness, Plaintiff relies on the Amended Complaint‘s allegations concerning: (1) the impact of WKSI status on Barclays’ core operations, Dkt. No. 45 ¶¶ 54–62, 65–66, 162–163; (2) Defendants’ awareness of the loss of WKSI status, id. ¶¶ 57–62, 65–66; (3) conduct on the part of the Individual Defendants, id. ¶¶ 23–28, 56, 60–61, 78–79, 88, 90–91, 96, 98–99, 104–106, 110, 112, 114, 120–121, 128–130; (4) the BPLC Board‘s reductions to the remuneration of the Individual Defendants, id. ¶¶ 157–159, and (5) the sheer size of the fraud and ease of discoverability, id., ¶¶ 138–140, 151; Dkt. No. 49 at 19–30.
Plaintiff invokes the core operations doctrine, stating that “chief” among the facts surrounding Defendants’ alleged conduct supporting a finding of scienter, “is the importance of
Even when viewed as “supplementary but not independently sufficient means to plead scienter,” In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326, 353 (S.D.N.Y. 2011) (Sullivan, J.), Plaintiff‘s core operations allegations still do not support a finding of scienter because Plaintiff focuses on the wrong question. Plaintiff argues that “Defendants knew that they had lost their WKSI status” and that “Defendants’ WKSI status was indeed important to the companies, which provides strong circumstantial evidence that Defendants’ failure to disclose their lack of controls was reckless.” Dkt. No. 49 at 21–22. But the allegedly false and misleading statements concern the quality of Barclays’ internal controls for the issuance of VXX and other ETNs. See supra. The pertinent question is therefore whether Defendants knew Barclays did not have effective internal controls with respect to the issuance of such securities, not whether Defendants knew that Barclays had lost WKSI status such that it needed to have effective internal controls. Plaintiff
Plaintiff argues that he sufficiently alleges Defendants were actually aware of the loss of WKSI status and of the attendant responsibilities that resulted from the loss. Dkt. No. 49 at 22–23. For example, Barclays Bank amended its 2017 Annual Report to correct its lack of WKSI
Plaintiff asserts several categories of allegations concerning the Individual Defendants that he claims support an inference of scienter: (1) the Individual Defendants had high-ranking roles within Barclays, (2) the Individual Defendants signed SOX certifications, (3) Staley and Venkat, evaluated Barclays’ disclosure controls and concluded that they were effective, and (4) the Individual Defendants had a duty to monitor Barclays’ internal controls. Dkt. No. 49 at 23–27 (citing Dkt. No. 45 ¶¶ 23–28, 56, 60–61, 78–79, 88, 90–91, 96, 98–99, 104–106, 110, 112, 114, 120-121, 128-130). None suffice to show Defendants’ conscious misbehavior or recklessness.
The Amended Complaint states that Staley was the CEO of BPLC from December 2015 to October 2021 and was the CEO of Barclays Bank from March 2019 to October 2021; Venkat served as BPLC‘s chief risk officers from May 2017 to May 2020, the co-president of Barclays Bank from October 2020 to October 2021, and the CEO of BPLC after October 2021; and Morzaria was the Group Finance Director throughout the time BPLC was an ineligible issuer. Id. ¶¶ 23, 25, 27, 166-168. However, the Individual Defendants’ high-level positions do not, standing alone, raise a strong inference of scienter. See Police & Fire Ret. Sys. of the City of Detroit v. SafeNet, Inc., 645 F. Supp. 2d 210, 234 (S.D.N.Y. 2009) (Lynch, J.) (“Courts may not infer scienter ‘solely from the fact that, due to the defendants’ board membership or executive managerial position, they had access to the company‘s internal documentation as well as any adverse information.‘“) (quoting In re Winstar Commc‘ns, 2006 WL 473885, at *7 (S.D.N.Y. Feb. 27, 2006)). “It is well established that boilerplate allegations that defendants knew or should have known of fraudulent conduct based solely on their board membership or executive positions are insufficient to plead scienter.” In re MBIA, Inc., Sec. Litig., 700 F. Supp. 2d 566, 588 (S.D.N.Y. 2010) (quotation
Plaintiff‘s argument that scienter can be inferred because the Individual Defendants signed SOX certifications fails. The Sarbanes-Oxley Act requires the Chief Executive and Chief Financial Officer of every registered and publicly traded company to certify annually the general effectiveness of the company‘s internal controls and procedures.
Barclay‘s SEC filings stated that Staley and Venkat had both, at times, evaluated the effectiveness of the relevant disclosure controls, ensured that the controls complied with SEC rules and regulations, and concluded that the design and operation of these disclosure controls and
In some circumstances, “[a]n egregious refusal to see the obvious, or to investigate the doubtful, may in some cases give rise to an inference of . . . recklessness.” City of Sterling Heights Police and Fire Ret. Sys. v. Abbey Nat., PLC, 423 F. Supp. 2d 348, 361 (S.D.N.Y. 2006) (Chin, J.) (quoting Novak, 216 F.3d at 308); accord Chill v. Gen. Elec. Co., 101 F.3d 263, 269 (2d Cir. 1996). In Sterling Heights, Judge Chin found that such an inference arose where executives made repeated
Plaintiff argues that Barclays’ claw back of the Individual Defendants’ remuneration supports scienter because, in doing so, “Barclays let the Individual Defendants, its shareholders, and the world know what it thought about the Individual Defendants’ culpability.” Dkt. No. 9 at 28 (citing Dkt. No. 45 ¶¶ 158–159). However, the Amended Complaint contains no allegation indicating that the claw back was a response to the Individual Defendants’ fraud, rather than, for example, mere mismanagement. See Jackson v. Abernathy, 960 F.3d 94, 96 (2d Cir. 2020) (per curiam); cf. In re Salix Pharms., Ltd., 2016 WL 1629341, at *15 (S.D.N.Y. Apr. 22, 2016) (plaintiffs established a strong inference of scienter where they alleged that the company clawed back millions of dollars’ worth of compensation from the individual defendants and one of the provisions of the individual defendants’ resignation agreements allowed for a claw back based on a determination by the board that the individual defendants “intentionally engaged in wrongdoing“).
Plaintiff‘s allegations do not support the inference that Defendants acted with conscious recklessness to a level approximating actual intent rather than a form of mismanagement more closely resembling a heightened form of negligence. See S. Cherry, 573 F.3d at 109. Allegations such as those in Amended Complaint “that merely describe a lack of due diligence, without more, will not give rise to a strong inference of conscious recklessness.” Ivanhoe Inv. Partners, 2025 WL 573497, at *2. Plaintiff fails to establish a strong inference that Defendants “knew their
Moreover, Plaintiff‘s arguments are neither cogent nor as compelling as the nonfraudulent inference available. See Tellabs, 551 U.S. at 324. Plaintiff does not allege any facts supporting the inference that at any time before March 8, 2022, any persons whose intent could be imputed to Barclays knew that Barclays had no system for tracking the amount of shares of VXX it had issued. It is illogical to presume that the executives had such knowledge. If, at the time of the Registration Statements, Barclays knew that there was no such system or that it was at risk of selling more securities than it had registered, Barclays easily could have accounted for those facts by implementing such a system. It was an admittedly “simple tas[k].” Dkt. No. 45 ¶ 142 (Defendants stated that “[t]his situation was entirely avoidable” and that “in all our complexities, we missed some simple tasks“). It also would have been easy for Barclays to register a greater amount of shares to avoid over-issuance. There was no limit on the amount of shares Barclays could register so long as it paid the registration fee. Furthermore, once the lack of internal control became known to Barclays’ executives in March 2022, they alerted regulators, disclosed the lack of capacity to the market, suspended further sales and issuances, and announced a voluntary buy-back. Id. ¶¶ 132-133, 139. There was no particular urgency to make such a disclosure if Defendants were bent on fraud. There is no evidence that the fact of the over-issuance was otherwise about to be revealed. The inference naturally arises, to the contrary, that Defendants made the disclosure when they did because they were not previously aware of the over-issuances or lack of controls. See Rotunno, 2022 WL 14997930, at *3 (holding that the more compelling inference is the Defendants negligently made an oversight error and “subsequently corrected their disclosures to the [SEC] when they became aware of the error“). Such remedial efforts weaken the inference of scienter.
Defendants’ motion to dismiss accordingly may be granted for lack of scienter.
C. Loss Causation
“It is settled that causation under federal securities laws is two-pronged: a plaintiff must allege both transaction causation, i.e., that but for the fraudulent statement or omission, the plaintiff would not have entered into the transaction; and loss causation, i.e., that the subject of the fraudulent statement or omission was the cause of the actual loss suffered.” Suez Equity Invs., L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001). The former, transaction causation, “is based upon the plaintiff‘s reliance upon the defendant‘s deceptive statements or omissions; that is, but for such conduct by the defendant, the plaintiff would not have acted to his detriment.” Id. at 96. The latter, loss causation, is more akin to the tort concept of proximate cause; that is, “in order for the plaintiff to recover it must prove the damages it suffered were a foreseeable consequence of the misrepresentation.” Id. Like proximate cause in the tort context, a finding of foreseeability for purposes of loss causation “is predicated upon notions of equity because it establishes who, if anyone, along the causal chain should be liable for the plaintiffs’ losses” and “must satisfy the judicial mind that such result conforms to ‘a rough sense of justice‘” id. (quoting Palsgraf v. L.I.R.R. Co., 162 N.E. 99 (N.Y. 1928) (Andrews, J., dissenting)). A plaintiff may plead loss causation by alleging either “(a) the existence of cause-in-fact on the ground that the market reacted negatively to a corrective disclosure of the fraud; or (b) that that the loss was foreseeable and caused by the materialization of the risk concealed by the fraudulent statement.” Carpenters Pension, 750 F.3d at 232–33 (quotations omitted).
The Second Circuit clarified in In re Vivendi, S.A. Securities Litigation, that the Circuit‘s “past holdings do not suggest that ‘corrective disclosure’ and ‘materialization of risk’ create fundamentally different pathways for proving loss causation.” 838 F.3d 223, 261 (2d Cir. 2016). Where a plaintiff pursues a materialization-of-concealed-risk theory, the disclosure takes the form of an “event[] constructively disclosing the fraud” instead of a clear statement correcting the prior
According to Plaintiff, Barclays’ announcement on March 14, 2022, that it was suspending issuances revealed the previously-concealed risk to the public and set off the short squeeze responsible for his loss. Dkt. No. 45 ¶¶ 8–10, 133–137, 174 (alleging that “[t]he risk of not having internal controls to track the issuance of VXX materialized when Barclays and BBPLC imposed an immediate suspension on their VXX sales“); Dkt. No. 49 at 33–35. The announcement disclosed that Barclays Bank was immediately suspending VXX sales because “Barclays does not currently have sufficient issuance capacity to support further sales from inventory and any further issuances of ETNs.” Dkt. No. 45 ¶ 133.
Rather than signaling fraud, Barclays’ acts on May 14, 2022 were in line with its right to suspend issuances of VXX at any time at its sole discretion. Dkt. No. 48-1 at 27. Instead, the inference is that the market price of VXX rose astronomically due to the sudden absence of a safety valve to absorb excess demand—a safety valve that Barclays had no obligation to provide. Dkt. No. 45 ¶¶ 8, 135. That allegation fails to establish loss causation because Plaintiff fails to allege that the loss that he suffered was a result of the alleged misrepresentation. In the hypothetical world where Defendants were upfront about Barclays’ lack of internal controls or announced with certainty that there would come a time when Barclays would lack capacity, Plaintiff would have suffered the same loss upon the announcement that Barclays had exceeded its issuance capacity and was resultingly suspending issuances. See In re Lehman Bros. Sec. & Erisa Litig., 2015 WL 5294759, at *3–4 (S.D.N.Y. Sept. 10, 2015) (rejecting plaintiff‘s theory of loss causation that defendant “would be liable even if [warrant issuer] had been unable to satisfy its obligations for
Courts have held that where, as here, a plaintiffs loss is caused by the defendant‘s exercise of a reserved right rather than the revelation of a concealed fact, the plaintiff inherently would have suffered the same harm and no Section 10(b) claim can stand. See Drachman v. Harvey 453 F.2d 722 (2d Cir. 1971); Levine v. Seilon, Inc., 439 F.2d 328, 334 (2d Cir. 1971) (Friendly, J.), superseded by statute; Standard Metals Corp. v. Tomlin, 503 F. Supp. 586, 599 (S.D.N.Y. 1980); Benson, 683 F. Supp. at 368–69; see also Fershtman v. Schectman, 450 F.2d 1357 (“[I]f defendants were legally entitled to terminate the partnership on March 31, 1968, in their sole discretion, it would make no difference what they misrepresented or concealed.“). In Drachman, the Second Circuit held that the company‘s redemption of its convertible debentures, even if carried out with a “fraudulent motive and purpose of a conspiracy” could not be a “cognizable wrong[] where the securities markets and securities investors [we]re not adversely affected by [the] securities transaction.” 453 F.2d at 731. The Circuit rejected the plaintiffs’ loss causation argument, holding that “[t]here is no claim that the alleged fraud in any way infected the redemption transaction nor could there be; the redemption was effected in accordance with the terms of the debentures.” Id. at 732; see also id. (holding that the contractual right meant that any fraud was not “in connection with” the securities transaction and that, regardless of improper motive or any associated corporate damage, “[t]he purity of the security transaction and the purity of the trading process were unsullied”
Plaintiff‘s failure to sufficiently plead loss causation provides independent grounds to grant the motion to dismiss in full.
II. Control Person Liability
Plaintiff asserts control person claims under Section 20(a) of the Exchange Act against BPLC and the Individual Defendants. Dkt. No. 45 ¶¶ 213–223.
“To establish a prima facie case of control person liability, a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person‘s fraud.” Kraft, 2021 WL 860987, at *26 (quoting ATSI, 493 F.3d at 108).
CONCLUSION
Defendants’ motion to dismiss is GRANTED.
“Although Rule 15(a) of the Federal Rules of Civil Procedure provides that leave to amend ‘shall be freely given when justice so requires,’ it is within the sound discretion of the district court to grant or deny leave to amend.” McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007) (quoting
The Clerk of Court is respectfully directed to close this case.
SO ORDERED.
Dated: March 21, 2025
New York, New York
LEWIS J. LIMAN
United States District Judge