A Second Circuit panel affirmed a decision dismissing securities fraud claims against Danske Bank and its officers and directors.  The panel unanimously held that plaintiffs had not pled a false or misleading statement, reaffirming—among other things—that companies are not subject to securities liability for alleged failures to disclose uncharged wrongdoing or for generic statements about corporate ethics.

On August 25, 2021, a panel for the United States Court of Appeals for the Second Circuit unanimously affirmed a district court’s dismissal with prejudice of a securities fraud case alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Danske Bank and four of its former executives.[1] 

In its opinion, the Second Circuit articulated several important threshold limitations on federal securities claims against companies and officers and directors, including that (i) companies are not subject to securities liability for allegedly failing to disclose unadjudicated wrongdoing, (ii) alleged misstatements and omissions temporally disconnected from plaintiffs’ securities purchases may not satisfy plaintiffs’ burden to plead materiality, and (iii) generalized statements regarding corporate responsibility and compliance are not actionable.

The Second Circuit’s decision underscores that securities cases based on these sorts of allegations—particularly so-called “event-driven” cases that seek to convert announcements of generalized corporate bad news into claims for securities fraud—should be subject to dismissal at the pleading stage. 

The case

In the years prior to plaintiffs’ lawsuit, Danske Bank and its executives and directors were made aware of certain AML compliance failures with respect to a branch of Danske Bank based in Estonia.  The Estonian branch managed a so-called non-resident portfolio (NRP), which consisted of several thousand foreign clients, many of whom were based in Russia.  After a whistleblower alerted Danske Bank to the AML issues in 2013, there were both internal and regulatory investigations that resulted in the gradual closing down of the NRP.  Following the closing of the NRP, news of the AML compliance issues began to publicly emerge via public reprimand from the Danish financial authorities, investigative reporting, and Danske Bank’s release of its own report.  The price of Danske Bank’s American Depositary Receipts (ADRs) declined, and securities litigation followed.

The lead plaintiffs in the securities litigation were three pension funds that had purchased Danske Bank’s ADRs in 2018, after the AML issues at the Estonian branch became public.  The complaint itself reflected a prototypical event-driven securities litigation theory:  the funds claimed that the information that emerged about the AML issues proved that Danske Bank had previously made misrepresentations about, among other things, the source of its revenue in its financial statements, the strength of its internal compliance mechanisms, and its commitment to corporate responsibility.  The district court dismissed the lawsuit with prejudice, concluding that the complaint failed to plead with particularity both (1) a material misrepresentation or omission and (2) a strong inference of scienter.  Plaintiffs appealed.

The Second Circuit decision

The Second Circuit, in an opinion by Judge Dennis Jacobs, affirmed the dismissal.  In doing so, the court based its conclusion on plaintiffs’ failure to allege any actionable misstatements or omissions.  In rejecting plaintiffs’ allegations and affirming the dismissal, the court rested its decision on several key principles of securities law:

  • Companies do not generally have a duty to disclose uncharged, unadjudicated wrongdoing.  The court rejected plaintiffs’ allegations that the company’s financial statements were materially misleading because the company did not disclose the allegedly illegal profits from the Estonian branch.  The plaintiffs did not allege, the court noted, that any of Danske Bank financials were manipulated or otherwise inaccurate.  As the court explained, accurate historical data does not become misleading, as plaintiffs had argued, just because the company did not simultaneously disclose that some wrongdoing may have contributed to the company’s performance.  The court explained that plaintiffs’ theory would impermissibly allow “every company whose quarterly financial reports include revenue from transactions that violated AML regulations [to] be sued for securities fraud.”  Op. at 14.
  • “Materiality can have a half-life.”  The court also rejected plaintiffs’ allegations that Danske Bank’s 2014 announcement of a technical write-down of the goodwill on its assets, part of which concerned Estonia, was materially misleading.  The court explained that “the further in time a purchase is removed from a misstatement and the more that updated related information reaches the market,” the less likely a statement is to be material.  Op. at 20.  Here, over three years had passed between the 2014 announcement and the funds’ 2018 purchases. In between those events, the court noted a number of intervening events and disclosures that amounted to an “outpouring of information” about the Estonian branch.  Op. at 23.  “In other words,” the court reasoned, “materiality can have a half-life.”  Op. at 20.
  • Vague, generic statements about compliance do not create liability.  Plaintiffs argued that other statements about the company’s efforts to comply with regulatory frameworks were actionable in light of the AML issues at the Estonian branch.  For example, plaintiffs highlighted a nonspecific statement in which Danske Bank said it “strive[s] to conduct [its] business in accordance with internationally recognised principles in the area[ ] of …  anti-corruption.”  The court again rejected plaintiffs’ arguments, reasoning that “bromides about being good and upright” are not actionable, and that no reasonable investor “would weigh these generic statements in its investment calculus.”  Op. at 27-29.
  • Plaintiffs that allege they purchased at an inflated price cannot rely only on statements made after that purchase.  The plaintiffs also pointed to a footnote contained in Danske Bank’s 2018 second quarter financial results in which the company said it did not expect the outcomes of pending lawsuits regarding the AML issues to have a material effect on its financial condition.  The court explained that because the funds failed to allege actionable misstatements or omissions prior to their purchase of Danske Bank’s ADRs, the challenged footnote “could not have influenced the price of a purchase that had already been made.”  Op. at 31.
  • Scheme liability must be pled with particularity.  The court held that plaintiffs’ Rule 10b-5(a) and 10b-5(c) claims failed to satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and that it was insufficient to refer generally to a lengthy complaint and allege that “Defendants carried out a common plan, scheme, and unlawful course of conduct … .”  Op. at 33.


Although event-driven securities litigation is unlikely to disappear anytime soon, the Second Circuit’s decision in Danske Bank is a reminder that courts can and will rigorously scrutinize such cases at the pleading stage to make sure that the allegations meet the applicable heightened standards at the motion to dismiss stage.

[1] As a matter of disclosure, one of the executives was the CEO, who was represented in the trial court and on appeal by Davis Polk.

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