On March 8, 2021, Davis Polk secured complete dismissal of a federal securities class action arising out of the initial public offering of XP Inc., a technology-driven financial services company based in Brazil. The case is captioned in In re XP Inc. Securities Litigation, 20-CV-01502-BMC (E.D.N.Y.).
The dismissal of the federal action followed an order last month from Justice Barry Ostrager of the New York State Commercial Division, which dismissed with prejudice a parallel state court class action relating to XP’s IPO because the plaintiff could not allege damages. As a result, Davis Polk has now defeated all securities actions filed against XP in connection with its IPO, which was the fourth largest of 2019 and the largest for a Brazilian issuer that year.
Founded in 2001, XP is a leading provider of low-fee financial products and services in Brazil. Among other things, it offers a suite of financial advisory services and operates an open platform with hundreds of investment products. In December 2019, XP conducted its initial public offering of Class A common shares in the United States, raising approximately $2 billion in proceeds. In early March 2020, a self-described “investigative financial firm” called the Winkler Group published a short-seller report identifying numerous supposed omissions from XP’s IPO offering materials. Shortly thereafter, and with the global economy experiencing significant dislocation in the early days of the COVID-19 pandemic, XP’s stock price temporarily dipped and several plaintiffs’ firms filed suit. The stock has since recovered and trades today substantially above its IPO price. In the interim, however, two actions were filed in the Eastern District of New York. These were ultimately consolidated, and lead plaintiffs filed an amended complaint on July 29, 2020.
The amended complaint alleged that XP’s IPO offering materials failed to adequately disclose (i) that its principal Brazilian operating subsidiary had incurred approximately $100 million Brazilian reais in expenses stemming from “operating errors” and “system failures” in the years preceding the offering, (ii) that XP, and certain senior executives, were involved in multiple regulatory proceedings before Brazil’s Securities and Exchange Commission and Market Supervisor and the company itself had experienced a significant increase in civil litigation claims and (iii) that, at the time of the IPO, XP was under investigation by Brazil’s Administrative Council for Economic Defense (“CADE”) for allegedly engaging in anticompetitive practices with respect to independent financial advisors. The complaint named as defendants XP itself, multiple controlling shareholders or other affiliates, several individual directors/executives and the IPO underwriters. It asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933.
Davis Polk filed a motion to dismiss for failure to identify an actionable omission or misstatement. On March 8, 2021, District Judge Brian M. Cogan of the Eastern District of New York granted the motion and dismissed the complaint in its entirety. With respect to purported “system failures” and “operating errors,” Judge Cogan concluded that the complaint failed to identify any accounting violation in XP’s financial statements as prepared under the International Financial Reporting Standards, that Plaintiffs could not state a securities claim based solely on apparent discrepancies with a Brazilian subsidiary’s treatment of the expenses under Brazilian GAAP and that Plaintiffs’ complaints about XP’s reporting amounted to inactionable disagreement with management’s subjective accounting judgment. Judge Cogan then determined that Plaintiffs failed to allege that either the increase in civil litigation exposure or the individual regulatory proceedings identified in the complaint were quantitatively or qualitatively material to XP. Finally, Judge Cogan held that XP’s offering materials adequately disclosed the existence of government investigations in general and that plaintiffs could not premise claims on failure to disclose the pendency of the CADE investigation in particular without allegations of actual underlying misconduct (as opposed to mere accusations) or some other factor likely to render the investigation material on an individual basis.
The Davis Polk team included partner Antonio J. Perez-Marques, counsel Daniel J. Schwartz and Craig J. Bergman and associates Esther C. Townes, Brendan Eng and Anthony J. Ricci. All members of the Davis Polk team are based in the New York office.