Investors in a $2.5 billion stock offering that Barclays put out in 2008 had the dismissal of their claims reversed by the Second Circuit to revive their fraud class action against the British financial giant on Monday, after the appeals court found they should have been allowed to amend their allegations.
A two-judge panel for the Second Circuit held that the lower court improperly denied as futile the shareholders’ bid to amend their suit, finding that the investors’ proposed amended complaint adequately alleged fraud by Barclays in failing to properly write down its credit market assets as their value fell amid the collapse of the U.S. housing market. The panel found that around the time that Barclays completed its Series Five $2.5 billion offering, the financial environment was deteriorating badly, with American International Group recording a $5.6 billion impairment over the upheaval in the residential mortgage and credit markets and storied investment bank Bear Stearns announcing its takeover by JPMorgan Chase & Co. in order to avoid bankruptcy.
At the time the Barclays’ offering closed, the International Monetary Fund was estimating the losses from the credit crisis could reach up to $1 trillion, but the panel noted that Barclays announced no write downs during those early months of 2008. About four months after it issued its $2.5 billion offering, Barclays disclosed that its net income had tanked by 34 percent in the first half of that year, due in part to a £2.8 billion ($4.39 billion) write down it had taken on its credit market assets. By October 2008, Barclays disclosed that it was in dire need of capital, and went on to sell a third of the bank to Middle Eastern investors in order to raise $12.1 billion. By March 2009, the shares at issue, which had initially sold for $25 apiece, were trading between $5 and $7.
“Given these circumstances, we find that the allegations in the proposed complaint that … in April 2008 Barclays failed to make timely and adequate write downs present facts sufficient to support a plausible claim that should be allowed to proceed,” the panel wrote. The judges found that in a quickly deteriorating credit market, the particulars about a firm’s exposure to that market could assume a level of importance and materiality that may not have been the case in less stressful times. The panel upheld other parts of the district court’s ruling tossing the case, however, agreeing that causes of action over three prior offerings by Barclays are time-barred.
The shareholders initially sued in March 2009, seeking compensatory damages for declines in the company’s stock following the credit meltdown, alleging documents related to Barclays’ U.S.-traded stock offerings were materially misleading because they did not adequately disclose the bank’s exposure to mortgage-related assets that had fallen precipitously in value.
But Barclays argued in an April 2010 motion to dismiss that the suit was based on hindsight because it argued the bank wrote down the values of mortgage-related assets in 2007 and 2008 and therefore must have known earlier its earlier valuations were false. When the district court dismissed the case, it found that Barclays had provided sufficient disclosure to investors about the extent of its mortgage-related exposure.
Circuit Judges Rosemary S. Pooler and Barrington D. Parker sat on the panel for the Second Circuit.
The case is In re: Barclays Bank Plc, case number 11-2665, in the U.S. Court of Appeals for the Second Circuit.