April 12, 2024

Securities Litigation: SDNY Refuses to Dismiss Claims Based on Internal Controls Statements

Remember the Barclays PLC over-issuance debacle from a few years ago? Unfortunately, the SDNY’s recent decision in In re Barclays PLC Sec. Litig., (SDNY 2/24) refusing to dismiss Rule 10b-5 claims against the company indicates that the repercussions from that incident continue to unfold. In that decision, the Court concluded that the plaintiff had adequately alleged that the company’s failure to appropriately track the amount of securities it had available under its shelf registration statement demonstrated that statements it made about its internal controls were misleading. This excerpt from Shearman’s blog on the case explains the Court’s reasoning:

The Court first considered the company’s general statements relating to internal controls before the alleged over-issuances were revealed, including that the company was “committed to operating within a strong system of internal control” and had “frameworks, policies and standards” that enabled the company “to meet regulators’ expectations relating to internal control and assurance.” The Court rejected defendants’ argument that these statements were too “simple and generic” to be actionable, explaining that, according to the complaint’s allegations, the company allegedly did not have any control mechanism in place to prevent the over-issuance of securities and the supposed omission of this lack of a control system was adequately alleged to be material.

The Court stressed that, in its view, the allegations were not merely that the company’s systems underperformed; rather, the allegations were that no system for tracking the company’s securities issuances existed at all. The Court further held that because it concluded that these statements were actionable, plaintiff could also pursue claims challenging the company’s Exchange Act compliance certifications.

The Court also found that the plaintiffs had adequately alleged that the company was reckless in failing to implement controls to appropriately track shelf issuances after the company lost its WKSI status. In reaching that conclusion, the Court noted the magnitude of the over-issuances and the fact that they had been uncovered through a simple inquiry from a low-level employee to the legal department.

John Jenkins