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Ross v. Lloyds Banking Group

October 16, 2012


The opinion of the court was delivered by: P. Kevin Castel, District Judge


Plaintiff Albert A. Ross brings this putative class action, alleging that the defendants committed securities fraud when they misstated and omitted material information regarding the acquisition of Halifax Bank of Scotland ("HBOS") by defendant Lloyds Banking Group, PLC ("Lloyds"). Plaintiff asserts a claim pursuant to Section 10(b) of the Securities Exchange Act of 1934 (the "'34 Act"), 15 U.S.C. § 78u-4(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, as well as a claim of control-person liability under Section 20(a), 15 U.S.C. § 78t(a).

Defendants now move to dismiss the First Amended Complaint (the "Complaint"). (Docket # 27.) They argue that the Complaint does not raise a strong inference of scienter, and that it therefore fails to satisfy the pleading threshold of the Private Litigation Securities Reform Act of 1995 (the "PSLRA"), 15 U.S.C. § 78u-4(b)(2), and Rule 9(b), Fed. R. Civ. P. Defendants also argue that the Complaint does not allege actionable misstatements or omissions, fails to allege loss causation and that all claims are time-barred.

Because the Complaint does not plausibly allege that defendants are liable for material misstatements or omissions and because it fails to raise an inference of scienter, the defendants' motion is granted. I need not reach defendants' other arguments.


For the purpose of the defendants' motion, all nonconclusory factual allegations are accepted as true. S. Cherry St. LLC v. Hennessee Group LLC, 573 F.3d 98, 100 (2d Cir. 2009); see alsoAshcroft v. Iqbal, 556 U.S. 662 (2009). As the non-movant, all reasonable inferences are drawn in favor of the plaintiff. Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 107 (2d Cir. 2012).

A. The Lloyds Acquisition of HBOS.

Plaintiff is an individual domiciled in St. Tammany Parish, Louisiana. (Compl't ¶ 9.) He owned more than 10,000 American Depositary Receipts ("ADRs") of Lloyds. (Compl't ¶ 9.) Each Lloyds ADR represents the right to receive four shares of Lloyds stock, and the ADRs trade in an efficient market on the New York Stock Exchange. (Compl't ¶¶ 6, 141-42.) The Complaint purports to bring claims on behalf of all persons and entities who purchased Lloyds ADRs from September 18, 2008 to February 27, 2009 (the "Class Period"). (Compl't ¶ 25.) Defendant Sir Victor Blank was Lloyds chairman during the Class Period, and defendant Eric Daniels was its chief executive. (Compl't ¶¶ 7-8.)

On September 18, 2008, Lloyds announced that it had reached an agreement to acquire HBOS, pursuant to which HBOS shareholders would receive 0.83 shares of Lloyds for each HBOS share.*fn1 (Compl't ¶¶ 10, 53.) The Complaint asserts that in the years preceding the financial crisis of 2008, HBOS expanded aggressively but did not maintain a suitable base of customer deposits. (Compl't ¶47-49.) According to plaintiff, by mid-September 2008, HBOS was "on the brink of collapse." (Compl't ¶ 51.) Because of significant economic turmoil in the financial sector and concern that its "severe liquidity crisis" threatened HBOS with failure, regulators in the United Kingdom (the "UK") approved the acquisition by Lloyds, despite previous opposition to such a transaction. (Compl't ¶¶ 11-12.)

B. UK Government Assistance to Bolster HBOS Liquidity.

According to plaintiff, beginning on October 1, 2008, HBOS was unable to meet its obligations and lacked liquidity. (Compl't ¶ 71.) Throughout 2008, the UK government was implementing new measures in hopes of stabilizing the nation's financial services sector. As characterized by plaintiff, on October 1, the Bank of England "secretly agreed" to extend £25 billion in Emergency Liquid Assistance (the "ELA") to HBOS. (Compl't ¶¶ 20, 73.) The Complaint distinguishes the ELA aid package from a separate government program that HBOS also used, the Specialized Liquidity Scheme ("SLS"). (Compl't ¶ 18.) The Complaint acknowledges that Lloyds and HBOS expressly disclosed participation in the SLS, representing that, among other things, the SLS provided financial institutions "additional flexibility." (Compl't ¶¶ 54-55.) Plaintiff asserts that the market erroneously believed that the SLS satisfied HBOS's liquidity needs and ensured its solvency. (Compl't ¶ 57.)

By contrast, the Complaint alleges that the ELA package was undisclosed, and imposed harsh borrowing terms on HBOS. Plaintiff asserts that the ELA charged an interest rate two percent above the market, and that to receive the ELA, HBOS was required to post collateral amounting to 50-60 pence per pound of government assistance. (Compl't ¶¶ 20, 72, 74, 77.) According to the plaintiff, absent the undisclosed ELA intervention, HBOS would have collapsed. (Compl't ¶¶ 21, 76.) Lloyds and HBOS publicly announced HBOS's participation in government assistance measures on October 13, 2008, but did not disclose the ELA package during the Class Period. (Compl't ¶¶ 14, 20-21.) According to the Complaint, the ELA funds to HBOS were "repaid through other sources on January 16, 2009," but peaked on November 13, 2008 at £25.4 billion. (Compl't ¶ 71.) In public statements, including testimony before the UK Parliament, Lloyds executives "suggested" that because the public was aware that HBOS received aid under the SLS it did not need to disclose assistance under the ELA. (Compl't ¶ 74.) Plaintiff also asserts that HBOS did not disclose that it received $11.5 billion in assistance from the United States Federal Reserve Bank. (Compl't ¶ 80.)

C. Alleged Material Misstatements and Omissions Made By Defendants.

On October 13, 2008 Lloyds announced that it would participate in "a comprehensive set of measures" announced by the UK government, but did not cite ELA aid to HBOS. (Compl't ¶ 14.) Lloyds executives also made public statements asserting that HBOS was financially stable and that Lloyds was acquiring HBOS at a significant discount. (Compl't ¶¶ 14-15.) Defendant Eric Daniels, chief executive at Lloyds, stated that in purchasing HBOS, Lloyds was acquiring £30 billion in assets at a price of £14 billion. (Compl't ¶ 88.) As characterized in the Complaint, in its public filings Lloyds stated that there had been no material change in HBOS finances since mid-2008 and that all of HBOS's material contracts had been disclosed. (Compl't ¶ 16.)

According to plaintiff, Lloyds's public statements "were false and misleading in several respects." (Compl't ¶ 17.) He alleges that defendants were aware that HBOS had a "substantially inferior" book value, and that Lloyds management intentionally concealed HBOS participation in the ELA. (Compl't ¶¶ 87-92.) Plaintiff cites to several alleged misrepresentations concerning the business strengths of HBOS, including assertions that the acquisition allowed for "a robust capital and liquidity position" and "very strong liquidity." (Compl't ¶¶ 94, 105-08.) Defendants also stated that Lloyds was not "critically dependant" on financial assistance from the UK government. (Compl't ¶ 94.) Other alleged misrepresentations cited by plaintiff include assertions that Lloyds diligence of HBOS went "as predicted," statements that Lloyds executives felt "very good" about the HBOS acquisition, and statements that the acquisition was "a good deal" that "just got better for Lloyds." (Compl't ¶ 95; see also Compl't ¶ 105, 109.)

Plaintiff alleges that Lloyds also falsely stated that HBOS had £60 billion in liquid reserves, when, in reality, the £60 billion figure reflected illiquid holdings of government debt and unsecured consumer loans. (Compl't ¶ 17, 79, 94.) By definition, plaintiff asserts, none of these holdings was liquid. (Compl't ¶ 17.) Plaintiff also alleges that HBOS's holdings included billions of pounds of "bad debt," and that defendants overstated the book value of the HBOS portfolio. (Compl't ¶ 18.)

The Complaint also discusses a document identified as a "shareholder circular" that was filed with the SEC on November 3, 2008. (Compl't ¶¶ 96-105, 108.) Plaintiff alleges that the circular falsely stated that HBOS finances had not significantly changed since June 30, 2008, when HBOS last published its financial statements, even though HBOS had lost £10 billion in that period. (Compl't ¶¶ 98-100.) Plaintiff asserts that in its summary of government funding measures, the circular omitted all material information concerning the ELA. (Compl't ¶¶ 101-03.) In a document described as an Open Offer Prospectus and in a separate letter to Lloyds shareholders, defendants again failed to mention ELA funding. (Compl't ¶¶ 110-16.)

D. Plaintiff's Allegations of Loss Causation and the Purported Corrective Disclosures.

Plaintiff alleges that from December 2008 through February 2009, defendants "dribbled out bad news" about HBOS, ultimately disclosing that it would "write off £10 billion in bad debt, and that it would move £35 billion of treasury assets previously booked as 'available for sale' to 'loans and receivables' in order to avoid further write-offs." (Compl't ¶ 22.) According to the plaintiff, when the market learned the truth about HBOS's financial condition, Lloyds share price "dropped precipitously." (Compl't ¶ 23.)

On February 13, 2009, Lloyds reported that HBOS lost £11 billion in 2008, along with a £7 billion impairment charge for bad loans. (Compl't ¶ 127.) The Complaint asserts that from February 12 to February 17, the price of Lloyds ADRs dropped from $5.33 to $2.99, a decline of 44 percent. (Compl't ¶ 139.) As characterized in the Complaint, on February 27, Lloyds "confirmed" that HBOS had £10.8 billion in pre-tax loss and stated that it had been "plagued" by £9.9 billion in bad loans, leading to a 44 percent decline in the value of Lloyds ADRs. (Compl't ¶ 139.)


Pursuant to Rule 12(b)(6), Fed. R. Civ. P., "[t]o survive a motion to dismiss, a complaint must plead 'enough facts to state a claim to relief that is plausible on its face.'" ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009) (quoting Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir. 2008)). "A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'" Iqbal, 556 U.S. at 678 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). "'The Supreme Court has held that, to maintain a private damages action under ยง 10(b) and Rule 10b-5, a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the ...

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