On September 4, 2012, the Southern District of New York, Judge Deborah A. Batts, issued a decision in In re Royal Bank of Scotland Group PLC Secs. Litigation, dismissing a putative class action alleging that RBS’s offering materials concerning its shares did not disclose the extent of RBS’s subprime exposure, misrepresented internal controls, and provided an inaccurate assessment of RBS’s acquisition of ABN AMRO. Plaintiffs, purchasers of RBS stock, brought claims under sections 11, 12(a)(2) and 15 of the Securities Act. Among other things, Judge Batts found that Plaintiffs’ allegations that RBS “failed to disclose that RBS had accumulated subprime assets which created material concentrations of risk” in its offering documents did not state an actionable claim under the Securities Act. Judge Batts criticized the Plaintiffs for engaging in a “backward-looking” assessment of the securities at issue, and clarified disclosure obligations:
There is “no obligation for an issuer to identify specifically every type of asset or liability it possesses, so long as its disclosures are ‘broad enough to cover’ all instruments that are in fact relevant to the value of the issuer’s securities.” Plumbers’ Union Local No. 12 Pension Fund v. Swiss Reinsurance Co., 753 F.Supp. 2d 166, 181 (S.D.N.Y. 2010). Here, the Offering Documents contained extensive disclosure regarding RBS’s securitization and lending business. The 2005 Form 20-F, for example, explains that RBS “engages in securitization transactions of its financial assets including commercial and residential mortgage loans, commercial and residential mortgage related securities, US Government agency collateralized mortgage obligations, and other types of financial assets.” …. It explains further that “[i)n such transactions, the assets, or interests in the assets, are transferred generally to a special purpose entity which then issues liabilities to third parties." (Id.) RBS disclosed that it engaged in securitization of residential mortgages and other types of financial assets.
Plaintiffs admit that the CDOs held by RBS typically held AAA ratings at the time that the alleged misstatements were made....Plaintiffs allege no contemporaneous facts to support the allegation that at the time of the relevant Offering Documents the AAA-rated CDOs presented credit risks would have been deemed material information by investors. Instead, with the benefit of hindsight, Plaintiffs now point to the collapse of the mortgage-backed security market in an attempt to frame past statements as false or misleading. However, in evaluating claims under the Securities Act, the "truth of a statement is adjudged by the facts as they existed" at the time of the statement. In re Flag Telecom Holdings, Ltd. Sec. Litig., 352 F. Supp. 2d 429, 447 (S.D.N.Y. 2005). Accordingly, "[a] backward-looking assessment of the infirmities or mortgage-related securities . . . cannot help plaintiffs’ case.” Yu v. State Street Corp., 686 F. Supp. 2d 369, 377 (S.D.N.Y. 2010).
Moreover, the court found that RBS’s subprime exposures constituted “less than one percent” of RBS’s entire asset portfolio of over $1 trillion, and thus, such holdings could not reasonably be characterized as creating a “concentration of risk.”