Investor Action Against RBS Ends in 2nd Circuit

MANHATTAN (CN) - The Second Circuit on Wednesday refused to revive a class action against Royal Bank of Scotland accusing its top executives of misleading investors about the value of mortgage-backed securities.

One of the world's largest banks, RBS is said to have grown rapidly by repackaging subprime mortgages between 2001 and 2006, the year the housing bubble burst.

After taking a financial hit from that event, RBS acquired the Dutch bank ABN AMRO in October 2007. The Scottish bank announced an initiative months later to issue additional shares and raise capital.

U.S. Circuit Judge Denny Chin noted in the 2nd Circuit's ruling that this initiative failed.

"Notwithstanding its attempts to raise capital and salvage its business, RBS could not survive the market's crash," he wrote. "The U.K. government provided an initial $40 billion bailout and took a 94 percent ownership stake in RBS."

A class led by a pension fund of the International Brotherhood of Electrical Workers filed a class action against the bank for allegedly painting too rosy a picture about its financial prospects.

But a federal judge found that nothing RBS executives said rose to the level of a securities-fraud claim.

Two out of three appellate judges supported that finding.

"We agree with the district court's determination that these statements were inactionable puffery," the majority opinion stated. "Statements of general corporate optimism, such as these, do not give rise to securities violations."

Judge Ralph Winter joined the 23-page holding.

In a partial dissent, Judge Pierre Leval argued that one of the statements RBS allegedly made should have headed toward discovery. RBS may have misled investors in telling them a regulatory agency "encouraged" the bank to raise capital instead of saying the regulator "required" them to do so, he wrote.

"The fact that such a regulatory agency has required a bank to raise capital implies that the regulatory agency finds the bank's capital reserves to be dangerously low," the partial dissent stated. "If the regulatory agency merely 'encourages' the bank to raise capital, but does not require it, this implies that while the agency believes it would be prudent for the bank to raise capital, the bank's present level of capital is not dangerously low."

The plaintiffs' lawyer Joseph Daley from the firm Robbins Geller Rudman & Dowd LLP declined to comment.

Attorney Seth Waxman, who represents RBS for the firm Wilmer Cutler Pickering Hale and Dorr LLP, said: "We're very grateful for the careful consideration of the court of appeals in this matter."

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