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From Securities Regulation Daily, July 26, 2016

Allegations that Deutsche Bank offering materials misrepresented subprime exposure survive dismissal

By Kevin Kulling, J.D.

A consolidated class action alleging Deutsche Bank AG (DB) used false and misleading offering materials that failed to disclose the true nature of its exposure to subprime mortgages has been given new life by a federal court revisiting the allegations after a remand by the U.S. Supreme Court. Allegations related to a 2007 DB offering were found to have adequately stated a claim (In re Deutsche Bank AG Securities Litigation, July 25, 2016, Batts, D.).

Offering materials. The matter before the court was DB’s motion to dismiss allegations involving a series of securities offering between May 2007 and May 2008 where allegedly false or misleading offering materials were used to sell $5.4 billion of preferred securities in violation of Section 11, 12 and 15 of the Securities Act of 1933.

The court consolidated six class action cases against DB and related entities and individuals involving the offerings. The complaint, a third consolidated amended complaint, related to a Form F-3 Registration Statement and Prospectus filed with the SEC on October 10, 2006, and subsequent supplements used to conduct six offerings of securities between October 2006 and May 2008.

The complaint alleged that DB securities were sold pursuant to offering materials which misrepresented or omitted material facts. Among the allegations, the class alleged that DB had exposure to high risk subprime and nonprime residential mortgage markets through Residential Mortgage Backed Securities (RMBS) and collateralized debt obligation (CDO) assets, in violation of Generally Accepted Accounting Principles, SEC Regulations, and International Financial Reporting Standards (IFRS).

In addition, the class alleged that the company’s disclosures concerning market risks were false and misleading in that they misrepresented DB’s true exposure to RMBS and CDO securities and other mortgage related assets; that the company’s assertions concerning its compliance with GAAP were false and misleading; that the company engaged extensively in high risk proprietary trading; and the company’s 2007 Form 20-F disclosures were false and misleading in that they failed to reflect the actual risk associated with DB’s proprietary trading practices.

Significant procedural history. The procedural history of the case includes a prior dismissal of the second amended complaint, a Second Circuit opinion affirming the court’s dismissal, the Supreme Court decision in OmniCare v. Laborers District Council Construction Industry Pension Fund, and the Supreme Court then granting the petition for certiorari, vacating the judgment of dismissal, and remanding the case for further consideration in light of Omnicare.

Ultimately, the court allowed plaintiffs to file a third consolidated amended complaint that incorporated the proper pleading standard under controlling Second Circuit precedent and Omnicare.

May and July 2007 offerings. The court said that the 2006 20-F disclosed on several occasions that DB was exposed to the residential mortgage backed securities market. In light of the disclosures, the allegations that DB "effectively represented that the company had no exposure to the subprime and non- prime markets" and that investors were led to believe that DB was not exposed to the U.S. subprime crisis, failed to meet the plausibility standard given that the offering materials did address DBs exposure to the residential and commercial mortgage market, according to the court.

The court said that the complaint’s reliance on a United States Senate Permanent Subcommittee on Investigations Report, known as the Levin Coburn Report, as a basis for its allegations related to management’s knowledge of DB’s alleged misrepresentations and omissions in the offering materials, was not persuasive.

The court noted that the subcommittee report found that DB’s top CDO trader was in the "minority of one" when arguing internally that the RMBS market was in severe decline.

DB was not required to disclose that senior bank officials disagreed with the opinion of a more junior employee, the court said. Additionally, the complaint did not allege facts demonstrating that DB had a duty to disclose allegedly omitted information prior to the fall of 2007.

Regarding Item 303, the court said, companies must describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on liquidity, capital resources net sales or revenues. The court said that the reports on which the complaint relied for its factual allegations did not render plausible allegations that DB knew that its subprime assets had deteriorated particularly at the time that the 2006 20-F and 6-Ks from February and July 2007 were filed with the SEC.

Fall 2007 offering. However, the court did find that the complaint plausibly alleged facts sufficient to defeat a motion to dismiss that DB knew of trends or uncertainties that would be reasonably likely to have a material impact on DB in a November 2007 offering.

Accordingly, DB had a duty to discuss and analyze known material trends necessary to understand its performance and potential future results under Item 303, the court said.

The case is No. 09-cv-01714.

Attorneys: Brian Philip Murray (Glancy Prongay & Murray LLP) for Norbert G. Kaess. Charles Alan Gilman (Cahill Gordon & Reindel LLP) for Deutsche Bank AG and Deutsche Bank Capital Funding Trust VIII.

Companies: Deutsche Bank AG; Deutsche Bank Capital Funding Trust VIII

MainStory: TopStory DirectorsOfficers FraudManipulation PublicCompanyReportingDisclosure SecuritiesOfferings NewYorkNews

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