UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

-----------------------------x In Re ROYAL BANK OF SCOTLAND GROUP PLC

SECURITIES LITIGATION,

-----------------------------x

j

v:r

DEBORAH A. BATTS, United States District Judge.

Lead Plaintiff the Freeman Group brings this action on

behalf of a putative class of Plaintiffs who purchased or

otherwise acquired Royal Bank of Scotland Series 0, R, 5, T

and/or U Non-cumulative Dollar Preference Shares (the "Preferred

Shares") Plaintiffs filed this consolidated securities class

action against Defendants The Royal Bank of Scotland plc ("RBS");

Sir Thomas McKillop; Sir Frederick Goodwin; Guy Whittaker; John

Cameron; Lawrence Fish; Gordon Pell; Cohn Buchan; Sir Stephen

Robson; Robert Scott; Peter Sutherland; Archibald Hunter; Joseph

MacHale (collectively, the "Individual Defendants"); Merrill

Lynch, Pierce, Fenner & Smith Inc.; Greenwich Capital Markets,

Inc. (n/k/a aBS Securities Inc.); Wachovia Capital Markets LLC

(n/k/a Wells Fargo Securities LLC); Morgan Stanley & Co. Inc.;

UBS Securities LLC; Banc of America Securities LLC; RBC Dam

Rauscher Inc. (n/k/a RBC Capital Markets Corporation); Citigroup

Global Markets Inc.; A.G. Edwards & Sons Inc.; and Goldman, Sachs

& Co. (collectively, the "Underwriter Defendants").

Plaintiffs assert claims for violations of Sections 11,

12(a) (2) and 15 of the Securities Act, 15 U.S.C. 5§ 77k,

771(a) (2), and 77o (the "Securities Act"). Plaintiffs bring these

claims individually and on behalf of all persons and entities,

except Defendants and their affiliates, who purchased or

otherwise acquired the Preferred Shares issued by RBS pursuant or

traceable to RES's April 8, 2005 Registration Statement.

Generally, Plaintiffs allege that the offering materials for the

Preferred Shares were materially false and misleading because

they did not disclose the extent of RBS's subprime exposure,

misrepresented the veracity of RBS internal controls, and

provided an inaccurate assessment of RBS's acquisition of Dutch

banking giant ABN ANRO. Plaintiffs assert that they and all other

purchasers of the Preferred Shares in the proposed Class have

suffered significant losses as a result of Defendants' materially

false and misleading statements and omissions of material fact.

On July 15, 2009, Plaintiffs filed their Consolidated

Amended Complaint ("CAC"). On October 23, 2009, the Underwriter

Defendants and the RES Individual Defendants filed Motions to

Dismiss the CAC pursuant to Fed. R. Civ. P. 12(b)(1), 12(b)(2)

and 12 (b) (6), as well as for for non conveniens. On June 24,

2010, the United States Supreme Court issued its decision in

Morrison v. National Australia Bank Ltd., 130 S.Ct 2869 (2010),

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which addressed the extent of the extraterritorial reach of U.S.

securities laws. In September 2010, the Parties fully

supplemented their previous submissions in light of Morrison. In

an Order dated January 11, 2011 this Court dismissed with

prejudice Counts One, Two, Six, Seven, Eight Nine and Ten of

Plaintiffs' CAC. Following the Court's Order, Lead Plaintiff the

Freeman Group filed a Second Consolidated Amended Complaint

("SAC") on March 18, 2011. This matter is now before the Court on

Motions to Dismiss the SAC filed separately by the Underwriter

Defendants and the RBS Individual Defendants pursuant to Fed. R.

Civ. P. 12(b) (1), 12(b) (2) and 12(b) (6) , as well as for forum non

conveni ens.

For the reasons below, the Motions to Dismiss filed by the

Underwriter Defendants and the Individuals Defendants are GRANTED

in their entirety, with prejudice.

I. BACKGROUND

This is a class action on behalf of investors who purchased

or otherwise acquired RBS Series Q, R, S, T and U Preferred

Shares issued by RBS pursuant or traceable to RBS's April 8, 2005

Registration Statement. (SAC ¶ 1.) For purposes of this Motion,

the Court assumes all of Plaintiffs' factual allegations in the

3

SAC are true. State Employees Bargaining Agent Coal. v. Rowland,

494 F.3d 71, 77 (2d Cir. 2007). The Court assumes the Parties'

familiarity with the factual background of this matter as set

forth in the Court's January 11, 2011 order at pages 5-14.

A. RBS's Subprime Exposure and Subsequent Near Collapse

Defendant 1(85 is a British banking and insurance holding

company based in Edinburgh, Scotland. (SAC ¶ 12.) According to

the SAC, PBS was a conservative regional Scottish bank before

Defendant Goodwin became CEO in 2001. (SAC ¶ 63.) Under Goodwin's

leadership, RBS completed twenty-six acquisitions between 2001

and 2007 and rapidly grew to become the tenth largest company in

the world, with operations in Europe, the United States and Asia.

(4) Throughout this period, PBS's SEC filings represented that

its business philosophy was to maintain a strong capital base

that balanced the underlying risks of the business and optimized

return to shareholders. BBS claimed to have extensive internal

control procedures in place at the Board and senior executive

levels to authorize, manage, oversee, assess, and report on PBS's

exposure to credit risk. (SAC ¶ 64.)

Tn 2006 and 2007, as concern of banks' "subprime" exposure

grew, P.85 senior executives were questioned by securities

4

analysts about RBS's exposure to subprime loans and related

trading activity. RES executives responded that investors had no

reason to be concerned about subprime exposure; they told

investors that RBS had a "longstanding aversion to subprime

lending, wherever we do business," that it has "always been very

risk averse," and it does not "do sub-prime." (SAC ¶ 71.)

Plaintiffs allege that these statements were false and

misleading as RBS had in fact accumulated billions of pounds of

risky subprime assets. (SAC ¶ 70.) Beginning in 2003, RBS's

Connecticut-based investment bank Greenwich Capital Markets

("Greenwich") generated vast profits by selling mortgage debt to

the financial markets as asset-backed securities ("ABS") and

packaging them together into collateralized debt obligations

("CDO"). (SAC ¶f 65-66.) These investment vehicles, created by

buying various kinds of debt, pooling them together and using

them to back the issuance of bonds, were in large part based on

mortgage-backed securities ("MBS"), including securities backed

by subprime and other high-risk residential mortgages. Another

U.S. subsidiary of RES, Citizens Financial Group, Inc.

("Citizens"), also took on significant exposure to su.bprime

loans. (SAC 9 68-69.)

Unbeknownst to investors, however, as the market for

mortgage-backed securities became increasingly illiquid, RBS was

5

forced to retain interests in many of the CDOs and assume the

risks associated with them. By the summer of 2007, PBS's subprime

exposure had reached at least £34 billion. (SAC 11 72.)

In April 2007 RBS announced that, as part of a three-member

consortium, it was submitting a proposal for the acquisition of

the Dutch bank ABN ANRO. Under the offer, PBS would acquire 38

percent of ABN AMRO for approximately $38 billion in cash and

securities. (SAC ¶ 73.) RBS told investors that the acquisition

would result in profitable "synergies" between the companies.

(SAC ¶ 74.)

In December 2007, PBS announced that PBS and ASK ANRO would

be taking writedowns of £950 million and €300 million,

respectively, attributable to exposure to U.S. subprime mortgage

markets. Nonetheless, RBS minimized the associated credit risks

and represented that the integration of AEN ANRO was progressing

well and that transaction benefits were higher than forecast.

(SAC ¶ 78.) In April 2008, PBS announced additional writedowns of

€5.9 billion (nearly $12 billion) due to exposure to subprime

assets, and also announced a £12 billion Rights Issue to increase

PBS's capital base. RBS management continued to tell investors

that the businesses acquired in the ABN AMRO acquisition were

good, synergized well with PBS's business, and improved RBS's

opportunities going forward. (SAC ¶ 79.)

In October 2008, RBS confined that it would receive a

bailout from the British government. (SAC ¶ 80.) Then, on January

19, 2009 RBS admitted that due to the volume of subprime exposure

the Company had taken on between 2005 and 2008 and the failure of

the ABN AMRO acquisition, it would report a loss of £28 billion

($41.3 billion) for 2008. (SAC ¶ 81.)

B. Plaintiffs' Claims

In Counts One, Two and Three of the SAC (which mirror Counts

Three, Four and Five of the previously filed CAC), Plaintiffs

allege claims for violations of Sections 11, 12 (a) (2), and 15 of

the Securities Act, 15 U.S.C. § 771(a) (2), 15 U.S.C. fl 77k,

771(a) (2), and 77o, against certain Defendants. They bring these

claims individually and on behalf of all persons and entities,

except Defendants and their affiliates, who purchased or

otherwise acquired Preferred Shares. The Preferred Shares were

issued pursuant to the following Preferred Share Offerings:

Series Q, effective May 22, 2006; Series R, effective December

18, 2006; Series B, effective June 26, 2007; Series T, effective

September 24, 2007; and Series U, effective September 28, 2007

(collectively, the "Preferred Share Offerings"). (SAC ¶ 2.)

WI

RBS raised more than $5.3 billion from the Preferred Share

offerings in 2006 and 2007. The Series Q, R, S and T Preferred

Shares were offered at $25 per share and initially traded at that

amount after the offerings. The Series U Preferred Shares were

offered at $100,000 per share and initially traded at that amount

after the Series U offering. (SAC It 5, 89.) By January 19, 2009,

the Series Q, It, S and T Preferred Shares had lost approximately

80 percent of their value, while the Series U Preferred Shares

had lost 61 percent of their value, (SAC ¶ 89.)

Plaintiffs allege that the offering materials for the

Preferred Share offerings (the "Preferred Share Offering

Documents" or the "Offering Documents") 1 contained materially

false and misleading statements and omissions, including: RBS's

representations about its business philosophy of maintaining a

1 The Preferred Share Offering Documents include the April 8, 2005 Registration Statement which incorporated RBS's comprehensive annual reports on Form 20-F and certain of its periodic Font 6-K updates into each Preferred Share Offering as follows: 1) Series Q: Annual Report on Form 20-F for 2005, Form 6-K filed May 24, 2006; 2) series It: Annual Report on Form 20-F for 2005, Annual Report on Form 20-F/A for 2005 (as restated), Form 6-K filed November 9, 2006, Interim Report on Form 6-K for first six months of 2006, Form 6-K filed December 21, 2006; 3) Series 8: Annual Report on Form 20-F for 2006, Form 6-K filed June 27, 2007; 4) Series T: Annual Report on Form 20-F for 2006, Interim Report on Form 6-K for the first six months of 2007, Form 5-K filed September 27, 2007; 5) Series U: Annual Report on Form 20-F for 2006, Interim Report on Form 6-K for the first six months of 2007, Form 6-K filed September 25, 2007, Form 6-K filed October 4, 2007, Form 6-K filed February 28, 2008. (SAC 1 91.)

strong capital base (SAC ¶ 4); RES failed to disclose the extent

to which it had subprime assets in its portfolio (SAC 111 96-97,

123, 132-33), which created undisclosed material concentrations

of risk (SAC It 98-99, 103-05, 123, 134, 142-43); RES's internal

risk control procedures were incapable of accurately reviewing,

monitoring or managing RBS's exposure to credit risk (103-08,

110, 123, 139, 140-44, 146, 148); RBS's financial statements were

not fairly presented under applicable accounting standards (SAC

¶ 98, 109-10, 146, 159-62); BBS failed to disclose it would take

on billions of dollars of additional subprime assets when it

acquired ABN ANRO (SAC ¶ 126, 132-33, 138, 142-43); BBS's

representations concerning the economic and strategic benefits of

the ABN ARO acquisition(SAC 9 126, 158).

BBS and the Individual Defendants argue that the SAC fails

to plead a material misstatement or omission because Plaintiff's

base their claims on generalizations, on statements of corporate

optimism that are not actionable, and on a backward-looking

assessment of disclosures made in 2006 and 2007. They argue that

the SAC puts forth no factual allegations that contradict the

information provided by Defendants at the time it was released,

and instead relies on subsequent disclosures. In the alternative,

the RBS and Individual Defendants argue that Plaintiffs' claims

are time-barred, or that the case here should be dismissed on the

grounds of forum non conveniens. The Underwriter Defendants join

the motion of the RBS and Individual Defendants, and argue

separately the Plaintiffs lack standing to assert Section 12

claims.

II. DISCUSSION

A. Motion to Dismiss Standard

For a complaint to survive dismissal under Rule 12 (b) (6),

the plaintiff must plead "enough facts to state a claim to relief

that is plausible on its face." Bell Ati. Corp. v. Twombly, 550

U.S. 544, 570 (2007). "A claim has facial plausibility," the

Supreme Court has explained,

when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of 'entitlement to relief.'

Ashcroft v, labal, 129 S.Ct. 1937, 1949-50 (2009) (quoting

Twombly, 550 U.S. at 556-57). "[A] plaintiff's obligation to

provide the grounds of his entitlement to relief requires more

than labels and conclusions, and a formulaic recitation of the

we

elements of a cause of action will not do." Twombly, 550 U.S. at

555 (internal quotation marks omitted). "In keeping with these

principles," the Supreme Court has stated,

a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.

Icibal, 2009 WL 1361536, at *13.

In ruling on a 12(b) (6) motion, a court may consider the

complaint as well as "any written instrument attached to the

complaint as an exhibit or any statements or documents

incorporated in it by reference." Zdenek Marek v. Old Navy

(Apparel) Inc., 348 F. Supp. 2d 275, 279 (S.D.N.Y. 2004) (citin:

Yak v. Bank Brussels Lambert, 252 F.3d 127, 130 (2d Cir. 2001)

(internal quotations omitted)).

Since Plaintiff's allegations and claims sound in strict

liability, not fraud, 2 the SAC is subject to the standards of

2 "The Counts set forth below are not based on and do not sound in fraud. Any allegations of fraud or fraudulent conduct and/or motive are specifically excluded from these Counts. For purposes of asserting these claims under the Securities Act, Plaintiffs do not allege that the Defendants acted with scienter or fraudulent intent. Plaintiffs expressly exclude and disclaim any allegation that could be construed as alleging fraud or

Rule 8(a), not to the heightened pleading requirements of Rule

9 (b) * Rule 8(a) provides that a pleading must "contain a short

and plain statement of the claim showing that the pleader is

entitled to relief." Fed. R. Civ. P. 8(a)(2). Rule B does not

require "detailed factual allegations," but it demands more than

an "unadorned, the-defendant-unlawfully-harmed-me accusation."

Igbal, 129 S.Ct. at 1949. A pleading that offers "labels and

conclusions" or "a formulaic recitation of the elements of a

cause of action will not do." Id. does a complaint suffice

if it tenders "naked assertion[s]" devoid of "further factual

enhancement." Id. While legal conclusions can form the

framework of a complaint, they must be supported by factual

allegations. Id.

B. Claims pursuant to Sections 11 and 12(a) of the Securities Act

Plaintiffs allege violations of Sections 11 and 12 (a) (2) of

the Securities Act against all Defendants. In particular,

Plaintiffs allege that the Preferred Share Offering Documents

contained numerous material misstatements and omissions because

they did not disclose the extent of RBS's subprime exposure,

intentional or reckless misconduct, as these Counts are based solely on claims of strict liability and/or negligence under the Securities Act." (SAC 1 174.)

HN

misrepresented RBS's capital base policy and the veracity of RBS

internal cQntrols, and prQvided an inaccurate assessment of RBS's

acquisition of Dutch bank ABN AMRO.

Defendants argue that Plaintiffs' SAC fails to allege any

actionable statement or omission because it does not contain any

factual allegations that contradict the information provided by

Defendants at the time it was released, and instead relies on

subsequent disclosures. Defendants, in essence, claim that

Plaintiffs' reliance on hindsight alone is fatal to their claims

under Sections 11 and 12 (a) (2) of the Securities Act.

To state a claim under Section 11, a plaintiff must allege

that: (1) it purchased a registered security; (2) the defendant

participated in the offering in a manner giving rise to liability

under Section 11; and (3) the registration statement "contained

an untrue statement of a material fact or omitted to state a

material fact required to be stated therein or necessary to make

the statements therein not misleading." 15 U.S.C. S 77k(a). A

claim under this section may be asserted against every person who

signed the registration statement, the directors of the issuer

and the underwriter of the securities. Id.

Liability under Section 12(a) (2) arises when a person offers

or sells a security by means of a prospectus or oral

communication that includes a material misrepresentation or

omission. 15 U.S.C. § 771(a) (2). claims under Sections 11 and

12(a) (2) of the Securities Act have "roughly parallel elements."

In re Morgan Stanley Info. Fund Sec. Litig,, 592 F,3d 347, 359

(2d Cir. 2010). Section 11 imposes liability on issuers and other

signatories of a registration statement, while Section 12 (a) (2)

imposes liability under similar circumstances with respect to,

inter alia, prospectuses. See Iowa Pub. Emps. Ret. Sys. v. MF

Global, Ltd., 620 F,3d 137, 141 (2d Cir. 2010).

Plaintiffs argue that RBS: 1) misled investors about its

capital base policy; 2) failed to disclose its holding of

subprime assets and the associated concentration of risk;

3) failed to adhere to alleged internal control and credit

management procedures: 4) failed to present financial statements

under applicable accounting standards; 5) failed to disclose the

subprime exposure of ABN ANRO when it acquired the Dutch bank;

and 6) misrepresented the economic and strategic benefits of the

AEN ANRO acquisition. They allege that as a result of these

failed disclosures and misrepresentations, the statements in the

Preferred Share Offering Documents were materially untrue and

omitted material facts necessary to make them not misleading.

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1. RBS's Capital Base Policy

Plaintiffc elatin that flsfsndantg misThd investors becus

RBS's annual report stated "it was RBS's policy to 'maintain a

strong capital base, to expand it as appropriate and to utilize

it efficiently throughout its activities to optimize the return

to shareholders while maintaining a prudent relationship between

the capital base and the underlying risks of the business." (SAC

¶J 100 (quoting RBS 2005 Annual Report, at 37), 136 (quoting RBS

2006 Annual Report, at 38.)) Plaintiffs claim that this statement

was false because during the Preferred Share Offerings, RES was

accumulating exposure to subprine loans and retaining interests

in CDOs and other asset-backed securities that were classified as

subprime. In light of the risks presented by this subprime

exposure, Plaintiffs argue, RBS's representations about its

policy of maintaining a strong capital base were false and

misleading.

In evaluating claims of securities misstatements, statements

must be read "in their entirety to determine whether a reasonable

investor would have been misled. The touchstone of the inquiry is

whether Defendants' representations or omissions,

considered together and in context, would affect the total mis of

information and thereby mislead a reasonable investor." Rombach

v. Chang, 355 F.3d 164, 173 (2d Cir. 2004). Here, however,

15

Plaintiffs have extracted a single sentence regarding Defendants'

capital base policy and presented it in a vacuum. The statement

to which Plaintiffs point merely introduces a discussion of RBS's

compliance with government capital adequacy regulations, and has

nothing to do with its securitization business. The section that

follows contains numerous charts detailing RBS's calculation of

its capital base, and the ratio of that base to weighted risk

assets. Plaintiffs do not claim that CDOs were improperly

included in the weighted risk asset calculation, nor that the

numbers regarding RBS's capital base calculations were inaccurate

or incomplete. Plaintiffs' allegations regarding PBS's capital

base policy take a single sentence and read it out of context and

in isolation. These allegations are insufficient to state an

actionable misstatement or omission under the Securities Act.

Ronbach, 355 F.3d at 173.

Accordingly, to the extent that Defendants' Motion to

Dismiss is based on Plaintiffs' allegations concerning RBS's

capital base policy, the Motion is GRANTED.

2. Failure to Disclose Subprime Holdings and Risk Concentrations

Plaintiffs allege that RES's statements about credit risk

misrepresented and omitted facts concerning its "subprime

BE

exposure." Specifically, Plaintiffs allege that the following

statements in the Preferred Share Offering Documents were

material misstatements or omissions of fact: "Overall credit

quality remained strong in 2005"; "Risk elements in lending and

potential problem loans represented [less than 2%] of gross loans

and advances to customers excluding reverse repos"; portfolio

risk remained stable and the corporate credit environment

remained benign; lending growth was centered on high quality

residential mortgages and small business loans; Citizens was not

active in subprime lending, its consumer lending was to prime

customers, and low impairment losses reflected the prime quality

of Citizens' portfolio. (See Preferred Share Offering Documents,

e.g., 2005 Form 20-F (Series Q, R), 2006 Form 20-F (Series 5, T,

U), August 16, 2007 Form 6-K Interim Report, Forms 6-K.)

Plaintiffs allege that these statements were false because they

failed to disclose that RBS had accumulated subprime assets which

created material concentrations of risk. Plaintiffs claim that

PBS was required to disclose such concentrations of risk in the

Preferred Share Offering Documents.

Plaintiffs' allegations, however, fail to state an

actionable claim under the Securities Act. There is "no

obligation for an issuer to identify specifically every type of

asset or liability it possesses, so long as its disclosures are

17

'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 RES

"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." (2005 Form 20-F, at 108.) 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." (4)

RBS disclosed that it engaged in securitization of

residential mortgages and other types of financial assets.

Plaintiffs admit that the COOs held by RBS typically held AAA

ratings at the time that the alleged misstatements were made.

(See SAC ¶ 59,) Plaintiffs allege no contemporaneous facts to

support the allegation that at the time of the relevant Offering

Documents the AAA-rated COs 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

W.

iiiti Fl V ISI

mortgage-backed security market in an attempt to frame past

statements as false or misleading. However, in evaluating claims

under the Securities Act, the tstruth of a statement

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).

The alleged failed disclosure of subprime exposure and risk

concentration do not amount to a material misstatement or

omission under the Securities Act. Accordingly, to the extent

that Defendants' Motion to Dismiss is based on these claims, it

is GRANTED.

3. Failure to Adhere to Internal Control and Credit Management

Procedures

Plaintiffs also allege that EBS's description in its annual

reports of its internal controls and risk management system was

misleading because, given BBS's subprime exposure, those controls

and systems either did not exist, or were not being followed. The

Preferred Share Offering Documents stated that all credit

19

exposures "were effectively monitored, managed and reviewed

periodically against approved limits, with lower quality

exposures being subject to a greater frequency of analysis and

assessments." The Offering Documents also explained that RBS had

an extensive governance framework at the Board and senior

executive levels, that portfolio analysis and reporting were used

to identify and manage credit risk concentrations, and than an

executive level committee would undertake regular assessment of

11135 credit risk management by division to ensure it complied with

RBS's overall standards. (See Offering Documents, e.g., 2005 Form

20-F (Series Q, R), 2006 Form 20-F (Series 5, T, U,))

In support of their assertions that 113$ failed to adhere to

its own internal control and credit management procedures,

Plaintiffs cite RBS's subprime holdings and subsequent write-

downs in 00 valuations during the credit crisis. However, "a

plaintiff challenging a defendant's disclosures regarding its

risk management processes must allege facts 'showing that the

descriptions of the processes were false or misleading at the

time they were included in the public statements, [or] facts

showing that the processes were not followed." In re Barclays

Bank Plc Sec. Litig., No. 09 Civ. 1989 (PAC), 2011 WL 31548

(S.D.N.Y. Jan. 4, 2011) (quoting In re Citigroup, Inc. Sec.

Litig., 330 F.Supp.2d 367, 379 (S.D.N.Y. 2004)). Here, Plaintiffs

fail to cite any contemporaneous support to show that the credit

management prgceures were not tollowed. Pointing to the

subsequent subprime market collapse and alleging that RBS must

therefore have failed to follow its internal control procedures

is not sufficient. The alleged misstatements concerning internal

control and risk management procedures are not actionable, and

Defendants' Motion to Dismiss is GRANTED to the extent that

Plaintiffs' claims are based on those allegations.

4. Failure to Present Financial Statements According to

Applicable Accounting Standards

Plaintiffs allege that RBS's financial statements were not

fairly presented under applicable accounting standards. They

claim that RBS did not present the financial statements that

formed part of the Preferred Share Offering Documents in

accordance with International Financial Reporting Standards

("IFRS"), including International Accounting Standards ("lAS")

and the International Accounting Standards Board Framework. (SAC

¶ 4(d).) specifically, they allege that RBS's interim 2007

financial statements failed to provide information about the

financial position, performance and change in financial position

useful to users and failed to provide information that was free

4!

from material error and bias. (SAC TT 110, 146, 159.) Plaintiffs

further allege that RBS's interim 2006 financial statements

violated lAS because they did not disclose that liDS's portfolio

of subprime assets increased during the relevant time period

resulting in a corresponding increase in credit risk and

concentration of risk. (SAC ¶ 160.) Finally, Plaintiffs claim

that the statements violated lAS because they failed to properly

mark-to-market the true value of liDS's portfolio of subprime

assets. (SAC ¶ 162.)

Defendants argue that they were under no duty to disclose

exact details concerning liES's subprime exposures because those

exposures amounted to only a very small percentage of liDS's

holdings of more than $1 trillion in assets. They note that the

statements challenged here were largely made in later 2005 and

early 2006, before the subprime crisis began to seriously affect

CO holders. Defendants argue that any undisclosed information

about RBS's subprime holdings would not have been material to

investors when such holdings formed a small part of RES's overall

portfolio and the subprinie market had not yet collapsed.

Plaintiffs have failed to allege sufficiently that the lAS

requirements gave rise to a duty to disclose detailed information

about RBS's subprime exposure. The liDS statements at issue

reported on liDS's entire asset portfolio of over $1 trillion. The

22

exposures in question amounted to less than one percent of these

asaeta, (See 2006 Annual Report, at 4; December 6 1 2007 trading

statement, at *7,) Plaintiffs have pointed to no authority that

requires disclosure of such relatively minor holdings.

Freidus v, INC Croep N.V., 736 F. Supp. 2d 816, 833 (S.D.N.Y.

2010) (no duty to disclose subprime holdings constituting two

percent and 0.24 percent of overall assets). Such holdings cannot

reasonably be characterized as creating a "concentration of

risk." 34 This is particularly true where, as here, RES's CDO

holdings were highly rated by independent credit rating agencies

in 2006 and 2007. Plaintiffs' conclusory assertions to the

contrary are unavailing. In re Duke Energy Corp. Sec. Litig., 282

F. Supp. 2d 158, 160 (S.D.N.Y. 2003) (dismissing conclusory

allegations of improper accounting practices where complaint

failed to allege "in any cognizable respect [] how the mark-to-

market accounting practices were improper"), aff'd 113 F. App'x

427 (2d Cir. 2004).

Plaintiffs allegations that RBS financial statements did not

provide sufficiently detailed or accurate information, did not

disclose the extent of or increase in RES's subprime holdings,

and did not properly mark-to-market the value of RBS's portfolio

are insufficient to state a claim of material misstatement or

23

omission under the Securities Act. Defendants' Motion to Dismiss

these claims is therefore QRMflP.

5. Failure to Disclose Subprime Exposure of ASK AMRQ

Plaintiffs allege that Dutch bank ABN AMRO had billions of

dollars of subprime assets on its books, and that RBS failed to

disclose that it would take on those subprime assets when it

acquired ABN ANRO. Plaintiffs claim this failure was misleading

because the ABN ANRO acquisition would materially increase RBS's

existing concentration of subprime assets.

As discussed supra, 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 v. Swiss, 753 F.Supp. 2d at

181. Here, RBS made numerous disclosures as to the limited scope

of its pre-acquisition diligence review. The Series S Prospectus

Supplement warned investors that "[i]nformation in respect of

each of the ABN AMRO Businesses is . . based on publicly

available information and limited information provided to [RBS]

by ABN A14R0." (Series S Prospectus Supplement, at S-9.) RBS

further disclosed that "[t]he Banks have conducted only a limited

ffj

review of ABN AKRO arid, therefore, we may become subject to

un}cnQvm liabj.].itieg of ABW MRQ, which may have an adverse effect

on our financial condition and results of our operations." (July

20, 2007 Form F-4, at 46; see also Series U Prospectus

Supplement, at S-li.) While Plaintiffs claim that RBS should

have disclosed that AEN AMRO had subprime exposure, they do not

identify any basis for alleging that RBS knew of ABN's subprime

exposure prior to the completion of the acquisition. Moreover,

Plaintiffs' allegations are undermined by REVs express

disclosures, in describing the potential acquisition, that it had

been given very limited access to ABN ANRO's records during the

diligence process and that RES may therefore "become subject to

unknown liabilities of ABN AMRO, which may have an adverse effect

on [RBS's] financial condition." (July 20, 2007 Form F-4, at 46.)

In light of Defendants' extensive disclosures concerning the

risk associated with the ANT AMRO acquisition, the alleged

failure to disclose the subprime holdings of AEN ANRO does not

amount to a material misstatement or omission under the

Securities Act, Plaintiffs' allegations are thus insufficient to

state a claim and Defendants' Motion to Dismiss is GRANTED in

this regard.

25

6. Misrepresentation of Benefits of ABN ANRO Acquisition

P1n'int4ffa n1a nh1AA hnt pg twiled invecorrs w11t

statements expressing undue optimism about anticipated benefits

from the potential acquisition of AEN AMRO. Plaintiffs contend

that this optimism lacked a reasonable basis due to AEN ANRO's

holdings of subprime assets. In support of their allegations,

Plaintiffs point to the following alleged misstatements in the

Preferred Share Offering Documents: "the acquisition would result

in profitable 'synergies' between the companies"; the acquisition

would prove beneficial for BBS and its shareholders; the

acquisition would create a "leading corporate and institutional

business with both scale and global reach" and would be a strong

strategic fit; BBS maintained that it had developed a detailed

roadniap for the integration of ABN AMRO's business and BBS

expected to generate significantly higher revenues from ABN

AMRO's business. (See Preferred Share Offering Documents, e.g.,

Series S Prospectus, Series T Prospectus, Series U Prospectus,

Forms 6-K (5, T, U.))

The statements that Plaintiffs challenge, however, amount to

nothing more than corporate optimism. "vague and non-specific

pronouncements on the success of integrating acquisitions are

inactionable puffery." In re Tower Auto Sec. Litia., 483 F. Supp.

2d 327, 336 ($.D.N.Y. 2007). RBS's statements here as to the

anticipated benefits of the ABN ANRO acquisition were no more

than "optimistic future projections that do not purport to

guarantee future outcomes." In re NBTY, Inc. Sec. Litig., 224 F.

Supp. 2d 482, 494 (E.D.N.Y. 2002). As a result, they "are not

misleading; and cannot support a securities fraud cause of

action." Id. Defendants' Motion to Dismiss is therefore GRANTED

as to the allegedly misleading expressions of optimism regarding

RES's acquisition of ABN ANRO.

***

Defendants' Motion to Dismiss Plaintiffs' claims pursuant to

Sections 11 and 12(a) (2) of the Securities Act are hereby

GRANTED, and those claims are hereby DISMISSED, with prejudice.

C. Claims pursuant to Section 15 of the Securities Act

Plaintiffs also allege violations of Section 15 of the

Securities Act against each of the Individual Defendants. They

allege that at all relevant times, the Individual Defendants were

controlling persons of RES within the meaning of Section 15 of

the Securities Act because each of the Individual Defendants

served as an executive officer and/or director of RBS prior to

and/or at the time of the Preferred Share Offerings. (SAC 11 196-

97.) Plaintiffs claim that because of their positions of control

27

and authority as officers and directors of RBS, the Individual

Defendants were able to, and did, control the contents of the

Preferred Share Offering Documents, which contained materially

untrue information in violation of Section 15 of the Securities

Act. (SAC ¶1! 198-99.)

To plead a claim under Section 15, "a plaintiff must allege

(1) a primary violation by a controlled person and (2) direct or

indirect control by the defendant of the primary violator." In re

Global Crossing, Ltd. Sec. Litiç, 322 F. Supp. 2d 319, 349

(S.D.N.Y. 2004). "Culpable participation" by the controlling

person is not an element of a Section 15 claim, Id. "A signature

on an SEC filing containing the misrepresentations that are the

subject of a claim is suggestive of control . . . allegations

that [the individual] was directly involved in its day-to-day

operations, including financial reporting and accounting

suffices as an allegation of control." In re Refco, Inc. Sec.

Litic., 503 F. Supp. 2d 611, 638 (S.D.N.Y. 2007).

"Section 15 merely creates a derivative liability for

violations of Sections 11 and 12." Dodds v. Cigna Sec., Inc., 12

F.3d 346, 349 n.1 (2d Cir. 1993). Therefore, "[i]n order to

establish a prima facie case of controlling-person liability, a

plaintiff must show a primary violation by the controlled

person." ECA v. 3? Morgan Chase Co., 553 F.3d 187, 206-07 (2d

fr1J

Cir. 2009) * Here, the Court has dismissed the Section 11 and 12

claims against all Defendants. Because the Court has found that

Plaintiffs' Section 11 and 12 claims cannot be sustained, there

is no primary violation and no claims under Section 15 can

proceed. In re Morgan Stanley, 592 F.3d at 358.

Accordingly, the claims against the Individual Defendants

pursuant to Section 15 of the Securities Act are hereby

DISMISSED, with prejudice.

III. CONCLUSION

For the reasons stated above, the Motions to Dismiss filed

by RBS and the Individual Defendants, and by the Underwriter

Defendants, are hereby GRANTED. The SAC is with

prejudice, in its entirety. The Clerk of Court is directed to

close the docket in this case.

SO ORDERED.

Dated: New York, New York

1. 2D13.

United States District Judge