Danske Bank A/S is facing a growing number of shareholder lawsuits accusing it of covering up its involvement in a money laundering scandal, with investors now claiming more than a billion dollars to recover losses from a significant share price drop.
In two rounds of suits filed by U.S. law firms Grant & Eisenhofer and DRRT in Copenhagen City Court in 2019, 232 institutional investors are asserting $800 million in losses against the Danish bank. Another coalition of 63 institutional investors filed a $225 million lawsuit on Dec. 27, 2019.
Deminor Recovery Services is soon filing a complaint on behalf of 140 investors claiming damages for a "9 digit [euro] figure," Edouard Fremault, partner, told S&P Global Market Intelligence.
Lawyers at other firms representing institutional and retail investors, including Njord Law Firm and Hindkjær Advokatfirma, said in interviews that they too are taking action against the bank. Danske also faces a class action suit in the U.S.
Danske Bank, meanwhile, is "defending itself against these claims," a spokesperson said in an email.
"The timing and completion of any such lawsuit are uncertain, and we consider any development together with our external counsel," the person said. "At this stage, we have no further comments."
In essence, the lawsuits accuse Danske Bank, and in some cases former bank executives, of misleading investors and inflating the bank's share price by failing to inform the market that it was facilitating illicit transactions through its Baltic operations.
They follow revelations that Danske Bank was embroiled in a money laundering scandal which saw €200 billion of non-resident money flow through the bank's Estonian branch from 2007 to 2015. An internal probe revealed in September 2018 that a "significant" part of these payments was suspicious, and that a whistleblower had notified Danske's senior management about the shortcomings as far back as 2013.
Investors, meanwhile, were "blindsided" by the bank's failure to disclose the regulatory and financial risks in connection with its Baltic operations, said ISAF-Danske, the coalition behind the Dec. 27 lawsuit, in a statement.
It claimed that Danske Bank violated Danish capital markets law by "deliberately misleading and keeping investors in the dark for years." The resulting share price drop caused "severe harm to investors," it said.
In 2018 alone, Danske's share price fell more than 46%.
Danske Bank, which is already being investigated by regulators in the U.S., Denmark and Estonia, is facing "potentially significant exposure" from these civil lawsuits, said Terence M. Grugan, an attorney at Ballard Spahr who specializes in securities fraud and money laundering.
So far, claims of more than $1 billion have been filed in Copenhagen City Court, but this figure is likely to rise, with several law firms having warned that more filings will come.
"Approximately $10.3 billion of the overall $12.8 billion in market cap losses in 2018 can be causally tied to revelations concerning the money laundering scandal," said Olav Haazen, a director at Grant & Eisenhofer, referring to an analysis made by the firm.
"In theory, that is the entire loss that all investors collectively have suffered," he said.
Grant & Eisenhofer has previously represented investors in major shareholder lawsuits in Europe, including a case against Royal Bank of Scotland Group PLC in which plaintiffs achieved a $1 billion settlement in 2016 in the U.K.
The Danske Bank lawsuits could become an example for potential shareholder actions against other banks that have been drawn into the Baltic money laundering scandal, such as Swedbank AB (publ) and Skandinaviska Enskilda Banken AB, said David P. Abel, managing attorney at U.S. Market Advisors Law Group, a member of the ISAF-Danske coalition.
"This Danske Bank case is certainly somewhat of a poster child for what type of litigation a bank might face if it has similar things come out," he said.
While most of the suits have been filed in Copenhagen, Danske Bank is also facing a class action in the U.S. The case, captioned Plumbers & Steamfitters Local 773 Pension Fund v. Danske Bank A/S et al, specifically seeks damages for investors in Danske Bank's American Depositary Receipts, a type of security issued in the U.S. representing shares in a foreign stock.
The U.S. District Court for the Southern District of New York is currently reviewing a motion to dismiss — a request to terminate further proceedings — by Danske Bank. Should the court deny this motion, it will "give the plaintiffs a lot of tailwinds to more aggressively pursue their claims," and will likely end with a settlement, said Abel. He expects the court to decide on the motion in the first half of 2020.
The case could set the scene for lawsuits elsewhere. "Certainly if there were to be a settlement in the U.S., we would look at that closely. It would be very insightful in terms of what Danske Bank might settle for elsewhere," Abel said.
For securities class actions, the median settlement as a percentage of damages sought in the U.S. in 2018 was 6%, according to Cornerstone Research.
Should the case, on the other hand, proceed through discovery — a pre-trial procedure in which the plaintiffs will be able to request documents from Danske Bank — this could be useful evidence for cases in Denmark, where the same discovery procedures do not exist, Haazen said.
Similar securities actions in the U.S. typically take three to four years, Abel said. In Denmark, however, the cases could take much longer. "One of the unknowns here is that, relative to the U.S., securities laws in the EU, and Denmark particularly, are relatively new in terms of investor protections," he said.
It is also uncommon for shareholder lawsuits against public companies in Denmark to end with settlement, said Thomas Ryhl, a partner in Njord Law Firm.
Past investor lawsuits in Denmark, such as those surrounding OW Bunker, Amagerbanken, a bank, and Hafnia, an insurer, have generally proceeded to trial.
In the case against OW Bunker, a marine fuel supplier that filed for bankruptcy in 2014 just eight months after listing in Copenhagen, a verdict is only expected in 2027, according to Danish media reports.
Another example is Pandora A/S, said Ryhl. The Danish jewelry company was in 2016 acquitted in a criminal case accusing it of breaking capital market laws, which led shareholders to subsequently withdraw their civil lawsuits. Similarly, he said, the outcome of Danish authorities' criminal investigations into Danske Bank will be important for the shareholder actions.
Danske Bank is currently being probed by authorities in Denmark and Estonia, as well as by the U.S. Department of Justice and the U.S. Securities and Exchange Commission.
Money laundering or securities fraud
Despite Danske Bank having admitted to its role in processing suspicious transactions in its Estonian branch, a claim of securities fraud is a very different question, said Grugan of Ballard Spahr, who specializes in U.S. law on the matter. It needs to prove that Danske Bank deliberately released material false information or omitted material information and that the plaintiffs justifiably relied on the misrepresentation by buying, selling or holding the bank's stock.
Grugan said that what may be a serious violation of money laundering allegations and significant losses do not necessarily add up to a securities violation.
"Securities fraud is a very precise claim," he said.
Danske Bank is taking a similar standpoint in the U.S. court, writing in its motion to dismiss the Plumbers & Steamfitters case, as reported by Law360: "While [Danske] does not dispute the significance of these AML issues, those matters are being addressed in the appropriate fora. They do not remotely support an opportunistic United States securities claim concerning five-year-old AML failures in Estonia against a Danish bank, whose common stock trades only in Denmark, and European citizens living in Denmark."