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Risk of money-laundering fine for Danske unchanged despite court victory in US

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Risk of money-laundering fine for Danske unchanged despite court victory in US

A U.S. judge's decision to dismiss a securities fraud class action against Danske Bank A/S related to a large-scale money-laundering scandal may be a relief for Denmark's largest lender, but it does not reduce the risk of a fine from U.S. or European authorities, according to legal experts.

Nor is the decision likely to impact the large number of shareholder lawsuits filed against Danske in Denmark, with law firms representing investors there saying the cases are not comparable to those in the U.S.

Danske could pay a total of 12 billion kroner, approximately $1.9 billion, in fines and damages to authorities and shareholders, according to an estimate from Jyske Bank analyst Anders Vollesen.

Danske told S&P Global Market Intelligence that it was "pleased" with the decision by the U.S. federal district court to dismiss "all aspects of the civil shareholder claims brought against Danske in the U.S." The bank would not comment on how the ruling could impact other lawsuits and investigations but said it "will continue to defend our position in civil shareholder claims [...] both in the U.S. and Denmark."

Failed to prove knowledge

In the U.S. securities case, Plumbers & Steamfitters Local 773 Pension Fund v. Danske Bank A/S et al, plaintiffs had sought damages for investors who lost money in Danske's American Depositary Receipts, a type of security representing shares in a foreign stock, from January 2014 to April 2019.

The class action followed revelations that €200 billion of nonresident money flowed through Danske's Estonian branch from 2007 to 2015. An internal probe revealed in 2018 that a "significant" number of these transactions were suspicious, and that a whistleblower had notified Danske's management about shortcomings as far back as 2013.

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In 2018, Danske's shares dropped by more than 46%, and approximately $10.3 billion of the market cap losses that year can be causally tied to revelations concerning money-laundering, according to an analysis by U.S. law firm Grant & Eisenhofer, which is representing investors in a Danish lawsuit against the bank.

Among a number of accusations, the Plumbers & Steamfitters action claimed Danske had defrauded investors by improperly reporting revenue derived from illicit transactions, and had downplayed its anti-money-laundering failures and the threat of potential penalties.

U.S. District Judge Valerie Caproni dismissed the case on Aug. 28 and denied plaintiffs leave to amend their claims.

"The court held that the plaintiff failed in virtually every way to sufficiently plead fraud because none of the alleged misrepresentations were in fact known factual misrepresentations when made or that the bank knew its fraud detection systems were inadequate when they were touting them," said Terence Grugan, an attorney at Ballard Spahr who specializes in securities fraud and money laundering, in an interview.

No impact on U.S. investigations

The case demonstrates that securities fraud theories of liability are "extremely difficult to sustain" when the claims arise from anti-money-laundering failures, Grugan said.

"If a plaintiff doesn't have facts demonstrating actual knowing deceit, the claims probably won't survive," he said.

However, the judge's decision says little about the potential fallout from U.S. government investigations, according to Grugan. Danske is being probed by the U.S. Department of Justice and the U.S. Securities and Exchange Commission, authorities that have historically issued hefty fines over such scandals.

First, the Plumbers & Steamfitters case was about securities fraud, while authorities such as the DOJ could be investigating Danske for other violations, Grugan said. As S&P Global Market Intelligence previously reported, the bank could be probed for anything from money laundering to breaching sanctions or failing to have in place proper anti-money-laundering controls.

Secondly, shareholders' access to evidence "is more constrained than the government's," Grugan said.

The authorities investigating Danske have subpoena power and often share information, said David Abel, managing attorney at U.S. Market Advisors Law Group. The law firm is a member of ISAF-Danske, a coalition representing investors in another Danish lawsuit against the lender.

Shareholders do not have access to information known to, for example, whistleblowers or insiders, and this constraint on access to evidence is "sometimes a handicap" for actions that progress faster than government investigations, he said.

Should Danske receive a fine from U.S. authorities, more shareholder actions could emerge in the country, and it may also provide insightful information for lawsuits against the bank elsewhere, Abel said.

'Denmark is different'

Criminal investigations into Danske's role in the Baltic scandal are underway in Denmark and Estonia, and it also faces shareholder lawsuits in Denmark by investors in the bank's ordinary shares.

More than $1 billion of claims have been filed in Denmark by a range of actors. Grant & Eisenhofer is asserting $800 million in losses on behalf of 232 institutional investors, while ISAF-Danske is representing 63 institutional investors in a $225 million lawsuit filed in 2019.

Most recently, ISAF-Danske filed with a second group of 30 investors on Sept. 4, claiming another $57 million in losses. "The filing certainly may be interpreted as a reflection of the coalition's confidence in the merits of the Danish litigation," said Abel.

"While both the U.S. and Danish securities cases have the same goal of recovering damages for investors, they have significant legal differences," he said, adding that the U.S. matter has no legal impact on the Danish cases.

Requirements in U.S. securities cases are stricter than in Denmark, said Olav Haazen, a director at Grant & Eisenhofer. A claim of "securities fraud" in the U.S. requires accusations of affirmative misstatements that are intentionally false, and each such false statement must be specifically identified, he said.

As such, the U.S. shareholder action "was compelled to focus on a handful of actual misstatements," which the judge found too vague, Haazen said.

Grant & Eisenhofer's Danish lawsuit is not based on "fraud" but "straightforward violations of very specific disclosure obligations that are identified in the Danish statutes," said Haazen.

"Danish law does recognize liability for omissions and failures to disclose material information to the market. In the Danish case, we identify numerous such disclosure failures that had the effect of misleading investors and are cause for liability," he said.

As of Sept. 9, US$1 was equivalent to 6.30 Danish kroner.