On Behalf of BTA Bank, Mintz Procures a Complete Second Circuit Victory

The Situation

Once the largest bank in Kazakhstan, BTA was forced into bankruptcy over a decade ago due to the devastating effects of the 2008 global financial crisis as well as the discovery in 2009 that the bank’s former chairman Muktar Ablyazov had stolen over $6 billion from BTA’s coffers. As a result, the company was forced to undergo two separate debt restructurings. The first occurred successfully in 2010, but thereafter BTA was not able to lend enough money at profitable enough rates to escape the Greek debt crisis that brought down all emerging markets in 2011, and it had to restructure once again in 2012. As BTA headed towards the second restructuring, three investment funds bought tens of millions of dollars of BTA subordinated notes at discounts to face value ranging from 20% to 97% under the assumption that BTA’s securities were worth more than the rest of the market valued them.

When the terms of the second restructuring were later announced, and the funds learned that they would not recoup even the highly discounted prices they had paid, the funds sued BTA and its largest shareholder under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs primarily claimed that BTA’s first restructuring memorandum fraudulently omitted certain information about BTA’s deposits and, by extension, its likelihood of returning to financial health.

The Approach

Mintz securities litigator Jason Vigna represented BTA through years of intense fact and expert discovery across the globe related to the Section 10(b) suit. In the litigation, plaintiffs claimed that BTA improperly failed to inform investors of a high-interest-rate, long-term deposit BTA’s largest shareholder had made at the bank. According to the suit, this omission allegedly “doomed any hope for a successful restructuring from the outset” (defendants contended the deposit actually provided needed liquidity in a time of crisis and was made on the same terms available to all depositors).

Eventually, after extensive discovery, Jason secured a hard-fought summary judgment for the bank. In its decision, the US District Court for the Southern District of New York found as a matter of law that BTA did not omit any material information from investors and, even if it had, plaintiffs failed to present any evidence that any such omission caused their investment losses. The summary judgment itself was widely-publicized, given that summary judgment motions are filed in only 7% of all Section 10(b) cases and are granted so infrequently that the major damages consulting firms do not even report statistics on them.

Thereafter, plaintiffs appealed, arguing that the district court had engaged in improper fact-finding. They also claimed that plaintiffs need not and could not distinguish the losses allegedly caused by defendants’ omissions from losses caused by other factors (such as repeated global financial crises and BTA’s other easily-explained business setbacks) because the market for BTA notes was — at least by some measures — “inefficient.”

The Outcome

In November 2021, we took up oral argument before the Second Circuit. Jason skillfully argued that securities fraud plaintiffs are required to disaggregate losses caused by alleged misrepresentations and omissions from losses caused by changed economic circumstances, changed investor expectations, or new industry-specific or firm-specific facts in order to establish a cause of action for securities fraud. Finally, in January 2022, the Second Circuit issued their ruling, agreeing with Mintz’s argument and holding that “proof of loss causation requires loss disaggregation whether the market is efficient or inefficient” — and that plaintiffs had failed to present such proof.

Our victory was significant because, while the court granted BTA their victory in a relatively short summary order, the decision itself addressed an issue of first impression in the Second Circuit that we expect to be cited in “inefficient market” cases for years to come.