Pleading Across Proceedings: Second Circuit Endorses Use of Other-Case Allegations (Rule 11–Limited) and Narrows “Storm Warnings” for Securities Act Timeliness — Commentary on Sherman v. Abengoa, S.A. (2d Cir. 2025)

Introduction

Sherman v. Abengoa, S.A., No. 22-2438 (2d Cir. Oct. 6, 2025), is a significant Second Circuit decision clarifying multiple recurring issues in federal securities litigation. The panel (Chief Judge Livingston and Judges Sullivan and Menashi; opinion by Judge Sullivan) reverses and vacates in part a district court’s dismissal of Securities Act and Exchange Act claims brought by investors in Abengoa, S.A., a Spanish engineering and construction conglomerate that listed American Depository Shares (ADSs) on NASDAQ in 2013 and later went insolvent.

The plaintiffs alleged that Abengoa concealed a mounting liquidity crisis through accounting manipulations—principally by misusing the “percentage-of-completion” revenue recognition method in its Engineering and Construction group (Abeinsa/Inabensa), employing “triangulation” to shift costs among projects, and booking premature or fictitious cost provisions to accelerate revenue. After a precipitous stock decline in 2014–2015 and ensuing Spanish criminal and civil proceedings, plaintiffs pursued U.S. claims under Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5, against Abengoa, several underwriters (Canaccord Genuity, HSBC, Merrill Lynch International, Société Générale), and certain individual officers including former CEO Manuel Sánchez Ortega.

The case presented four core issues:

Timeliness under Section 11’s one-year statute of limitations (the “storm warnings” doctrine) and relation back under Rule 15(c).
Pleading sufficiency for Section 11, including use of confidential witnesses and reliance on allegations and reports from foreign and other proceedings, and whether cautionary language renders misstatements immaterial.
Whether plaintiffs adequately alleged corporate scienter under the Exchange Act (as to Abengoa) and individual scienter (as to Sánchez Ortega).
The viability of control-person liability under Section 15 if Section 11 claims survive.

Most notably, the Court announces a clear rule permitting complaints to rely on factual allegations or reports incorporated in other complaints or proceedings—here, Spanish criminal matters—subject to the certification obligations of Federal Rule of Civil Procedure 11. The Court also clarifies the “storm warnings” standard: triggering disclosures must “relate directly” to the alleged misstatements at issue. And it holds that new Securities Act misstatements in an amended pleading can relate back where they arise from the same operative conduct alleged earlier.

Summary of the Opinion

Timeliness: The Second Circuit holds the Securities Act claims were timely. The one-year clock did not start with Abengoa’s November 2014 disclosure about debt classification; it started on August 3, 2015, when the company sought a capital increase shortly after assuring investors it would not tap the market—an event that “related directly” to the alleged misstatements about accounting and liquidity. The Third Amended Complaint (TAC) also relates back to the earlier, timely complaint under Rule 15(c).
Use of Other Proceedings: The Court clarifies that plaintiffs may rely on factual allegations and reports incorporated in other proceedings (including foreign criminal matters), subject to Rule 11. The Spanish National Court’s rulings (based on an auditor’s report, ICAC’s findings, and forensic analyses) and confidential witness allegations were sufficiently detailed and corroborated to be credited at the pleading stage.
Section 11 Merits: Statements about “strict financial discipline” were puffery, but the Registration Statement’s specific representations about how Abengoa applied the percentage-of-completion method were actionable. The “bespeaks caution” doctrine did not immunize those statements because the cautionary language was too generic to warn of deliberate manipulation. Materiality was adequately pleaded.
Section 15: Because the Section 11 claims survive, the Section 15 control-person claim against Sánchez Ortega is vacated for the district court to consider on remand.
Exchange Act Claims: The Court vacates dismissal of the Exchange Act claims against Abengoa because the district court improperly disregarded the confidential witnesses and Spanish proceedings in assessing falsity and scienter. But it affirms denial of leave to re-plead Exchange Act claims against Sánchez Ortega, holding that plaintiffs’ allegations (primarily a “suspicious” resignation) did not create a strong inference of his individual scienter.
Disposition: Affirmed in part, reversed in part, and vacated in part; case remanded.

Analysis

Precedents Cited and How They Shaped the Decision

Dodds v. Cigna Sec., Inc., 12 F.3d 346 (2d Cir. 1993): Established the “storm warnings” standard—when facts would suggest to a reasonable investor the probability of fraud, a duty of inquiry arises. The Court applied Dodds but emphasized the “relate directly” refinement from Nomura.
Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc., 873 F.3d 85 (2d Cir. 2017): Clarified that storm warnings must “relate directly” to the alleged misstatements. The Court used Nomura to hold that a 2014 debt-classification disclosure did not relate directly to misstatements about Abengoa’s accounting method and liquidity; the August 3, 2015 capital raise did.
ASARCO LLC v. Goodwin, 756 F.3d 191 (2d Cir. 2014); Slayton v. Am. Express Co., 460 F.3d 215 (2d Cir. 2006): Rule 15(c) relation back. Slayton is key: new claims can relate back if they arise from the same operative facts and give adequate notice within the limitations period. The Court rejected defendants’ “novel argument” that new Securities Act misstatements can never relate back.
Lipsky v. Commonwealth United Corp., 551 F.2d 887 (2d Cir. 1976) and Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160 (2d Cir. 2015): Lipsky limited the use of a consent judgment because it reflects no adjudication. Loreley held complaints can rely on government findings where plaintiffs also plead non-conclusory facts and comply with Rule 11. Sherman harmonizes these, expressly allowing reliance on other-case allegations and reports if they are detailed, corroborated, and counsel can certify under Rule 11.
Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000): Confidential witnesses need not be named if described with sufficient particularity to suggest they possess the alleged information. The Court found FE1–FE7 sufficiently particularized.
In re Synchrony Fin. Sec. Litig., 988 F.3d 157 (2d Cir. 2021); Singh v. Cigna Corp., 918 F.3d 57 (2d Cir. 2019): General statements about discipline, integrity, and compliance are puffery. But specific, verifiable statements (like accounting method application) are actionable.
Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004): “Bespeaks caution” doctrine. Generic caution about estimates does not sanitize misstatements where the risk has already materialized or manipulation is alleged.
Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co., 19 F.4th 145 (2d Cir. 2021): Materiality is rarely resolvable on a motion to dismiss; dismissal is proper only if misstatements are obviously unimportant to reasonable investors. Not so here.
Ashcroft v. Iqbal, 556 U.S. 662 (2009): Plausibility standard under Rule 12(b)(6); the Court applied this but credited detailed factual allegations rather than disregarding them.
Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4(b)(2)(A): Requires particularized facts giving rise to a strong inference of scienter. The Court found the corporate scienter allegations sufficient for Abengoa to proceed but insufficient for Sánchez Ortega individually.
KBC Asset Mgmt. NV v. MetLife, Inc., No. 21-291, 2022 WL 480213 (2d Cir. Feb. 17, 2022); In re Hain Celestial Grp., Inc. Sec. Litig., 20 F.4th 131 (2d Cir. 2021); Schiro v. Cemex, S.A.B. de C.V., 396 F. Supp. 3d 283 (S.D.N.Y. 2019): “Suspicious” resignations can suggest scienter only with other compelling circumstantial allegations. Plaintiffs lacked such corroboration as to Sánchez Ortega.
Pyskaty v. Wide World of Cars, LLC, 856 F.3d 216 (2d Cir. 2017): Standard for denial of leave to amend; futility when amendment would still fail to state a claim. Applied to uphold denial as to Sánchez Ortega.

Legal Reasoning and Application

1) Timeliness: When do “storm warnings” arise?

Section 11 claims must be brought within one year of the “discovery” of the untrue statement or omission, or when such discovery should have been made with reasonable diligence. The Court rejected the district court’s view that Abengoa’s November 2014 admission about misclassifying “Greenfield” bonds as non-recourse debt constituted a storm warning for misstatements about revenue recognition and liquidity. Under Nomura, storm warnings must “relate directly” to the misstatements alleged. The relevant storm warning was August 3, 2015—Abengoa’s surprise capital increase and asset divestiture after assuring investors it would not tap the market—because it bore directly on liquidity and raised red flags about the truth of the Registration Statement’s accounting assertions. Plaintiffs filed within one year of that date.

2) Relation Back under Rule 15(c): Can new Securities Act misstatements in an amended complaint relate back?

Yes. The Court held the TAC’s new Section 11 allegations—focused more tightly on the percentage-of-completion method—arose out of the same conduct and transactions alleged in the earlier, timely complaint: overstated liquidity and project earnings, inaccurate percentage-of-completion reporting, and misclassification practices. This gave defendants adequate notice. The Court rejected the argument that new Securities Act misstatements can never relate back; Slayton forecloses such a categorical rule.

3) Section 11 Falsity: Puffery vs. specific accounting representations

General claims of “strict financial discipline” and “robust” controls were puffery and thus inactionable. But the Registration Statement’s specific, verifiable descriptions of how Abengoa used the percentage-of-completion method—e.g., reliance on objective data, exclusion of future costs when determining completion—were actionable if false or misleading. Plaintiffs plausibly alleged falsity through:

Confidential Witnesses (FE1–FE7): Sufficiently particularized job roles and access to information (e.g., Inabensa controller staff, senior accountant, project budgeting roles) supported allegations of premature revenue recognition, inflated profit margins, falsified cost provisions, and “triangulation” (shifting costs from troubled projects to new ones to increase reported completion and revenue).
Spanish Proceedings: The National Court’s rulings (supported by an auditing firm’s expert report, ICAC’s investigation, and forensic analyses) and witness statements provided independent, investigative corroboration of systemic misreporting and the maintenance of two sets of books.
KPMG Internal Audit: Commissioned by Abengoa’s new president, it found manipulation of margins and percentages of completion at Inabensa, including directed “invoice triangulation.”

Together, these sources plausibly alleged that Abengoa did not apply the percentage-of-completion method as represented, enabling premature and inflated revenue recognition.

4) Reliance on Allegations from Other Proceedings: A clarified, Rule 11–anchored standard

To “avoid all doubt,” the Court holds that a complaint may rely on factual allegations or reports incorporated in other complaints or proceedings, subject to Rule 11’s certification that counsel has a reasonable basis to believe the factual contentions have or will likely have evidentiary support after reasonable investigation. Distinguishing Lipsky (consent decree context) and building on Loreley, the Court emphasizes case-specific considerations:

Are the borrowed allegations detailed and non-conclusory?
Are they corroborated by independent evidence (e.g., audits, regulator reports, multiple witnesses)?
Were they the product of investigation by credible bodies (e.g., auditors, regulators, law enforcement)?

Here, the Spanish National Court relied on an auditor’s expert report, ICAC’s findings, and forensic work; internal audit findings by KPMG corroborated witness accounts. That was enough at the pleading stage.

5) Cautionary Language and Materiality

Abengoa’s Registration Statement warned that percentage-of-completion uses “estimates,” but this generic caveat did not neutralize the specific, allegedly false assurances about how the method would be applied. Under Rombach’s “bespeaks caution,” rote risk language does not immunize a speaker who knows the “Grand Canyon” lies a foot away. Materiality was sufficiently pleaded: insider accounts and KPMG’s report described systemic practices that precipitated Abengoa’s collapse—far from “obviously unimportant.”

6) Exchange Act Claims

As to Abengoa: The district court dismissed largely because it disregarded the confidential witnesses and Spanish materials. Once credited, the complaint contained ample allegations that senior executives orchestrated practices to inflate earnings and conceal losses, supporting falsity and a strong inference of corporate scienter. The dismissal is vacated and remanded.
As to former CEO Sánchez Ortega: The district court denied leave to re-plead as futile. The Second Circuit affirmed: the timing of his resignation, absent other compelling circumstantial allegations tying him to the fraud, did not create a strong inference of individual scienter under the PSLRA. New assertions raised only in appellate briefing could not salvage the claim.

7) Section 15 Control-Person Liability

Because the Court revived the Section 11 claims, it vacated the dismissal of the Section 15 claim against Sánchez Ortega and remanded for further proceedings. The panel declined to entertain a late-raised argument that scienter is required for Section 11, deeming it forfeited on appeal.

Impact and Implications

A. A new, express pleading pathway: Using other-case allegations and foreign proceedings

Second Circuit clarity: Plaintiffs may rely on factual allegations and investigative reports embedded in other complaints or proceedings—domestic or foreign—provided counsel can make a Rule 11 certification. This is a practical and doctrinally significant development for complex, cross-border securities cases.
District court practice: Sherman aligns and elevates district-level trends allowing reliance on government or investigative materials (e.g., SEC orders, attorney general complaints) when paired with independent factual pleading. It curbs overly broad applications of Lipsky at the motion to dismiss stage.
Transnational litigation: The Court validates the persuasive use of foreign regulator and criminal-court materials in U.S. securities litigation, sharpening the tools available to investors in multinational fraud cases.

B. Timeliness tightened to the alleged misconduct: “Relate directly” for storm warnings

Targeted trigger: The limitations clock for Section 11 does not start upon any negative disclosure. It starts when a disclosure “relates directly” to the specific misstatements alleged. That narrows defendants’ ability to time-bar claims based on generic or adjacent disclosures.
Practical effect: Plaintiffs can better defend timeliness when earlier disclosures concern different topics or different facets of corporate misconduct.

C. Relation back is robust when notice exists

New misstatements, same core conduct: Plaintiffs may sharpen or refocus Securities Act theories in amended pleadings if they arise from the same operative facts alleged in the original filing. This reinforces Rule 15’s preference for decisions on the merits over technical dismissals.

D. Accounting representations are actionable when concrete

Specific accounting method representations: Detailed descriptions of how an issuer applies a revenue-recognition method are actionable if untrue in practice. Boilerplate warnings about “estimates” will not sanitize deliberate manipulation.
Underwriter exposure: Underwriters who sign or distribute registration statements containing such specifics face revived exposure under Section 11 when plaintiffs plead detailed, corroborated falsity.

E. Corporate scienter vs. individual scienter

Corporate scienter: Allegations tying high-level executives to systemic accounting practices (especially when corroborated by internal and regulator audits) can suffice to plead corporate scienter under the PSLRA.
Individual scienter: By contrast, “suspicious” resignations, without more, will rarely meet the PSLRA’s strong inference threshold for individuals. Plaintiffs should marshal specific, individualized facts (e.g., communications, approvals, directives) to proceed against particular executives.

F. Practice pointers

For plaintiffs:
- Describe confidential witnesses with precision: roles, timeframes, access, and how they know what they allege.
- When incorporating other-case allegations, highlight the investigative pedigree (audits, regulator findings) and show independent corroboration; be prepared to certify under Rule 11.
- On timeliness, tether storm warnings to disclosures that “relate directly” to the alleged misstatements.
- Plead why generic cautions do not address the actual risk or manipulation alleged.
For issuers and underwriters:
- Vet specific accounting-method descriptions; avoid overstating rigor and objectivity if practices are judgment-heavy or unevenly applied.
- Do not rely on generic “estimates” disclaimers to offset known problems; enhance risk factors to address known trends and practices.
- Underwriter diligence should probe application (not merely policy) of revenue-recognition methods, including how cost provisions and project margins are set and altered.

Complex Concepts Simplified

American Depositary Shares (ADSs): U.S.-traded securities representing shares of a foreign company, here Abengoa, listed on NASDAQ.
Section 11 (Securities Act): Imposes near-strict liability for material misstatements or omissions in a registration statement; plaintiffs generally need not prove scienter or reliance.
Section 15 (Securities Act): Control-person liability for those who control a primary violator of Section 11.
Section 10(b) and Rule 10b-5 (Exchange Act): Anti-fraud provisions covering material misstatements or schemes in connection with securities trades; require scienter (intent or recklessness) and transaction causation.
Section 20(a) (Exchange Act): Control-person liability for Exchange Act violations by controlled persons.
“Storm warnings”: Facts that would alert a reasonable investor to probable fraud, triggering a duty to inquire and starting the limitations clock if the warnings “relate directly” to the alleged misstatements.
Relation back (Rule 15(c)): Amended claims “relate back” to the original filing date if they arise out of the same conduct/occurrence and the original pleading provided adequate notice.
Percentage-of-completion method: Revenue recognition for long-term construction contracts based on the proportion of costs incurred to total estimated costs. If estimates cannot be reliable, revenue is recognized only to the extent of recoverable costs incurred.
Cost provisions: Accounting entries for costs incurred but not yet invoiced or posted; inflating cost provisions can accelerate recognized revenue under percentage-of-completion.
“Triangulation”: Shifting costs from old/loss-making projects to new projects, increasing the latter’s percentage-of-completion and reported revenue while concealing losses.
“Bespeaks caution” doctrine: Forward-looking statements accompanied by adequate, specific cautionary language may be immaterial as a matter of law. Generic cautions do not neutralize allegations of known, ongoing manipulation.
Corporate scienter: The company’s state of mind inferred from actions and knowledge of senior management or those whose intent can be imputed to the corporation.
Rule 11: Attorneys must certify that, after reasonable inquiry, factual contentions have evidentiary support or will likely have such support after discovery; governs permissible reliance on other-case allegations.

Conclusion

Sherman v. Abengoa, S.A. is a consequential Second Circuit decision on securities pleading, timeliness, and the use of cross-proceeding materials. The Court:

Expressly authorizes reliance on detailed, corroborated factual allegations and reports from other proceedings—including foreign criminal matters—subject to Rule 11.
Tightens the “storm warnings” trigger to disclosures that “relate directly” to the alleged misstatements, preserving timeliness for claims aligned to later, more probative events.
Confirms that new misstatement theories can relate back when grounded in the same operative facts, reinforcing Rule 15’s merits preference.
Delineates puffery from actionable specificity in accounting representations; generic estimate disclaimers cannot sanitize alleged manipulation.
Reinvigorates corporate scienter pleading based on corroborated insider accounts and internal/regulatory audits, while reaffirming that individual scienter demands more than suspicious timing.

On remand, the plaintiffs’ Section 11 and Section 15 claims will proceed, as will Exchange Act claims against Abengoa; individual Exchange Act claims against the former CEO remain dismissed. Beyond this case, Sherman equips plaintiffs—especially in cross-border contexts—with a clearer pathway to plead securities fraud using credible, independently investigated materials from other proceedings, and it refines the limitations and relation-back doctrines to focus on the heart of the alleged misconduct. For issuers, underwriters, and counsel, its message is equally clear: specific, verifiable accounting representations must match reality, and generic cautions will not cure known or orchestrated deviations.