25 F. Supp. 3d 444
S.D.N.Y.2014Background
- Plaintiffs filed a putative class action under Sections 11 and 15 of the Securities Act on behalf of purchasers of TVIX ETNs (leveraged ETNs tied to VIX short-term futures), alleging material misstatements and omissions in the Registration Statement, Pricing Supplement, and (for a subclass) two Credit Suisse press releases during a temporary issuance suspension in Feb–Mar 2012.
- TVIX ETNs provided 2x daily leveraged exposure to a VIX futures index, required daily rebalancing, and Plaintiffs allege that daily rebalancing causes cumulative decay making the ETNs unsuitable for holding beyond one trading day.
- Plaintiffs contend the Offering Documents failed to disclose quantitative decay (alleged ~24 bps/day or ~48.6% annually), contained ‘‘contra‑indicators’’ (e.g., maturity payout language and 20‑year hypothetical examples), and misrepresented that Credit Suisse would issue more ETNs to meet demand.
- During Feb–Mar 2012 Credit Suisse temporarily suspended new issuances; the Dislocation Subclass alleges omissions about internal issuance limits, illiquidity risks, and the risks of Credit Suisse’s ‘‘vertical platform,’’ causing market price/indicative value dislocations.
- Defendants moved to dismiss under Rule 12(b)(6). The Court considered the Offering Documents and Press Releases and granted the motion in full, dismissing both Section 11 and derivative Section 15 claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Offering Documents omitted material information making them misleading under §11 (long‑holding risk / daily decay) | Plaintiffs: Offering Documents failed to quantify inevitable daily decay and thus misled investors into believing ETNs could be held >1 day or produce long‑term returns | Credit Suisse: Offering Documents repeatedly and plainly warned ETNs were designed for daily use, warned of long‑holding risks, included examples and rebalancing math; no duty to predict future market inputs | Dismissed: disclosures, read as whole, adequately alerted reasonable investors to daily‑holding risks; no plausible omission |
| Whether ‘‘contra‑indicators’’ (maturity payout, 20‑yr hypotheticals, some language) rendered warnings misleading | Plaintiffs: those elements undermined warnings and suggested holding to maturity could be appropriate | Defendants: those elements were neutral, accompanied by explicit disclaimers that examples are not predictions and repeated statements that long‑term value likely ≈0 and ETNs not suitable for long holdings | Dismissed: contra‑indicators did not plausibly alter the total mix of information for a reasonable investor |
| Whether Offering Documents and press releases omitted material facts re: issuance suspension and vertical platform (Dislocation Subclass) | Plaintiffs: omitted existence/limits of internal caps, illiquidity risks if issuance suspended, and risks of vertical platform — so subclass members bought without full disclosure | Defendants: Offering Documents disclosed issuer discretion to issue or not issue, warned supply/demand affects market price, and press release explicitly warned suspension risks; no duty to predict specifics | Dismissed: core risk of suspension and its market effects were disclosed; reasons for suspension immaterial once risk disclosed |
| Whether control‑person liability under §15 survives if §11 fails | Plaintiffs: seek derivative control liability | Defendants: §15 depends on underlying §11 liability | Dismissed: §15 derivative; dismissed because §11 claims insufficient |
Key Cases Cited
- McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184 (2d Cir.) (Rule 12(b)(6) pleading standard and inference drawing)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (application of Twombly plausibility standard)
- In re Morgan Stanley Info. Fund Secs. Litig., 592 F.3d 347 (Section 11 negligence pleading standard; materiality analysis)
- In re ProShares Trust Secs. Litig., 728 F.3d 96 (disclosure sufficiency for leveraged short/leveraged products and reading documents as whole)
- Rombach v. Chang, 355 F.3d 164 (materiality: whether representations would have misled a reasonable investor)