457 F.Supp.3d 289
S.D.N.Y.2020Background:
- ZIV ETNs were inverse exchange-traded notes issued by Credit Suisse designed to track the inverse of the S&P 500 Mid‑Term VIX Index (SPVIXMTR).
- Offering documents (registration statement, prospectus, prospectus supplement, Pricing Supplement) were filed with the SEC and repeatedly warned the ETNs were for sophisticated, short‑term investors and that holders could lose up to 100% of their investment.
- The Pricing Supplement specifically disclosed Credit Suisse’s intention to hedge and that such hedging and daily rebalancing could affect futures prices, index levels, ETN market value, and could contribute to investors’ losses.
- On Feb 5, 2018, volatility spiked and ZIV fell ~14.5%; plaintiffs (investors who bought ZIV between June 30, 2017 and Feb 5, 2018) sued under Sections 11 and 15 of the Securities Act and alleged violations of Regulation S‑K (Items 303 and 105), claiming omissions about hedging extent, liquidity, and suitability.
- The Court treated the Pricing Supplement as integral, relied on prior SDNY/N.D. Ala. decisions addressing the same disclosures, and concluded the Offering Documents adequately warned of the risks plaintiffs say materialized.
- Ruling: Defendants’ motion to dismiss granted; Section 11 and 15 claims dismissed, and Regulation S‑K claims dismissed for failure to plead actual knowledge of undisclosed risks.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Material omissions under §11 | Pricing Supplement failed to disclose the extent/effect of Credit Suisse’s hedging and liquidity problems; disclosures were misleading | Pricing Supplement repeatedly warned of hedging, rebalancing, liquidity risks and possible total loss; adequate disclosure defeats §11 claim | Dismissed — warnings addressed the risks; omissions immaterial as a matter of law |
| Hedging disclosure specificity | Disclosures used permissive language ("may") and thus did not admit hedging would actually affect ETN value | No obligation to predict or state inevitability; "may" warnings sufficiently precise and repeated | Dismissed — use of "may" not misleading; adequate cautionary language |
| Liquidity of VIX futures | Defendants failed to disclose that VIX futures lacked liquidity to absorb hedging/rebalancing | Pricing Supplement warned of liquidity/volatility, supply/demand and market disruptions; issuers need not predict exact manifestation | Dismissed — liquidity risks were disclosed; not actionable to omit precise predictions |
| Regulation S‑K (Items 303/105) | Credit Suisse knew of trends/risks (e.g., prior volatility spikes); failed to disclose most significant risks | Plaintiffs must plausibly allege actual knowledge of an undisclosed trend or uncertainty; conclusory allegations insufficient | Dismissed — plaintiffs failed to plausibly allege defendants’ actual knowledge of undisclosed risks |
Key Cases Cited:
- Ashcroft v. Iqbal, 556 U.S. 662 (establishes federal pleading standard for plausibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard and rule against mere speculation)
- In re Morgan Stanley Info. Fund Secs. Litig., 592 F.3d 347 (Section 11 pleading and materiality principles)
- In re ProShares Trust Secs. Litig., 728 F.3d 96 (holding that warnings of risk that later materialized can defeat §11 claims)
- Panther Partners, Inc. v. Ikanos Commc'ns, Inc., 538 F. Supp. 2d 662 (cautionary language may be sufficient to warn prudent investors)