996 F.3d 64
2d Cir.2021Background
- XIV Notes were inverse ETNs issued by Credit Suisse tied to the S&P 500 VIX Short‑Term Futures Index (profit when volatility fell); Janus affiliate JIC calculated intraday and closing indicative values; Credit Suisse affiliate CSI could declare Acceleration Events.
- Prior volatility spikes (2011, 2015, 2016) showed Credit Suisse’s hedging purchases of VIX futures contributed to liquidity squeezes that amplified VIX moves and depressed XIV prices; those incidents were reported to Credit Suisse’s CARMC.
- Credit Suisse offered large new issuances (notably Jan. 29, 2018 offering of 16.275M notes), substantially increasing XIV outstanding days before the February 5, 2018 volatility spike.
- On Feb. 5, 2018 Credit Suisse purchased ≈105,000 VIX futures after market close, dramatically spiking VIX futures volume and driving XIV value down >96%; intraday indicative value flatlined at an inflated level for ~1 hour, during which investors bought ≈$700M of XIV at those stale prices.
- Credit Suisse declared an Acceleration Event, accelerated and redeemed XIV (final payment ~$5.99), investors lost ≈$1.8B while Credit Suisse allegedly realized hundreds of millions in gains; plaintiffs sued alleging market manipulation, failure to correct the Flatline Value, and misstatements/omissions in offering documents.
- Procedural posture: district court dismissed for failure to plead a strong inference of scienter; Second Circuit AFFIRMED dismissal of Flatline Value claims but VACATED and REMANDED manipulation and offering‑document misstatement/omission claims (and related control‑person claims).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether complaint pleads actionable market manipulation (manipulative acts + scienter) | Credit Suisse issued millions of XIV knowing hedging would create liquidity squeezes; then executed hedges on Feb 5 to collapse XIV and lock in profit | Trades were open-market, legitimate hedging to manage risk; any price impact was not "artificial" and Credit Suisse had alternative hedges | Reinstated manipulation claim: alleged pre‑existing knowledge from prior spikes, issuance conduct, motive/opportunity and circumstantial evidence together plead a strong inference of scienter and a manipulative act |
| Whether defendants knowingly/recklessly failed to correct the Flatline intraday indicative value | CSI/JIC failed to correct or disclose stale intraday values, misleading investors who transacted during flatline | Flatline merely reflected S&P/VIX Futures Index delay; JIC/CSI had no obligation or motive to compute redundant real‑time values and lacked scienter | Dismissed Flatline claims: complaint fails to plead strong inference of scienter as to CSI/JIC (and Individual Defendants) |
| Whether the Offering Documents contained actionable misstatements/omissions (Sections 10(b), 11) | Offering Documents downplayed or mischaracterized the impact of Credit Suisse’s hedging ("could"/"may" vs. facts showing virtual certainty) and omitted intent to increase issuance to benefit from acceleration | Documents contained extensive risk warnings and disclosed hedging/conflicts; no misleading half‑truths | Reinstated claims: alleged half‑truths and omissions (given prior spikes, unchanged warnings, and issuance strategy) plausibly altered the total mix of information; scienter alleged via manipulation theory |
| Whether control‑person claims survive (Sections 15, 20(a)) | Janus and other defendants exercised control over issuers and/or calculation agents, so secondary liability follows from primary violations | Defendants argue lack of control over primary actors and that primary claims were deficient | Reinstated insofar as primary manipulation and offering‑document claims are reinstated; district court to address control issues on remand |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308 (2007) (PSLRA ‘‘strong inference’’ scienter standard and holistic inquiry)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (framework for market manipulation claims and when open‑market trades may be actionable)
- Wilson v. Merrill Lynch & Co., Inc., 671 F.3d 120 (2d Cir. 2011) (half‑truths doctrine; truthful but misleading statements can be actionable)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (scienter via motive/opportunity or conscious misbehavior; Rule 9(b) pleading baseline)
- Stoneridge Inv. Partners v. Scientific‑Atlanta, Inc., 552 U.S. 148 (2008) (elements for Rule 10b‑5 claims and proximate causation principles)
- Dolphin & Bradbury, Inc. v. SEC, 512 F.3d 634 (D.C. Cir. 2008) (distinguishing disclosure of possible risks from knowledge that events will occur)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (scienter requirement and definitions in securities fraud law)