Sharette v. Credit Suisse International
127 F. Supp. 3d 60
S.D.N.Y.2015Background
- ECD, a solar manufacturer, conducted twin offerings on June 18, 2008: $316M of convertible notes and ~4.7M common shares; a share‑lending agreement gave Credit Suisse a pool of ~3.44M shares to lend.
- Plaintiffs allege Credit Suisse solicited hedge funds pre‑offering, set a clearing price, and structured the deals to enable massive short sales by hedge funds at negligible borrow cost (one cent/share) and with reduced upside risk via the convertible feature.
- After the offerings short interest rose sharply and ECD’s stock fell from ~$72 to under $1 by Feb 2012; ECD later filed bankruptcy and shareholders suffered large losses.
- Plaintiffs (former ECD shareholders) brought a putative class action alleging Section 10(b)/Rule 10b‑5 market manipulation and misrepresentation claims, and Section 9 claims, naming Credit Suisse International and Credit Suisse Securities (USA).
- Credit Suisse moved to dismiss under Rule 12(b)(6); the court took judicial notice of SEC filings and evaluated pleading sufficiency under Twombly/Iqbal, Rule 9(b), the PSLRA, and Second Circuit law.
- Court denied dismissal in large part: manipulation and misstatement claims survived as to statements in the Share Lending Agreement and manipulation allegations; misstatements alleged in the Prospectuses were dismissed as to Credit Suisse for failure to plead that Credit Suisse “made” those Prospectus statements with particularity.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Market manipulation under §10(b)/Rule10b‑5 | Credit Suisse engineered the offerings and lent excessive shares to enable coordinated high‑volume shorting that depressed ECD’s stock | Short selling alone (even high volume) is not manipulative; plaintiffs plead only trading patterns and speculation | Plaintiffs pleaded sufficient manipulative acts and participation by Credit Suisse to survive dismissal under ATSI standards given facts likely within defendants’ control |
| Misstatements / omissions (10b/10b‑5) | Prospectuses and Share Lending Agreement misrepresented that shares would be used only for hedging and omitted that Credit Suisse designed the deal to facilitate predatory shorts | Prospectuses disclosed the lending arrangement and risks; statements were true or non‑actionable; plaintiffs fail to show falsity when made | Statements in the Share Lending Agreement (which Credit Suisse authored/signed) survive; alleged misleading statements in the Prospectuses dismissed as to Credit Suisse for failure to plead Credit Suisse as the “maker” with particularity |
| Attribution / who “made” Prospectus statements (Janus) | Credit Suisse substantially contributed to and prepared the Prospectuses and thus should be liable | Janus limits liability to the entity with ultimate authority over content; plaintiffs fail to plead facts showing Credit Suisse had that control | Court held plaintiffs failed to plead particularized facts to attribute Prospectus statements to Credit Suisse (unlike Share Lending Agreement) and dismissed those Prospectus‑based claims as to Credit Suisse |
| Scienter (motive/opportunity and recklessness) | Credit Suisse had motive (fees, access to lucrative hedge‑fund business) and structured the deal, solicited hedge fund interest, and enabled post‑offering shorts — strong circumstantial evidence of intent | Alleged motives are generalized profit seeking; structuring offerings is not inherently fraudulent; competing nonculpable inferences exist | Considering allegations collectively (structure, solicitations, post‑offering shorting) the court finds a strong inference of scienter sufficient to survive pleading stage |
| Loss causation | The offerings and subsequent manipulative shorting caused the sustained depression in ECD’s stock and ultimate bankruptcy, producing plaintiffs’ losses | Plaintiffs fail to link Credit Suisse’s conduct to plaintiffs’ losses; unidentified traders caused declines; plaintiffs lack a corrective disclosure theory | Plaintiffs adequately alleged loss causation under Rule 8 by pleading the concealed condition (manipulative scheme) materialized and proximately caused price decline |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (plaintiff must plead factual content allowing reasonable inference of liability)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for complaints)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (elements and pleading standards for market manipulation claims)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (assessment of competing inferences for scienter)
- Janus Capital Grp. v. First Derivative Traders, 564 U.S. 135 (maker of a statement is the entity with ultimate authority over content)
- Stoneridge Inv. Partners, LLC v. Scientific‑Atlanta, 552 U.S. 148 (elements for §10b misrepresentation claims)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (loss causation requirement)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (PSLRA pleading standards for scienter and falsity)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (recklessness and circumstantial evidence for scienter)