592 F.Supp.3d 230
S.D.N.Y.2022Background
- Plaintiffs Patricia A. Steadman (pro se) and Patricia Steadman Ltd. (corporate plaintiff) purchased Citigroup-issued "Velocity Shares 3x Long Crude Oil ETNs" in the secondary market on March 20, 2020, after Citi issued a March 19, 2020 press release announcing exercise of an optional acceleration.
- The Pricing Supplement (Mar. 18, 2020) disclosed material risks: ETNs are leveraged daily trading tools, may be unsuitable for multi‑day holders, Citi retained an option to accelerate, acceleration yields a declining exposure during an Optional Acceleration Valuation Period, and payments on acceleration could be significantly less than principal or zero.
- Plaintiffs’ ETNs were redeemed pursuant to Citi’s optional acceleration on April 7, 2020, producing losses of about $112,619 per plaintiff.
- Plaintiffs filed a pro se complaint (Mar. 18, 2021) asserting New York common‑law fraud and a Section 11 Securities Act claim; Citi moved to dismiss under Rules 8, 9(b), and 12(b)(6); the corporate plaintiff had been warned it must appear through counsel but did not.
- Magistrate Judge Lehrburger issued an R&R recommending dismissal without prejudice (Jan. 24, 2022); no objections were filed; the district court adopted the R&R and dismissed the complaint (corporate plaintiff claims dismissed for failure to retain counsel), while granting leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Can the corporate plaintiff proceed pro se? | Patricia Steadman Ltd. proceeded without counsel. | Corporations must be represented by counsel in federal court. | Corporate plaintiff must be dismissed for failure to appear through counsel. |
| Does the Complaint satisfy Rule 8? | Complaint gives a short, plain statement of claims. | Complaint is deficient/unclear. | Complaint is sufficiently "short and plain" under Rule 8. |
| Is the common‑law fraud claim adequately pled (material misstatement, scienter, reliance) and subject to Rule 9(b)? | The "3x" designation and press release were misleading; acceleration and shutdown were fraudulent. | Pricing Supplement and press release disclosed the risks and Citi had contractual acceleration rights; allegations of tampering or intent are speculative. | Fraud claim fails: misrepresentation is foreclosed by express disclosures; scienter and reasonable reliance are not plausibly alleged; dismissal for failure to state a claim. |
| Is the Section 11 claim viable (false or misleading registration statement at time of offering)? | Prospectus/registration became untrue after March 19, 2020 and rendered statements misleading. | Section 11 requires a false or misleading registration statement at the time it became effective; subsequent events do not suffice. | Section 11 claim dismissed: plaintiffs do not identify a registration statement that was misleading when effective. |
Key Cases Cited
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading must state a claim that is plausible on its face)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (legal conclusions not entitled to presumption; plausibility standard applied)
- Lattanzio v. COMTA, 481 F.3d 137 (2d Cir. 2007) (corporations and limited liability entities must be represented by counsel)
- Rowland v. California Men's Colony, 506 U.S. 194 (1993) (litigants must comply with procedural rules; corporate entities cannot proceed pro se)
- Foman v. Davis, 371 U.S. 178 (1962) (standards for granting leave to amend pleadings)
- Ruotolo v. City of New York, 514 F.3d 184 (2d Cir. 2008) (factors counseling denial of leave to amend)
- Premium Mortg. Corp. v. Equifax, Inc., 583 F.3d 103 (2d Cir. 2009) (elements of common‑law fraud under New York law)