PATRICIA A. STEADMAN and PATRICIA STEADMAN LTD, a corporation wholly owned by Patricia A. Steadman v. CITIGROUP GLOBAL MARKETS HOLDINGS INC.
21 Civ. 2430 (PGG) (RWL)
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
March 15, 2022
PAUL G. GARDEPHE, U.S.D.J.
Case 1:21-cv-02430-PGG-RWL Document 38 Filed 03/15/22
PAUL G. GARDEPHE, U.S.D.J.:
In this action, Patricia A. Steadman (“Plaintiff“) and Patricia Steadman Ltd. (the “Corporate Plaintiff“), proceeding pro se, assert fraud claims against Defendant Citigroup Global Markets Holdings Inc. (“Citi“). (Cmplt. (Dkt. Nos. 1, 1-1)) Citi has moved to dismiss for failure to state a claim, pursuant to
For the reasons stated below, Judge Lehrburger‘s R&R will be adopted in its entirety, and the Complaint will be dismissed without prejudice.
I. FACTS1
In March 2020, Plaintiffs purchased in the secondary market exchange traded notes issued by Citi. (Cmplt. (Dkt. No. 1-1) at 2-3; id., Exs. C-D (Dkt. No. 1-1) at 9, 11)2 The notes Plaintiffs purchased were denominated “Velocity Shares 3x Long Crude Oil ETNs” (the “ETNs“). (Cmplt. (Dkt. No. 1-1) at 2-3) The ETNs were linked to the S&P GSCI Crude Oil Index ER (the “Index“), which tracks futures contracts fоr crude oil. (See id. at 1-2; Rubin Decl., Ex. A (Dkt. Nos. 23-1 to 23-6) at 5, 46)3 The ETNs were unsecured debt obligations that were intended to be daily trading tools for sophisticated investors. They reflected a leveraged long or leveraged inverse exposure to the performance of the Index on a daily basis. (Rubin Decl., Ex. A (Dkt. Nos. 23-1 to 23-6) at 1, 3, 55) Unlike debt securities that provide interest and a guaranteed return of prinсipal, the ETNs offered investors the right “to receive a cash payment at maturity, upon early redemption or upon acceleration, as applicable, . . . linked to the performance of the Index.” (Id. at 3)
The Pricing Supplement also explains that Citi has the right to accelerate the ETNs at its “option at any time,” and that the ETNs will be automatically accelerated if the Index declines to a certain level. (Id. at 13, 36) The Pricing Supplement warns that (1) payments made following acceleration could “be significantly less than the stated principal amount of the . . . ETNs and could be zero” (id. at 36, 55), and (2) during the “Optional Acceleration Valuation Period” – the time between Citi‘s exercise of its option to accelerate and the time of valuation – “the return on the ETNs will not be based entirely on Index fluctuations . . . and [investors] will not entirely benefit from any favorable movements in the level of the Index during this period as [exposure to the Index] declines” (id. at 13, 36).
On March 20, 2020, after Governor Cuomo signed executive orders mandating the reduction of in-person work in New York as a result of the COVID-19 pandemic, Citi shut down its business operations, “leaving investors in the [ETNs] unable to receive аny assistance from the company.” (Cmplt. (Dkt. No. 1-1) at 2-4)
On April 7, 2020, Plaintiffs’ shares were redeemed pursuant to the optional acceleration invoked by Citi on March 20, 2020. At redemption, each Plaintiff incurred a loss of approximately $112,619. (Cmplt. (Dkt. No. 1-1) at 3, 6; id., Exs. C-D (Dkt. No. 1-1) at 10, 12)
II. PROCEDURAL HISTORY
The Complaint was filed on March 18, 2021, and asserts claims for fraud under New York law and Section 11 of the Securities Act of 1933. (Cmplt. (Dkt. No. 1-1) at 1-2, 5-6) Plaintiffs’ claims аre premised on the following factual allegations:
- the “3x” in the ETNs’ name and description falsely represents that the ETNs will consistently track the Index by three times the Index‘s performance;
the ETNs “faithfully tracked” the Index “for months,” but on March 19, 2020, the ETNs “started to under-track the [I]ndex“; - Defendant had no right to accelerate the ETNs because no triggering event had occurred;
- the Press Release is misleading because the ETNs did not track the Index after March 31, 2020, and the redemption value was not three times the Index; and
- Defendant shut down its business on March 20, 2020.
(Cmplt. (Dkt. No. 1-1) at 2-4)
On May 23, 2021, this Court referred the case to Magistrate Judge Lehrburger for general pretrial supervision. (Dkt. No. 14) In orders dated April 6, 2021 and July 7, 2021, Judge Lehrburger advised the Corporate Plaintiff that it could appear in this action only through counsel. (April 6, 2021 Order (Dkt. No. 6) at 2; July 7, 2021 Order (Dkt. No. 26)); see also March 25, 2021 Order (Dkt. No. 2) at 1 n.1) No attorney has appeared on behalf of the Corporate Plaintiff.
On July 1, 2021, Defendant moved to dismiss. (Dkt. No. 21) In its motion to dismiss, Defendant contends that the claims of the Corporate Plaintiff must be dismissed because it has not appeared through counsel. Defendant further argues that the claims of both Plaintiffs must be dismissed because the Complaint does not (1) provide a “short and plain” statement of Plaintiffs’ claims, as required by
On July 6, 2021, this Court referred Defendant‘s motion to Judge Lehrburger for an R&R. (Dkt. No. 25) The motion was fully briefed on August 16, 2021 (Dkt. Nos. 22, 27,
III. THE REPORT AND RECOMMENDATION
As an initial matter, Judge Lehrburger finds that the Corporate Plaintiff‘s claims must be dismissed because of its failure to appear through counsel. (Id. at 7-8)
As to Defendant‘s assertion that the Complaint does not “contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief,”
As to Defendant‘s Rule 12(b)(6) motion, Judge Lehrburger accurately states the applicable standard:
To survive a Rule 12(b)(6) motiоn, a complaint must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1960 (2007). A claim is facially plausible when the factual content pleaded allows a court “to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949 (2009). But “even pro se plaintiffs cannot withstand a motion to dismiss unless their pleadings cоntain factual allegations sufficient to raise a ‘right to relief above the speculative level,‘” Martinez v. Ravikumar, 536 F. Supp. 2d 369, 370 (S.D.N.Y. 2008) (quoting Twombly, 550 U.S. at 555, 127 S. Ct. at 1965), and must allege “enough facts to state a claim to relief that is plausible on its face.” Perry v. Mary Ann Liebert, Inc., 765 F. App‘x 470, 473 (2d Cir. 2019) (quoting Twombly, 550 U.S. at 570, 127 S. Ct. at 1960).
(Id. at 10)
“Under New York Law, plaintiffs must allege five elements to state a common law fraud claim: (1) a material misrepresentation or omission of fact (2) made by defendants with knowledge of its falsity (3) and intent to defraud, which (4) plaintiffs reasonably relied on, (5) resulting in damage to plaintiffs.” Santana v. Adler, No. 17-CV-06147, 2018 WL 2172699, at *9 (S.D.N.Y. Mar. 26, 2018); Premium Mortgage Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009).
(Id. (quotation marks omitted)) Judge Lehrburger further notes that Plaintiffs’ fraud claim must “meet the heightened pleading standard for fraud required by Federal Rule of Civil Procedure 9(b).” (Id. at 11 n.9)
Judge Lehrburger then cоnsiders the factual allegations on which Plaintiffs’ fraud claim is premised:
- that the “3x” in the ETNs’ name and description falsely represents that the ETNs will consistently track the Index by three times the Index‘s performance;
- that the ETNs “faithfully tracked” the Index “for months,” but on March 19, 2020, the ETNs “started to under-track the [I]ndex“;
- that Defendant had no right to accelerate the ETNs because no triggering event had occurred;
- that the Press Release is misleading because the ETNs did not track the Index after March 31, 2020, and the redemption value was not three times the Index; and
- that Defendant shut down its business on March 20, 2020.
(Cmplt. (Dkt. No. 1-1) at 2-4); see also R&R (Dkt. No. 35) at 11-17)
Judge Lehrburger likewise concludes that the Press Release does not contain misleading statements, because it exprеssly warns that “payment upon optional acceleration is based upon a declining exposure to the ETNs’ underlying index over the Optional Acceleration Valuation Period,” and that as a result, the redemption value at the end of the acceleration period “would be even less likely to fully reflect the Index.” (Id. at 14 (citing Rubin Decl., Ex. B (Dkt. No. 23-7))) In this regard, Judge Lehrburger notes that Plaintiffs purchased the ETNs “precisely at a time when their value was likely to be most volatile” – in March 2020, at the beginning of the COVID-19 pandemic. (Id.)
Judge Lehrburger further finds that the Complaint‘s allegations regarding Defendant‘s acceleration of the ETNs and the shutting down of its operations in March 2020 are
Judge Lehrburger also finds that Plaintiffs have not adequately pled scienter or reliance. He notes that the allegation that someone intentionally interfered with the “computer” that was tracking the Index (Cmplt. (Dkt. No. 1-1) at 3) “is far too speculative and conclusory to create a plausible cause of action.” (R&R (Dkt. No. 35) at 16 (citing In re Fannie Mae 2008 Securities Litigation, 891 F. Supp. 2d 458, 470 (S.D.N.Y. 2012), aff‘d, 525 F. App‘x 16 (2d Cir. 2013) and Yencho v. Chase Home Finance LLC, No. 14-CV-230 (NSR), 2015 WL 127721, at *3 (S.D.N.Y. Jan. 8, 2015))) As to reliance, Judge Lehrburger notes that Plaintiffs’ “own pleading” acknowledges that Plaintiffs purchased the ETNs on March 20, 2020 (Cmplt. (Dkt. No. 1-1) at 3) – a day after the Press Release announced that the payment upon acceleration would be based on decreased exposure to the Index (Rubin Decl., Ex. B (Dkt. No. 23-7)) – and thus, Plaintiffs could not have “reasonably relied on representations concerning correlation with the Index made prior to that time.” (R&R (Dkt. No. 35) at 17)
For all these reasons, Judge Lehrburger recommends that Plaintiffs’ common law fraud claim be dismissed for failure to state a claim.
As to Plaintiffs’ claim under Section 11 of the Securities Act of 1933,
To state a claim under Sеction 11 . . ., a plaintiff must allege that “(1) it purchased a registered security, either directly from the issuer or in the aftermarket following the offering; (2) the defendant participated in the offering in a manner sufficient to give rise to liability under section 11; and (3) the registration statement contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” Y-GAR Capital LLC, 2020 WL 71163, at *3. It “is not sufficient that, at some point after the registration statement became effective, some subsequent event made it no longer accurate.” Jiajia Luo v. Sogou, Inc., 465 F. Supp. 3d 393, 406 (S.D.N.Y. 2020).
(Id.)
Here, the Complaint does not identify a registration statement that was false and misleading at the time the registration statement became еffective. (Id. at 18-19) In reaching this conclusion, Judge Lehrburger points to express disclosures in the Pricing Supplement, and to the Complaint‘s assertion that the prospectus descriptions of the ETNs “became untrue statements of facts” after March 19, 2020. (Id. at 18 (citing Cmplt. (Dkt. No. 1-1) ¶ 2) (emphasis in R&R))
For these reasons, Judge Lehrburger recommends that Plaintiffs’ claim under Section 11 of the Securities Act be dismissed for failure to state a claim.7
DISCUSSION
A district court reviewing a magistrate judge‘s report and recommendation “may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge.”
Here, the R&R cites the requirement that “[p]ursuant to
Because neither side filed objections to Judge Lehrburger‘s R&R, the parties have waived judicial review. This Court has, however, reviewеd the R&R and finds it to be thorough, well-reasoned, and free of any clear error.
As an initial matter, the Corporate Plaintiff‘s claims must be dismissed, because a corporate entity cannot appear other than through counsel. See Lattanzio v. COMTA, 481 F.3d 137, 140 (2d Cir. 2007) (“[A] limited liability company . . . may appear in federal court only through a licensed attorney.“); United States ex rel. Mergent Servs. v. Flaherty, 540 F.3d 89, 92 (2d Cir. 2008)
This Court likewise agreеs with Judge Lehrburger that the Complaint – although it fails to state a claim – is sufficient under
Finally, for all the reasons stated by Judge Lehrburger, neither Plaintiffs’ common law fraud claim nor their claim under Section 11 is sufficiently pled. Accordingly, the Complaint will be dismissed.
Judge Lehrburger recommends that leave to amend be granted. (R&R (Dkt. No. 35) at 19) District courts “ha[ve] broad discretion in determining whether to grant leave to аmend.” Gurary v. Winehouse, 235 F.3d 792, 801 (2d Cir. 2000). Leave to amend may properly be denied in cases of “undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, futility of amendment, etc.” Ruotolo v. City of New York, 514 F.3d 184, 191 (2d Cir. 2008) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)). The Second Circuit has cautionеd that district courts “should not dismiss [a pro se complaint] without granting leave to amend at least once when a liberal reading of the
For these reasons, this Court will likewise adopt Judge Lehrburger‘s recommendation that leave to amend be granted.
CONCLUSION
For the reasons stated above, the R&R is adopted, and the Complaint is dismissed. Any motion for leave to file an amended complaint will be submitted by April 1, 2022. The proposed amended complaint is to be attached as an exhibit to the motion. The Corporate Plaintiff cannot assert any claim in an amended complaint absent the filing of a notice of appearance by counsel. The Clerk of Court is directed to terminate the motion (Dkt. No. 21).
Dated: New York, New York
March 14, 2022
SO ORDERED.
Paul G. Gardephe
United States District Judge