Rubinstein v. Credit Suisse Grp. AG

457 F.Supp.3d 289

Julian RUBINSTEIN, Barbara Antinoro and David Fleer Individually and on Behalf of All Others Similarly Situated, Plaintiffs,

v.CREDIT SUISSE GROUP AG, Credit Suisse AG, Credit Suisse Securities (USA) LLC, Tidjane Thiam, and David R. Mathers, Defendants.

19-CV-1069 (VEC)

United States District Court, S.D. New York.

Signed April 28, 2020

David George Januszewski, Herbert Scott Washer, Peter James Linken, Sesi V. Garimella, Sheila Chithran Ramesh, Cahill Gordon & Reindel LLP, New York, NY, for Defendants.

OPINION AND ORDER

VALERIE CAPRONI, United States District Judge:

Plaintiffs bring this securities class action on behalf of all investors who purchased or acquired VelocityShares Daily Inverse VIX Medium-Term Exchange Traded Notes ("ZIV ETNs") between June 30, 2017 and February 5, 2018. Plaintiffs assert claims pursuant to Sections 11 and 15 of the Securities Act of 1933, as well as Regulation S-K, alleging that Defendants’ Offering Documents failed to disclose certain risks associated with the ZIV ETNs. See Amended Complaint, Dkt. 32 ("Am. Compl."). Defendants move to dismiss Plaintiffs’ Amended Complaint for failure to state a claim. See Dkt. 33. Defendants argue that the Offering Documents, and particularly the Pricing Supplement, included robust disclosures addressing the precise risks that Plaintiffs claim caused their damages. For the following reasons, Defendants’ motion to dismiss is GRANTED. Plaintiffs’ Amended Complaint is DISMISSED.

BACKGROUND

The ZIV ETNs¹ at issue in this case were created and issued by Defendant Credit Suisse and were designed to inversely track the performance of the S&P 500 Mid-Term VIX Index. Am. Compl. ¶ 19. The Volatility Index ("VIX index"), sometimes referred to as Wall Street's "fear index," or "fear gauge," is calculated by the Chicago Board of Exchange ("CBOE"), and it is a measure of the expected future volatility in the S&P 500 Index ("SPX"). Id. ¶ 14. The VIX index is based on real time pricing of SPX Options and is calculated by averaging the weighted prices of call and put options over a wide range of strike prices. Id. Although investors cannot invest directly in the VIX, as it is not an actual security, they can purchase VIX future contracts on the VIX index ("VIX Futures"), which trade over a seven-month expiration period. Id. ¶¶ 15, 17. Futures contracts allow investors to invest based on their assessment of likely future movement of the VIX index; the futures contracts settle on a single day based on the difference between the VIX index on that day and the strike price for the futures contract. Id. The Mid-Term VIX Index ("SPVIXMTR") "measures the return of a daily rolling long position" of VIX Futures expiring in four, five six, and seven months. Id. ¶ 18. The Mid-Term VIX Index is less popular and less volatile than the S&P 500 VIX Short-Term Futures Index, which measures VIX Futures expiring in one and two-months. Id. ¶¶ 17, 18. As noted, supra, the ZIV ETNs were designed to track the inverse performance of the SPVIXMTR; in other words, the value of the ZIV ETNs increased as the SPVIXMTR declined and vice versa. Id. ¶¶ 18, 19.

The ZIV ETNs were issued by Credit Suisse pursuant to a registration statement, prospectus, prospectus supplement, and a pricing supplement, each of which was filed with the SEC and each of which contained extensive disclosures regarding the risks of investing in and holding the ETNs.² Id. ¶¶ 56-59; Pricing Supplement ("PS"), Linken Decl., Dkt. 34 Ex A. For example, the Pricing Supplement explained that the ZIV ETNs were intended for sophisticated, "knowledgeable" investors to use on a short-term basis, and that investors who chose to hold the ETNs for longer periods faced significant risks, including losing their entire investment. See, e.g., PS at 1 ("The ETNs are riskier than securities that have intermediate or long-term investment objectives, and may not be suitable for investors who plan to hold them for longer than one day"); PS at 10 ("[i]f the applicable underlying Index declines or increases, as applicable, investors should be willing to lose up to 100% of their investment); PS at 14 ("[Y]ou may lose all or a significant part of your investment in the ETNs."). The Supplement also specifically warned that, if Credit Suisse exercised its right to accelerate the notes, investors would likely "lose part or all of [their] initial investment. PS at 10. As a result, the Supplement included bolded and underlined warnings, indicating that the ETNs were not appropriate for investors seeking a "guaranteed return" on their investment and that the "long term expected value" of the ETN was zero. PS at 11, 16.

The Pricing Supplement further cautioned that the ETNs were not appropriate for investors who were "not willing to be exposed to fluctuations in volatility in general and in the level of the applicable underlying Index in particular." PS at 11. In an entire section devoted to "Risk Factors," the Pricing Supplement described the effect that market volatility could have on the ZIV ETNs’ returns and emphasized that investors "should proceed with extreme caution in considering an investment in the ETNs." PS at 14. Specifically, the Supplement warned that the "Inverse ETNs ... are linked to the daily performance of the applicable underlying Index and include [ ] inverse [ ] exposure," such that "changes in the market price of the underlying futures will have a greater likelihood of causing such ETNs to be worth zero." Id. at PS 28. The Supplement highlighted that this risk could materialize within a single day. Id. ("In particular, any significant increase in the market price of the underlying futures on any Index Business Day will result in a significant decrease in the Closing Indicative Value and Intraday Indicative Value of the Inverse ETNs.").

The Pricing Supplement also contained disclosures concerning Credit Suisse's intention to hedge its own exposure to the ZIV ETNs.³ See PS at 16 ("The daily rebalancing of the futures contracts underlying the Indices may cause the Issuer, our affiliates, or third parties with whom we transact to adjust their hedges accordingly."). Moreover, the Supplement indicated that "this hedging activity could affect the value of the Index, and accordingly the value of the ETNs." PS at 13. As will be discussed infra, warnings regarding the impact of Defendants’ hedging activity on the value of the ETNs were reiterated throughout; the Supplement stated that Defendants’ hedging "will contribute to the trading volume of the underlying futures contracts and may adversely affect the market price of such underlying futures contracts and in turn the level of the applicable underlying index." PS at 17; see also PS at 50.

This Court is neither the first nor the only court to analyze investors’ Section 11 claims based on the securities at issue in this case. See, e.g., Y-GAR Capital LLC v. Credit Suisse Grp. AG , No. 19-CV-2827, 2020 WL 71163, at *5 (S.D.N.Y. Jan. 2, 2020) (holding that the Pricing Supplement for the ZIV ETNs contained "cautionary statements [that] directly addressed the risks that ultimately materialized," and that, "as a result, the alleged omissions are immaterial as a matter of law."); Set Capital LLC v. Credit Suisse Grp. AG , No. 18-CV-2268, 2019 WL 3940641, at *11 (S.D.N.Y. Aug. 16, 2019), report and recommendation adopted, Set Capital LLC v. Credit Suisse Grp. AG , No. 18-CV-2268, 2019 WL 4673433 (S.D.N.Y. Sept. 25, 2019) (finding the Pricing Supplement for these securities to be devoid of any material misstatements or omissions) Halbert v. Credit Suisse AG , 402 F. Supp. 3d 1288, 1311 (N.D. Ala. 2019) (holding that the Pricing Supplement for these securities was "not misleading as a matter of law," and explaining that the disclosures were "transparent about the nature of Credit Suisse's hedging activities, the potential adverse consequences for investors, and the significant risks of acceleration and loss.").⁴

On February 5, 2018, the markets became volatile and the ZIV share price fell 14.5% from the prior day's closing value. Am. Compl. ¶ 48. Plaintiffs, who suffered damages as a result of the price drop, now assert claims for violations of Sections 11 and 15 of the Securities Act. Id. ¶¶ 72-87. Despite acknowledging several of the numerous disclosures contained in the Pricing Supplement, see id. ¶¶ 57-62, Plaintiffs argue that the Supplement was materially false or misleading because it failed to adequately disclose the risks associated with the ZIV ETNs. Id. ¶¶ 61-62. Defendants respond that the disclosures sufficiently warned Plaintiffs of the risks and accordingly move to dismiss the amended complaint for failure to state a claim. See Defs.’ Mem. of Law, Dkt. 35.

DISCUSSION

To survive a motion to dismiss for failure to state a claim, "a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). A complaint "does not need to contain detailed or elaborate factual allegations, but only allegations sufficient to raise an entitlement to relief above the speculative level." Keiler v. Harlequin Enters., Ltd. , 751 F.3d 64, 70 (2d Cir. 2014). Although the Court must accept as true all allegations in the complaint and make all reasonable inferences in favor of the non-moving party, the Court need not credit claims that are contradicted by documents incorporated in the complaint or publicly filed with the SEC. See Olkey v. Hyperiod 1999 Term Trust, Inc. , 98 F.3d 2, 5-9 (2d Cir. 1996) ; In re Optionable Sec. Litig., 577 F. Supp. 2d 681, 692 (S.D.N.Y. 2008).

A. Plaintiffs’ Section 11 Claim Fails

Section 11 of the Securities Act of 1933 prohibits "materially misleading statements or omissions in registration statements filed with the SEC." In...