Y-GAR Capital LLC v. Credit Suisse Group AG

Background

Y-GAR Capital LLC purchased a large quantity of VelocityShares Daily Inverse VIX Short Term Exchange Traded Notes, or XIV notes. These notes were designed to let investors profit from low stock-market volatility. Their value moved inversely with the S&P VIX Short-Term Futures Index, and the offering documents explained that the notes were intended for short-term trading and could lose all or a substantial part of an investor’s money.

Credit Suisse AG issued and sold the notes, while Janus Henderson Distributors marketed them. The offering documents described how the notes would be valued, warned that Credit Suisse’s hedging could reduce their value, and disclosed that an acceleration could result in investors losing part or all of their investment. The documents also stated that a significant increase in the price of the underlying futures could sharply reduce the notes’ value.

On February 5, 2018, the S&P 500 fell and volatility increased. Credit Suisse bought VIX futures to hedge its exposure, and the opinion states that this and other market participants’ purchases drove trading volumes higher and contributed to a sharp increase in the VIX Futures Index. The XIV notes fell sharply. Credit Suisse declared an Acceleration Event the next day and ultimately redeemed the notes at $5.99 per note.

Y-GAR alleged that defendants violated Sections 11 and 15 of the Securities Act of 1933 and Sections 9, 10(b), and 20(a) of the Securities Exchange Act of 1934. It claimed that defendants failed to disclose objective risks, including low liquidity, market imbalances, and the effects of hedging, and that Credit Suisse had an undisclosed plan to cause the notes to fail. Defendants filed motions to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Section 11 claim

The court held that the Section 11 claim failed because Y-GAR did not adequately allege an actionable false statement or omission. Because the claim alleged that defendants concealed a plan to cause the notes to collapse, the court treated it as sounding in fraud and applied the heightened particularity requirement of Rule 9(b). The court also discussed the Private Securities Litigation Reform Act’s heightened requirements for allegations of misleading statements and fraudulent intent.

The court concluded that the offering documents expressly disclosed the risks about which Y-GAR claimed it was misled. They warned that investors could lose all or nearly all of their investment, that the notes could decline sharply in a single day, and that Credit Suisse’s hedging could adversely affect the notes’ value. Under the court’s analysis, the documents did not need to predict that those effects were inevitable or identify every specific market condition that contributed to the loss.

The court separately held that Y-GAR had not pleaded with particularity that Credit Suisse intentionally designed the notes to fail. Allegations that Credit Suisse sold additional notes shortly before the collapse, had market knowledge, and profited from the collapse did not identify specific reports, meetings, people, or conversations showing that defendants planned to cause the collapse. The court granted defendants’ motions as to the Section 11 claim.

Section 10(b) and related claims

The court held that the Section 10(b) claims also failed. The disclosures were sufficient to defeat the alleged misrepresentation and nondisclosure theories. Even assuming the complaint’s allegations could plausibly suggest a material omission, they did not create the required strong inference of scienter, meaning an inference that defendants acted with fraudulent intent or conscious recklessness.

The court found that Y-GAR’s alleged motives—such as selling notes at a high price and reducing Credit Suisse’s exposure after the notes were sold—were consistent with an ordinary profit motive. The court also found that Y-GAR had not identified specific information showing that defendants knew the notes were certain to collapse or intended to trigger that result. The court therefore granted defendants’ motions as to the Section 10(b) claims.

Y-GAR’s claims based on Items 303 and 503 of Securities and Exchange Commission Regulation S-K also failed. For the Section 11 theory, Y-GAR had not adequately alleged material omissions. For the Section 10(b) theory, the failure to adequately plead scienter was fatal. The court granted defendants’ motions as to those claims.

The Section 9 claim failed because it depended on allegations of material misstatements and scienter that were insufficient under the Section 10(b) analysis. The court granted defendants’ motions as to the Section 9 claim.

Control-person claims and disposition

Y-GAR also asserted control-person liability against Credit Suisse Group AG, Janus Henderson Group plc, Tidjane Thiam, and David R. Mathers under Sections 15 of the Securities Act and 20 of the Exchange Act. Because those claims required an adequately pleaded primary securities-law violation, the court held that they also failed. The court granted defendants’ motions as to the control-person claims.

The court’s conclusion states that defendants’ motions to dismiss were granted. The Clerk was directed to terminate the motions and close the case.