Rubinstein v. Credit Suisse Group AG

Background

Julian Rubinstein, Barbara Antinoro, and David Fleer brought a proposed securities class action for investors who purchased or acquired VelocityShares Daily Inverse VIX Medium-Term Exchange Traded Notes, called ZIV ETNs, between June 30, 2017, and February 5, 2018. An exchange-traded note is an unsecured debt obligation whose return is based on an underlying index. These notes were designed to move inversely with the S&P 500 Mid-Term VIX Index, which tracks certain volatility futures. The ZIV ETNs’ share price fell 14.5% from the prior day’s closing value on February 5, 2018.

The plaintiffs sued Credit Suisse Group AG, Credit Suisse AG, Credit Suisse Securities (USA) LLC, Tidjane Thiam, and David R. Mathers. They asserted claims under Sections 11 and 15 of the Securities Act of 1933 and under Items 303 and 105 of Regulation S-K. In general, those claims alleged that the registration and offering documents failed to disclose material risks associated with the notes.

The Parties’ Arguments

The plaintiffs alleged that the offering documents inadequately disclosed three principal risks: the extent of Credit Suisse’s hedging and its possible effect on the notes’ value; insufficient liquidity in the VIX futures market to absorb Credit Suisse’s hedging and rebalancing; and the possibility that the notes were unsuitable even for investors managing their portfolios daily. The opinion also notes that the plaintiffs abandoned an allegation that the documents failed to disclose manipulation of the underlying index.

The defendants moved to dismiss the amended complaint for failure to state a claim. They argued that the offering documents, especially the Pricing Supplement, repeatedly warned investors about the same risks that allegedly caused the plaintiffs’ losses.

Section 11 Claim

Section 11 prohibits materially misleading statements or omissions in registration statements filed with the Securities and Exchange Commission. The court explained that an omission is material if the omitted information would likely have significantly changed the total information available to a reasonable investor. The court also stated that a Section 11 claim fails as a matter of law when the offering documents warn about the exact risk that later occurs.

The court held that the Pricing Supplement adequately disclosed Credit Suisse’s hedging activities and their potential effects. It warned that hedging could affect the underlying index and the value of the notes, that hedging could cause adverse effects in the underlying futures market, and that the defendants could profit from hedging while the notes declined in value or became worthless. The court rejected the plaintiffs’ argument that the documents had to say the adverse effect “would” occur rather than that it “may” occur. The defendants were not required to predict the precise way the disclosed risks would materialize.

The court also held that the Pricing Supplement adequately disclosed liquidity risks. It identified the volatility and liquidity of relevant options and futures contracts as factors affecting the notes’ market price and warned that futures markets could be distorted or disrupted by a lack of liquidity. The court ruled that the securities laws did not require the defendants to state specifically that the VIX futures market lacked enough liquidity to handle the relevant hedging and rebalancing.

The court further held that information about earlier volatility spikes was publicly available and therefore did not become a material omission merely because the Pricing Supplement did not repeat it. Finally, the court ruled that the documents adequately warned that the notes were intended for sophisticated, knowledgeable investors, were suitable only for a very short investment period, did not offer a guaranteed return, and could result in the loss of up to 100% of an investment.

The court concluded that the Pricing Supplement contained no material misstatements or omissions sufficient to support a Section 11 claim.

Section 15 Claim

Section 15 imposes secondary liability on a controlling person when there is a primary securities-law violation and the defendant controlled the primary violator. Because the court found that the complaint did not state a primary Section 11 claim, it dismissed the plaintiffs’ Section 15 claim as well.

Regulation S-K Claims

The plaintiffs also alleged violations of Items 303 and 105 of Regulation S-K. Item 303 requires disclosure of a trend, demand, commitment, event, or uncertainty that management presently knows about and that is reasonably likely to materially affect the company’s financial condition or results. Item 105 requires disclosure of the most significant risk factors associated with a security.

The court held that the plaintiffs did not plausibly allege that the defendants actually knew about undisclosed risk factors. The court rejected the plaintiffs’ argument that Credit Suisse’s participation in the VIX futures market allowed the court to presume that knowledge. It therefore dismissed the Regulation S-K claims. The court additionally noted that the extensive disclosures would independently defeat those claims.

Disposition

The court granted the defendants’ motion to dismiss, dismissed the plaintiffs’ complaint, directed the Clerk of Court to close the motion at docket entry 33, and terminated the case. The opinion does not state that the dismissal was with or without prejudice.