Steadman v. Citigroup Global Markets Holdings, Inc.

Background

Patricia A. Steadman and Patricia Steadman Ltd., a corporation wholly owned by Patricia A. Steadman, sued Citigroup Global Markets Holdings Inc. The plaintiffs proceeded without a lawyer. They asserted fraud claims under New York law and a claim under Section 11 of the Securities Act of 1933.

In March 2020, the plaintiffs bought exchange-traded notes issued by Citi called “Velocity Shares 3x Long Crude Oil ETNs.” The notes were linked to an index tracking crude-oil futures and provided leveraged exposure to the index. The pricing document warned that the notes were risky, might not be suitable for holdings longer than one day, could be highly volatile, and could be accelerated by Citi. It also warned that payments after acceleration could be substantially less than the stated principal amount, including zero, and that exposure to the index would decline during the acceleration valuation period.

On March 19, 2020, Citi announced that it would exercise its option to accelerate the notes. On March 20, after that announcement, each plaintiff purchased approximately $277,000 of the notes. The notes were redeemed on April 7, 2020, and each plaintiff allegedly lost approximately $112,619.

Claims and Motion

The plaintiffs alleged that “3x” falsely suggested that the notes would consistently move three times the index’s performance; that the notes began underperforming the index; that Citi lacked authority to accelerate them; that Citi’s press release was misleading; and that Citi shut down its operations during the COVID-19 pandemic.

Citi moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. Citi also argued that the complaint failed to meet Rule 8(a)’s requirement for a short and plain statement and Rule 9(b)’s heightened pleading requirements for fraud. Citi further argued that the corporate plaintiff had to be represented by counsel.

Court’s Analysis

The court adopted Magistrate Judge Robert W. Lehrburger’s factual account and report and recommendation. Because neither side objected, the court reviewed the recommendation for clear error and found none.

The court agreed that the complaint was sufficiently clear and concise under Rule 8(a). It nevertheless concluded that the fraud and Section 11 claims were not adequately pleaded.

For the New York fraud claim, the court agreed that the plaintiffs had not adequately alleged a material misrepresentation. The pricing document and press release disclosed the risks and mechanics that the plaintiffs claimed had been concealed or misrepresented. The court noted that “3x” referred to payment and value at maturity, redemption, or acceleration, rather than promising that the notes would move three times the index on a daily basis. The press release also warned that payment after optional acceleration would be based on declining exposure to the index.

The court further found that the allegations about Citi’s acceleration and business shutdown did not adequately support fraud. The pricing document expressly gave Citi the option to accelerate the notes even without an automatic-acceleration trigger. The court also found that the plaintiffs had not adequately pleaded intent to defraud or reasonable reliance. In particular, they bought the notes after the press release had announced the declining exposure during the acceleration period.

The court separately agreed that the Section 11 claim failed because the complaint did not identify a registration statement that was false or misleading when it became effective. Alleging that the descriptions later became inaccurate after March 19, 2020 was not enough to state a Section 11 claim.

The court also held that Patricia Steadman Ltd.’s claims had to be dismissed because a corporation may appear in federal court only through a licensed attorney. The corporation had previously been warned that it could appear only through counsel, but no attorney had appeared for it.

Disposition

The court adopted the report and recommendation and dismissed the complaint without prejudice. It granted leave to amend. Any motion for leave to file an amended complaint had to be submitted by April 1, 2022, with the proposed amended complaint attached. Patricia Steadman Ltd. could not assert a claim in an amended complaint unless counsel filed a notice of appearance. The clerk was directed to terminate Citi’s motion to dismiss.