The Stone Family Trust v. Credit Suisse AG

Background

The Stone Family Trust sued Credit Suisse AG, Credit Suisse Securities (USA) LLC, Tidjane Thiam, and David R. Mathers concerning XIV, an exchange-traded note issued by Credit Suisse AG. XIV was designed to track the daily inverse performance of the S&P 500 VIX Short-Term Futures Index, a measure connected to stock-market volatility.

The complaint alleged that Credit Suisse’s hedging of its XIV obligations contributed to a sharp rise in VIX futures prices and a corresponding collapse in XIV’s value on February 5, 2018. The Trust alleged that it purchased more than $43 million in XIV notes that day and later lost approximately $37.7 million when Credit Suisse declared an acceleration event and redeemed the notes for $5.99 per note.

The Trust asserted claims under Sections 9(a), 10(b), and 20(a) of the Securities Exchange Act of 1934; Sections 11 and 15 of the Securities Act of 1933; the Pennsylvania Securities Act; and Pennsylvania common law. The defendants filed a partial motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Claims Concerning XIV’s Indicative Value

The Trust argued that the offering documents falsely stated that XIV’s Indicative Value would be calculated every 15 seconds and failed to disclose that the value was not properly updated between 4:00 and 6:00 p.m. each trading day. The court rejected both theories at the pleading stage.

The court held that the statement about 15-second calculations was not materially misleading because the offering documents warned that XIV’s actual trading price could vary significantly from the Indicative Value and that the calculation could be delayed or postponed. The court also held that the Trust had not plausibly alleged that the omitted information was material to a reasonable investor who already knew the Indicative Value could be inaccurate or delayed. The court noted that the Trust itself alleged that the inaccuracy was immaterial before February 5, 2018, because volatility was generally stable after 4:00 p.m.

The court further held that the Trust had not adequately alleged the required state of mind for its Exchange Act claims. For securities-fraud claims, this requirement is commonly called scienter and requires particularized facts supporting a strong inference that the defendants acted knowingly or recklessly. The court found that the allegations did not show that the defendants knew the Indicative Value was not properly updated every day during the 4:00-to-6:00 p.m. period.

The court therefore granted the defendants’ motion to dismiss the claims under Rule 10b-5 and Sections 9(a), 10(b), and 11 based on the alleged failure to disclose the Indicative Value problem.

Control-Person Claims

The Trust also sought control-person liability under Sections 20(a) and 15. These provisions can impose liability on a person who controls an entity or person responsible for an underlying securities-law violation.

Because the court found no adequately pleaded primary securities-law violation concerning the Indicative Value disclosures, it dismissed the related control-person claims. It also granted the motion to dismiss the control-person claims against Credit Suisse AG and Credit Suisse Securities (USA) LLC because the Trust did not adequately allege that those entities controlled a person involved in the alleged primary violation.

The court denied the motion to dismiss the control-person claims against Thiam and Mathers insofar as those claims concerned alleged market manipulation and related misrepresentations about the risks of Credit Suisse’s hedging activities. The court found that their positions as chief executive officer and chief financial officer, their signatures on the offering documents, their membership in relevant risk committees, and their alleged knowledge of the risks adequately pleaded control and culpable participation at this stage.

State-Law Claims and Other Claims

The court deemed the Pennsylvania Securities Act claims and the negligent-misrepresentation claim abandoned because the Trust did not defend them in its opposition brief. The court granted the motion to dismiss the Pennsylvania state-law claims. It also concluded that the Trust could not use its opposition brief to change its Pennsylvania fraud theory to one based on New York law.

The defendants’ motion concerning alleged violations of various Securities and Exchange Commission regulations and rules was denied as moot because the Trust said those claims were not clearly included in the second amended complaint and disclaimed bringing them.

Leave to Amend and Disposition

The defendants asked the court to dismiss the Trust’s claims with prejudice, which would bar refiling. The Trust requested permission to amend. Because the court was not persuaded that the pleading defects could not be cured, it allowed the Trust to file a motion for leave to further amend within 21 days. That motion could not seek to amend the Pennsylvania state-law claims the court deemed abandoned.

Judge Torres concluded that the defendants’ motion was granted in part and denied in part. The order terminated the motion at docket entry 37.