Jacobson v. Citigroup Global Markets Holdings Inc.

Background

Bret W. Jacobson, an individual broker, sued Citigroup Global Market Holdings Inc. under Section 11 of the Securities Act of 1933 and under New York common law for fraud. The claims concerned “Velocity Shares 3x Long Crude Oil ETNs,” unsecured debt obligations linked to the S&P GSCI Crude Oil Index ER. Jacobson alleged that the notes’ trading prices failed to rise by three times the index’s increase on March 19, 2020. He also alleged that Citigroup had used a computer program to keep the notes’ secondary-market prices aligned with the index and that someone changed the program.

The pricing supplement warned that the notes were intended as daily trading tools for sophisticated investors, could be highly volatile, and could trade at prices that differed significantly from their indicative value. It also explained that the notes’ “3x” designation related to value at maturity, early redemption, or acceleration, rather than promising that the notes would move three times the index’s daily movement. Citigroup announced optional acceleration of the notes on March 19, 2020, and Jacobson purchased 3,400 notes on March 26, 2020.

Procedural History

Citigroup previously moved to dismiss for lack of subject-matter jurisdiction, but the court denied that motion on January 28, 2022. Citigroup then moved to dismiss under Federal Rules of Civil Procedure 9(b) and 12(b)(6). Rule 12(b)(6) permits dismissal when a complaint does not state a legally sufficient claim, and Rule 9(b) requires fraud allegations to be pleaded with particular detail. Jacobson did not file an opposition, so the court deemed the motion unopposed and fully briefed.

Section 11 Claim

The court held that the complaint failed to state a claim under Section 11. That provision allows an investor to sue when a registration statement contains a material false statement or omission when it becomes effective.

The court concluded that the pricing supplement disclosed the risks about which Jacobson claimed he was misled. It stated that the notes’ trading prices were determined by the market, could vary significantly from the index-linked indicative value, and could be affected by unpredictable factors outside Citigroup’s control. The court also found that neither the notes’ name nor the pricing supplement represented that the notes would move three times the index on a daily basis.

The court separately held that Jacobson did not allege that the relevant statements were false when the registration statement became effective. Instead, his allegations asserted that the pricing supplement later “became untrue.” The court dismissed the Section 11 claim.

New York Fraud Claim

The court declined to exercise supplemental jurisdiction over Jacobson’s New York common-law fraud claim. Supplemental jurisdiction is a federal court’s authority to hear related state-law claims after hearing a federal claim. The court stated that it had dismissed the federal claim and had already found no basis for diversity jurisdiction over the state-law claim.

Disposition

The court granted Citigroup’s motion to dismiss and directed the Clerk to terminate the motion. The court stated that any motion for leave to file an amended complaint had to be submitted by March 3, 2023.