Allen v. Citigroup Global Markets Holdings, Inc.

Background

Thomas P. Allen, proceeding without a lawyer, sued Citigroup Global Markets Holdings, Inc. He alleged fraud under New York law and a claim under Section 11 of the Securities Act of 1933, which allows investors to sue over a materially false or misleading statement in a registration statement.

Allen purchased exchange-traded notes called “Velocity Shares 3x Long Crude Oil ETNs.” The notes were linked to the S&P GSCI Crude Oil Index ER and provided leveraged exposure to the index’s daily performance. Citigroup announced optional acceleration of the notes on March 19, 2020. Allen’s 1,500 notes were redeemed on April 3, 2020, and he alleged a loss of $14,751.30. He claimed that the notes should have increased by three times the index’s increase on March 19, 2020, but did not.

Citigroup first moved to dismiss for lack of subject-matter jurisdiction, but the court denied that motion in a July 19, 2022 order. Citigroup then moved under Federal Rules of Civil Procedure 9(b) and 12(b)(6), arguing that Allen had not adequately pleaded his claims. Allen did not file an opposition, so the court treated the motion as unopposed.

Section 11 claim

The court granted the motion to dismiss the Section 11 claim. It explained that Allen needed to identify a materially false statement or omission in a registration statement when that statement became effective. The court found that the complaint did not do so.

The court focused on the pricing supplement for the notes. It stated that the supplement warned of the notes’ heightened risks, explained that their trading prices were determined by the market rather than solely by the index, and disclosed that prices could vary significantly from the notes’ indicative value. Neither the notes’ title nor Citigroup’s materials promised that the notes would increase or decrease by exactly three times the index’s daily movement.

The court also held that Allen did not allege that the relevant statements were false when the registration statement became effective. Instead, he alleged that the pricing supplement later “became untrue.” The court stated that a later change in circumstances does not establish a Section 11 violation based on a statement that was not alleged to be false when made.

New York fraud claim

The court declined to exercise supplemental jurisdiction over Allen’s New York common-law fraud claim. Supplemental jurisdiction allows a federal court to hear related state-law claims in some circumstances. The court had already determined that there was no basis for diversity jurisdiction over this fraud claim. After dismissing the federal claim, the court therefore declined to hear the remaining state-law claim.

Disposition

The court granted Citigroup’s motion to dismiss and directed the clerk to terminate the motion. The order stated that any motion for leave to file an amended complaint had to be submitted by March 20, 2023. The opinion does not state that the dismissal was with or without prejudice.