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In re TVIX Secs. Litig.

United States District Court, S.D. New York

June 9, 2014


Page 445

June 9, 2014, Filed

For Elite Aviation LLC, Endless H3, David Schottenstein, William Bostedo, Grace Trading LLC, Ann Nicolosi, Mountain Vista LLC, Ram Sinai, DRHP, Inc., Md. Mostofa Afzal Momen, Rick L. Colyer, Yohanna Marini, Jorge Bitar Naim, Elias Antonio Khouri Makl, William Mathers, Brian Vandiver, Farid Rahimi and Robert Kovaks, Consolidated Plaintiffs: Gregory M. Nespole, Esq., Mark C. Rifkin, Esq., Matthew M. Guiney, Esq., E. Joshua Rosenkranz, Esq., WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP, New York, NY.

For Credit Suisse AG, Credit Suisse Securities (USA) LLC, Brady W. Dougan, Renato Fassbind, D. Neil Radey, Walter B. Kielholz, Hans-Ulrich Doerig, Peter Brabeck-Letmathe, Thomas W. Bechtler, Robert H. Benmosche, Noreen Doyle, Jean Lanier, Anton Van Rossum, Aziz R. D. Syriani, David W. Syz, Ernst Tanner, Richard E. Thornburgh and Peter F. Weibel, Defendants: James H.R. Windels, Esq., Emmet P. Ong, Esq., Melissa C. King, Esq., DAVIS POLK & WARDWELL LLP, New York, NY.

Page 446

Opinion and Order

LAURA TAYLOR SWAIN, United States District Judge.

This consolidated case is a putative class action brought on behalf of investors who purchased Velocity Shares Daily 2x VIX Short Term Exchange Traded Notes[1] (" TVIX ETNs" ) between November 30, 2010, the date on which the TVIX ETNs were first offered, and the date of the Complaint in this action (the " Class Plaintiffs" ), with certain claims brought only on behalf of a subclass consisting of investors who purchased TVIX ETNs between February 22, 2012, and March 22, 2012, while there was a temporary suspension of the issuance of TVIX ETNs (the " Dislocation Subclass Plaintiffs" and, together with the Class Plaintiffs, " Plaintiffs" ). Plaintiffs allege that they invested in the TVIX ETNs pursuant to a March 25, 2009, Registration Statement and Prospectus (the " Registration

Page 447

Statement" ) and a series of pricing supplements (one of which is attached as Exhibit 1 to Defendants' Declaration in support of their motion and is referred to herein as the " Pricing Supplement" and, together with the Registration Statement, the " Offering Documents" ). The Dislocation Subclass Plaintiffs also allegedly relied on the press releases issued by Credit Suisse on February 21, 2012 and March 22, 2012, respectively (the " Press Releases" ). (CCAC ¶ 2.) Plaintiffs assert claims under Sections 11 and 15 of the Securities Act of 1933, 15 U.S.C. § § 77k and 77o.

Defendants Credit Suisse, AG, Credit Suisse Securities (USA), LLC (collectively, " Credit Suisse" )[2] and the individual defendants (who are directors and officers of Credit Suisse) (together with Credit Suisse, the " Defendants" )[3] move pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss all of the claims asserted in the Consolidated Class Action Complaint (the " CCAC" ). The Court has jurisdiction of this action pursuant to 28 U.S.C. § 1331 and Section 22 of the Securities Act, 15 U.S.C. § 77v. Having considered carefully the parties' submissions and arguments, the Court grants Defendants' motion in its entirety.


The following facts are alleged in the CCAC or drawn from the Offering Documents and Press Releases. TVIX ETNs are one of the six types of ETNs that Credit Suisse offers to investors who seek exposure to the volatility of equities in the S& P 500 Index. (CCAC ¶ 51.) The " VIX" is a trademarked ticker symbol for the Chicago Board Options Exchange (" CBOE" ) Market Volatility Index, which measures the implied 30-day volatility of S& P 500 Index options. (Id. ¶ ¶ 51, 54-56.) The VIX is quoted in percentage points and roughly corresponds to the expected movement of the S& P 500 Index over the upcoming 30-day period, which is then annualized, allowing investors the ability to invest in changes in forward volatility based on their views of the future direction of the market. (Id. ¶ ¶ 54-56.) The specific ETN at issue here, the TVIX ETN, uses a formula to track the performance of the S& P 500 VIX Short-Term Futures Index (the " Index" ), which, in turn, is based on the value of futures contracts on the VIX. TVIX ETNs are designed to offer a leveraged exposure to the VIX (specifically, two times the daily performance of the Index) (Id. ¶ ¶ 56-65.) Applying this formula results in an Indicative Value for the TVIX ETNs, which changes throughout the day based on changes in the value of the Index.

TVIX ETNs must be rebalanced every day in order to track the Index and to achieve their daily investment objectives. Plaintiffs allege that the mechanics of the daily rebalancing caused the TVIX ETNs to underperform their target returns when held for longer than a single trading session. (Id. ¶ 63.) Plaintiffs assert that the Offering Documents misled investors as to the propriety of holding TVIX ETNs for longer than a single trading session because, inter alia, the " Offering [D]ocuments did not disclose the mechanics of daily rebalancing or how daily rebalancing would constantly disadvantage the portfolio, leading to lower daily closing indicative

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values . . . and lower market prices for TVIX ETNs" over time. (Id.)[4] Plaintiffs also allege that in 2012, which was a volatile time in the financial markets, investors and speculators sought exposure to VIX-related products in order to hedge volatility risk and the volume of TVIX ETNs soared. (Id. ¶ ¶ 69-70.)

On February 21, 2012, Credit Suisse announced, through a press release that was filed with the SEC, that it had temporarily suspended further issuances of the TVIX ETNs because it had reached " internal limits." (Id. ¶ 72; (" Feb. 21 Press Release" ).) The Feb. 21 Press Release warned that " the market value of the ETNs may be influenced by, among other things, the levels of supply and demand for the ETNs" and warned investors " that the temporary suspension of further issuances may cause an imbalance of supply and demand in the secondary market for the ETNs, which may cause the ETNs to trade at a premium or discount in relation to their indicative value" and that " any purchase of the ETNs in the secondary market may be at a purchase price significantly different from their indicative value." (Id.) Following this suspension, TVIX ETNs began trading at prices that did not correspond to the Index that they were designed to track and, by March 21, 2012, TVIX ETNs were trading at a 90% premium to their Indicative Value. (Id. ¶ 73.) At the close of trading on March 22, 2012, Credit Suisse announced, again through a press release filed with the SEC, that it would reopen the issuance of TVIX shares on a limited basis the next day. The market price of TVIX ETNs dropped rapidly and significantly beginning that afternoon. (Id. ¶ ¶ 74-76.)

Plaintiffs allege that, throughout the Class Period, the Offering Documents misstated and omitted material facts and information concerning the substantial risk associated with purchasing TVIX ETNs and the magnitude of that risk, including: (1) statements and other indicators suggesting that a holding period longer than one trading session was appropriate; (2) a series of " Hypothetical Examples" (projecting performance over a 20 year period) that misleadingly implied that TVIX ETNs could or should be held for longer than a single trading session and could or would deliver targeted returns over such a longer period, and omitted material information about the substantial risks that would adversely affect holders of notes over longer trading periods; and (3) " omitted material information concerning the quantifiable risk that the daily rebalancing of TVIX ETNs would cause the notes to underperform their targeted returns by an average of 24 basis points each day or 48.6% per annum." (Id. ¶ ¶ 6, 85, 91, 105-07.)

With respect to the Dislocation Subclass, Plaintiffs allege that the Offering Documents, inter alia, (1) misstated that Credit Suisse would issue more TVIX ETNs in order to meet any growth in the demand for them (id. ¶ 7), (2) omitted material information concerning whether there was a limit on the number of TVIX ETNs that Credit Suisse could or would issue or that Credit Suisse could or would cease issuing the notes (id. ¶ ¶ 7, 138), (3) omitted material information concerning whether Credit Suisse maintained internal limits on the number of TVIX ETNs it could or would offer for sale, (4) omitted material information concerning the nature and magnitude

Page 449

of the substantial risk that TVIX ETNs would become illiquid during that period (id. ¶ ¶ 7, 147), (5) omitted material information concerning the likelihood and the reasons why TVIX ETNs could deviate from their intrinsic value, including the impact of a decision to cease issuing TVIX ETNs (id. ¶ ¶ 143-57), and (6) omitted material information disclosing that the " vertical platform" employed by Credit Suisse to sell and manage TVIX ETNs (i.e., the use of affiliated companies to perform various functions relating to ETN issuance and the hedging of risks relating to the TVIX ETNs) was inherently more risky than traditional " open" platforms involving nonaffiliated entities and made it more difficult for Credit Suisse to hedge its exposure to the notes (id. ¶ ¶ 7, 140.)


When deciding a motion, pursuant to Rule 12(b)(6), to dismiss a complaint the Court accepts the allegations in the complaint as true and draws all reasonable inferences in the plaintiffs' favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). The Court should not dismiss a complaint if plaintiffs have alleged " enough facts to state a claim to relief that is plausible on its face." Bell A. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). It is not enough for a plaintiff to plead facts that are " merely consistent with" a right to relief. Id. at 557. " A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

Plaintiffs assert claims under Section 11 of the Securities Act, which " prohibits materially misleading statements or omissions in registration statements filed with the SEC." In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358 (2d Cir. 2010); see 15 U.S.C. ยง 77k. Plaintiffs also assert " control person" liability claims under section 15 of the Securities Act, based on the alleged violations of Section 11. Where, as here, the Section 11 claims sound in negligence rather than in fraud, Plaintiffs' pleading must satisfy the basic requirements of Rule 8(a)(2) of the Federal Rules of Civil Procedure, rather than the heightened standard set by Rule 9(b). " Therefore, notice pleading ...

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