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Y-GAR Capital LLC v. Credit Suisse Group AG

United States District Court, S.D. New York

January 2, 2020




         This is one of several cases arising out of the collapse of VelocityShares Daily Inverse VIX Short Term Exchange Traded Notes, a complicated and risky investment instrument designed to allow investors to profit off of low volatility in the stock market. See, e.g., Set Capital LLC v. Credit Suisse Grp. AG, No. 18 Civ. 2268, 2019 WL 3940641 (S.D.N.Y. Aug. 16, 2019), report and recommendation adopted, Set Capital LLC v. Credit Suisse Grp. AG, No. 18 Civ. 2268, 2019 WL 4673433 (S.D.N.Y. Sept. 25, 2019), appeal docketed, No. 19-3466 (2d Cir. Oct. 18, 2019); Halbert v. Credit Suisse AG, No. 2:18 Civ. 00615, 2019 WL 3975362 (N.D. Ala. Aug. 22, 2019).[1] Plaintiff, Y-GAR Capital LLC, which purchased a large quantity of those instruments and consequently lost a great deal of money when their value crashed, claims that this collapse was not an accident, but rather arose out of risks that the issuers, underwriters, and marketers of the notes-Defendants here-knew of, concealed, and intentionally exacerbated as part of a scheme to reap large profits. Compl. ¶¶ 1-17, ECF No. 1.[2] Now before the Court are Defendants' motions to dismiss Plaintiff's complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). ECF Nos. 19, 22. For the reasons stated below, those motions are GRANTED.


         I. Factual Background

         VelocityShares Daily Inverse VIX Short Term Exchange Traded Notes (“XIV notes” or “XIV ETNs”) provided a mechanism by which investors could profit from low volatility in the stock market. See Compl. ¶ 2. In purchasing an exchange traded note (“ETN”), investors agree to pay money to the institution sponsoring the ETN in return for a payment when the note matures, the amount of which is determined by the value of a market index. Id. ¶ 35. The XIV ETNs in this case derived their value from the S&P VIX Short-Term Futures Index, an index that measures volatility in the stock market. Id. ¶ 37. To allow investors to bet against market volatility, the value of XIV notes was inverse to the value of the VIX Futures Index. See Id. ¶ 38. Defendant Credit Suisse AG issued and sold the notes, and Defendant Janus Henderson Distributors placed and marketed them.[3] Id. ¶ 35.

         Credit Suisse AG and Janus Henderson Distributors issued a prospectus for the XIV notes, and a supplement to the prospectus on January 29, 2018 (the “Pricing Supplement” or the “Supplement”) in connection with the issuance of more than 16 million additional notes. Id. ¶ 70; see Pricing Supplement, ECF No. 21-1.[4] The Supplement set out the conditions under which Credit Suisse AG would be required to pay noteholders, and provided that the company would pay them based on the notes' “closing indicative value”-an amount calculated at the end of each trading day based on that day's movement in the VIX Futures Index. See Pricing Supplement at PS-7. Because the closing indicative value was only calculated once per day, an “intraday indicative value” was also automatically calculated and distributed every 15 seconds, by applying the same formula used to calculate the closing indicative value to the most recent value of the Index. See Id. Neither the closing indicative value nor the intraday indicative value necessarily reflected the actual market price of the notes. See Id. at PS-8. If the notes matured, Credit Suisse AG was required to pay the closing indicative value on the maturity date. Id. at PS-4. Credit Suisse AG could also “accelerate” the notes in two circumstances: (1) at its option, in which case it would be required to pay the closing indicative value at a date at least 5 days after the optional acceleration; or (2) if a predefined “Acceleration Event” occurred in which case it would pay the closing indicative value on the day the Event occurred. See Id. at PS-6. One such Acceleration Event was the intraday indicative value of the notes dropping to less than 20% of the previous days closing indicative value. Id. at PS-46.

         The Supplement designated Defendants Credit Suisse International and Janus Index & Calculation Services LLC-two entities affiliated with, but separate from, Credit Suisse AG and Janus Henderson Distributors-as responsible for calculating the value of the notes, and allocated responsibilities between them. Id. at PS-49. Janus Index & Calculation Services had “the sole ability to calculate and disseminate the Closing Indicative Value, ” while Credit Suisse International had “the sole ability to make determinations with respect to reduction of the Minimum Redemption Amount, certain Acceleration Events, and calculation of default amounts.” Id.

         The Supplement also included detailed warnings about the risks associated with trading XIV notes. In broad terms, it warned that “[t]he long term expected value of [the] ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment.” Id. at PS-16. It disclosed that Credit Suisse AG intended to hedge its exposure to the notes by buying VIX futures, and that “[t]he costs of maintaining or adjusting this hedging activity could affect the value of the Index, and accordingly the value of the ETNs.” Id. at PS-13. And the Supplement specifically warned that investors faced a risk of losing their investment in the event of an acceleration: “[B]ecause of the way in which the underlying Indices are calculated, the amount payable at maturity or upon redemption or acceleration is likely to be less than the amount of your initial investment in the ETNs, and you are likely to lose all or part of your initial investment.” Id. at PS-10.#

         By January 2018, Credit Suisse AG had issued approximately 10.8 million XIV notes, and their indicative value as of January 26, 2018, was $134.14 per note. Comp. ¶ 41. On January 29, 2018, Credit Suisse issued another 16.3 million notes. Id. ¶ 56. The events that ultimately led to this litigation occurred on February 5, 2018, when the S&P 500 dropped roughly 4%. Id. ¶ 57. This drop caused volatility to spike, and the VIX Futures Index to spike with it. Id. ¶¶ 58-59. Over the course of regular trading on February 5, the price of XIV notes dropped to $99, from $115.55 the previous day. Id. ¶ 60. To hedge against risks that this drop in value created, Credit Suisse AG bought large numbers of VIX futures contracts. Id. ¶¶ 60-61. Credit Suisse AG and other market participants' efforts to buy up futures pushed trading volumes much higher than usual, which caused the VIX Futures Index to skyrocket, and thus the value of XIV notes to plummet. Id. ¶¶ 61-62. By 6:30 p.m., the price of XIV notes had dropped 90% from the previous day's closing price to approximately $10 per note. Id. ¶ 64. On February 6, 2018, Credit Suisse declared an Acceleration Event based on the drop in value, specifying February 15, 2018 as the date for calculating the closing indicative value that would be paid out to noteholders. Id. ¶ 67. Credit Suisse AG ultimately redeemed the notes at $5.99 per note. Id.

         II. Procedural Background

         Plaintiff was a purchaser of XIV notes. Compl. ¶ 22. On March 29, 2019, Plaintiff filed suit against Credit Suisse AG (the issuer), Credit Suisse International (one of the calculation agents), Credit Suisse Securities (USA) (the underwriter), Credit Suisse Group AG (their holding company), Tidjane Thiam (Credit Suisse Group's CEO), David R. Mathers (Credit Suisse Group's CFO) (collectively, the “Credit Suisse Defendants”); and Janus Henderson Distributors, LLC (the marketer), Janus Index & Calculation Services LLC (the other calculation agent), and Janus Henderson Group plc (their holding company) (collectively, the “Janus Defendants”). See Id. ¶¶ 23-34. Plaintiff claims that Defendants violated Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. §§ 77k, 77o, and Sections 9, 10(b), and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§78i, 78j(b), 78t(a). Compl. ¶ 18. On May 16, 2019, the Credit Suisse Defendants and the Janus Defendants each filed motions to dismiss the complaint for failure to state a claim. ECF Nos. 19, 22.


         I. Legal Standards

         A. Rule 12(b)(6)

         To survive a Rule 12(b)(6) motion to dismiss, a pleading “must contain sufficient factual matter . . . to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A plaintiff is not required to provide “detailed factual allegations, ” but must assert “more than labels and conclusions.” Twombly, 550 U.S. at 555. Ultimately, the “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Id. On a Rule 12(b)(6) motion, the court may consider only the pleading, documents attached to the pleading, matters of which a court can take judicial notice, or documents that the plaintiff knew about and relied upon in bringing suit. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002). The court must accept the allegations in the pleading as true and draw all reasonable inferences in favor of the non-movant. ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).

         B. Rule 9(b) and the PSLRA

         Rule 9(b) of the Federal Rules of Civil Procedure provides that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” It is well settled that “the particularity requirement of Rule 9(b) applies to securities fraud claims brought under Section 10(b) and Rule 10b-5” of the Exchange Act. Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004). And “the heightened pleading standard of Rule 9(b) [also] applies to [Securities Act] Section 11 . . . claims insofar as the claims are premised on allegations of fraud.” Id. at 171 (internal quotation marks and citation omitted). When Rule 9(b) applies, the complaint must “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Id. at 170. To satisfy the fourth element, Rule 9(b) requires plaintiffs to “state with particularity the specific facts in support of plaintiffs' belief that defendants' statements were false when made.” Id. at 172 (internal quotation marks and citation omitted).

         The Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4, also enhances the pleading requirements in securities suits. In any suit where a plaintiff “alleges that the defendant (A) made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading, ” the PSLRA requires that the complaint “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). Moreover, if plaintiffs' claims are ones where “the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, ” then the PSLRA requires that “the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A).

         II. Sec ...

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