On March 31, 2023, Judge John P. Cronan of the United States District Court for the Southern District of New York dismissed a putative class action asserting claims under the Securities Exchange Act of 1934 against a financial institution that offered certain Exchange Traded Notes (the “ETN”) linked to a natural gas price index. Gomez v. Credit Suisse AG, No. 22 Civ. 115 (JPC) (BCM), 2023 WL 2744415 (S.D.N.Y. Mar. 31, 2023).
Plaintiff alleged that defendant failed to adequately disclose the risk of a “short squeeze” (in which short sellers are forced to sell their positions at a loss due to rising prices of the underlying securities), and further that it engaged in a manipulative scheme when it announced that it was suspending the issuance of and delisting the ETN. The Court held that plaintiff failed to adequately allege an actionable misrepresentation and failed to establish scienter or scheme liability. The Court granted leave for plaintiff to file an amended complaint but emphasized that plaintiff should only do so if she could remedy the many pleading deficiencies identified in the Court’s decision. The Court initially observed that the offering materials for the ETN in fact broadly cautioned that: (i) only sophisticated investors should transact in the ETN, which was leveraged and designed to be held for less than one day; (ii) while the ETN was designed to track the performance of an index, the price of the ETN could diverge from the index and would also reflect supply and demand for the ETN itself; and (iii) defendant had the discretion to suspend the issuance of the ETN or delist it, which could cause an imbalance in supply and demand with potentially unpredictable effects. Id. at *2–3. Defendant also regularly disclosed its own holdings of the ETN in its SEC filings, which reflected that it held more shares in its inventory than were outstanding on the market. Id. at *4. When defendant announced that it intended to delist the ETN, it further cautioned that this decision could affect the market value of ETN through the time of its delisting. Id.
With respect to plaintiff’s allegations that defendant’s press release announcing the suspension and delisting failed to adequately disclose the risk of a short squeeze, the Court explained that the offering materials for the ETN warned of that specific risk. Id. at *8. The Court also emphasized that “the Offering Documents repeatedly made clear, sometimes with bold for emphasis, that the trading price for the ETNs may at any time vary significantly from the Indicative Value.” Id. at *9. While plaintiff argued that more detailed warnings about a potential short squeeze should have been disclosed, the Court rejected that contention, explaining that “the securities laws do not require issuers to predict the precise manner in which disclosed risks will manifest themselves.” Id. The Court also noted that plaintiff did not allege that defendant did anything to alter the supply of ETNs in the market after the press release (id.), and plaintiff also did not allege that short squeezes always occur in the event of a delisting—and that, in fact, the complaint alleged that delisting of another ETN had the opposite effect on market prices (id. at *10). Moreover, the Court observed that the risk of a short squeeze in the particular ETN at issue had been reported in publicly available sources as early as 2019. Id.
The Court also rejected plaintiff’s claim that defendant had engaged in market manipulation by delisting the ETN. Id. at *12. The Court held that the complaint “does not even allege that [d]efendant in fact manipulated the market for [the ETN], let alone facts to plausibly support an inference of such manipulation.” Id. at *11. The Court emphasized that defendant had warned investors that it had the discretion to suspend the ETN and that doing so could adversely affect supply and demand and cause prices to rise. Thus, the Court held that the delisting “was neither manipulative nor deceptive.” Id. Moreover, the Court held that the complaint “contains nowhere near enough details to properly allege the who, what, when, where and why of the [alleged] fraudulent scheme.” Id.
Finally, the Court held that plaintiff failed to adequately allege scienter under either a “motive and opportunity” theory or “strong circumstantial evidence of conscious misbehavior or recklessness.” Id. While plaintiff contended that defendant had a financial motive to delist the ETN, the Court concluded that “it would be a stretch to impute a motive to defraud investors of roughly $135,000 to a company the size of [defendant], especially when the Complaint lacks any detail whatsoever as to who at [defendant] was involved.” Id. at *13. Moreover, the Court observed that defendant could have made more money by selling its own holdings into the short squeeze, which made an inference of scienter “even less plausible.” Id. Further, the Court noted that defendant earned investor fees on outstanding ETNs and could have earned more from such fees by keeping the ETN open than by delisting it. Id.
In addition, the Court rejected plaintiff’s argument that defendant behaved recklessly because it possessed unique facts suggesting a short squeeze was imminent, as plaintiff failed to allege which of defendant’s employees allegedly possessed such information. Id. at *14. The Court also emphasized that defendant decided to delist not only the ETN at issue but also a number of other ETNs and took steps to give investors time to cover their short positions, as well as providing clear warnings of the impact of these decisions. Id.
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