United States District Court, N.D. Alabama, Southern Division
MEMORANDUM OPINION
ABDUL
K. KALLON UNITED STATES DISTRICT JUDGE.
Erich,
Sherri, and John Halbert bring this action against Credit
Suisse, AG and Janus Index & Calculation Services, LLC
for alleged violations of federal and state securities laws
and common law causes of action stemming from a market-wide
volatility spike on February 5, 2018. Doc. 45. The Halberts
claim Credit Suisse sold them high-risk securities in the
days leading up to this volatility spike, but failed to
disclose that the Defendants intended to facilitate the
collapse of these securities by hedging against them, and
then profit off their collapse by redeeming the securities at
a fraction of their earlier value. The Halberts also claim
that, during a one-hour period when the value of the
securities was rapidly falling, the Defendants disseminated
misleadingly high estimates of the securities' value. The
Defendants have moved to dismiss pursuant to Federal Rule of
Civil Procedure 12(b)(6). Doc. 52. For the reasons explained
below, except for the Alabama Code §§ 8-6-19(a) and
(c) claims premised on the alleged misrepresentation of the
Intraday Indicative Values and the breach of contract claim
against Credit Suisse, and the negligent misrepresentation
claim against Janus related to the Intraday Indicative Value,
the motion, which is fully briefed and ripe for review, docs.
57, 58, is due to be granted.
I.
STANDARD OF REVIEW
A.
The Relevant Standards
Under
Federal Rule of Civil Procedure 8(a)(2), a pleading must
contain “a short and plain statement of the claim
showing that the pleader is entitled to relief.”
“[T]he pleading standard Rule 8 announces does not
require ‘detailed factual allegations,' but it
demands more than an unadorned,
the-defendant-unlawfully-harmed-me accusation.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007)). Mere “labels and conclusions” or
“a formulaic recitation of the elements of a cause of
action” are insufficient. Id. (citations and
internal quotation marks omitted). By contrast with Rule
8(a)'s fairly liberal pleading standard, Federal Rule of
Civil Procedure 9(b) requires a party to “state with
particularity the circumstances constituting fraud or
mistake.” Where a party raises claims of fraud, Rule
9(b)'s standard is satisfied if the pleading sets forth:
(1) precisely what statements or omissions were made in which
documents or oral representations; (2) the time and place of
each such statement and the person responsible for making
(or, in the case of omissions, not making) them; (3) the
content of such statements and the manner in which they
misled the plaintiff; and (4) what the defendant obtained as
a consequence of the fraud.
FindWhat Inv'r Grp. v. FindWhat.com, 658 F.3d
1282, 1296 (11th Cir. 2011) (citations omitted).
Additionally, claims of securities fraud must satisfy the
requirement of the Private Securities Litigation Reform Act
(PSLRA), which requires a complaint alleging
“misleading statements and omissions” to
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.
Federal
Rule of Civil Procedure 12(b)(6) permits dismissal when a
complaint fails to state a claim upon which relief can be
granted. “To survive a motion to dismiss, a complaint
must contain sufficient factual matter, accepted as true, to
state a claim to relief that is plausible on its face.”
Id. (citations and internal quotation marks
omitted). A complaint states a facially plausible claim for
relief “when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.”
Id. (citation omitted). Ultimately, this inquiry is
a “context-specific task that requires the reviewing
court to draw on its judicial experience and common
sense.” Id. at 679.
B.
What the Court Considers
Generally,
a district court “must convert a motion to dismiss into
a motion for summary judgment if it considers materials
outside the complaint.” Day v. Taylor, 400
F.3d 1272, 1275-76 (11th Cir. 2005) (citation omitted);
see Fed. R. Civ. P. 12(d). However, “the court
may consider a document attached to a motion to dismiss
without converting the motion into one for summary judgment
if the attached document is . . . central to the
plaintiff's claim and . . . undisputed, ” meaning
“the authenticity of the document is not
challenged.” Day, 400 F.3d at 1276 (citation
omitted). Similarly, if a “document's contents are
alleged in a complaint, ” and the document is
“central to the plaintiff's claim” and
undisputed, the court may consider it. Id. In
determining whether a document is central to the
plaintiff's claims, courts consider whether the plaintiff
“would have to offer the document to prove his
case.” See Lockwood v. Beasley, 221 Fed.Appx.
873, 877 (11th Cir. 2006). Furthermore, the court may take
judicial notice of an adjudicative fact “not subject to
reasonable dispute” because it is either
“generally known within the trial court's
territorial jurisdiction” or “can be accurately
and readily determined from sources whose accuracy cannot
reasonably be questioned.” Fed.R.Evid. 201.
The
Defendants have attached seven documents to their motion: (1)
a sworn affidavit by defense counsel attesting to the
authenticity of the other six documents; (2) the January 29,
2018 VelocityShares Pricing Supplement to the Prospectus
Supplement dated June 30, 2017 and Prospectus dated June 30,
2017; (3) Credit Suisse's press release dated February 6,
2018; (4) a news article from Reuters published on
April 30, 2018; (5) Credit Suisse's press release dated
February 14, 2018; (6) data tables purportedly displaying the
Intraday Indicative Value for the VelocityShares Daily
Inverse VIX Short Term exchange traded notes on February 5,
2018 from 3:30:02 PM to 5:10:00 PM ET; and (7) data tables
purportedly displaying the levels of the S&P 500 VIX
Short-Term Futures Index (“VIX Futures Index”) on
February 5, 2018 from 3:30:02 PM to 5:10:04 PM. See
docs. 52-1, 52-2, 52-3, 52-4, 52-5, 52-6, 52-7. The
authenticity of all the documents is undisputed. See
doc. 57.
The
court finds that the January 29, 2018 Pricing Supplement is
“central” to the Halberts' claims because
their claims are based on purported misrepresentations and
omissions made in this document. Moreover, the court takes
judicial notice of the Pricing Supplement because “a
court, when considering a motion to dismiss in a securities
fraud case, may take judicial notice . . . of relevant public
documents required to be filed with the SEC, and actually
filed.” Bryant v. Avado Brands, Inc., 187 F.3d
1271, 1278 (11th Cir. 1999).
However,
the remaining documents are neither “central” to
the Halberts' claims nor properly subject to judicial
notice. Although the February 6, 2018 press release, in which
Credit Suisse announced the acceleration event and end of
trading for the XIV ETNs, is referenced in the Amended
Complaint, see doc. 45 ¶ 33, this document is
not “central” because the Halberts would not have
to “offer the document to prove [their] case”
given there were no alleged misrepresentations in the press
release. See Lockwood v. Beasley, 221 Fed.Appx. 873,
877 (11th Cir. 2006). Similarly, the February 14, 2018 press
release and the Reuters article are not
“central” to the Halberts' claims as they are
not referenced anywhere in the Amended Complaint.
Furthermore, with respect to the attached data tables, docs.
52-6, 52-7, the Defendants contend that the court can
consider “the entirety of this data” and cite to
cases in which courts have taken judicial notice of stock
prices. See doc. 52 at 25 n.12; see La Grasta v.
First Union Sec., Inc., 358 F.3d 840, 842 (11th Cir.
2004), abrogated on other grounds by Bell Atlantic Corp.
v. Twombly, 550 U.S. 544 (2007) (judicially noticing
stock price on the “other days” during the
relevant period where the complaint only listed stock price
on certain days); see In re ING Groep, N.V. ERISA
Litig., 749 F.Supp.2d 1338, 1344 (N.D.Ga. 2010) (noting
that “general economic conditions, stock prices, and
market trends” are subject to judicial notice). While
the court does not disagree with the proposition that the
historical levels of market indices and public estimates of
securities' values may properly be the subject of
judicial notice, the Defendants have not provided the
necessary information in order for the court to take judicial
notice of the proffered data. Namely, neither the exhibits
themselves nor the affidavit purportedly authenticating the
data provide the source of the data, precluding the court
from finding that the data “can be accurately and
readily determined from sources whose accuracy cannot
reasonably be questioned.” See Fed. R. Evid.
201(b)(2); docs. 52-6, 52-7. Accordingly, the court does not
consider these documents in ruling on the Defendants'
motion.
II.
FACTUAL BACKGROUND
A.
Background on the Securities
This
case arises from the sale and subsequent collapse of a
security tied to market volatility.[1] The Chicago Board Options
Exchange (“CBOE”) Volatility Index, also known
simply as the Volatility Index (“VIX”), is a
measurement of the implied volatility of the Standard &
Poor (S&P) 500 Index at points along the volatility
forward curve. Doc. 45 ¶ 8. Investors can invest in the
forward volatility of the S&P 500 Index by trading
futures contracts-contracts in which the parties agree to
purchase and sell an underlying asset at a predetermined time
and price- on the VIX Index. See id. ¶ 9. The
S&P 500 VIX Short-Term Futures Index ER (“VIX
Futures Index”) reflects the outcome of holding long
positions-the position of the party obligated to purchase the
underlying asset-in VIX futures contracts in the short term.
See id.
Investors
could purchase exchange-traded notes (ETNs) tied to the VIX
Futures Index. One such ETN, offered by Credit Suisse, was
known as the Inverse VIX Short-Term ETNs (“XIV
ETNs”). Id. ¶ 9-10; doc. 52-2 at 2. The
XIV ETNs were designed to generally provide the opposite
return of the VIX; meaning that as market volatility
decreased, generally, the value of the XIV ETNs increased,
and vice-versa. See doc. 45 ¶ 10; doc. 52-2 at
26. The XIV ETNs were liquid, tradeable, and available to
unsophisticated investors. Doc. 45 ¶¶ 12-13. Like
stock, their value was dictated by market supply and demand.
Id. In 2017 and the beginning of 2018, the value of
XIV ETNs consistently increased due to low volatility in the
stock market, leading unsophisticated investors to purchase
the XIV ETNs. Id. ¶ 24.
B.
The Offering Documents
On
January 29, 2018, Credit Suisse issued a pricing supplement
pursuant to SEC Rule 424(b)(2) in conjunction with a
registration statement, a prospectus, and a prospectus
supplement (collectively “the Offering
Documents”). Id. ¶ 16. The Offering
Documents offered for sale six series of ETNs linked to
market volatility, one of which was the XIV ETNs. See
id. ¶ 10; doc. 52-2 at 2. Between February 2 and 5,
2018, the Halberts purchased 5, 590 XIV ETNs, of the 16, 275,
500 XIV ETNs Credit Suisse offered at a principal amount of
$10 each. Id. Credit Suisse collected a daily
investor fee on these XIV ETNs, “generat[ing] millions
of dollars for Credit Suisse.” Id. ¶ 15.
The
Offering Documents explained that Credit Suisse and Janus
would publish two public estimates of the value of the XIV
ETNs at certain times: an Intraday Indicative Value, updated
every fifteen seconds, and a Closing Indicative Value at the
close of each day. Id. ¶¶ 13-14; doc. 52-2
at 5, 7. Furthermore, the Documents explained that Credit
Suisse had the option to accelerate the XIV ETNs upon the
occurrence of “any event that adversely affects [Credit
Suisse's] ability to hedge or [its] rights in connection
with the ETNs, including . . . if, at any point, the Intraday
Indicative Value is equal to or less than twenty percent
(20%) of the prior day's Closing Indicative Value.”
Docs. 45 ¶ 19; 52-2 at 8.
Finally,
the Offering Documents contained various disclosures,
including that Credit Suisse “expect[s] to hedge [its]
obligations relating to the ETNs” and “may also
engage in trading in the underlying futures, or . . . futures
contracts, ” both of which “could adversely
affect . . . the market value of [investors'] ETNs . .
.” Doc. 45 ¶ 18 (quoting doc. 52-2 at 34). The
Offering Documents also stated, inter alia, that it
was “possible that [Credit Suisse] . . . could receive
substantial returns with respect to these hedging activities
while the value of [investors'] ETNs decline or become
zero.” Id.
C.
The February 5, 2018 Volatility Spike and Collapse of the
XIV ETNs
A week
after Credit Suisse issued additional XIV ETNs, market
volatility spiked and the value of XIV ETNs, which totaled
approximately $1.9 billion, collapsed, see doc. 45
¶ 22, due to heavy trading in March VIX futures, which
caused VIX futures prices to dramatically increase because of
“liquidity issues in the VIX futures market due to
volatility in the market, ” id. ¶ 36.
Before 4:00 p.m. E.T. on February 5, 2018, the average VIX
futures price increased 34.5% “from the previous
day.” Doc. 45 ¶ 37. By 4:09 p.m., that average
price had increased to over 80% of the previous day's
closing value. Id. And, by 4:15 p.m., VIX futures
prices were 96% greater than “the day before.”
Id. ¶ 28.
As to
be expected, the value of XIV ETNs dropped dramatically
during the same period. At the closing bell at 4:00 p.m., the
XIV ETN was trading at a value of $99.00. Doc. 45 ¶ 25.
At 4:30 p.m., the trading price of XIV ETNs was $70.01 and,
by 4:45 p.m., the price had dropped to $42.81 per share.
Id. ¶ 30. By 6:28 p.m., the price of XIV ETNs
was $10.16 per note, a decrease of 89.74% from its
“closing value” that day. Id. ¶ 32.
During
this period, the Intraday Indicative Value did not accurately
track the decline in the XIV ETN's value. See
id. ¶ 26. From 4:10 p.m. until 5:09 p.m., the
Intraday Indicative Value was approximately $24.70, but, at
5:10 p.m., it had dropped to $4.22. See id.
¶¶ 26, 31; doc. 52-6 at 17-18, 53. However, from
4:10 p.m. until 5:09 p.m., the “actual” value of
one ETN was between $4.22 and $4.40. Doc. 45 ¶ 26.
The
following morning, Credit Suisse announced an Acceleration
Event that would end trading on the XIV ETNs by February 20,
2018. Id. ¶ 33. Consequently, the Halberts sold
their XIV ETNs for a fraction of their purchase price.
Id. ¶¶ 33, 46. And, Credit Suisse
subsequently accelerated the XIV ETNs, redeeming them for
“pennies on the dollar, ” and ended trading on
the securities. Id. ¶¶ 33, 41. Allegedly,
had Credit Suisse not accelerated the XIV ETNs, their value
would have risen to $30.88 per ETN within a month, over five
times their value at redemption. Id. ¶ 45.
Unlike Credit Suisse which announced that it experienced no
trading losses from the XIV ETNs despite holding a
“significant amount of short-volatility financial
products, ” the investors lost approximately $1.8
billion in total. Id. ¶¶ 43-44.
D.
The Alleged Fraudulent Misrepresentations and
Conduct
Allegedly,
the Defendants “knew, or should have known, ”
that the increased value of XIV ETNs over the previous year
had attracted unsophisticated investors. Id. ¶
24. Credit Suisse was “actively manipulating” the
value of the XIV ETNs by “liquidating its holdings in
various financial products to avoid a loss, ”
id. ¶ 27, and planned to “hedge”
against the XIV ETNs so that their value would plummet, to
allow Credit Suisse to profit by accelerating and redeeming
these lower-valued securities, see id. ¶¶
47-48, 38-39. Moreover, the Offering Documents failed to
disclose Credit Suisse's intentions with respect to the
XIV ETNs, the attendant conflicts of interest between Credit
Suisse and investors, and the full extent of the risk that
the value of the XIV would plummet. See id.
¶¶ 52, 62. And, because the market for XIV ETNs was
an efficient public market that digested all publicly
available information, see doc. 45 ¶ 60, the
allegedly misleading statements in the Offering Documents
“artificially inflate[d]” the value of the XIV
ETNs, see id. ¶¶ 47-48.
Credit
Suisse purportedly engaged in “hedging
activities” that caused the sudden increase in VIX
futures prices. See id. ¶¶ 37-38.
Additionally, from 4:10 to 5:09 p.m. on the day at issue, the
Defendants failed to “update” the Intraday
Indicative Value while “the value of the underlying VIX
futures were rapidly changing.” Id. ¶ 26.
The Defendants knew, or should have known, that the VIX
Futures Index, on which the Intraday Indicative Value
depended, was “not updating every 15 seconds to
‘apply[] real time prices of the relevant VIX futures
contracts, '” and yet never attempted to notify or
warn investors of this failure. Id. ¶¶
26-27. The failure to update the Intraday Indicative Value
increased the likelihood of an Acceleration Event because, if
the Defendants had done so, the Closing Indicative Value
would have only been 77% of the previous day's value.
Id. ¶ 41. Instead, the Intraday Indicative
Value dropped to 20% or less than of the previous day's
Closing Indicative Value, [2] thereby giving Credit Suisse an option,
but not an obligation, to declare an Acceleration Event
pursuant to the Offering Documents. See id.
¶¶ 19, 34. It consequently exercised this option,
allowing Credit Suisse to “realize[] an enormous
profit” by redeeming the outstanding XIV ETNs. See
id. ¶ 46.
Based
on these alleged fraudulent acts and misrepresentations, the
Halberts plead violations of Section 10(b) of the Exchange
Act of 1934, 15 U.S.C. § 78j(b), negligence, wantonness,
fraudulent misrepresentation, negligent misrepresentation,
and fraudulent suppression. They also plead claims against
Credit Suisse for violations of Section 11 of the Securities
Act of 1933, 15 U.S.C. § 77k, violations of the Alabama
Blue Sky Law, Ala. Code § 8-6-19(a)(2) and (c), and
breach of contract.
III.
ANALYSIS
The
Defendants have moved to dismiss the federal securities
claims for failure to sufficiently allege misrepresentation,
scienter, and loss causation. See doc. 52, 58. They
also contend that the state securities law and common law
claims fail as a matter of law. See id. The opinion
is divided as follows. In Section A, the court, first, finds
that the Halberts have adequately alleged standing for their
Section 10(b) claims premised on the allegedly false Intraday
Indicative Values on February 5, 2018. Second, the court
finds that, the Halberts adequately alleged material
misstatements or omissions under Section 10(b) premised on
the allegedly false Intraday Indicative Values, but not with
respect to the alleged omissions in the Offering Documents
and, therefore, their Section 11 claims also fail. Third, the
court finds that the Halberts have not alleged scienter for
their Section 10(b) claims. Because the Halberts' claims
fail on the issues of misrepresentation and scienter, the
court does not reach the issue of loss causation.
Next,
in Section B, the court finds that the Halberts have pled
violations of Alabama Code §§ 8-6-19(a)(2) and (c),
based on the allegedly false Intraday Indicative Values.
Finally, in Section C the court finds that the Halberts have
pled breach of contract against Credit Suisse and negligent
misrepresentation against Janus, and that the rest of their
common law claims fail.
A.
The Federal Securities Law Claims
The
Halberts assert securities claims under Section 10(b) of the
Exchange Act, and SEC Rule 10b-5, as well as under Section 11
of the Securities Act.
1.
Overview of the Federal Securities Laws
Section
10(b) of the Exchange Act of 1934 makes it unlawful
“for any person . . . [t]o use or employ, in connection
with the purchase or sale of any security . . . any
manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the
[Securities Exchange Commission] may prescribe . . .”
15 U.S.C. § 78j. SEC Rule 10b-5, promulgated under
Section 10(b), further makes it “unlawful for any
person”
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under
which they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any
person, in connection with the purchase or sale of any
security.
17 C.F.R. § 240.10b-5. Rule 10b-5 creates two types of
claims under Section 10(b): misrepresentation/nondisclosure
claims pursuant to Rule 10b-5(b), and scheme liability/market
manipulation claims pursuant to Rule 10b-5(a) and (c).
See IBEW Local 595 Pension & Money Purchase Pension
Plans v. ADT Corp., 660 Fed.Appx. 850, 858 (11th Cir.
2016) (“A scheme liability claim [under § 10(b)]
is different and separate from a nondisclosure
claim.”); Ala. Farm Bureau Mut. Cas. Co. v. Am.
Fid. Life Ins. Co., 606 F.2d 602, 608 (5th Cir. 1979)
(recognizing scheme liability claims under § 10(b) and
Rule 10b-5).[3] To establish a misrepresentation claim
under Rule 10b-5(b), plaintiffs must allege: “(1) the
existence of a material misrepresentation or omission, (2)
made with scienter, (3) in connection with the purchase or
sale of a security, (4) on which the plaintiff relied, and
(5) which was causally connected to (6) the plaintiff's
economic loss.” Edward J. Goodman Life Income Tr.
v. Jabil Circuit, Inc., 594 F.3d 783, 789 (11th Cir.
2010). Scheme liability claims, on the other hand, require a
showing of conduct that “can be fairly viewed as
‘manipulative or deceptive' within the meaning of
the statute.” Ala. Farm Bureau, 606 F.2d at
608 (quoting Santa Fe Industries, Inc. v. Green, 430
U.S. 462, 473-74 (1977)). In other words, plaintiffs must
allege “intentional or willful conduct designed to
deceive or defraud investors by controlling or artificially
affecting the price of securities.” In re Galectin
Therapeutics, Inc. Sec. Litig., 843 F.3d 1257, 1273
(11th Cir. 2016) (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 199 (1976)). Basically, a
plaintiff must show that defendants engaged in an activity
“designed to ‘create an unnatural and unwarranted
appearance of market activity.'” See Id.
(citation omitted). And, significantly, “[m]isleading
statements and omissions only create scheme liability in
conjunction with ‘conduct beyond those
misrepresentations or omissions.'” IBEW,
660 Fed.Appx. at 858 (internal citation
omitted)).[4]
By
contrast, Section 11(a) of the Securities Act of 1933
“provides a cause of action to purchasers of securities
where: ‘any part of the registration statement, when
such part became effective, contained an untrue statement of
a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading.'” Oxford Asset Mgmt.
Ltd. v. Jaharis, 297 F.3d 1182, 1189 (11th Cir. 2002)
(quoting 15 U.S.C. § 77k(a)). A “registration
statement” includes a prospectus and any supplements.
See Miyahira v. Vitacost.com, Inc., 715 F.3d 1257,
1265 (11th Cir. 2013). “A registration statement can be
misleading either by containing an untrue statement or by
omitting facts that are necessary to prevent other statements
from being misleading.” Wagner v. First Horizon
Pharm. Corp., 464 F.3d 1273, 1277 (11th Cir. 2006)
(citing 15 U.S.C. § 77k(a)). There is no state of mind
element to a Section 11 claim, and liability is
“virtually absolute, even for innocent
misstatements.” Id. (quoting Herman &
MacLean v. Huddleston, 459 U.S. 375, 382 (1983)). For
Section 11 claims premised on material omissions, plaintiffs
must allege:
1) the [registration statement] contained an omission; 2) the
omission was material; 3) defendants were under a duty to
disclose the omitted material information; and 4) that such
information existed at the time the [relevant part of the
registration statement] became effective.
Oxford Asset Mgmt., 297 F.3d at 1189. Finally,
where, as here, “the [alleged] facts underlying the
misrepresentation at stake in the [Section 11] claim are said
to be part of a fraud claim, as alleged elsewhere in the
complaint[, ] . . . plaintiffs must plead with
particularity.” See Wagner, 464 F.3d at 1278.
2.
Standing under Section 10(b)
As an
initial matter, the Defendants contend that the Halberts lack
standing to assert their Section 10(b) claim with respect to
the alleged misrepresentations of the Intraday Indicative
Value on February 5, 2018 because they failed to allege that
they purchased or sold the XIV ETNs during the one-hour
window when Defendants purportedly misrepresented the value.
Doc. 52 at 9-10; 58 at 2-3. In support of this contention,
the Defendants cite O & G Carriers, Inc. v.
Smith, in which the Southern District of New York held
that, because “the alleged fraud . . . took place
after [the plaintiffs] had invested, the alleged
fraud was not ‘in connection with' the purchase or
sale of a security, ” as required by Section 10(b).
See 799 F.Supp. 1528, 1539 (S.D.N.Y. 1992). However,
although the Halberts do not specifically allege that they
bought and sold XIV ETNs within the one-hour period when the
Intraday Indicative Value allegedly failed to update, they do
allege that they bought and sold XIV ETNs on February 5 and
6, 2018. See doc. 45 ¶ 46. Moreover, the
Halberts allege that they purchased the XIV ETNs “in
reliance on the integrity of the market, ” id.
¶ 63, which, they allege, was an efficient market that
was affected by “the misstated Intraday Indicative
Values, ” id. ¶ 60. Their contentions are
sufficient to allege a “fraud-on-the-market
theory” of reliance, see doc. 45 ¶ 60,
which entitles the Halberts to a rebuttable presumption of
reliance on the allegedly false Intraday Indicative Values
based on the theory that “the market price of shares
traded on well-developed markets reflects all publicly
available information, and, hence, any material
misrepresentations[.]” See Meyer v. Greene,
710 F.3d 1189, 1195 (11th Cir. 2013) (quoting Basic Inc.
v. Levinson, 485 U.S. 224, 241 (1988)); Stoneridge
Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 159
(2008) (“[U]nder the fraud-on-the-market doctrine,
reliance is presumed when the statements at issue become
public.”).
The
Defendants further contend that the Halberts have merely
alleged impermissible “holding” claims-that the
allegedly false Intraday Indicative Values on February 5,
2018 induced them to hold, rather than to buy or sell, their
XIV ETNs. See doc. 58 at 7-8. In Blue Chip
Stamps v. Manor Drug Stores, the Supreme Court affirmed
the standing rule created by Birnbaum v. Newport Steel
Corp., 193 F.2d 461, 464 (2d Cir. 1952), which permits
only purchasers and sellers of securities, and parties to
contracts to purchase and sell securities, to bring suit
under Rule 10b-5. 421 U.S. 723, 731-32 (1975). This rule
bars, in part, plaintiffs who “are actual shareholders
in the issuer who allege that they decided not to sell their
shares because of an unduly rosy representation or a failure
to disclose unfavorable material. . . .” Blue Chip
Stamps, 421 U.S. at 737-38. In citing this rule and
contending that the Halberts have plead impermissible
“holder” claims, the Defendants rely on
assertions from the Halberts' responsive brief, rather
than the allegations in the Amended Complaint. See
doc. 58 at 2-3. In ruling on a motion to dismiss, however,
the court's review is limited to the allegations in the
complaint, incorporated exhibits, central and undisputed
extrinsic documents, and judicially-noticed documents and
facts. See U.S. ex rel. Osheroff v. Humana Inc., 776
F.3d 805, 811 (11th Cir. 2015) (describing what district
courts may consider on motion to dismiss under Rule
12(b)(6)). The court cannot, and does not, consider unpleaded
allegations in the parties' briefs. See id.
Accordingly, at this stage of the proceedings, the Halberts
have adequately alleged standing for their Section 10(b)
claim premised on the allegedly false Intraday Indicative
Values on February 5, 2018.
3.
Material Misrepresentations under Section 10(b) and
Section 11
To
state a claim under Section 11 of the Securities Act, or a
misrepresentation claim under Section 10(b) and Rule 10b-5(b)
of the Exchange Act, “a complaint must allege the
misstatement or omission of a material fact.” In re
BellSouth Corp. Sec. Litig., 355 F.Supp.2d 1350, 1365
(N.D.Ga. 2005). A statement is misleading under the
securities laws “if in the light of the facts existing
at the time of the [statement] . . . [a] reasonable investor,
in the exercise of due care, would have been misled by
it.” FindWhat Inv'r Grp. v. FindWhat.com,
658 F.3d 1282, 1305 (11th Cir. 2011) (quoting parenthetically
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 863 (2d
Cir. 1968)). “In other words, if no reasonable investor
could conclude public statements, taken together and in
context, were misleading, the issue is appropriately resolved
as a matter of law.” In re BellSouth, 355
F.Supp.2d at 1365 (citation omitted) (analyzing Section 11
and Section 10(b) misrepresentation claims together). The
alleged misleading misrepresentations must also be
material-i.e., that “there is a substantial likelihood
that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly
altered the total mix of information made available.”
S.E.C. v. Morgan Keegan & Co., Inc., 678 F.3d
1233, 1245 (11th Cir. 2012) (articulating this standard for
Section 10(b) claims); see Oxford Asset
Mgmt., 297 F.3d at 1189 (applying this standard under
Section 11). “The trier of fact usually decides the
issue of materiality.” Oxford Asset Mgmt., 297
F.3d at 1189. “Only if the lack of importance of the
omission is so plain that reasonable minds cannot differ
thereabout is it proper for the court to pronounce the
omission immaterial as a matter of law.” Id.
a.
Alleged Omissions Concerning Hedging and Plan to Collapse and
...