Opinion
21-CV-02430 (PGG) (RWL)
2022-03-14
Patricia A. STEADMAN and Patricia Steadman Ltd., a corporation wholly owned by Patricia A. Steadman, Plaintiffs, v. CITIGROUP GLOBAL MARKETS HOLDINGS INC., Defendant.
Patricia A. Steadman, Pro Se. Patricia Steadman Ltd., Pro Se. Marshall Howard Fishman, Samuel Joseph Rubin, Goodwin Procter, LLP, New York, NY, for Defendant.
Patricia A. Steadman, Pro Se.
Patricia Steadman Ltd., Pro Se.
Marshall Howard Fishman, Samuel Joseph Rubin, Goodwin Procter, LLP, New York, NY, for Defendant.
ORDER
PAUL G. GARDEPHE, U.S.D.J.:
In this action, Patricia A. Steadman ("Plaintiff") and Patricia Steadman Ltd. (the "Corporate Plaintiff"), proceeding pro se , assert fraud claims against Defendant Citigroup Global Markets Holdings Inc. ("Citi"). (Cmplt. (Dkt. Nos. 1, 1-1)) Citi has moved to dismiss for failure to state a claim, pursuant to Fed. R. Civ. P. 12(b)(6), and for failure to comply with the pleading standards of Fed. R. Civ. P. 8(a) and 9(b). (Dkt. No. 21) On July 6, 2021, this Court referred Citi's motion to Magistrate Judge Robert W. Lehrburger for a Report and Recommendation ("R&R"). (Dkt. No. 25) On January 24, 2022, Judge Lehrburger issued an R&R recommending that Citi's motion be granted. (R&R (Dkt. No. 35)) No objections have been filed to the R&R.
For the reasons stated below, Judge Lehrburger's R&R will be adopted in its entirety, and the Complaint will be dismissed without prejudice.
BACKGROUND
I. FACTS
The parties have not objected to the R&R's factual statement. Accordingly, this Court adopts Judge Lehrburger's factual account, and merely summarizes the facts below. See Silverman v. 3D Total Solutions, Inc., No. 18 CIV. 10231 (AT), 2020 WL 1285049, at *1 n.1 (S.D.N.Y. Mar. 18, 2020) ("Because the parties have not objected to the R&R's characterization of the background facts ..., the Court adopts the R&R's ‘Background’ section and takes the facts characterized therein as true." (citation omitted)).
In resolving Defendant's motion to dismiss, this Court has accepted as true all well-pleaded factual allegations in the Complaint, and has drawn all inferences in favor of Plaintiffs. See Lotes Co. v. Hon Hai Precision Indus. Co., 753 F.3d 395, 403 (2d Cir. 2014). The Court has also considered certain documents incorporated by reference in the Complaint, including the "Pricing Supplement" and "Press Release" described below. See DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010).
In March 2020, Plaintiffs purchased in the secondary market exchange traded notes issued by Citi. (Cmplt. (Dkt. No. 1-1) at 2-3; id. , Exs. C-D (Dkt. No. 1-1) at 9, 11) The notes Plaintiffs purchased were denominated "Velocity Shares 3x Long Crude Oil ETNs" (the "ETNs"). (Cmplt. (Dkt. No. 1-1) at 2-3) The ETNs were linked to the S&P GSCI Crude Oil Index ER (the "Index"), which tracks futures contracts for crude oil. ( See id. at 1-2; Rubin Decl., Ex. A (Dkt. Nos. 23-1 to 23-6) at 5, 46) The ETNs were unsecured debt obligations that were intended to be daily trading tools for sophisticated investors. They reflected a leveraged long or leveraged inverse exposure to the performance of the Index on a daily basis. (Rubin Decl., Ex. A (Dkt. Nos. 23-1 to 23-6) at 1, 3, 55) Unlike debt securities that provide interest and a guaranteed return of principal, the ETNs offered investors the right "to receive a cash payment at maturity, upon early redemption or upon acceleration, as applicable, ... linked to the performance of the Index." ( Id. at 3)
Unless otherwise noted, all references to page numbers in this Order are as reflected in this District's Electronic Case Files ("ECF") system.
Cites to the Pricing Supplement are to the page numbers on the document itself, rather than to ECF page designations.
Citi published an 86-page document (the "Pricing Supplement"), dated March 18, 2020, in which it discloses the risks of investing in the ETNs. (Rubin Decl., Ex. A (Dkt. Nos. 23-1 to 23-6)) The Pricing Supplement explains that "[t]he ETNs are riskier than securities that have intermediate- or long-term investment objectives"; the ETNs "may not be suitable for investors who plan to hold them for a period more than one day"; "the ETNs should be purchased only by knowledgeable investors who understand the potential consequences of an investment linked to the Index"; the ETNs "could experience greater volatility" than other investments because the Index tracks a single commodity – crude oil; and the trading price of the ETNs is determined based on trading in the secondary market, not based on the so-called "indicative value" of the ETNs. ( Id. at 1, 16, 38-39, 46)
The full title of the Pricing Supplement is "Pricing Supplement No. 2016 – USNCH0277/A/10± and 2016 – USNCH0278/A/10± Dated March 18, 2020 (to Prospectus Supplement and Prospectus each Dated May 14, 2018): Medium-Term Senior Notes, Series N. (Rubin Decl., Ex. A (Dkt. Nos. 23-1 to 23-6) at 1)
The "Indicative Value" of the ETNs refers to the "approximate ... economic value" of the ETNs, which is calculated by reference to the Index. (Id. at 9-10)
The Pricing Supplement also explains that Citi has the right to accelerate the ETNs at its "option at any time," and that the ETNs will be automatically accelerated if the Index declines to a certain level. ( Id. at 13, 36) The Pricing Supplement warns that (1) payments made following acceleration could "be significantly less than the stated principal amount of the ... ETNs and could be zero" ( id. at 36, 55), and (2) during the "Optional Acceleration Valuation Period" – the time between Citi's exercise of its option to accelerate and the time of valuation – "the return on the ETNs will not be based entirely on Index fluctuations ... and [investors] will not entirely benefit from any favorable movements in the level of the Index during this period as [exposure to the Index] declines" ( id. at 13, 36).
On March 19, 2020, when "the price of oil was at a historic low" (Cmplt. (Dkt. No. 1-1) at 2), Citi issued a press release (the "Press Release") stating that it would exercise its option to accelerate the ETNs. ( Id. at 3-4; Rubin Decl., Ex. B (Dkt. No. 23-7)) The Press Release states that the Optional Acceleration Valuation Period would begin on March 25, 2020 and was expected to end on March 31, 2020, and that investors would be paid on April 3, 2020. (Rubin Decl., Ex. B (Dkt. No. 23-7)) The Press Release also states that "[t]he payment upon optional acceleration is based upon a declining exposure to the ETNs’ underlying index over the Optional Acceleration Valuation Period." ( Id. ) On March 20, 2020 – after the Press Release was issued – Plaintiffs each purchased approximately $277,000 worth of the ETNs. (Cmplt. (Dkt. No. 1-1) at 3; id. , Ex. C-D (Dkt. No. 1-1) at 9-12)
On March 20, 2020, after Governor Cuomo signed executive orders mandating the reduction of in-person work in New York as a result of the COVID-19 pandemic, Citi shut down its business operations, "leaving investors in the [ETNs] unable to receive any assistance from the company." (Cmplt. (Dkt. No. 1-1) at 2-4)
On April 7, 2020, Plaintiffs’ shares were redeemed pursuant to the optional acceleration invoked by Citi on March 20, 2020. At redemption, each Plaintiff incurred a loss of approximately $112,619. (Cmplt. (Dkt. No. 1-1) at 3, 6; id. , Exs. C-D (Dkt. No. 1-1) at 10, 12)
II. PROCEDURAL HISTORY
The Complaint was filed on March 18, 2021, and asserts claims for fraud under New York law and Section 11 of the Securities Act of 1933. (Cmplt. (Dkt. No. 1-1) at 1-2, 5-6) Plaintiffs’ claims are premised on the following factual allegations:
the "3x" in the ETNs’ name and description falsely represents that the ETNs will consistently track the Index by three times the Index's performance; the ETNs "faithfully tracked" the Index "for months," but on March 19, 2020, the ETNs "started to under-track the [I]ndex";
Defendant had no right to accelerate the ETNs because no triggering event had occurred;
the Press Release is misleading because the ETNs did not track the Index after March 31, 2020, and the redemption value was not three times the Index; and
Defendant shut down its business on March 20, 2020.
(Cmplt. (Dkt. No. 1-1) at 2-4)
On May 23, 2021, this Court referred the case to Magistrate Judge Lehrburger for general pretrial supervision. (Dkt. No. 14) In orders dated April 6, 2021 and July 7, 2021, Judge Lehrburger advised the Corporate Plaintiff that it could appear in this action only through counsel. (April 6, 2021 Order (Dkt. No. 6) at 2; July 7, 2021 Order (Dkt. No. 26)); see also March 25, 2021 Order (Dkt. No. 2) at 1 n.1) No attorney has appeared on behalf of the Corporate Plaintiff.
On July 1, 2021, Defendant moved to dismiss. (Dkt. No. 21) In its motion to dismiss, Defendant contends that the claims of the Corporate Plaintiff must be dismissed because it has not appeared through counsel. Defendant further argues that the claims of both Plaintiffs must be dismissed because the Complaint does not (1) provide a "short and plain" statement of Plaintiffs’ claims, as required by Fed. R. Civ. P. 8(a) ; and (2) state a claim under Fed. R. Civ. P. 12(b)(6). (Def. Br. (Dkt. No. 22)) Defendant contends that Plaintiffs’ fraud claim under New York law fails because, inter alia , the Complaint does not identify a fraudulent statement made by Defendant – particularly given the express disclosures contained in the Pricing Supplement. ( Id. at 14-19)
On July 6, 2021, this Court referred Defendant's motion to Judge Lehrburger for an R&R. (Dkt. No. 25) The motion was fully briefed on August 16, 2021 (Dkt. Nos. 22, 27, 28), and Judge Lehrburger heard oral argument on January 10, 2022. On January 24, 2022, Judge Lehrburger issued an R&R, recommending that Plaintiffs’ claims be dismissed without prejudice. (R&R (Dkt. No. 35)) As noted above, no objections to the R&R have been filed.
III. THE REPORT AND RECOMMENDATION
As an initial matter, Judge Lehrburger finds that the Corporate Plaintiff's claims must be dismissed because of its failure to appear through counsel. ( Id. at 7-8)
As to Defendant's assertion that the Complaint does not "contain ... a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a), Judge Lehrburger concludes that dismissal is not warranted, because "the Complaint is suitably plain and short." ( Id. at 9) The Complaint " ‘is not the incomprehensible labyrinthian prolixity of unrelated and vituperative charges that Rule 8 was intended to curb.’ " ( Id. (quoting Harnage v. Lightner , 916 F.3d 138, 142 (2d Cir. 2019) (quotation marks omitted)))
As to Defendant's Rule 12(b)(6) motion, Judge Lehrburger accurately states the applicable standard:
To survive a Rule 12(b)(6) motion, a complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S. Ct. 1955, 1960 (2007). A claim is facially plausible when the factual content pleaded allows a 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, 1949 (2009). But "even pro se plaintiffs cannot withstand a motion to dismiss unless their pleadings contain factual allegations sufficient to raise a ‘right to relief above the speculative level,’ " Martinez v. Ravikumar , 536 F. Supp. 2d 369, 370 (S.D.N.Y. 2008) (quoting Twombly , 550 U.S. at 555, 127 S. Ct. at 1965 ), and must allege " ‘enough facts to state a claim to relief that is plausible on its face.’ " Perry v. Mary Ann Liebert, Inc. , 765 F. App'x 470, 473 (2d Cir. 2019) (quoting Twombly , 550 U.S. at 570, 127 S. Ct. at 1960 ).
( Id. at 10)
1 As to Plaintiff's common law fraud claim, Judge Lehrburger also accurately sets forth the pleading standard under New York law :
Defendant contends that New York law applies to Plaintiffs’ common law fraud claim because Plaintiffs allege that Defendant made use of the New York Stock Exchange in furtherance of the alleged fraud. (Def. Br. (Dkt. No. 22) at 20 n.14 (citing, inter alia, TeeVee Toons v. Gerhard Schubert GmbH, No. 00 Civ. 5189 (RCC), 2006 WL 2463537, at *14 (S.D.N.Y. Aug. 23, 2006) )) Plaintiffs also reference "New York State law" in the complaint. (Cmplt. (Dkt. No. 1-1) at 2) Accordingly, this Court concludes that Judge Lehrburger properly applied New York law to Plaintiffs’ common law fraud claim.
"Under New York Law, plaintiffs must allege five elements to state a common law fraud claim: (1) a material misrepresentation or omission of fact (2) made by defendants with knowledge of its falsity (3) and intent to defraud, which (4) plaintiffs reasonably relied on, (5) resulting in damage to plaintiffs." Santana v. Adler , No. 17-CV-06147, 2018 WL 2172699, at *9 (S.D.N.Y. Mar. 26, 2018) ; Premium Mortgage Corp. v. Equifax, Inc. , 583 F.3d 103, 108 (2d Cir. 2009).
( Id. (quotation marks omitted)) Judge Lehrburger further notes that Plaintiffs’ fraud claim must "meet the heightened pleading standard for fraud required by Federal Rule of Civil Procedure 9(b)." ( Id. at 11 n.9)
Judge Lehrburger then considers the factual allegations on which Plaintiffs’ fraud claim is premised:
that the "3x" in the ETNs’ name and description falsely represents that the ETNs will consistently track the Index by three times the Index's performance;
that the ETNs "faithfully tracked" the Index "for months," but on March 19, 2020, the ETNs "started to under-track the [I]ndex";
that Defendant had no right to accelerate the ETNs because no triggering event occurred;
that the Press Release is misleading because the ETNs did not track the Index after March 31, 2020, and the redemption value was not three times the Index; and
that Defendant shut down its business on March 20, 2020.
(Cmplt. (Dkt. No. 1-1) at 2-4); see also R&R (Dkt. No. 35) at 11-17)
As an initial matter, Judge Lehrburger finds that the first element of fraud under New York law – a material misrepresentation – is not adequately alleged, because "Plaintiffs’ fraud allegations are foreclosed by the express warnings and disclosures in the Pricing Supplement [and Press Release,] which Plaintiffs reference in the Complaint." ( See R&R (Dkt. No. 35) at 11-14 (citing, inter alia , Y-GAR Capital LLC v. Credit Suisse Group AG , No. 19-CV-2827 (AT), 2020 WL 71163, at *4 (S.D.N.Y. Jan. 2, 2020) ("There cannot be a material misstatement or omission if defendants’ statements explicitly disclosed the very risks about which plaintiff claims to have been misled.")) As to Plaintiffs’ claim that the "3x" in the ETNs’ name and description is deceptive (Cmplt. (Dkt. No. 1-1) at 3; Pltf. Opp. (Dkt. No. 27) at 3-4), Judge Lehrburger notes that "the Pricing Supplement explains that ‘3x’ is tied to payment and value at maturity, redemption, or acceleration," but is not a "representation that the ETN on a daily basis will rise or fall three times the extent to which the Index rises or falls." (R&R (Dkt. No. 35) at 13 (citing Rubin Decl., Ex. A (Dkt. Nos. 23-1 to 23-6) at 3, 9))
Judge Lehrburger likewise concludes that the Press Release does not contain misleading statements, because it expressly warns that "payment upon optional acceleration is based upon a declining exposure to the ETNs’ underlying index over the Optional Acceleration Valuation Period," and that as a result, the redemption value at the end of the acceleration period "would be even less likely to fully reflect the Index." ( Id. at 14 (citing Rubin Decl., Ex. B (Dkt. No. 23-7))) In this regard, Judge Lehrburger notes that Plaintiffs purchased the ETNs "precisely at a time when their value was likely to be most volatile" – in March 2020, at the beginning of the COVID-19 pandemic. ( Id. )
Judge Lehrburger further finds that the Complaint's allegations regarding Defendant's acceleration of the ETNs and the shutting down of its operations in March 2020 are not sufficient to allege a fraud claim. The Pricing Supplement explicitly states that Defendant retains an option to accelerate the ETNs, even where the ETNs have not reached the threshold for triggering an automatic acceleration. ( Id. (citing Rubin Decl., Ex. A (Dkt. Nos. 23-1 to 23-6) at 13)) Judge Lehrburger concludes that "a far more plausible explanation" than fraud for Defendant's decision to exercise its acceleration option – and to cease its business operations – is that the COVID-19 pandemic led to in-person business closures and historically low oil prices. ( Id. at 15 n.10)
Judge Lehrburger also finds that Plaintiffs have not adequately pled scienter or reliance. He notes that the allegation that someone intentionally interfered with the "computer" that was tracking the Index (Cmplt. (Dkt. No. 1-1) at 3) "is far too speculative and conclusory to create a plausible cause of action." (R&R (Dkt. No. 35) at 16 (citing In re Fannie Mae 2008 Securities Litigation , 891 F. Supp. 2d 458, 470 (S.D.N.Y. 2012), aff'd , 525 F. App'x 16 (2d Cir. 2013) and Yencho v. Chase Home Finance LLC , No. 14-CV-230 (NSR), 2015 WL 127721, at *3 (S.D.N.Y. Jan. 8, 2015) )) As to reliance, Judge Lehrburger notes that Plaintiffs’ "own pleading" acknowledges that Plaintiffs purchased the ETNs on March 20, 2020 (Cmplt. (Dkt. No. 1-1) at 3) – a day after the Press Release announced that the payment upon acceleration would be based on decreased exposure to the Index (Rubin Decl., Ex. B (Dkt. No. 23-7)) – and thus, Plaintiffs could not have "reasonably relied on representations concerning correlation with the Index made prior to that time." (R&R (Dkt. No. 35) at 17)
For all these reasons, Judge Lehrburger recommends that Plaintiffs’ common law fraud claim be dismissed for failure to state a claim.
2 As to Plaintiffs’ claim under Section 11 of the Securities Act of 1933, 15 U.S.C. § 77a et seq , Judge Lehrburger accurately recites the pleading standard:
To state a claim under Section 11 ..., a plaintiff must allege that "(1) it purchased a registered security, either directly from the issuer or in the aftermarket following the offering; (2) the defendant participated in the offering in a manner sufficient to give rise to liability under section 11; and (3) the registration statement 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." Y-GAR Capital LLC , 2020 WL 71163, at *3. It "is not sufficient that, at some point after the registration statement became effective, some subsequent event made it no longer accurate." Jiajia Luo v. Sogou, Inc. , 465 F. Supp.3d 393, 406 (S.D.N.Y. 2020).
( Id. )
Here, the Complaint does not identify a registration statement that was false and misleading at the time the registration statement became effective. ( Id. at 18-19) In reaching this conclusion, Judge Lehrburger points to express disclosures in the Pricing Supplement, and to the Complaint's assertion that the prospectus descriptions of the ETNs " became untrue statements of facts" after March 19, 2020. ( Id. at 18 (citing Cmplt. (Dkt. No. 1-1) ¶ 2) (emphasis in R&R))
For these reasons, Judge Lehrburger recommends that Plaintiffs’ claim under Section 11 of the Securities Act be dismissed for failure to state a claim.
In recommending dismissal, Judge Lehrburger notes that claims against Defendant similar to those raised here have been dismissed under Rule 12(b)(6). (R&R (Dkt. No. 35) at 19 n.12 (citing Ravi v. Citigroup Global Markets Holdings, Inc., 21 Civ. 2223 (GHW), Jan. 10, 2022 Order (Dkt. No. 43) (adopting R&R and granting motion to dismiss); see also Thomas v. Citigroup Global Markets Holdings Inc., 21 Civ. 3673 (VEC) (DF), March 1, 2022 R&R (Dkt. No. 29) (recommending that complaint be dismissed for failure to state a claim))
DISCUSSION
34 A district court reviewing a magistrate judge's report and recommendation "may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge." 28 U.S.C. § 636(b)(1)(C). Where, as here, no objections have been filed to a magistrate judge's report and recommendation, "a district court need only satisfy itself that there is no ‘clear error on the face of the record’ in order to accept the recommendation." Austin v. Lynch , No. 10 Civ. 7534 (JPO) (GWG), 2011 WL 6399622, at *1 (S.D.N.Y. Dec. 20, 2011) (quoting Fed. R. Civ. P. 72(b) advisory committee note). Moreover, "a party generally waives judicial review of an issue when he or she fails to make timely objection to a magistrate judge's report, as long as all parties receive clear notice of the consequences of their failure to object." DeLeon v. Strack , 234 F.3d 84, 86 (2d Cir. 2000) (citing Small v. Sec'y of Health & Human Servs. , 892 F.2d 15, 16 (2d Cir. 1989) ); see also McCarthy v. Manson , 714 F.2d 234, 237 (2d Cir. 1983) ("When a party fails to object timely to a magistrate's recommended decision, it waives any right to further judicial review of that decision." (citation omitted)).
Here, the R&R cites the requirement that "[p]ursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules of Civil Procedure, the parties have fourteen (14) days to file written objections to this Report and Recommendation. (R&R (Dkt. No. 35) at 19) The R&R further states that "[f]ailure to file objections will result in a waiver of objections and preclude appellate review." ( Id. at 20 (emphasis omitted)) Despite clear warning that a failure to file objections would result in a waiver of judicial review, neither side filed objections to Judge Lehrburger's R&R.
Because neither side filed objections to Judge Lehrburger's R&R, the parties have waived judicial review. This Court has, however, reviewed the R&R and finds it to be thorough, well-reasoned, and free of any clear error.
56 As an initial matter, the Corporate Plaintiff's claims must be dismissed, because a corporate entity cannot appear other than through counsel. See Lattanzio v. COMTA , 481 F.3d 137, 140 (2d Cir. 2007) ("[A] limited liability company ... may appear in federal court only through a licensed attorney."); United States ex rel. Mergent Servs. v. Flaherty , 540 F.3d 89, 92 (2d Cir. 2008) ("[A] layman may not represent a corporation even if the sole shareholder." (citations omitted)); see also Rowland v. Cal. Men's Colony, Unit II Men's Advisory Council , 506 U.S. 194, 202-03 (1993). Where, as here, a plaintiff corporation has been repeatedly warned that its claim will be dismissed absent retention of counsel, and it has failed to appear through counsel, dismissal is appropriate. See , e.g. , Liberty Synergistics, Inc. v. Microflo, Ltd. , No. 11CV00523JMASIL, 2017 WL 9512403, at *2 (E.D.N.Y. May 11, 2017), report and recommendation adopted , No. 11CV523MKBSIL, 2017 WL 4119268 (E.D.N.Y. Sept. 18, 2017) (dismissing corporate plaintiff's claims under Fed. R. Civ. P. 41(b) where it had failed to appear through counsel).
This Court likewise agrees with Judge Lehrburger that the Complaint – although it fails to state a claim – is sufficient under Fed. R. Civ. P. 8.
Finally, for all the reasons stated by Judge Lehrburger, neither Plaintiffs’ common law fraud claim nor their claim under Section 11 is sufficiently pled. Accordingly, the Complaint will be dismissed.
789 Judge Lehrburger recommends that leave to amend be granted. (R&R (Dkt. No. 35) at 19) District courts "ha[ve] broad discretion in determining whether to grant leave to amend." Gurary v. Winehouse , 235 F.3d 792, 801 (2d Cir. 2000). Leave to amend may properly be denied in cases of " ‘undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, futility of amendment, etc.’ " Ruotolo v. City of New York , 514 F.3d 184, 191 (2d Cir. 2008) (quoting Foman v. Davis , 371 U.S. 178, 182 (1962) ). The Second Circuit has cautioned that district courts " ‘should not dismiss [a pro se complaint] without granting leave to amend at least once when a liberal reading of the complaint gives any indication that a valid claim might be stated.’ " Cuoco v. Moritsugu , 222 F.3d 99, 112 (2d Cir. 2000) (quoting Gomez v. USAA Fed. Sav. Bank , 171 F.3d 794, 795 (2d Cir. 1999) ). Moreover, where a claim is dismissed on the grounds that it is "inadequate[ly] ple[d]," there is "a strong preference for allowing plaintiffs to amend." In re Bear Stearns Cos., Inc. Sec., Derivative. & ERISA Litig. , No. 08 MDL 1963, 2011 WL 4072027, at *2 (S.D.N.Y. Sept. 13, 2011) (citing Ronzani v. Sanofi S.A. , 899 F.2d 195, 198 (2d Cir. 1990) ).
For these reasons, this Court will likewise adopt Judge Lehrburger's recommendation that leave to amend be granted.
CONCLUSION
For the reasons stated above, the R&R is adopted, and the Complaint is dismissed. Any motion for leave to file an amended complaint will be submitted by April 1, 2022. The proposed amended complaint is to be attached as an exhibit to the motion. The Corporate Plaintiff cannot assert any claim in an amended complaint absent the filing of a notice of appearance by counsel.
REPORT AND RECOMMENDATION TO HON. PAUL G. GARDEPHE: MOTION TO DISMISS
ROBERT W. LEHRBURGER, United States Magistrate Judge.
Patricia A. Steadman ("Plaintiff" or "Steadman") and Patricia Steadman Ltd., ("Corporate Plaintiff", collectively "Plaintiffs") proceeding pro se, bring this action to recover damages against Citigroup Global Markets Holdings Inc. ("Defendant" or "CGMHI") for common law fraud and violation of Section 11 of the Securities Act of 1933 ("Section 11"). Plaintiffs are investors who purchased exchange traded notes issued by CGMHI in the secondary market. Plaintiffs allege that CGMHI committed fraud because the notes issued by CGMHI stopped tracking the index to which they were linked in the manner as advertised. Plaintiffs also claim that CGMHI improperly accelerated redemption of the notes and issued a misleading press release announcing the acceleration. Plaintiffs seek compensatory and punitive damages. CGMHI now moves to dismiss the action for failure to state a claim for relief pursuant to Federal Rule Of Civil Procedure 12(b) and for failure to comply with pleading standards of Federal Rules Of Civil Procedure 8(a) and 9(b). For the reasons that follow, the Court recommends that Defendant's motion be GRANTED and the claims dismissed without prejudice.
FACTUAL BACKGROUND
As required on a motion to dismiss, the Court accepts as true all well-plead allegations of the Complaint and draws all reasonable inferences in favor of Plaintiffs, the non-moving parties.1 The Court also considers documents referenced by the Complaint, including disclosures made about the notes issued by CGMHI.2 Applying a liberal reading afforded to pro se plaintiffs,3 Plaintiffs’ allegations and claims can be distilled to the following.
A. The Exchange Traded Notes
CGMHI offered and sold to investors a series of exchange traded notes. (Compl. ¶ 1.) The notes at issue here were named "Velocity Shares 3x Long Crude Oil ETNs" (the "ETNs"). (Compl. ¶ 2.) The ETNs were linked to the S&P GSCI Crude Oil Index ER (the "Index"), which tracked a futures contract on a single commodity, crude oil. (Compl. ¶¶ 2-3; Pricing Supplement at 1, 46.)4 The ETNs were designed to reflect a leveraged long or leveraged inverse exposure to the performance of the Index on a daily basis; were unsecured debt obligations of CGMHI;5 and were "intended to be daily trading tools for sophisticated investors to manage daily trading risks." (Pricing Supplement at 1, 2, 3, 55.) Unlike debt securities that provide interest and guaranteed return of principal, the ETNs entitled investors "to receive a cash payment at maturity, upon early redemption or upon acceleration, as applicable, ... linked to the performance of the Index." (Pricing Supplement at 3.)
B. CGMHI's Disclosures
CGMHI published an 86-page Pricing Supplement for the ETNs, outlining their terms and risks.6 The Pricing Supplement made numerous disclosures about the risks of investing in the ETNs, including, among others, that the ETNs were riskier than securities with intermediate or long-term investment objectives, "and may not be suitable for investors who plan to hold them for a period other than one day; that "the ETNs should be purchased only by knowledgeable investors who understand the potential consequences of an investment linked to the Index"; that because the Index tracked futures on a single commodity, and specifically crude oil, the ETNs "could experience greater volatility" than other investments and bore the "risks of a highly concentrated investment"; and that the trading price of the ETNs was determined based on trading in the secondary market, not the so-called "indicative value" of the ETNs. (Pricing Supplement at 1, 16, 18, 46.)
The Pricing Supplement also explained that redemption of the ETNs could be accelerated under either of two circumstances. One circumstance was "Automatic Acceleration," which, as the name suggests, would be triggered automatically when the Index declined to a certain level. (Pricing Supplement at 13.) The other circumstance was "Optional Acceleration," under which CGMHI had the right to accelerate the ETNs at its "option at any time." (Pricing Supplement at 13.)
The Pricing Supplement also warned about the potential value of the ETNs upon redemption following acceleration. Payments made upon redemption could "be significantly less than the stated principal amount of the ... ETNs and could be zero." (Pricing Supplement at 55.) During the Optional Acceleration Valuation Period acceleration period – between CGMHI's exercise of its optional acceleration rights and the time of valuation – "the return of the ETNs [would] not be based entirely on Index fluctuations" and investors may "not entirely benefit from any favorable movements in the level of the Index during this period as [exposure to the index] declines." (Pricing Supplement at 36.)
C. CGMHI's Acceleration Of The ETNs
On March 19, 2020, "the price of oil was at a historic low." (Compl. ¶ 3.) That same day (and again on March 22, 2020), CGMHI published a press release announcing that it would exercise its option to accelerate the ETNs. (Compl. ¶ 6; Rubin Decl., Ex. B.) The press release stated that the Optional Acceleration Valuation Period would begin on March 25, 2020 and was expected to end on March 31, 2020, and that investors would be paid for the redemption on April 3, 2020.7 (Rubin Decl., Ex. B.)
D. Plaintiffs’ Purchase Of ETNs And Their Redemption
According to the Complaint, on March 7, 2020, then Governor Andrew Cuomo of New York signed an executive order taking action against the Covid-19 emergency. (Compl. ¶ 5.) Following two interim orders reducing the in-person workforce at work locations, Governor Cuomo signed an order on March 20, 2020 ordering the reduction of the in-person workforce by 100% no later than March 22, 2020. (Compl. ¶ 5.) Plaintiffs allege these orders enabled CGMHI to essentially shut down its business operations on March 20, 2020 and left investors unable to receive assistance from CGMHI. (Compl. ¶ 7.) Nonetheless, on March 20, 2020, Plaintiffs each purchased approximately $277,000.00 worth of the ETNs. (Compl., Ex. C.D.) Plaintiffs planned to sell the ETNs on the next trading day after their purchases, March 23, 2020, but they did not because the price was down 14.74% "when the ETN should have been up roughly 9.69%" if the ETNs had accurately been tracking the Index. (Compl. ¶ 5.)
On April 7, 2020, Plaintiffs’ shares were redeemed pursuant to the optional acceleration invoked by CGMHI on March 20, 2020. (Compl. Ex. B at ECF 10, 12.) Based on the redemption value, each Plaintiff incurred a loss of $112,600. (Compl. ¶ 5, 8.)
E. The Alleged Fraud
The Complaint asserts two causes of action – common law fraud and violation of Section 11 – based on four theories. First, Plaintiffs claim that the ETNs’ name and description is fraudulent. According to Plaintiffs, the "3x" in the ETNs’ name and its description as being linked to the Index represented that the ETNs would consistently track the Index by three times its performance. (Compl. ¶ 5.) The ETNs faithfully tracked the Index for months, which built up the investor trust in the ETNs "performing as advertised." (Compl. ¶ 3.) By March 19, 2020, however, the ETNs started to under-track the Index by over 50 percentage points and continued to have little correlation to the Index. (Compl. ¶ 3.) Plaintiffs surmise that CGMHI must have used a computer program during the months that the ETNs tracked the Index, and that a human must have intentionally interfered with the program. (Compl. ¶ 5.)
Elsewhere, the Complaint alleges that CGMHI stopped tracking the Index "over a week prior to its March 22 announcement" – i.e., March 15, 2020. (Compl. ¶ 6.)
Second, Plaintiffs allege that CGMHI had no right to accelerate the ETNs because no trigger event occurred; instead, Plaintiffs allege, CGMHI "allowed the share price to fall so that it could hit the threshold vs allowing the market to dictate the date of acceleration." (Compl. ¶¶ 4, 6.) Third, Plaintiffs claim that CGMHI's press release was misleading because the ETNs did not track the Index "subsequent to March 31" and the redemption value did not reflect three-times the Index. (Compl. ¶ 6.) Finally, Plaintiffs assert that CGMHI committed fraud by effectively shutting down its business on March 20, 2020 and violated its "obligation to its shareholders to operate its business while the [ETNs] traded." (Compl. ¶ 7.)
Plaintiffs each claim $112,619.79 in compensatory damages for their losses in the ETNs and punitive damages in the amount of $1,013,577.66.
PROCEDURAL BACKGROUND
Plaintiffs commenced this action on March 17, 2021. (Dkt. 1.) CGMHI filed its motion to dismiss on July 1, 2021. (Dkts. 21-22.) Plaintiffs filed their opposition on July 19, 2021 (Dkt. 27), and CGMHI filed its reply on August 16, 2021. (Dkt. 29.) The Court has twice issued orders, one on April 6, 2021, the other on July 6, 2021, advising the Corporate Plaintiff that it could not proceed pro se and must instead appear through a lawyer. (Dkt. 6, 26.) No attorney has appeared on behalf of the Corporate Plaintiff. The case has been referred to the undersigned for general pretrial management as well as for issuing reports and recommendations on dispositive motions. (Dkt. 25.) The Court held oral argument on January 10, 2022.
DISCUSSION
CGMHI advances three arguments for dismissal: failure to provide a "short and plain" statement of Plaintiffs’ claims; failure to plead fraud with particularity; and failure to state a claim for relief. CGMHI also notes that the Corporate Plaintiff has defaulted by failing to appear. The Court agrees that the Corporate Plaintiff has defaulted and that the Complaint fails to state a plausible claim for relief.
A. The Corporate Plaintiff Has Defaulted
It is well established that "[a] corporation or other unincorporated entity may not represent itself pro se." Mendelka v. Penson Financial Services, Inc. , No. 16-CV-7393, 2017 WL 1208665, at *5 (S.D.N.Y. March 31, 2017) ; Jones v. Niagara Frontier Transportation Authority , 722 F.2d 20, 22 (2d Cir. 1983) ("The rule that a corporation may litigate only through a duly licensed attorney is venerable and widespread.") A non-attorney may not represent a corporation even if they are the sole shareholder. United States ex rel. Mergent Services. v. Flaherty , 540 F.3d 89, 92 (2d Cir. 2008). If a pro se corporate entity fails to secure counsel, despite ample notice of its need to do so, it will be deemed to have defaulted. See Coventry Enterprises LLC v. Sanomedics International Holdings, Inc. , No. 14-CV-8727, 2017 WL 3610585, at *1 (S.D.N.Y. July 25, 2017) ; Intelligen Power Systems., LLC v. dVentus Technologies LLC , No. 14-CV-7392, 2015 WL 7168527, at *1 (S.D.N.Y. Nov. 12, 2015).
Plaintiffs had ample notice from the Court that counsel was required for the Corporate Plaintiff to proceed. The first such order issued on April 6, 2021, shortly after the action was filed, and again on July 7, 2021, just six days after CGMHI filed its motion to dismiss. The Corporate Plaintiff has eschewed those warnings and has not appeared by counsel. Accordingly, the Corporate Plaintiff is in default, and the motion to dismiss may be granted as against it for that reason alone. Moreover, as discussed below, regardless of the Corporate Defendant's default, the Complaint should be dismissed for failure to state a claim.
B. The Complaint Satisfies Rule 8
CGMHI argues that the Complaint should be dismissed because it fails to satisfy the requirement that a complaint "contain ... a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2) (" Rule 8").
Rule 8 serves a salutary purpose. "The statement should be short because unnecessary prolixity in a pleading places an unjustified burden on the court and the party who must respond to it because they are forced to select the relevant material from a mass of verbiage." Salahuddin v. Cuomo , 861 F.2d 40, 42 (2d Cir. 1988) (internal quotation marks omitted). "[C]omplaints which ramble, which needlessly speculate, accuse and condemn, and which contain circuitous diatribes far removed from the heart of the claim do not comport with [ Rule 8 ] and must be dismissed." Coon v. Benson , No. 09-CV-230, 2010 WL 769226, at *3 (S.D.N.Y. March 8, 2010) (internal quotation marks). "Dismissal, however, is usually reserved for those cases in which the complaint is so confused, ambiguous, vague, or otherwise unintelligible that its true substance, if any, is well disguised." Salahuddin , 861 F.2d at 42.
Other than citing to Rule 8, CGMHI does not offer any specific reasons why the Complaint fails to meet Rule 8 ’s requirements, and the Court does not find any. While the Complaint "may not represent the paradigm of notice pleading, it is not the incomprehensible ‘labyrinthian prolixity of unrelated and vituperative charges’ that Rule 8 was intended to curb." Harnage v. Lightner , 916 F.3d 138,142 (2d Cir. 2019) (quoting Prezzi v. Schelter , 469 F.2d 691, 692 (2d Cir. 1972) ). To the contrary, the Complaint is only six pages long and broken down into paragraphs. It uses section headings (such as "Jurisdiction," "Complaint," and "Damages") and paragraph headings (such as "Sale of Fraudulent Product" and "Acceleration of Fund Closure"). Although it repeats some of the same allegations several times, the Complaint is suitably plain and short.
Affording the Complaint the solicitude due to a pro se plaintiff, a logical factual narrative can be discerned as set forth above. Accordingly, the Court finds that the Complaint complies with the pleading standards of Rule 8. That does not mean, however, that the Complaint satisfies other requirements as discussed next.
C. The Complaint Fails To State A Claim For Relief
The Complaint fails to state a plausible claim for relief. It overlooks the disclosures made in the Pricing Supplement and does not adequately allege a fraud claim because it fails to identify any misrepresentation. Nor does it assert facts demonstrating that CGMHI acted with fraudulent intent, or that Plaintiffs relied on the allegedly fraudulent statements. The Complaint's failure to identify any misleading statement also forecloses Plaintiffs’ claim that CGMHI violated Rule 11 of the 1933 Securities Act.
1. Legal Standard For Rule 12(b)(6) Motion To Dismiss
Under Federal Rule Of Civil Procedure 12(b)(6), a pleading may be dismissed for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6) (" Rule 12(b)(6)"). To survive a Rule 12(b)(6) motion, a complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S. Ct. 1955, 1960, 167 L.Ed.2d 929 (2007). A claim is facially plausible when the factual content pleaded allows a 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, 1949, 173 L.Ed.2d 868 (2009). But "even pro se plaintiffs cannot withstand a motion to dismiss unless their pleadings contain factual allegations sufficient to raise a ‘right to relief above the speculative level,’ " Martinez v. Ravikumar , 536 F. Supp. 2d 369, 370 (S.D.N.Y. 2008) (quoting Twombly , 550 U.S. at 555, 127 S. Ct. at 1965 ), and must allege " ‘enough facts to state a claim to relief that is plausible on its face.’ " Perry v. Mary Ann Liebert, Inc. , 765 F. App'x 470, 473 (2d Cir. 2019) (quoting Twombly , 550 U.S. at 570, 127 S. Ct. at 1960 ).
2. The Complaint Does Not Plead A Plausible Fraud Claim
"Under New York Law, plaintiffs must allege five elements to state a common law fraud claim: "(1) a material misrepresentation or omission of fact (2) made by defendants with knowledge of its falsity (3) and intent to defraud, which (4) plaintiffs reasonably relied on, (5) resulting in damage to plaintiffs." " Santana v. Adler , No. 17-CV-06147, 2018 WL 2172699, at *9 (S.D.N.Y. Mar. 26, 2018) ; Premium Mortgage Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009). In a federal diversity action such as this one, a state-law fraud claim must be pleaded with particularity pursuant to Rule 9(b). Trodale Holdings LLC v. Bristol Healthcare Investors L.P., No. 16-Civ-4254, 2018 WL 2980325, at *3 (S.D.N.Y. June 14, 2018). Plaintiffs fail to meet the first element of common law fraud as the Complaint does not identify a misrepresentation. Additionally, Plaintiffs do not sufficiently plead two central elements of common law fraud: scienter and reliance. The Court addresses each of Plaintiffs’ four theories of fraudulent statements in turn.
Inasmuch as the Complaint fails to state a claim for fraud, it also does not meet the heightened pleading standard for fraud required by Federal Rule Of Civil Procedure 9(b).
a. 3x Index
Although the Complaint repeatedly asserts that CGMHI sold a fraudulent product because it did not perform as Plaintiffs believe it was advertised to consistently perform, the Complaint fails to identify with any particularity a misleading or fraudulent statement made on behalf of CGMHI. Instead, Plaintiffs’ fraud allegations are foreclosed by the express warnings and disclosures in the Pricing Supplement which Plaintiffs reference in the Complaint. If "a document relied on in the complaint contradicts allegations in the complaint, the document, not the allegations, control, and the court need not accept the allegations in the complaint as true." Poindexter v. EMI Record Group Inc. , No. 11-CV-559, 2012 WL 1027639, at *2 (S.D.N.Y. March 27, 2012) (quoting Barnum v. Millbrook Care Ltd. Partnership , 850 F. Supp. 1227, 1232-33 (S.D.N.Y. 1994) ). This Court has held that "there cannot be a material misstatement or omission if defendants’ statements explicitly disclosed the very ... risks about which plaintiff claims to have been misled." Y-GAR Capital LLC v. Credit Suisse Group AG , No. 19-CV-2827, 2020 WL 71163, at *4 (S.D.N.Y. Jan. 2, 2020) (internal quotation marks and brackets omitted).
The Pricing Supplement is an 86-page document that identifies and warns investors of the particular and heightened risks associated with investing in the ETNs. In particular, the Pricing Supplement states the following warnings on the first page in bold letters: (a) the ETNS are designed to achieve their stated investment objectives on a daily basis, but their performance over different periods of time can differ significantly from their stated daily objective; (b) the ETNs are riskier than securities; (c) the ETNs should be purchased only be knowledgeable investors who understand the potential consequences of an investment linked to the Index; and (d) investing in the ETNs involves significant risks. (Pricing Supplement at 1.) Additionally, page one directs potential investors to the Pricing Supplement's "Risk Factors," a detailed nineteen-page warning of the risks associated with the ETNs. (Pricing Supplement at 29–48.) Among other things, investors are explicitly warned that the ETNs do not pay interest or guarantee any return of initial investment and that an investor may lose all or a significant part of their investment in the ETNs; and the ETNs will magnify any adverse movements in the closing level of the Index and, therefore, are highly speculative and risky. (Pricing Supplement at 29.)
Plaintiffs nonetheless claim the ETNs’ name and description is fraudulent because the "3x" in the name indicated that the ETN would consistently track the Index by three times its performance. (Compl. ¶ 5.) That argument, however, improperly conflates the ETNs’ trading price with its "Indicative Value" – a value that is calculated by CGMHI using a formula designed to approximate the economic value of the ETNs at a given time. (Pricing Supplement at 9.) The Indicative Value is a fundamentally different value than what an investor may see the ETNs trading at on the secondary market at a given time. (Pricing Supplement at 9.) The Pricing Supplement explicitly distinguishes between the trading price and the Indicative Value:
Intraday Indicative Value is a calculated value and is not the same as the trading price of the ETNs and is not a price at
which you can buy or sell the ETNs in the secondary market. The Intraday Indicative Value does not take into account the factors that may influence the trading price of the ETNs, such as imbalances of supply and demand, lack of liquidity and credit considerations. The actual trading price of the ETNs in the secondary market may vary significantly from their Intraday Indicative Value.
(Pricing Supplement at 9.) CGMHI had no control over the trading price of the ETNs in the secondary market, nor does it make any such representation. (Pricing Supplement at 9.) Nor does CGMHI or the name of the ETN make any statement that the value of the ETN will faithfully track three times the Index on a daily basis. Rather, the "3x" refers to the value at "maturity or upon early redemption or acceleration," when the "holders of each ETN will receive an amount in cash that will vary depending on the level of the Index." (Pricing Supplement at 55.) While the title of the ETN does include "3x," the Pricing Supplement explains that "3x" is tied to payment and value at maturity, redemption, or acceleration. (Pricing Supplement at 3, 9.) The Pricing Supplement thus forecloses the notion that the "3x" included in the ETNs’ name is a representation that the ETN on a daily basis will rise or fall three times the extent to which the Index rises or falls. Rather the daily value of the ETN is determined in the market.
b. March 19, 2021 Press Release
Plaintiffs also fail to adequately plead that CGMHI's March 19, 2020 press release announcing the optional acceleration of the ETNs contained untrue or misleading statements. Plaintiffs allege that the press release was misleading because the redemption payments they received did not reflect a full three times exposure to the Index. (Compl. ¶ 6.)
The press release states "[h]olders of the ETNs will receive a cash payment per ETN in an amount ("the Optional Acceleration Redemption Amount") equal to the closing indicative value of the respective series of ETNs on the final valuation date of the Optional Acceleration Period." (Rubin Decl., Ex. B.) The press release expressly warns, however, that "the payment upon optional acceleration is based upon a declining exposure to the ETNs’ underlying index over the Optional Acceleration Valuation Period." (Rubin Decl., Ex. B.) Investors thus were expressly informed that the redemption value at the end of the acceleration period would be even less likely to fully reflect the Index.
Moreover, Plaintiffs purchased the ETNs at issue precisely at a time when their value was likely to be most volatile. As the Complaint asserts, in mid to late March 2020, the world was witnessing the beginning of the highly disruptive global Covid-19 pandemic. (Compl. ¶ 5.) Yet Plaintiffs purchased their ETNs on March 20, 2020, exactly in that most volatile time period. (Compl., Ex. C, D.) That they ended up on the losing side of the investment cannot be attributed to any false or misleading statement by CGMHI.
c. Acceleration
Plaintiffs’ allegation that CGMHI fraudulently invoked "automatic acceleration" even though the threshold for doing so is simply incorrect. (Compl. ¶ 6.) The "threshold" trigger for acceleration is required only for automatic acceleration; no trigger event is required for CGMHI to exercise its option to accelerate on any business day. (Pricing Supplement at 13.) The Complaint presents no alleged facts to the contrary. The Complaint thus fails to state a claim grounded in CGMHI's decision to accelerate the ETNs.
d. Closing Of The Business
The Complaint characterizes as a crime CGMHI's ceasing business operations on March 20, 2020, leaving investors without assistance. (Compl. ¶¶ 4, 7.) It fails, however, to cite to any criminal law, let alone one that would provide a private right of action based on the conduct alleged. Nor does the Complaint allege any specific statement from CGMHI that was rendered misleading or fraudulent by cessation of the business. At most, as framed by the Complaint, CGMHI's winding down of business bolsters the allegations that CGMHI unlinked the ETNs from the Index it purported to track. But the Complaint does not plausibly allege any fraud claim based on CGMHI's shutting down operations.
The Complaint's allegations regarding CGMHI's shutting down business operations as of March 20, 2020 are speculative at best. While suggesting that CGMHI left investors unable to receive assistance, Plaintiffs nowhere allege that they desired any assistance during the post-acceleration period, that they tried to obtain assistance, or that any failure to obtain assistance resulted in any injury. Moreover, Plaintiffs allege that CGMHI closed its "main office in NY" (Compl. ¶ 5), which falls short of alleging that CGMHI shut down its business with respect to the ETNs or that CGMHI did not have other offices that could be reached or that CGMHI employees were not working remotely. Indeed, the Complaint acknowledges that as of March 20, 2020, business offices in New York City were compelled to reduce the in-person workforce in New York by as much as 100% (Compl. ¶ 5), thus rendering unreasonable any inference that CGMHI was engaged in anything nefarious by closing business operations at their main office in New York. Plaintiffs do ascribe nefarious intent to CGMHI's accelerating the ETNs on the same day that New York offices were to reduce their workforce by 100% (Compl. ¶ 5.) But at the same time, Plaintiffs recognize that oil prices were at a historic low (Compl. ¶ 3), a far more plausible explanation for CGMHI's decision to exercise its acceleration option.
e. The Remaining Elements Of Common Law Fraud Are Not Met
Apart from failing to identify a fraudulent or misleading statement, Plaintiffs have not sufficiently pled scienter or reliance as required to prove common law fraud. To adequately allege that CGMHI acted with intent, Plaintiffs are required to set forth factual allegations that "give rise to a strong inference of fraudulent intent" or scienter. Acito v. IMCERA Grp., Inc., 47 F.3d 47, 52 (2d Cir. 1995). This may be established by pleading facts that (1) demonstrate the defendant's motive and opportunity to commit or assist in the fraud, or (2) constitute strong circumstantial evidence of the defendant's conscious misbehavior or recklessness. See Acito, 47 F.3d 47 at 52 ; Matsumura v. Benihana National Corp. , 542 F. Supp. 2d 245, 255 (S.D.N.Y. 2008). The Complaint does neither.
The closest Plaintiffs come to alleging any intentional conduct is that "a human that had access to the defendant's software must have chosen to change it" and thus there was "intentional human interference." (Compl. ¶ 5.) That assertion is far too speculative and conclusory to create a plausible cause of action. See, e.g., In re Fannie Mae 2008 Securities Litigation , 891 F. Supp. 2d 458, 470 (S.D.N.Y. 2012), aff'd , 525 F. App'x 16 (2d Cir. 2013) ("speculation and conclusory allegations will not suffice" to support a strong inference of fraudulent intent); Yencho v. Chase Home Finance LLC , No. 14-CV-230, 2015 WL 127721, at *3 (S.D.N.Y. Jan. 8, 2015) (conclusory labels of fraud or deception are legally insufficient). The Complaint sets forth neither facts indicating motive on behalf of CGMHI to engage in or assist in any fraud, nor circumstantial evidence of conscious misbehavior.
Plaintiffs also have not plausibly alleged reliance. "To plead a cause of action for fraud under New York law, plaintiffs must allege, among other things, that they justifiably relied on a material misrepresentation of a fact." Alfandary v. Nikko Asset Management, Co., No. 17-CV-5137, 2019 WL 6683752, at *2 (S.D.N.Y. Dec. 6, 2019) (internal quotation marks omitted); SRM Global Master Fund Limited Partnership v. Bear Stearns Companies L.L.C., 829 F.3d 173, 177 (2d Cir. 2016) ("[t]o plead a common law fraud claim under New York law, a plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations") (internal quotation marks omitted); Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 31 N.Y.3d 569, 579, 106 N.E.3d 1176, 1182 (N.Y. 2018) (justifiable reliance on the misrepresentation or material omission is a "fundamental precept of a fraud cause of action"). Plaintiffs own pleading, however, concedes that she purchased her ETNs on March 20, 2020, a day after CGMHI's press release announcing optional acceleration and decreased exposure to the Index. She thus could not have reasonably relied on any representations concerning correlation with the Index made prior to that time.
3. The Complaint Fails To State A Section 11 Claim
The Complaint also fails to state a claim under Section 11 of the 1933 Securities Act. (Compl. ¶ 2.) The Act provides a private right of action to investors of a security if "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." 15 U.S.C. § 77k(a) ; Lin v. Interactive Brokers Group, Inc., 574 F. Supp. 2d 408, 421 (S.D.N.Y. 2008) (quoting 15 U.S.C. § 77k(a) ). To state a claim under Section 11 of the Securities Act, a plaintiff must allege that: "(1) it purchased a registered security, either directly from the issuer or in the aftermarket following the offering; (2) the defendant participated in the offering in a manner sufficient to give rise to liability under section 11; and (3) the registration statement 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." Y-GAR Capital LLC, 2020 WL 71163, at *3. It "is not sufficient that, at some point after the registration statement became effective, some subsequent event made it no longer accurate." Jiajia Luo v. Sogou, Inc. , 465 F. Supp.3d 393, 406 (S.D.N.Y. 2020). For liability to attach, "the registration statement must contain an untruth or material omission ‘when such part became effective.’ " Lin. , 574 F. Supp. 2d at 421 (quoting Section 11).
The Complaint does not satisfy the third prong of a Section 11 Claim. As with the fraud claim, it does not identify any misleading statement or omission for one of the same reasons that Plaintiffs’ fraud claim does not: it fails to identify any registration statement that was false or misleading, particularly given the disclosures made in the Pricing Supplement.
Additionally, the Complaint fails to allege that the statements identified were untrue at the time the registration statement became effective. To the contrary, the Complaint alleges that the prospectus descriptions of the ETNs (as "3x Long Crude Oil ETNs linked to the [Index]") " became untrue statements of facts using simple math on March 19, 2020 to the closure of the ETF." (Compl. ¶ 2 (emphasis added).) A statement that "became untrue" is by definition not one that was untrue at the time it was made. The Section 11 claim should be dismissed. See In re Hexo Corp. Securities Litigation , 524 F.Supp.3d 283, 300 (S.D.N.Y. 2021) (dismissing Section 11 claim "based on hindsight pleading"); Scott v. General Motors Co. , 46 F. Supp.3d 387, 394 (S.D.N.Y. 2014) (dismissing Section 11 claim as implausible "because it alleges no facts that, if true, would demonstrate that the Registration Statement contained a material misstatement or omission at the time it became effective"), aff'd , 605 F. App'x 52 (2d Cir. 2015) ; In re Hi-Crush Partners L.P. Securities Litigation , No. 12-CV-8557, 2013 WL 6233561, at *11 (S.D.N.Y. Dec. 2, 2013) (dismissing Section 11 claim based on later-occurring events because "corporation's duty to disclose is adjudged by the facts as they existed when the registration statement became effective") (internal quotation marks omitted).
CGMHI also argues that the Complaint fails to establish that Plaintiffs have standing to assert a Section 11 claim "because it fails to allege that Plaintiffs’ purchases of [the] ETNs are traceable to any particular registration statement or other offering document." The Complaint does reference, however, the ETN prospectus. (Compl. ¶ 2.) In any event, the Court does not find it necessary to reach this issue given the defects in the Complaint discussed above.
CONCLUSION
For the foregoing reasons, I recommend that the Court GRANT Defendant's motions to dismiss and that Plaintiffs’ claims be dismissed without prejudice to filing an amended complaint. To the extent not expressly addressed above, the Court has considered Plaintiffs’ other arguments and finds them to be without merit.
Following the Optional Acceleration Period initiated by CGMHI in March 2020, several pro se litigants filed lawsuits against CGMHI based on similar theories to Plaintiffs. Many of them include nearly identical complaints. See Jacobson v. Citigroup Global Markets Holdings Inc., 21-cv-2384 (Dkt. 1); Allen v. Citigroup Global Markets Holdings, Inc. , 21-CV-2387 (Dkt. 1); Mai v. Citigroup Global Markets Holdings Inc., 20-CV-11129 (Dkt. 1). In one such case, Ravi et al. v. Citigroup Global Markets Holdings, Inc. , CGMHI filed a motion to dismiss based on the same arguments set forth in this case. Magistrate Judge Fox issued a Report and Recommendation recommending dismissal, which Judge Woods adopted in full on January 10, 2022. 21-CV-2223 (Dkt. 43.) In short, the claims advanced by Plaintiffs have been rejected when asserted by others. There is no reason for a different conclusion here.
DEADLINE FOR OBJECTIONS
Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules of Civil Procedure, the parties have fourteen (14) days to file written objections to this Report and Recommendation. Such objections shall be filed with the Clerk of Court, with extra copies delivered to the Chambers of the Honorable Paul G. Gardephe, United States Courthouse, 40 Foley Square, New York, New York 10007, and to the Chambers of the undersigned, 500 Pearl Street, New York, New York 1007. Failure to file timely objections will result in waiver of objections and preclude appellate review.