Opinion
21cv3673 (VEC) (DF)
03-01-2022
SEAN H. THOMAS, Plaintiff, v. CITIGROUP GLOBAL MARKETS HOLDINGS INC., Defendant.
TO THE HONORABLE VALERIE CAPRONI, U.S.D.J.
REPORT AND RECOMMENDATION
DEBRA FREEMAN, UNITED STATES MAGISTRATE JUDGE
In the above-captioned case, plaintiff Sean H. Thomas (“Plaintiff”), proceeding pro se, brings this action to recover damages against Citigroup Global Markets Holdings Inc. (“Defendant” or “CGMHI”) for an alleged violation of Section 11 of the Securities Act of 1933 (“Section 11”). Plaintiff is an investor who purchased exchange-traded notes issued by CGMHI in the secondary market. He claims that CGMHI committed fraud when the performance of the exchange-traded notes in March 2020 stopped tracking the performance of the notes' referenced index in the manner purportedly advertised, and, in connection with his investment losses, he seeks both compensatory and punitive damages.
This case is one in a series of lawsuits brought by individual investors against CGMHI. In fact, in the past few years, at least 11 investors have commenced suits in this District against CGMHI - asserting largely identical Section 11 claims, as well as, at times, common-law fraud claims, all stemming from the investors' purchases of CGMHI-issued exchange-traded notes. 1 Some of those cases have been dismissed without prejudice on Defendant's motions, while others still have dispositive motions pending. Here, CGMHI has filed a motion to dismiss Plaintiff's Complaint under Rules 12(b)(1), 12(b)(6), 9(b), and 8(a) of the Federal Rules of Civil Procedure (see Dkt. 14), and that motion has been referred to this Court for a report and recommendation. For the reasons discussed below, I respectfully recommend that CGMHI's motion to dismiss be granted, and that the Complaint be dismissed without prejudice to filing an amended pleading.
See Kirk v. CGMHI, No. 20cv7619 (ALC); Jacobson v. CGMHI, No. 21cv2384 (ALC); Allen v. CGMHI, No. 21cv2387 (ALC); Zellner v. CGMHI, No. 21cv2387 (ALC); Yambo-Torres v. CGMHI, No. 21cv2386 (ALC); Korovin v. CGMHI, No. 21cv3294 (ALC); Mai v. CGMHI, No. 20cv11129 (GBD) (GWG); Ravi v. CGMHI, No. 21cv02223 (MKV); Steadman v. CGMHI, No. 21cv02430 (PGG) (RWL); Labib v. CGMHI, No. 21cv02658 (LJS). This Court notes that, in his submissions, Plaintiff has referred to David M. Kirk (“Kirk”), the pro se plaintiff in Kirk v. CGMHI, No. 20cv6719 (ALC), as a leader of an ETN-holder social media group that was created to gather information about CGMHI's alleged conduct. (See Dkt. 18 ¶¶ 1-2.) CGMHI, in turn, has informed this Court that Plaintiff filed papers in this suit that appear to have been drafted by Kirk, as evidenced by those documents' underlying metadata. (See Dkt. 22, at 1 (stating that Plaintiff's opposition brief and sur-reply were authored by Kirk).) Notably, in his own case, Kirk was warned “that he could not, in any way, represent plaintiffs in other cases in this District.” Kirk v. CGMHI, No. 20cv7619 (ALC), 2022 WL 125615, at *2 (S.D.N.Y. Jan. 13, 2022) (addressing CGMHI's allegations that Kirk filed papers on behalf of four pro se plaintiffs, including Plaintiff here). Although the allegations regarding Kirk's conduct in this litigation are concerning, this Court declines to find that sanctions, such as striking Plaintiff's opposition briefing, are warranted at this time.
BACKGROUND
A. Factual Allegations
The facts summarized herein are taken from Plaintiff's Complaint (see Complaint, dated Apr. 26, 2021 (Dkt. 1) (“Compl.”)), as well as the brokerage statements that Plaintiff has attached as exhibits to the Complaint (see id., Exs. 1, 2). This Court also considers documents referenced by the Complaint, including written disclosures issued by CGMHI about the exchange-traded notes, as those disclosures are integral to Plaintiff's allegations and are documents that were publicly filed with the U.S. Securities and Exchange Commission (“SEC”). (See Discussion, infra, at Section I; see also AIG Global Secs. Lending Corp. v. Banc of Am. Secs. LLC, 2 No. 01cv11448 (JGK), 2005 WL 2385854, at *2 (S.D.N.Y. Sept. 26, 2005) (on motion to dismiss, “the Court may consider documents that are referenced in the complaint, [as well as] documents that the plaintiff[] relied on in bringing suit”); In re Optionable Sec. Litig., 577 F.Supp.2d 681, 692 (S.D.N.Y. 2008) (on motion to dismiss, considering “SEC filings and press releases referred to in the Complaint, ” because those documents were “incorporate[d] by reference or [were] amenable to judicial notice”).) Liberally construed, Plaintiff's allegations can be distilled to the following:
1. The Exchange-Traded
CGMHI offered and sold to investors a series of exchange-traded notes. (Compl. ¶ 1.) The notes at issue were named “Velocity Shares 3x Long Crude Oil ETNs” (the “ETNs”). (Id. ¶ 2.) The ETNs were linked to the S&P GSCI Crude Oil Index ER (the “Index”), which was “determined, composed[, ] and calculated by S&P Dow Jones Indices LLC” and tracked a futures contract on a single commodity, crude oil. (Id. ¶¶ 2-3; Declaration of Samuel J. Rubin, dated June 11, 2021 (“Rubin Decl.”) (Dkt. 16), Ex. A (“Pricing Supplement”), at 1, 46.) The ETNs were designed to reflect a leveraged long or leveraged inverse exposure to the performance of 3 the Index on a daily basis; were unsecured debt obligations of CGMHI; and were “intended to be daily trading tools for sophisticated investors to manage daily trading risks.” (Pricing Supplement, at 1-3, 55.) Unlike debt securities that provide interest and a 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.” (Id., at 3.)
The full title of the Pricing Supplement is “Pricing Supplement No. 2016-USNCH0227/A/7* and 2016-USNCH0278/A/7* Dated February 6, 2020 (To Prospectus Supplement and Prospectus Each Dated May 14, 2018) Medium-Term Senior Notes, Series N.” The Complaint expressly, and repeatedly, cites this pricing supplement, referring to it as a “prospectus” for the ETNs. (See Compl. ¶¶ 2-3, 7-8, 10.)
As described in the Pricing Supplement: “The value of the Index fluctuate[d] with changes in the price of the relevant NYMEX light sweet crude oil futures contracts. The Index [was] determined, composed[, ] and calculated by S&P Dow Jones Indices LLC (the ‘Index Sponsor'). The Index Sponsor publishe[d] the level of the Index on Bloomberg under the ticker [SPGSCLP].” (Pricing Supplement, at 5.)
“Some ETNs offer leveraged exposure to the index or benchmark they track. This means that they promise to pay a multiple of the performance of the underlying index or benchmark.” Exchange-Traded Notes - Avoid Unpleasant Surprises (“Exchange-Traded Notes”), FINRA, https://www.finra.org/investors/alerts/exchange-traded-notes-avoid-unpleasantsurprises (last accessed Feb. 12, 2022). Here, the ETNs offered three times - or 3x - leverage, meaning that CGMHI agreed to pay, at the time of redemption, three times the daily return of the Index, subject to certain fees. (See Pricing Supplement, at 8.)
The Complaint at times incorrectly refers to the ETNs as “stock.”
“Inverse ETNs offer to pay the opposite of the performance of the index or benchmark they track, and leveraged inverse ETNs seek to pay a multiple of the opposite of the performance of the index or benchmark they track. Some leveraged, inverse[, ] or leveraged inverse ETNs are designed to achieve their stated performance objectives on a daily basis and ‘reset' their leverage or inverse exposure on a daily basis. Given the daily resetting of its leverage factor, an ETN that is set up to deliver twice [or 2x] the performance of a benchmark on a daily basis will not necessarily deliver twice the performance of that benchmark over longer periods such as weeks, months[, ] or years. Due to the effect of compounding, their performance over longer periods of time can differ significantly from the stated multiple of the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time. Generally, leveraged and inverse ETNs are designed to be short-term trading tools and are not intended for buy-and-hold investing.” Exchange-Traded Notes, supra note 4.
2. CGMHI's Disclosures
On February 6, 2020, CGMHI published the 85-page Pricing Supplement for the ETNs, outlining their terms and risks. (See generally Pricing Supplement.) The Pricing Supplement included several disclosures about the risks of investing in the ETNs, including, as relevant here, the following: 4
a. Disclosure That the ETNs Were Intended To Be Short-Term Investments
First, the Pricing Supplement disclosed that the ETNs were designed to achieve their stated investment objectives on a daily basis, and that their performance over longer periods of time could differ significantly from their stated daily objectives. (Id., at 1.) Starting on the first page, the Pricing Supplement explained that:
[t]he ETNs are not intended to be “buy and hold” investments. . . . The ETNs are riskier than securities that have 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. Any decision to hold the ETNs for more than one day should be made with great care and only as the result of a series of daily (or more frequent) investment decisions to remain invested in the ETNs for the next one-day period. Accordingly, the ETNs should be purchased only by knowledgeable investors who understand the potential consequences of an investment linked to the Index and of seeking daily compounding leveraged long . . . investment results. . . . If you hold the ETNs for more than one day, it is possible that you will suffer significant losses in the ETNs even if the performance of the Index over the time you hold the ETNs is positive.(Id. (bolded and italicized in original); see also id., at 26 (explaining that “[t]he 3-to-1 (long or inverse) leverage ratio does not hold for any period longer than one day.”).)
b. Disclosure That the ETNs Were Highly Concentrated Investments Subject To Greater Market Volatility
Second, the Pricing Supplement noted that, because the Index tracked futures on a single commodity, crude oil, the ETNs “could experience greater volatility” than other investments and bore the “risks of a highly concentrated investment.” (Id., at 45 (“There is concentration risk associated with the ETNs.”).) The Pricing Supplement warned that the referenced Index could “be more volatile” and would “be more susceptible to fluctuations in the price of a single commodity (namely, crude oil) than a broader commodities index.” (Id.) Further, given that 5 “[t]he price of crude oil futures [could] exhibit high and unpredictable volatility, ” the Pricing Supplement explained that such volatility “could lead to high and unpredictable volatility in the Index.” (Id. (“The prices of crude oil are primarily affected by the global demand for and supply of crude oil, but are also influenced significantly from time to time by speculative actions and by currency exchange rates. Crude oil prices are generally more volatile and subject to dislocation than prices of other commodities.”).) In addition, given that the ETNs at issue provided a 3x leveraged long return, the Pricing Supplement cautioned that the ETNs would “magnify any adverse movements in the closing level of the Index by [three] times, ” and, therefore, were “highly speculative and highly risky” investments. (Id., at 28 (“For example, if the Index moves by 3.33% in an adverse direction, the ETNs will lose 10% of their value, and if the Index moves by 33.33% in an adverse direction, the ETNs will lose all of their value, all within a one-day period.”).)
c. Disclosure That the ETNs' Trading Price In the Secondary Market Was Not the Same As The ETNs' Indicative Value
Third, the Pricing Supplement stated explicitly that the “trading price” of the ETNs was determined based on trading in the secondary market, not on the so-called “Indicative Value” of the ETNs. (Id., at 1, 9, 18, 45.) As defined in the Pricing Supplement, the Indicative Value was a value calculated by CGMHI using a formula designed to approximate the economic value of the ETNs at a given time. (Id., at 9.) The Indicative Value was a fundamentally different value 6 than the price at which an investor may have seen the ETNs trading on the secondary market. (See id.)
According to the Pricing Supplement, two valuations of the ETNs were completed by CGMHI a regular basis: Closing Indicative Value and Intraday Indicative Value (collectively referred to in the Pricing Supplement as the ETNs' “Indicative Value”). (See Pricing Supplement, at 17.)
The Pricing Supplement distinguished between the trading price and the Indicative Value as follows:
The trading price of the ETNs in the secondary market is not the same as the Indicative Value of the ETNs at any time, even if a concurrent trading price in the secondary market were available at such time. The trading price of any series of the ETNs at any time may vary significantly from the Indicative Value of such ETNs at such time because the market value reflects investor supply and demand for the ETNs.(Id., at 18.) As noted by other courts in this District that have considered the ETNs at issue, CGMHI had no control over the trading price of the ETNs in the secondary market and did represent, in the Pricing Supplement, that it had such control. (See id., at 16-18.)
See, e.g., Steadman v. CGMHI, No. 21cv02430 (PGG) (RWL) (Dkt. 35), at 13.
d. Disclosure That the ETNs Could Experience Loss of Value Upon Redemption
Lastly, with respect to cash payments made on the ETNs, the Pricing Supplement disclosed that redemption of the ETNs could be accelerated under either of two circumstances. “Automatic Acceleration” would be triggered when the Index declined to a certain level. (Id., at 13.) Separately, CGMHI had the right to “Optional Acceleration, ” by which it could accelerate the ETNs at its “option at any time.” (Id.) The Pricing Supplement explained that, in either scenario, the cash payments made to investors would be calculated “based on the Closing Indicative Value of the applicable ETNs on one or more Valuation Dates.” (Id., at 16.) 7
As noted above (see supra, at n.7), the “Closing Indicative Value” calculation was regularly completed by CGMHI as part of its overall “Indicative Value” determination. “The Closing Indicative Value of each series of ETNs on each Index Business Day [was] based on the closing level of the Index.” (Pricing Supplement, at 16.)
Notably, the Pricing Supplement warned of the potential loss of value of the ETNs upon redemption following acceleration, stating that payments made upon redemption could “be significantly less than the stated principal amount of the applicable ETNs and could be zero.” (Id., at 54.) According to the Pricing Supplement, during the Optional Acceleration Valuation Period acceleration period - i.e., the time 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 would “not entirely benefit from any favorable movements in the level of the Index during this period as [exposure to the Index] decline[d].” (Id., at 35.)
3. Plaintiff's Purchase of the ETNs and Their Redemption
The brokerage statements attached to the Complaint show that, on March 11, 2020, Plaintiff bought 11, 471 ETNs in the secondary market at then-prevailing trading prices. (See Compl., Ex. 2.) This purchase was made four days after Governor Andrew Cuomo of New York signed an Executive Order “taking action against the Covid-19 emergency.” (Compl. ¶ 9.) According to those same brokerage statements, as of March 31, 2020, Plaintiff held an additional 29, 468 ETNs (see id., Ex. 2); Plaintiff, however, does not allege in the Complaint - nor do the brokerage statements show - when he purchased these additional ETNs (see id.). Regardless, according to Complaint, prior to and at the time of Plaintiff's purchases of the ETNs, the performance of the ETNs on the secondary market had “faithfully tracked” the performance of the Index “for months.” (Compl. ¶ 3.)
Then, on March 18, 2020, Governor Cuomo issued another Executive Order that required the “reduction of personnel of non-essential business by 50%” as the Covid-19 emergency continued (id.), and, according to Plaintiff, one day later, on March 19, “the price of oil was at a 8 historic low” (id.). On April 3, 2020, Plaintiff's ETNs were redeemed by CGMHI. (See Id. ¶ 11 (alleging that April 2, 2020 was the “final day prior to liquidation”).) Based on the redemption value of the ETNs on April 3, 2020, Plaintiff allegedly incurred a loss of $87,554.17. (See Id. ¶ 5.)
The Complaint does not specify whether the redemption of the ETNs on April 3, 2020 was the result of an Automatic Acceleration or an Optional Acceleration, as those terms are defined in the Pricing Supplement.
4. The Alleged Fraud
Plaintiff alleges that the description of the ETNs in the Pricing Supplement (dated February 6, 2020) “became untrue statements of fact[] using simple math starting on March 18, 2020” when the performance of the ETNs, as measured by the daily trading prices on the secondary market, no longer “track[ed]” the performance of the Index. (Id. ¶ 2.) More particularly, Plaintiff alleges that, prior to and in the first half of March 2020, the performance of the ETNs at issue (3x leveraged long ETNs) had “faithfully tracked” the Index, as well as “mirrored” their counterpart (3x leveraged inverse ETNs), which then built up investors' “reliable trust” in the ETNs' performance “as advertised.” (Id. ¶ 3.) Plaintiff further alleges, however, that, by March 18-19, 2020, when the price of oil plummeted, the secondary market trading prices of the ETNs had started to “under track” the performance of the Index “by over 50%, ” and they continued to have little correlation to the Index thereafter. (Id. (alleging that, in the “two-day period” from March 18-19, 2020, the ETNs had “a massive 50 percentage point shortfall in tracking the [I]ndex” on the secondary market, which caused “nearly an 80% loss” to ETN investors”).) 9 As for CGMHI's alleged involvement in these developments, Plaintiff alleges that CGMHI must have been using a computer program during the months when the secondary market trading prices of the ETNs had “tracked” the Index (i.e., in the months prior to March 2020), and that a human being must have intentionally interfered with the program on or around March 18-19, 2020. (Id. ¶ 9.) In other words, it is Plaintiff's allegation that, prior to March 2020, CGMHI had used a computer program to ensure that, “if the price of [the ETNs] deviated from the price [they] should have been to follow the [Index], the computer would automatically buy or sell enough [ETNs]” - presumably in the secondary market - “to bring the price to where it should be so that the [Index] was followed correctly.” (Id.) Then, according to Plaintiff, on March 18-19, 2020, “a human [who] had access to [CGMHI's] software must have chosen to change [the software's programming], ” since the trading price for the ETNs in the secondary market on those dates “flagrantly under-tracked the [I]ndex.” (Id.)
Focusing on the “3x” in the ETNs' name in the Pricing Supplement, it is Plaintiff's view that, when the Index allegedly “rose [by] 24.38%” on March 19, 2020, the trading price of the ETNs on the secondary market should have risen “24.39% [multiplied by three, ] equaling 73.17%.” (Compl. ¶ 7.) Yet, according to Plaintiff, on March 19, 2020, the trading price of the ETNs on the secondary market “only increased 23%, ” and, thus, Plaintiff asserts that a “massive 50 percentage point shortfall” occurred on that date. (Id.)
B. Procedural History
1. Plaintiff's Complaint
Plaintiff filed his Complaint on April 26, 2021. (See Compl.) In the Complaint, Plaintiff asserts a single claim, brought under Section 11 of the Securities Act of 1933 (the “Act”). (See id. ¶ 2.) Plaintiff seeks $87,554.17 as compensatory damages, as well as nine times that amount ($787,987.53) in punitive damages. (Id. ¶ 12.)
2. CGMHI's Motion To Dismiss
On June 11, 2021, CGMHI filed a motion to dismiss Plaintiff's Complaint pursuant to Rules 12(b)(1), 12(b)(6), 9(b), and 8(a) of the Federal Rules of Civil Procedure (Dkt. 14 (Notice of Motion)), 10 supported by a memorandum of law (see Memorandum of Law in Support of Defendant's Motion to Dismiss, dated June 11, 2021 (“Def. Mem.”) (Dkt. 15)), and an attorney declaration, with exhibits (see Rubin Decl.).
In its motion, CGMHI first argues that the Complaint should be dismissed under Rule 12(b)(1) because Plaintiff lacks standing to assert a Section 11 claim, as he has not alleged that his purchase of the ETNs was “traceable” to any registration statement or other offering document. (Def. Mem., at 6-7.)
Second, under Rule 12(b)(6), CGMHI contends that the Section 11 claim should be dismissed as untimely, because this action was commenced more than one year from the time the purported fraud occurred or from the time that Plaintiff should have had inquiry notice of the alleged fraud. (See id., at 7-8.)
Third, under Rules 12(b)(6), 9(b), and 8(a), CGMHI argues that Plaintiff's Complaint should be dismissed for failure to state a Section 11 claim. (See id., at 8-12.) On this point, CGMHI notes that Section 11 of the Act provides a private right of action to investors who purchased securities traceable to an offering pursuant to a registration statement, if such registration statement or any part thereof “contained an untrue statement of a material fact” at the time it “became effective.” 15 U.S.C. § 77k. Here, CGMHI argues that any Section 11 claim was “vitiated entirely” by Plaintiff's own allegation “that the Pricing Supplement was accurate when effective and only ‘became untrue . . . starting on March 18, 2020.'” (Def. Mem., at 9 (quoting Compl. ¶ 2).) Moreover, CGMHI notes that the disclosures in the Pricing Supplement expressly warned that trading prices for the ETNs were determined by the secondary trading market - not by CGMHI - and could therefore “vary significantly” from the Index or the ETNs' Indicative Value. (Id., at 10.) In light of these warnings, CGMHI maintains that its statements in 11 the Pricing Supplement had, in fact, disclosed the very risks about which Plaintiff claims to have been misled, and, thus, any Section 11 claim concerning the precipitous drop in value of the ETNs in the secondary market at the time of redemption cannot survive. (See id., at 11.)
Fourth, CGMHI argues that Plaintiff's punitive damages demand fails as a matter of law because such damages “are not available under Section 11.” (Id., at 12.)
Lastly, CGMHI contends in a footnote that, although Plaintiff has not expressly pleaded a New York common-law fraud claim independent of his Section 11 claim, the Complaint, in any event, fails to allege the requisite elements of common-law fraud. (See id., at 12 n.11.) More specifically, according to CGMHI, the Complaint fails to identify a single fraudulent statement by CGMHI, fails to plead any facts that give rise to a strong inference of fraudulent intent, and fails to allege that Plaintiff did anything in reliance on CGMHI or that the alleged fraud was the cause of Plaintiff's monetary losses. (See id.)
On June 14, 2021, Plaintiff filed a memorandum of law in opposition to CGMHI's motion to dismiss. (See Plaintiff's Opposition to [the] Motion to Dismiss, dated June 14, 2021 (Dkt. 18) (“Pl. Mem.”).) In his memorandum, Plaintiff first asserts that he has standing to bring the Section 11 claim, as he has sufficiently alleged that he purchased securities “traceable to a specific registered offering.” (Id. ¶ 1.)
Next, in response to CGMHI's contention that this action is time-barred, Plaintiff responds by stating that:
This complaint was filed 4/26/2021, only a few weeks more than a year from the start of the fraud [on] March 18, 2020, and the limit is from the discovery, not the fraud. I discovered the fraud only after joining the online group of nearly 700 other [ETN] stockholder victims. The group only became intensely active on pursuing remedy from the fraud by lawsuit after Mr. David Kirk became the administrator, and his suit in this Honorable SDNY Court wasn't even filed until 9/17/2020 because he initially filed12
many months earlier in his home state of Florida but discovered that since [CGMHI] timed the start of the fraud to THE VERY DAY THAT NY GOV CUOMO issued his order closing all non-essential businesses in NYC, his process server had many unsuccessful attempts to serve summons over many months until his process server informed him of the option of serving via the NY Secretary of State whom only accepted summons from courts in the State of NY so he had to file all over again in this SDNY Court. The referenced 15 U.S.C. § 77m one year limit from discovery also states a total limit of three years. [CGMHI] has no business inferring when I “should” have discovered the fraud - some victim's losses were a larger portion of their portfolio than others and I submit the three-year limit is appropriate in my case especially because of the devious timing of [CGMHI's] fraud to coincide with the acute effort in dissuading lawsuits.(Id.)
As for the adequacy of his Section 11 claim, Plaintiff argues that it is “hogwash” for CGMHI to suggest that “a plaintiff must allege that an offering document is misleading at the time it became effective, not that it became misleading thereafter.” (Id.) According to Plaintiff, the Complaint satisfies Section 11's pleading requirements, as it “repeatedly” alleges that the ETN description in the Pricing Supplement “became an effective untrue statement of fact starting [on] March 18, 2020.” (Id.) Plaintiff elaborates on his Section 11 theory of liability as follows:
[T]he ‘3X' stock description [should have] been adhered to. Why have such a stock description if it can be off by 50 percentage points in a single day! . . . The stock description alone determines that the stock price will reflect 3x the change in the stated oil [I]ndex. Yes, a fraction of a percent difference might naturally be expected momentarily but the stock description ensured it was the job of the computer software of [CGMHI] to correct for any such fractional difference by automatically buying or selling as many shares as needed to bring the price to reflect this 3X change. . . . All I expected like the dozen other [ETN] plaintiffs was for [the ETNs] to follow the stated oil [I]ndex as its [Pricing Supplement] advertised it to track. It grossly did not.13 (Id. ¶¶ 1-2.) Furthermore, Plaintiff argues that, contrary to CGMHI's position, he is entitled to request punitive damages because this is a “[15 U.S.C.] § 77k case, ” as opposed to a case brought under “[15 U.S.C.] § 17(a).” (Id. ¶ 3.)
Lastly, in his opposition, Plaintiff does not raise any argument in favor of a common-law fraud claim, though he repeats his assertion that CGMHI committed “100% intentional fraud.” (Id. ¶ 1; see also Id. ¶ 2 (describing CGMHI as an “acute fraudster”).)
On June 21, 2021, CGMHI filed a reply brief, essentially repeating its arguments in support of its motion to dismiss. (See Reply Memorandum of Law in Support of Defendant's Motion to Dismiss the Complaint, dated June 21, 2021 (“Def. Reply Mem.”) (Dkt 19).)
DISCUSSION
I. APPLICABLE LEGAL STANDARDS
An action should be dismissed pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure where it is apparent that the court lacks subject matter jurisdiction to hear the case. See Fed. R. Civ. P. 12(b)(1). See, e.g., Thomas v. Metro. Corr. Ctr., No. 09cv1769 (PGG), 2010 WL 2507041, at *1 (S.D.N.Y. June 21, 2010) (“A claim is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it.”). A claim that a plaintiff lacks standing to sue is usually construed as a challenge to the court's subject matter jurisdiction under Rule 12(b)(1). See, e.g., Lee v. Doe, No. 20cv6176 (CS), 2022 WL 204355, at *2 (S.D.N.Y. Jan. 24, 2022).
In contrast, Rule 12(b)(6) may be invoked to dismiss a claim that is insufficiently pleaded. Under this Rule, a defendant may move to dismiss for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. (12)(b)(6). Further, as relevant to Plaintiff's pleading in this suit, Rule 9(b) requires that a complaint “state with particularity the 14 circumstances constituting fraud or mistake.” To satisfy this particularity requirement, a complaint must “(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent.” Eternity Glob. Master Fund Ltd. v. Morgan Guar. Tr. Co., 375 F.3d 168, 187 (2d Cir. 2004) (citation and internal quotation marks omitted). “[T]he heightened pleading standard of Rule 9(b) applies to Section 11 . . . claims insofar as the claims are premised on allegations of fraud.” Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004).
In addition, Rule 8(a)(2) instructs that a complaint “must contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). “The statement should be short because necessary 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[, ] or 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. 09cv230 (SCR) (LMS), 2010 WL 769226, at *3 (S.D.N.Y. Mar. 8, 2010). The fundamental purpose of Rule 8(a), though, is “to give the defendant fair notice of what the . . . claim is and the grounds upon which it rests, ” Bell Atlantic v. Twombly, 550 U.S. 544, 555 (2007) (internal quotation marks and citation omitted); see also Wynder v. McMahon, 360 F.3d 73, 79 (2d Cir. 2004) (“The key to Rule 8(a)'s requirements is whether adequate notice is given.” (citation omitted)); Salahuddin, 861 F.2d at 42 (2d Cir. 1988) (noting that “the principal function of pleadings under the Federal Rules is to give the adverse party fair notice of the claim asserted so 15 as to enable him to answer and prepare for trial” (citation omitted)). Dismissal under Rule 8(a) “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.
Ultimately, on a motion to dismiss, the Court must “accept as true all factual statements alleged in the complaint and draw all reasonable inferences in favor of the non-moving party.” McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007); accord Jaghory v. New York State Dep't of Ed., 131 F.3d 326, 329 (2d Cir. 1997). “It is well established that the submissions of a pro se litigant must be construed liberally and interpreted ‘to raise the strongest arguments that they suggest.'” Triestman v. Fed. Bureau of Prisons, 470 F.3d 471, 474 (2d Cir. 2006) (collecting authority). The court's function on a motion to dismiss is “not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient.” Kopec v. Coughlin, 922 F.2d 152, 155 (2d Cir. 1991) (citation omitted). At the same time, though, “conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to defeat a motion to dismiss.” Achtman v. Kirby, McInerney, & Squire, LLP, 464 F.3d 328, 337 (2d Cir. 2006) (citation and brackets omitted). 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.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Starr v. Sony BMG Music Entm't, 592 F.3d 314, 321 (2d Cir. 2010) (quoting Iqbal, 556 U.S. at 666), cert. denied, 131 S.Ct. 901 (2011). 16
On a motion to dismiss, a court is generally constrained to look only at the pleadings. See Fed R. Civ. P. 12(b); Calcutti v. SBU, Inc., 273 F.Supp.2d 488, 492 (S.D.N.Y. 2003). Nonetheless, the mandate that a pro se plaintiff's complaint be construed liberally makes it appropriate for the court to consider the factual allegations in the plaintiff's opposition materials to supplement the allegations in the complaint. See Johnson, 234 F.Supp.2d at 356. Further, as noted above, a court may consider additional materials, including documents attached to the complaint as exhibits or incorporated therein by reference, matters of which judicial notice may be taken, and documents that are “integral” to the complaint. Calcutti, 273 F.Supp.2d at 498 (citing Brass v. American Films Tech., 987 F.2d 142, 150 (2d Cir. 1993)). As to documents attached to or incorporated by reference in a complaint, Rule 10(c) of the Federal Rules of Civil Procedure provides that “[a] copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes.” Fed.R.Civ.P. 10(c). Relying on that Rule, the Second Circuit has held that a “complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference.” Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991) (citations omitted)).
II. DEFENDANT'S MOTION TO DISMISS SHOULD BE GRANTED.
As discussed above, CGMHI has raised three arguments as to why Plaintiff's Section 11 claim (and, therefore, the whole action) should be dismissed: (1) Plaintiff lacks standing to bring such a claim; (2) the claim is time-barred; and (3) Plaintiff has failed to state a viable claim. (See Def. Mem.; Def. Reply Mem.) Further, CGMHI has argued that, should Plaintiff's Complaint be 17 construed as also asserting a New York common-law fraud claim, that claim should be found to fail as a matter of law. (See id.) This Court will address each contention, in turn.
A. Liberally Construing the Complaint, Plaintiff has Adequately Alleged That He Has Standing Under Section 11.
Section 11 provides that a purchaser of a security may sue if the registration statement “contained an untrue statement of a material fact.” 15 U.S.C. § 77k(a). Section 11 creates strict liability for any defendant who (1) signed the statement at issue; (2) was a director, person performing similar functions, or partner in the issuer at the time the statement was issued; (3) was named in the statement, with that party's consent, as being or about to become a director, person performing similar functions, or partner; (4) was an expert whose involvement was, with that party's consent, listed in the statement; or (5) was a statutory underwriter of the security. Id. § 77k(a)(1)-(5).
“To establish standing under [Section] 11 at the motion-to-dismiss stage, [a plaintiff] need only assert that [he] purchased shares ‘issued pursuant to, or traceable to the public offerings.'” City of Omaha Police and Fire Ret. System v. Evoqua Water Tech. Corp., 450 F.Supp.3d 379, 403 (S.D.N.Y. 2020) (citing In re: WRT Energy Sec. Litig., 75 Fed.Appx. 839 (2d Cir. 2003) (Summary Order)); see In re Wachovia Equity Sec. Litig., 753 F.Supp.2d 326, 372-73 (S.D.N.Y. 2011) (“[T]he pleading requirement for Section 11 standing is satisfied by general allegations that plaintiff purchased [securities] pursuant to or traceable to [a] false registration statement.” (internal quotation marks omitted)); see also In re Authentidate Holding Corp., No. 05cv5323 (LTS), 2006 WL 2034644, at *7 (S.D.N.Y. July 14, 2006) (explaining that Section 11 plaintiffs “are not required to explain how their shares can be traced” at the motion-to-dismiss stage). 18
Courts in this Circuit have noted that “[t]he plain language of Section 11 confirms that it confers standing to purchasers in the secondary market.” DeMaria v. Andersen, 153 F.Supp.2d 300, 310 (S.D.N.Y. 2001), aff'd, 318 F.3d 170 (2d Cir. 2003); see In re Ultrafem Inc. Sec. Litig., 91 F.Supp.2d 678, 694 (S.D.N.Y. 2000) (holding that “plaintiffs making after-market purchases who can trace their securities to the Offering have standing under Section 11”); Milman v. Box Hill Sys. Corp., 192 F.R.D. 105, 109 (S.D.N.Y. 2000) (“[S]econdary market purchasers who can trace their shares to a registered offering have standing to assert claims under § 11”); Salomon Smith Barney v. Asset Securitization Corp., No. 98cv4186 (BSJ), 1999 WL 1095605, at *3 (S.D.N.Y. Dec. 3, 1999) (same).
Further, it is well settled that the language of Section 11 creates liability for false or misleading statements “in any part of the registration statement, ” 15 U.S.C. § 77k(a), including a “prospectus supplement.” In re Marsh & Mclennan Cos., Inc. Sec. Litig., 501 F.Supp.2d 452, 491-92 (S.D.N.Y. 2006) (“[T]he February 13, 2003 prospectus supplement, and the Exchange Act filings it expressly incorporates, may serve as a basis for Section 11 liability.”); see also New Jersey Carpenters Health Fund v. Royal Bank of Scotland Grp., PLC, 709 F.3d 109, 114 (2d Cir. 2013) (holding that a false registration statement claim may be based on a supplemental prospectus's material misstatements or omissions, since newly disclosed information is deemed to be included in the registration statement); see 17 C.F.R. § 430B(f)(1) (information disclosed in a supplemental prospectus “shall be deemed to be part of and included in the registration statement”); see also Id. § 229.512(a)(2) (deeming each supplemental prospectus “to be a new registration statement” for “the purpose of determining any liability” under the Act).
Here, CGMHI has argued that Plaintiff's Section 11 claim should be dismissed because Plaintiff did not specifically plead that the ETNs he purchased were “traceable to any registration 19 statement or other offering document.” (Def. Mem., at 6.) Although this Court agrees with CGMHI that, in his Complaint, Plaintiff has not stated, in so many words, that his ETN purchases were traceable to the offering made pursuant to the February 6, 2020 Pricing Supplement, his Complaint repeatedly references (and quotes) the Pricing Supplement, and, more specifically, alleges that Plaintiff relied to his detriment on the Pricing Supplement's description of the ETNs (as “3x Long Crude Oil ETNs linked to the [Index]”) as “advertised.” (Compl. ¶¶ 1, 3.) Liberally construing the allegations in this pro se Complaint, this Court finds that Plaintiff has satisfied the pleading requirement for Section 11 standing, as he has made “general allegations” that support the reasonable inference that he purchased securities in the secondary trading market “pursuant to or traceable to [a] false registration statement” - i.e., the February 6, 2020 Pricing Supplement. See In re Authentidate, 2006 WL 2034644, at *7; see also Funke v. Life Fin. Corp., 237 F.Supp.2d 458, 473 (S.D.N.Y. 2002) (“If the shares were issued in the 1997 IPO, they may be traced to it, irrespective of when plaintiffs bought.”). As Plaintiff is not required, at this stage of the litigation, to explain in greater detail “how [his] shares can be 20 traced, ” In re Authentidate, 2006 WL 2034644, at *7, I do not recommend dismissal of the Complaint for lack of standing.
Although CGMHI labels its standing argument as a basis for dismissal under Rule 12(b)(1), courts in this District that have recently considered this same issue have held that it is, in fact, “substantive and not jurisdictional.” Zellner v. CGMHI., No. 21cv2413 (ALC), 2022 WL 126002, at *2 (S.D.N.Y. Jan. 13, 2022); see also Jacobson v. CGMHI., No. 21cv2384 (ALC), 2022 WL 268792, at *2 (S.D.N.Y. Jan. 28, 2022). According to the Zellner court, whether a plaintiff “can directly trace his [ETNs] to the prospectus goes to the validity of his claim and not to th[e] Court's power to hear th[e] dispute.” Zellner, 2022 WL 126002, at *2. As this Court finds that Plaintiff has satisfied the pleading standard for standing under Section 11, it need not consider whether Rule 12(b)(1) is applicable here.
Plaintiff's Complaint includes a hyperlink to the February 6, 2020 Pricing Supplement. (See Compl.) Therefore, this is not a case where the subject “prospectus” or “registration statement” has not been defined or identified. See Caiafa v. Sea Containers Ltd., 525 F.Supp.2d 398, 407 (S.D.N.Y. 2007) (dismissing Section 11 claim, without prejudice, where the complaint failed to identify the particular “prospectus” at issue).
B. Even Though Plaintiff Has Adequately Alleged Standing, His Section 11 Claim Should Be Dismissed as Time-Barred.
Section 11 claims are governed by the one-year statute of limitations prescribed by Section 13 of the Act. See 15 U.S.C. § 77m (1988). “Section 13's statute of limitations extinguishes any action not ‘brought within one year after the discovery of the untrue statement or the omission, or after such discovery should not have been made by the exercise of reasonable diligence.” Federal Hous. Fin. Agency for Federal Nat'l Mortg. Ass'n v. Nomura Holding Am., Inc., 873 F.3d 85, 119 (2d Cir. 2017). “The filing period commences ‘when the plaintiff discovers (or should have discovered) the securities-law violation.'” Id. (quoting CalPERS v. ANZ Sec., Inc., 137 S.Ct. 2042, 2049 (2017)). “A plaintiff is charged with knowledge of any fact that ‘a reasonably diligent plaintiff would have discovered.'” Id. (quoting City of Pontiac Gen. Emps.' Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 175 (2d Cir. 2011)).
“‘[W]hen the circumstances would suggest . . . the probability that' a violation of the securities laws has occurred - a situation sometimes called ‘storm warnings' - [the court] deem[s] the plaintiff on inquiry notice and assume[s] that a reasonable person in his . . . shoes would conduct further investigation into the potential violation.” Id. (quoting Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 168 (2d Cir. 2005)). In the context of Section 13's statute of limitations, the one-year limitations period “begins to run . . . when, in the course of that investigation, the reasonable plaintiff would have discovered sufficient information to plead a securities-law violation adequately.” Id. (citing Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 651 (2010)). 21
A “[p]laintiff must plead compliance with the statute of limitations outlined in [Section] 13 of the [] Act because it is a substantive element of a [Section] 11 claim.” Ho, 887 F.Supp.2d at 564-65 (citing Bresson v. Thomson McKinnon Sec., Inc., 641 F.Supp. 338, 343 (S.D.N.Y. 1986) (citing Brick v. Dominion Mortg. & Realty Trust, 442 F.Supp. 283, 291 (W.D.N.Y. 1977))). “In order for [a plaintiff] to comply with the statute of limitations[, ] ‘the complaint must set forth: (1) the time and circumstances of the discovery of the fraudulent statement; (2) the reasons why it was not discovered earlier (if more than one year has lapsed); and (3) the diligent efforts which plaintiff undertook in making or seeking such discovery.'” Id. at 565 (quoting Quantum Overseas, N.V. v. Touche Ross & Co., 663 F.Supp. 658, 662 (S.D.N.Y. 1987)).
Although determining “whether a plaintiff had sufficient facts to place it on inquiry notice is often inappropriate for resolution on a motion to dismiss, ” LC Cap. Partners, LP v. Frontier Ins. Grp., Inc., 318 F.3d 148, 156 (2d Cir. 2003), the Second Circuit has explained that:
courts can readily resolve the issue of inquiry notice as a matter of law on a motion to dismiss . . . where the facts needed for determination of when a reasonable investor of ordinary intelligence would have been aware of the existence of fraud can be gleaned from the complaint. . . . Given the objective standard for inquiry notice, there is an inherent sliding scale in assessing whether inquiry notice was triggered by information in the public domain: the more widespread and prominent the public information disclosing the facts underlying the fraud, the more accessible this information is to plaintiffs.Staehr v. Hartford Fin. Servs. Grp., 547 F.3d 406, 425 (2d Cir. 2008); see Youngers v. Virtus Inv. Partners Inc., 195 F.Supp.3d 499 (S.D.N.Y. 2016) (holding that, although the statute of limitations is ordinarily an affirmative defense, in an action under the Securities Act alleging material misstatements or omissions in registration statement, a statute of limitations defense may be decided on a Rule 12(b)(6) motion if the defense appears on the face of the complaint); 22 Monroe Cty. Employees' Ret. Sys. v. YPF Sociedad Anonima, 15 F.Supp.3d 336, 348 (S.D.N.Y. 2014) (on motion to dismiss, finding plaintiffs' Securities Act claims, including their Section 11 claim, untimely); In re Ultrafem Inc. Sec. Litig., 91 F.Supp.2d at 692 (“Dismissal is appropriate when the facts from which knowledge may be imputed are clear from the pleadings and the public disclosures themselves.”).
This action was commenced on April 26, 2021 (see Compl.), which Plaintiff concedes was more than one year from the time the alleged fraud occurred (March 18-19, 2020) (see Pl. Mem. ¶ 1 (admitting that this suit was commenced “only a few weeks more than a year from the start of the fraud [on] March 18, 2020”)). The date of commencement of the suit was also more than one year from when Plaintiff's ETNs were redeemed (April 3, 2020). Nonetheless, Plaintiff argues that this action is not time-barred because he “discovered the fraud only after joining the online group of nearly 700 other [ETN] stockholder victims.” (Id.) Plaintiff does not specify when he joined this online group.
Even if it not always appropriate to determine, at the motion-to-dismiss stage, when a plaintiff was placed on inquiry notice, the Court need not look to extrinsic evidence to resolve the issue in this case. This is because the facts needed to decide when a reasonable investor of ordinary intelligence, such as Plaintiff, would have discovered sufficient information regarding the alleged fraud to plead a Section 11 claim can be readily gleaned from face of Plaintiff's Complaint. According to Plaintiff's own allegations, the fraud was discernable by using “simple math” and by simply looking at secondary market trading prices “starting on March 18, 2020.” (Compl. ¶ 2.) Nowhere does Plaintiff suggest that any of the relevant valuations here - including the Index, the ETNs' secondary market trading prices, or the ETNs' Indicative Value calculations - were somehow hidden from him on March 18-19, 2020, or at any time thereafter. 23 Further, Plaintiff alleges in the Complaint that, on April 3, 2020, CGMHI opted to accelerate the redemption of the ETNs pursuant to the terms in the Pricing Supplement. (Id. ¶ 11 (referring to April 3, 2020 as the “liquidation” date).) It then follows from Plaintiff's own allegations that he would have been notified of his monetary losses, caused by the alleged fraud, by no later than April 3, 2020 - as that was when his ETNs were redeemed and cash payments to investors, including Plaintiff, were made. (See id.; Pl. Mem. ¶ 1 (stating that the “liquidation” of the ETNs on April 3, 2020 “topped off with a MASSIVE '75.2 percentage point shortfall”).) Thus, as a reasonable investor of ordinary intelligence, Plaintiff was placed on inquiry notice of the alleged fraud no later than April 3, 2020 - and he commenced this action more than one year after that date.
This Court has considered the assertions made in Plaintiff's opposition papers, but, even reading his opposition generously in light of his pro se status, this Court finds that the arguments he has raised to show the supposed timeliness of this action are of no avail. As for his contention that he did not discover the fraud until he joined an online group of ETN investors (see Pl. Mem. ¶ 1), he has not specified (1) when he joined this group, (2) what information he, in fact, learned from this group, and (3) most importantly, what information he learned from this group that would not have already been available to a reasonable investor of ordinarily intelligence prior to the time of joining the group. The mere fact that the online group's “administrator, ” Mr. Kirk, commenced his own lawsuit against CGMHI in September 2020, raising similar allegations to those asserted here (see Pl. Mem. ¶ 1), does not mean that the one-year statute of limitations in this case would not have started running until then, or at any date after April 3, 2020. Likewise, the fact that Plaintiff's alleged loss of $87,554.17 may have constituted a smaller percentage of his overall investment portfolio than the losses allegedly suffered by other ETN investors does 24 not mean that, as Plaintiff seems to suggest (see id. ¶ 1 (noting that “some victim[s'] losses were a larger portion of their portfolio than others”)), Plaintiff was not on inquiry notice of the alleged fraud by the date when his ETNs were redeemed.
Ultimately, even when viewed in the light most favorable to him, Plaintiff's allegations, in both his Complaint and opposition papers, do not set forth any basis for this Court to find that he was not on inquiry notice of the alleged fraud by at least April 3, 2020, the date of the redemption of his ETNs. Given that his Section 11 claim was not asserted against CGMHI until April 26, 2021, more than one year later, Plaintiff's claim is time-barred under the applicable one-year statute of limitations. See, e.g., Lau v. Opera Ltd., No. 20cv674 (JGK), 2021 WL 964642, at *13 (S.D.N.Y. Mar. 13, 2021) (dismissing Section 11 claim because “a reasonably diligent plaintiff would have discovered the alleged misstatement when it was made”).
To the extent Plaintiff argues in his opposition that a three-year statute of limitations should apply in this case, as opposed to a one-year limitations period, that contention is not persuasive, as it appears to be based on Plaintiff's misunderstanding of the applicable three-year statute of repose. See 15 U.S.C. § 77m (“In no event shall any such action be brought to enforce a liability created under [S]ection 77k or 77l(a)(1) of this title more than three years after the security was bona fide offered to the public[.]”). As CGMHI notes (Def. Reply, at 3), the Act's three-year statute of repose establishes an “absolute” bar on a defendant's liability and “does not erode the applicability of the one-year limitations period” (see Id. (citing CALPERS v. ANZ Sec. Inc., __ U.S. __, 137 S.Ct. 2042, 2047-49 (2017))).
Nonetheless, although Plaintiff's Section 11 claim is plainly time-barred, this Court notes that neither party has directly addressed the question of there might be a basis, in this case, for equitable tolling of the statute of limitations. “Generally, a litigant seeking equitable tolling bears the burden of establishing two elements: (1) that he has been pursuing his rights diligently, and (2) that some extraordinary circumstance stood in his way.” Pace v. DiGuglielmo, 544 U.S. 408, 418 (2005). Section 13's one-year statute of limitations may be subject to equitable tolling, 25 in cases where the necessary elements are established. See In re Magnum Hunter Res. Corp. Sec. Litig., 26 F.Supp.3d 278, 303 (S.D.N.Y. 2014) (analyzing whether plaintiffs, who asserted Section 11, 12(a)(2), and 15 claims under the Act, were entitled to equitable tolling of Section 13's one-year limitations period), aff'd, 616 Fed.Appx. 442 (2d Cir. 2015) (Summary Order); see, e.g., Monroe Cty. Employees' Ret. Sys., 15 F.Supp.3d at 354 n.118 (finding that stock purchasers were not entitled to equitable tolling of one-year statute of limitations governing their Section 11 claim, absent any demonstration that the purchasers pursued their rights diligently and were prevented from filing complaint due to extraordinary circumstances).
In contrast, the Second Circuit has explained that the three-year “statute of repose” that is also set forth in Section 13, is “absolute” and, as such, is “not subject to equitable tolling.” Police and Fire Ret. Sys. of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95, 106 (2d Cir. 2013).
Here, neither party has discussed the standard for equitable tolling or the facts relevant to its potential application in this suit. Although Plaintiff has not pleaded factual allegations to support the application of the doctrine, this Court finds that, given Plaintiff's pro se status, he should be given an opportunity to do so. See Abbas v. Dixon, 480 F.3d 636, 640 (2d Cir. 2007) (cautioning against the dismissal of a pro se plaintiff's complaint without first affording him at least one chance to amend); see also Fed. R. Civ. P. 15(a)(2) (providing that leave to amend a complaint should be freely given “when justice so requires”). Accordingly, I recommend that Plaintiff's Section 11 claim be dismissed without prejudice to his refiling an amended complaint setting forth facts (if any such facts exist), that would support the application of the equitable tolling doctrine to his otherwise time-barred claim. As discussed below, I further recommend that if Plaintiff wishes to reassert his Section 11 claim based on allegations of equitable tolling, he also be directed to address, in his amended pleading, the substantive issues identified below. 26
C. Plaintiff's Section 11 Claim Also Fails, as a Matter of Law, Under Rules 12(b)(6) and 9(b).
Although CGMHI cites to Rule 8(a) as an additional basis for dismissal, it does not offer any specific reasons why the Complaint fails to meet Rule 8's requirements, and this Court finds none. The Complaint is seven pages long, structured by paragraph number, and uses section and paragraph headings (including “Jurisdiction” and “Statement of Claim”). (See Compl.) This pro se submission is thus suitably plain and short, and, even if Plaintiff's Section 11 claim is legally deficient, his allegations are still adequate to give Defendant notice of the nature of the claim against it. (See Discussion, supra, at Section I.) Accordingly, this Court finds that the Complaint complies with pleading requirements of Rule 8(a).
Plaintiff's Section 11 claim also cannot withstand scrutiny on the merits, as currently pleaded. To establish a prima facie claim under Section 11, “the plaintiff must allege that: (1) [he] 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.'” In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358-59 (2d Cir. 2010) (quoting 15 U.S.C. § 77k(a)).
Critically, under Section 11, 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). Rather, “[t]o be actionable under Section 11, the registration statement must contain an untruth or material omission ‘when such part became effective.'” Lin v. Interactive Brokers Grp., Inc., 574 F.Supp.2d 408, 421 (S.D.N.Y. 2008) (quoting Section 11) (emphasis added). “‘[P]laintiffs are not allowed to plead Section 11 claims with the benefit of 20/20 hindsight,' because ‘Section 11 claim[s] cannot be based on a backward-looking assessment of the registration statement.'” In re TVIX Sec. Litig., 25 F.Supp.3d 444, 450 (S.D.N.Y. 2014), aff'd sub nom. Elite Aviation LLC v. Credit Suisse AG, 27 588 Fed.Appx. 37 (2d Cir. 2014) (Summary Order) (quoting Charter Twp. of Clinton Police & Fire Ret. Sys. v. KKR Fin. Holdings LLC, No. 08cv7062 (PAC), 2010 WL 4642554, at *11 (S.D.N.Y. Nov. 17, 2010)). Further, as discussed above, where a Section 11 claim is grounded in an alleged fraud, as is the case here, the plaintiff must plead fraud with the particularity required by Rule 9(b). See Rombach, 355 F.3d at 171.
In addition to being untimely, Plaintiff's Section 11 claim fails under Rules 12(b)(6) and 9(b), as it does not allege, much less with particularity, the necessary third prong of a such a claim: that the challenged registration statement contained an untrue statement of a material fact or omitted to state a material fact, at the time it became effective.
1. The Complaint Fails To Specify Any Misleading or False Statement Made by or on Behalf of CGMHI.
To start, although the Complaint asserts that CGMHI sold a fraudulent product (the ETNs at issue), as evidenced by the fact that, on March 18-19, 2020, the ETNs did not perform as Plaintiff believed they were advertised to perform, the Complaint fails to identify, with any particularity, any misleading or false statement made by or on behalf of CGMHI in any registration statement. Liberally construing the Complaint, this Court understands Plaintiff's Section 11 claim as follows: the ETNs' description in the Pricing Supplement (as VelocityShares 3x Long Crude Oil ETNs linked to the S&P GSCI Crude Oil Index ER) was fraudulent because the “3x” in the name indicated to investors that the prices of the ETNs in the secondary market would consistently track the Index by three times its performance, yet that did not occur starting on March 18, 2020, as that was when an unidentified individual, working on behalf of CGMHI, allegedly interfered with CGMHI's software program. (Compl. ¶¶ 2-9.) This allegation, even when assumed true and afforded every reasonable inference, fails as a matter of law, as it is foreclosed by the explicit warnings and disclosures made in the Pricing 28 Supplement - a document relied upon by Plaintiff in the Complaint. See Poindexter v. EMI Rec. Grp. Inc., No. 11cv559 (LTS), 2012 WL 1027639, at *2 (S.D.N.Y. Mar. 27, 2012) (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.” (internal quotation marks and citation omitted)); see also, e.g., Y-GAR Cap. LLC v. Credit Suisse Grp. AG, No. 19cv2827 (AT), 2020 WL 71163, at *4 (S.D.N.Y. Jan. 2, 2020) (“[T]here cannot be a material misstatement or omission if [a] defendant['s] statements explicitly disclosed the very . . . risks about which [the] plaintiff claims to have been misled.”).
As discussed above, the 85-page Pricing Supplement identified and warned investors of the many heightened risks associated with investing in the ETNs. The Pricing Supplement specifically cautioned, inter alia, that: the ETNs were designed to achieve their stated investment objectives on a daily basis, and their performance over different periods of time could differ significantly from their stated daily objective; the ETNs were highly concentrated investments subject to greater market volatility; and the ETNs could experience a loss of value upon accelerated redemption. (See Pricing Supplement.) Most importantly, the Pricing Supplement made clear that CGMHI had no control over the trading price of the ETNs in the secondary market. (See id., at 9 (discussing the differences between CGMHI's calculated Indicative Value and the trading prices of ETNs in the secondary market); id., at 16 (“The trading price of the ETNs is a market-determined price that will reflect market supply and demand and may differ from the most recent Indicative Value.”); id., at 37 (discussing how the “market price of the ETNs may be influenced by many unpredictable factors, ” including, inter alia, the level of the Index at any given time, the volatility of the futures contracts included in the Index, supply and demand for the ETNs in the secondary market, and the global supply and 29 demand for crude oil).) Indeed, nowhere did CGMHI represent that it had control over the ETNs' secondary market trading prices, nor did it represent that the value of the ETNs would faithfully track three times the Index on a daily basis for the duration of an ETN holder's investment. (See id., at 26.) To the contrary, CGMHI warned investors that “[t]he 3-to-1 (long or inverse) leverage ratio [did] not hold for any period longer than one day.” (Id.) Yet, despite these warnings, all of which were “of sufficient precision and clarity to alert prudent investors to the nature of the offering[] and the risks entailed, ” Panther Partners, Inc. v. Ikanos Comm'ns, Inc., 538 F.Supp.2d 662, 664 (S.D.N.Y. 2008), Plaintiff chose to hold onto at least 11, 471 worth of ETNs for seven days prior to March 18, 2020, and then continued to hold onto the ETNs for an additional 16 days until their redemption.
Ultimately, the Pricing Supplement made clear that, contrary to Plaintiff's conclusory assertions, the daily trading price of the ETNs in the secondary market was determined by outside market-conditions, not by CGMHI. As Plaintiff's allegations regarding CGMHI's alleged false statements or omissions are foreclosed by the CGMHI's own disclosures and warnings, Plaintiff has failed to state a plausible Section 11 claim.
2. The Complaint Fails To Allege That the Challenged Registration Statement Contained a Material False Statement or Omission at the Time When the Statement Became Effective.
As an additional pleading defect under Rules 12(b)(6) and 9(b), the Complaint fails to allege that the statements made in the Pricing Supplement were untrue at the time the Pricing Supplement became “effective.” Lin, 574 F.Supp.2d at 421. The Complaint alleges that the description of the ETNs in the Pricing Supplement “became untrue statements of fact[] using 30 simple math starting on March 18, 2020 to the closure of the ETF.” (Compl. ¶ 2 (emphasis added).) As the Honorable Robert W. Lehrburger, U.S.M.J., recently noted in another investor suit brought against CGMHI, where the exact same allegation was made, “[a] statement that ‘became untrue' is by definition not one that was untrue at the time it was made.” Steadman, No. 21cv02430 (PGG) (RWL) (Dkt. 35), at 18. Thus, just as Judge Lehrburger reasoned in Steadman, the Section 11 claim in this case should be dismissed because it is impermissibly “based on hindsight pleading.” In re Hexo Corp. Sec. Litig., No. 19cv10965 (NRB), 2021 WL 878589, at *9 (S.D.N.Y. Mar. 8, 2021); see Scott v. Gen. Motors Co., 46 F.Supp.3d 387, 394 (S.D.N.Y. 2014) (dismissing Section 11 claim as implausible “because it allege[d] 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 Fed.Appx. 52 (2d Cir. 2015) (Summary Order); see also In re Hi-Crush Partners L.P. Sec. Litig., No. 12cv8557 (CM), 2013 WL 6233561, at *11 (S.D.N.Y. Dec. 2, 2013) (dismissing Section 11 claim based on later-occurring events because a “corporation's duty to disclose is adjudged by the facts as they existed when the registration statement became effective” (internal quotation marks omitted)).
It is this Court's understanding that “[c]losure of the ETF” refers to the date that CGMHI redeemed the ETNsi.e., April 3, 2020.
For all of these reasons, this Court finds that Plaintiff's Section 11 claim has not been adequately pleaded under Rules 12(b)(6) and 9(b). In light of Plaintiff's pro se status, I recommend that Plaintiff be granted leave to amend his Complaint not only to allege a factual basis for equitable tolling of the statute of limitations (as discussed above), but also to replead his Section 11 claim, to remedy the substantive defects identified above, should he be able to do so. 31
D. To The Extent Plaintiff May Have Sought To Allege Common-Law Fraud, His Complaint Is Also Deficient.
Plaintiff has only expressly pleaded one claim in this case: a violation of Section 11 of the Act. Nonetheless, as CGMHI points out, Plaintiff's pro se Complaint could be read to raise a common-law fraud claim as well. (See Compl. (using the word “fraud” 19 times); id. ¶ 11 (describing CGMHI's alleged conduct as “gross fraud”).) Liberally construing the Complaint to assert such a claim, this Court finds that the claim fails under Rules 12(b)(6) and 9(b).
“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. 17cv06147 (AT) (SDA), 2018 WL 2172699, at *9 (S.D.N.Y. Mar. 26, 2018), report and recommendation adopted, 2018 WL 2170299 (S.D.N.Y. May 10, 2018); see Premium Mortg. Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009).
As discussed above, Plaintiff has failed to plead the first element of common-law fraud, as the Complaint does not identify any material misrepresentation or omission of fact made by or on behalf of CGMHI. In addition, Plaintiff has failed to plead that CGMHI acted with the requisite intent to defraud. To plead that element adequately, a plaintiff needs 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 done by pleading facts that, if true, would (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. Here, Plaintiff has done neither. 32
The closest that Plaintiff comes to alleging any intentional conduct is that an unidentified “human” who “had access to [CGMHI's] software must have chosen to change it” and that there was thus “[i]ntentional human interference.” (Compl. ¶ 9.) This same allegation has been raised in other ETN investor suits against CGMHI, and, in each instance, has been deemed “far too speculative and conclusory to create a plausible cause of action.” Steadman, No. 21cv02430 (PGG) (RWL) (Dkt. 35), at 16; see also Ravi v. CGMHI, No. 21cv2223 (GHW) (KNF), 2021 WL 6802817, at *8 (S.D.N.Y. Nov. 30, 2021) (“[T]he plaintiffs' conclusory allegations, that the defendant's tracking was fraudulent because an unidentified person intentionally changed the defendant's software on March 19, 2020, do not suffice to satisfy (1) the standard under Rule 9(b) . . .; and (2) the elements of common law fraud under New York [law].”), report and recommendation adopted as modified, 2022 WL 92775 (S.D.N.Y. Jan. 10, 2022). Further, the Complaint does not set forth any facts indicating motive on behalf of CGMHI to engage in or assist in any fraud, nor does it identify circumstantial evidence of conscious misbehavior. Yencho v. Chase Home Fin. LLC, No. 14cv230 (NSR), 2015 WL 127721, at *3 (S.D.N.Y. Jan. 8, 2015) (conclusory labels of fraud or deception are legally insufficient).
Thus, as pleaded, the Complaint fails, under Rules 12(b)(6) and 9(b), to state a claim for common-law fraud under New York law, but, once again, I recommend that Plaintiff be granted leave to replead to try to cure the identified defects. 33
This Court notes that, even if Plaintiff were unable to save his federal claim in this case because of the time bar, he could potentially still proceed with his common-law fraud claim, should he be able to remedy its deficiencies, as it seems that this Court would have diversity jurisdiction over that state claim. Although he does not allege this clearly, it seems from his Complaint that Plaintiff is a citizen of Canada (see Compl., at 1 (heading)); he plausibly alleges that Defendant is a citizen of New York (see id. ¶ 1); and he has placed more than $75,000 in controversy (see id. ¶ 5).
CONCLUSION
For all of the foregoing reasons, I respectfully recommend that CGMHI's motion to dismiss the Complaint (Dkt. 14) be granted. I further recommend, however, that Plaintiff be granted leave to file an amended complaint to cure the pleading deficiencies described above. More specifically, I recommend that Plaintiff be granted leave to amend so as:
(1) to remedy the defects in his federal Section 11 claim by
(a) setting forth facts that would support equitable tolling of the one-year statute of limitations applicable to his Section 11 claim; and
(b) pleading, with particularity, the third prong of that claim, i.e., that the challenged registration statement contained a material false statement or omission at the time when that statement became effective; and
(2) to plead, with particularity, each of the necessary elements of a common-law fraud claim, as set out herein.
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days from service of this Report to file written objections. See also Fed. R. Civ. P. 6 (allowing three (3) additional days for service by mail). Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable Valerie Caproni, United States Courthouse, 40 Foley Square, Room 240, New York, New York 10007, if her Individual Practices require such courtesy copies. Any requests for an extension of time for filing objections must be directed to Judge Caproni. FAILURE TO FILE OBJECTIONS WITHIN FOURTEEN (14) DAYS WILL RESULT IN A WAIVER OF OBEJCTIONS AND WILL PRECULDE APPELLATE REVIEW. See Thomas v. Arn, 474 U.S. 140, 155 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); 34 Wesolek v. Canadair Ltd., 838 F.2d 55, 58 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).) 35