Opinion
21-CV-2223 (GHW) (JW)
06-01-2022
UMASHANKAR RAVI and SARITHA RAVI, Plaintiffs, v. CITIGROUP GLOBAL MARKETS HOLDINGS INC., Defendant.
REPORT & RECOMMENDATION
SNNIEER E. WILLIS United States Magistrate Judge
To the Honorable Gregory H. Woods, United States District Judge:
The Plaintiffs, proceeding pro se, bring this action against Defendant Citigroup Global Markets Holdings Inc. (“CGMHI”) alleging common law fraud and a claim under Section 11 of the Securities Act. On November 30, 2021, Magistrate Judge Fox issued a Report & Recommendation granting the Motion to Dismiss the First Amended Complaint. Dkt. No. 31 (the “Judge Fox Report”). On January 10, 2022, District Judge Woods adopted Judge Fox's Report and Recommendation, but granted Plaintiffs leave to amend their Complaint. Dkt. No. 43 (the “Judge Woods Order”). Plaintiffs subsequently filed their Second Amended Complaint. Dkt. No. 44 (the “SAC”). This Motion to Dismiss follows. Dkt. No. 47 (the “Motion or “Mot.”).
BACKGROUND
Plaintiffs were holders of certain notes issued by Defendant, known as the Velocity Shares 3x Long Crude Oil Exchange Traded Notes (the “UWT ETNs”). SAC ¶ 3. The UWT ETNs are “unsecured debt obligations” of CGMHI. Mot. at 3 (quoting the Pricing Supplement, Exhibit A to the Rubin Declaration (Dkt. No. 49)). Plaintiffs allege that, on March 19, 2020, the UWT ETNs under-tracked the Crude Oil Index. SAC ¶ 4. Plaintiffs argue that “the UWT ETNs had faithfully tracked the index as advertised corrected in real time for months,” and therefore this deviation indicates some interference to the computer systems that managed the UWT ETNs SAC ¶ 8. As a result of this alleged interference, Plaintiffs claim they lost money in the amount of $371,196.05, SAC ¶ 4, and further allege a claim for punitive damages. SAC ¶ 9.
Judge Fox's Report reviewed the First Amended Complaint, and ultimately granted dismissal of all claims. With respect to the claim for common law fraud, the Report found that Plaintiffs' “conclusory allegations, that the defendant's tracking was fraudulent because an unidentified person intentionally changed the defendant's software on March 19, 2020” did not suffice to satisfy either the Rule 9(b) standard, or the elements of common law fraud under New York law. See Judge Fox Report at 13. As for the claims under the Securities Act of 1933, Judge Fox stated that because “plaintiffs failed to allege that the defendant's prospectus offering investment securities to the public contained any materially false or misleading statements or omissions” those claims also warranted dismissal. Id.at 13-14. Judge Woods granted Plaintiffs leave to replead their claims through another amended complaint. Judge Woods Order at 4.
LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(6) allows a party to move for dismissal of an action for “failure to state a claim upon which relief can be granted.” To survive a motion to dismiss under FRCP 12(b)(6), “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 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). When determining a motion pursuant to Rule 12(b)(6), all facts alleged in the complaint are assumed to be true, and all reasonable inferences are drawn in the plaintiffs favor. See Interpharm, Inc. v. Wells Fargo Bank, Nat'l Ass'n, 655 F.3d 136, 141 (2d Cir. 2011). However, the Court is “not required to credit conclusory allegations or legal conclusions couched as factual... allegations.” Inspired Capital, LLC v. Conde Nast, 803 Fed. App'x 436, 439 (2d Cir. 2020) (quoting Nielsen v. Rabin, 746 F.3d 58, 62 (2d Cir. 2014). “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) (quotations omitted).
To survive a motion to dismiss a claim of common law fraud, Plaintiffs must establish the following elements: “(1) defendant made a representation as to a material fact; (2) such representation was false; (3) defendant[ ] intended to deceive plaintiff; (4) plaintiff believed and justifiably relied upon the statement and was induced by it to engage in a certain course of conduct; and (5) as a result of such reliance plaintiff sustained pecuniary loss.” Stephenson v. PricewaterhouseCoopers, LLP, 482 Fed. App'x 618, 622 (2d Cir. 2012) (quoting Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 488 (2007)). Furthermore, under the Federal Rules, a party alleged fraud must “state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” Fed.R.Civ.P. 9(b).
As for claims under the Securities Act of 1933, Plaintiffs' allegations can be read as bringing forth claims under either Section 11 or Section 12(a)(2). To sustain a claim under Section 11, Plaintiffs must allege (1) [they] 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 Secs. Litig., 592 F.3d 347, 358-59 (2d Cir. 2010) (quoting 15 U.S.C. § 77k(a)). As for any Section 12(a)(2) claims, Plaintiffs need to establish: “(1) the defendant is a ‘statutory seller'; (2) the sale was effectuated ‘by means of a prospectus or oral communication'; and (3) the prospectus or oral communication ‘include[d] an untrue statement of a material fact or omit[ted] to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.'” Id. at 359 (quoting 15 U.S.C. § 77 l (a)(2)).
“For purposes of [Rule 12(b)(6)], the complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference.” Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). As the Second Amended Complaint refers to the Pricing Supplement, attached as Ex. A to the Declaration of Samuel J. Rubin (Dkt. No. 49), the Court will consider the contents of said Supplement in its consideration of this Motion.
DISCUSSION
A. Common Law Fraud
In order to cure the deficiencies in Plaintiffs' common law fraud claim as identified in Judge Fox's Report, Plaintiffs needed to amend their complaint to state a “representation of a material fact that was false.” Judge Fox Report at 12 (citing Ross, 8 N.Y.3d at 488). Ostensibly, the misrepresentation is that Defendant advertised that the UWT ETNs faithfully tracked the index and that in March 2020 the UWT ETNs stopped doing so. SAC at ¶¶ 3, 5.
However, Plaintiffs can argue that this statement was a misrepresentation only by selectively reading the Pricing Supplement. The Pricing Supplement makes clear that the trading prices for the UTW ETNs were variable and could be influenced by “unpredictable factors.” Rubin Decl. Ex. A, at 38. One of the factors identified in the Pricing Supplement is the “global supply and demand for crude oil.” Id. The Pricing Supplement also indicates several reasons why the UTW ETNs might not track the Index on a given day, including certain Trigger Events or Market Disruption Events. Id. at 34-35. As Plaintiffs note, the pricing variation that they contend is indicative of fraud coincided with the onset of the Covid-19 pandemic and a historic low in oil prices. SAC ¶ 3. As this risk was explicitly identified in the Pricing Supplement, it qualifies any statements regarding faithful tracking of the index, and as such eliminates the argument regarding any misrepresentation. See 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) (finding that where a Pricing Supplement expressly disclosed the risk that ultimately occurred, there could not be a material misstatement or omission). As Defendant's representations must be “taken together and in context,” the SAC fails to allege a misrepresentation of a material fact. In re TVIX Secs. Litig., 25 F.Supp.3d 444, 450 (S.D.N.Y. 2014) (quotations omitted).
Even if Plaintiffs alleged a misrepresentation, the SAC still fails to plead scienter as required by Rule 9(b). Plaintiffs only evidence of malice is that before March 19, 2020 the UWT tracked the index, whereas on that date it did not. SAC ¶ 5. Plaintiffs conclude from this that a person with access to the software must have “chosen to change it.” SAC ¶ 8. “Conclusory statements and allegations are not enough to meet the Rule 9(b) pleading requirements.” Musalli Factory for Gold & Jewellry Co. v. JPMorgan Chase Bank, N.A., 382 Fed. App'x 107, 108 (2d. Cir. 2010). Plaintiffs therefore fail to meet the heightened pleading standard set forth in Rule 9(b), and thus fail to state claim for common law fraud.
B. Securities Act of 1933 Claims
Plaintiffs' claims under the Securities Act suffered from the same fault as their common law claims, and their Second Amended Complaint fails for the same reason. Regardless of whether their claim would arise under Section 11 or under Section 12(a)(2), an element of the claim is that an untrue statement of fact was made, or a material fact omitted. See In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d at 358-59. As noted in the prior section, Plaintiffs have not alleged an untrue statement, as the Pricing Statement disclosed the very risks that did, in fact, occur. See In re TVIX Secs. Litig., 25 F.Supp.3d at 456 (dismissing claims asserted under Section 11 because the documents “read in context and as a whole” could have misled a reasonable investor); In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347 at 360-61 (applying the same analysis to both Section 11 and Section 12(a)(2) claims). As such, Plaintiffs fail to state a claim under either section of the Securities Act.
RECOMMENDATION
For the foregoing reasons, I recommend that the Defendant's Motion to Dismiss the Second Amended Complaint, Dkt. No. 47, be granted.
FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
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 days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections, and any responses to objections shall be filed with the Clerk of Court and on ECF. Any requests for an extension of time for filing objections must be directed to Judge Woods. Failure to file objections within fourteen days will result in a waiver of objections and will preclude appellate review. See Thomas v. Arn, 474 U.S. 140 (1985); Cephas v. Nash, 328 F.3d 98, 107 (2d Cir. 2003).
SO ORDERED.