Summary
The Second Circuit affirmed the dismissal of investors’ Securities Act claims against Barclays concerning a 4:1 reverse split of exchange-traded notes. The court held that the mandatory reverse split did not constitute a statutory sale for purposes of Section 12 liability because it did not significantly change the nature of the investment. The court also held that the investors failed to trace their post-split notes to the allegedly misleading April pricing supplement as required for Section 11 liability.
Topics
Practice areas
Questions Presented
- Whether Barclays' mandatory 4:1 reverse split of exchange-traded notes constituted a sale or disposition for value under section 12(a)(1) of the Securities Act.
- Whether plaintiffs adequately pleaded that the post-split exchange-traded notes were issued pursuant to, or traceable to, the April Supplement for purposes of section 11 of the Securities Act.
- Whether the district court properly dismissed the complaint for failure to state a claim.
Holdings
- A reverse split does not constitute a statutory sale unless it meaningfully changes the nature of the asset underlying the securities holders' investment. Barclays' mandatory 4:1 reverse split merely changed the number and form of the notes without materially changing the underlying investment or investment risks, so it was not a sale.
- Plaintiffs failed to plead that the post-split notes they acquired through the reverse split were issued pursuant to, or traceable to, the April Supplement. The supplement governed Barclays' later initial sales and market-making transactions involving post-split notes remaining in its inventory, not the notes transferred to investors in the reverse split.
Key quotations
“The Investors cannot prevail under section 12 because a split does not qualify as a statutory “sale” unless it meaningfully changes the nature of the asset underlying the securities holders’ investment.” (7)
“Because section 11 focuses on securities issued under a “particular registration statement,” plaintiffs must first plead that they acquired securities “traceable to [that] allegedly defective . . . statement.”” (13)
Factual background
Barclays issued VXX exchange-traded notes whose value tracked expected future market volatility. On April 23, 2021, Barclays exercised a contractual right to conduct a mandatory 4:1 reverse split, replacing every four outstanding notes with one note of ostensibly equal aggregate value. Plaintiffs held post-split notes and alleged that the reverse split constituted an unregistered sale under section 12 and that the notes were traceable to an allegedly misleading April pricing supplement for purposes of section 11.
Procedural history
Plaintiffs alleged that Barclays violated section 12(a)(1) by effecting a reverse split of unregistered exchange-traded notes and violated section 11 through allegedly misleading registration materials. The district court dismissed the section 12 claims because the reverse split was not a statutory sale and dismissed the section 11 claims because plaintiffs failed to trace their post-split notes to the allegedly defective April Supplement. The Second Circuit affirmed the judgment in full.