Set Capital LLC v. Credit Suisse Group AG

19-3466
Set Capital LLC v. Credit Suisse Group AG

In the
United States Court of Appeals
For the Second Circuit
________

AUGUST TERM, 2019

ARGUED: APRIL 30, 2020
DECIDED: APRIL 27, 2021

No. 19-3466-cv

SET CAPITAL LLC, STEFAN JAGER, NIKOLAY DROZHZHINOV,
ALEKSANDR GAMBURG, ACM, LTD.,
Lead Plaintiffs-Appellants,

RAJAN CHAHAL, individually and on behalf of all others similarly
situated, SHAOLEI QIU, GLENN EISENBERG,
Plaintiffs,

v.

CREDIT SUISSE GROUP AG, DAVID R. MATHERS, TIDJANE THIAM,
CREDIT SUISSE AG, CREDIT SUISSE INTERNATIONAL, JANUS HENDERSON
GROUP PLC, JANUS INDEX & CALCULATION SERVICES LLC, JANUS
DISTRIBUTORS, LLC, DBA JANUS HENDERSON DISTRIBUTORS,
Defendants-Appellees.
________

Appeal from the United States District Court
for the Southern District of New York.
________
2 No. 19-3466-cv

Before: WALKER, POOLER, and LYNCH, Circuit Judges.
________

Set Capital LLC, Stefan Jager, Nikolay Drozhzhinov, Aleksandr
Gamburg, and ACM, Ltd. (collectively, Set Capital) brought this
securities class action lawsuit against Credit Suisse Group AG, Credit
Suisse AG, and Credit Suisse International (collectively, Credit
Suisse); Credit Suisse’s CEO Tidjane Thiam and CFO David R.
Mathers (together, the Individual Defendants); and Janus Henderson
Group PLC, Janus Index & Calculation Services LLC, and Janus
Distributors, LLC, doing business as Janus Henderson Distributors
(collectively, Janus). Set Capital principally alleges that, on February
5, 2018, Credit Suisse, Janus, and the Individual Defendants executed
a complex fraud to collapse the market for VelocityShares Daily
Inverse VIX Short Term Exchange Traded Notes (XIV Notes), earning
hundreds of millions of dollars in profit at their investors’ expense.
The district court (Torres, J.) dismissed the complaint for failure to
plead a strong inference of scienter. For the reasons that follow, we
AFFIRM in part and VACATE and REMAND in part.
________

MICHAEL EISENKRAFT (Laura H. Posner, Carol V.
Gilden, and Eric S. Berelovich, on the brief), Cohen
Milstein Sellers & Toll PLLC, New York, New
York, for Appellants Set Capital LLC, Stefan Jager,
Nikolay Drozhzhinov, Aleksandr Gamburg, and ACM,
Ltd.

HERBERT SCOTT WASHER (David G. Januszewski,
Nola B. Heller, Peter J. Linken, on the brief), Cahill
Gordon & Reindel LLP, New York, New York, for
Appellees Credit Suisse Group AG, Credit Suisse AG,
Credit Suisse International, Tidjane Thiam, and David
R. Mathers
3 No. 19-3466-cv

JASON M. HALPER (Jared J. Stanisci, Gillian Groarke
Burns, Tianyin Luo, Victor M. Bieger, on the brief),
Cadwalader, Wickersham & Taft LLP, New York,
New York, for Appellees Janus Henderson Group
PLC, Janus Index & Calculation Services LLC, and
Janus Distributors, LLC
________

JOHN M. WALKER, JR., Circuit Judge:

Set Capital LLC, Stefan Jager, Nikolay Drozhzhinov, Aleksandr
Gamburg, and ACM, Ltd. (collectively, Set Capital) brought this
securities class action lawsuit against Credit Suisse Group AG, Credit
Suisse AG, and Credit Suisse International (collectively, Credit
Suisse); Credit Suisse’s CEO Tidjane Thiam and CFO David R.
Mathers (together, the Individual Defendants); and Janus Henderson
Group PLC, Janus Index & Calculation Services LLC, and Janus
Distributors, LLC, doing business as Janus Henderson Distributors
(collectively, Janus). Set Capital principally alleges that, on February
5, 2018, Credit Suisse, Janus, and the Individual Defendants executed
a complex fraud to collapse the market for VelocityShares Daily
Inverse VIX Short Term Exchange Traded Notes (XIV Notes), earning
hundreds of millions of dollars in profit at their investors’ expense.
The district court (Torres, J.) dismissed the complaint for failure to
plead a strong inference of scienter. For the reasons that follow, we
AFFIRM in part and VACATE and REMAND in part.

BACKGROUND

This appeal stems from the February 5, 2018 collapse of the
market for certain investment vehicles called XIV Notes. XIV Notes
were a derivative financial product that increased in value when the
market was calm and decreased in value when the market was
volatile. The notes were issued by Credit Suisse and priced based on
the inverse of a volatility index called the S&P 500 VIX Short-Term
4 No. 19-3466-cv

Futures Index (VIX Futures Index).

This case concerns Set Capital’s allegation that, after observing
prior episodes of market volatility, Credit Suisse discerned an ability
to depress prices for XIV Notes by purchasing VIX futures contracts
on days when volatility spiked. In essence, Set Capital claims that
Credit Suisse used this knowledge as part of a scheme to sell millions
of XIV Notes before engineering a near-total collapse in their price
through just 15 minutes of its own trading. Set Capital further alleges
that Janus, although not directly involved in this manipulative
scheme, exacerbated the damage by failing to publish accurate prices
for XIV Notes during the window of time when the value of those
notes collapsed. The complaint alleges that the scheme cost investors
$1.8 billion while at the same time allowing Credit Suisse to realize
more than $475 million in gains.

In the background section that follows, we explain in detail: (1)
the characteristics of XIV Notes, including their relationship to the
VIX Futures Index; (2) the way Credit Suisse’s trading impacted
prices for XIV Notes during prior episodes of market volatility; (3) the
extent to which Credit Suisse and Janus warned investors about risks
of investing in XIV Notes; and (4) the remarkable collapse of XIV
Notes following significant volatility on February 5, 2018. As always
at this stage of the litigation, we draw our discussion of the facts from
the complaint, which must be taken as true. 1

1. The Characteristics of XIV Notes

XIV Notes were Exchange Traded Notes (ETNs) issued and
sold by Credit Suisse and placed and marketed by Janus. The notes
were traded on NASDAQ and were related to the Chicago Board
Options Exchange’s VIX Index (VIX Index). The VIX Index is not an

1 See J. App. at 26–125 (complaint).
5 No. 19-3466-cv

asset, but rather a measure of expected volatility in the stock market.
When the market expects higher volatility, the VIX Index increases.
When the market expects lower volatility, the VIX Index decreases.
Because it measures expected swings in the market, the VIX Index is
sometimes referred to as Wall Street’s “fear index” or “fear gauge.” 2

Although the VIX Index is not a tradable asset, investors may
take a position on future levels of market volatility by purchasing
futures contracts on the VIX Index. 3 When viewed in the aggregate,
the prices of these futures contracts provide a window into whether
investors expect market volatility to rise or fall over a specified period
of time. To help investors digest this information, S&P created the
S&P 500 VIX Short-Term Futures Index (VIX Futures Index), which
tracks a portfolio of short-term futures contracts on the VIX Index.

The XIV Notes at issue in this case were designed to track the
inverse (or opposite) of the VIX Futures Index. This inverse
relationship between XIV Notes and the VIX Futures Index meant
that investors in XIV Notes would profit from low volatility in the
stock market. As market volatility declined and prices underlying the
VIX Futures Index decreased, the value of XIV Notes would increase
by an equivalent amount. The converse, of course, was also true. As
market volatility increased and prices underlying the VIX Futures
Index rose, the value of XIV Notes would decline proportionally.

In the event of early redemption, acceleration, or maturity of
the XIV Notes, Credit Suisse agreed to pay noteholders based on the
notes’ “closing indicative value.” An affiliate of Janus, Janus Index &
Calculation Services LLC (JIC), calculated the closing indicative value
at the end of each trading day using a formula that automatically

2See Compl. ¶ 50.
3 A futures contract is an agreement to purchase or sell a particular

commodity on a later date at a predetermined price.
6 No. 19-3466-cv

adjusted the notes’ value based on the inverse of price changes
observed on the VIX Futures Index. 4 Because the closing indicative
value was calculated only once each day, JIC also computed an
“intraday indicative value” every 15 seconds, which was used by
investors trading their notes in the secondary market. 5 JIC used the
same formula to automatically calculate this value, which was
promptly distributed by NASDAQ. Although the intraday indicative
value reflected only a theoretical price for XIV Notes, the secondary
market price tracked the intraday indicative value on a typical day.

To receive a payment from Credit Suisse based on the closing
indicative value, XIV noteholders could redeem their notes early or
attempt to hold their notes through maturity. But noteholders could
not fully control the timing of their notes’ redemption: As disclosed
to investors, Credit Suisse could accelerate the redemption of all XIV
Notes either at its option or upon the occurrence of one or more pre-
defined “Acceleration Events.” 6 If Credit Suisse accelerated the notes
at its option, noteholders would receive a payment based on the
closing indicative value on a predetermined date no earlier than five
business days after receiving notice of the acceleration. If Credit
Suisse declared an Acceleration Event, noteholders would receive a
payment based on the closing indicative value on the day the
acceleration was declared. As relevant here, one Acceleration Event
would occur if, at any point, the intraday indicative value of the XIV

4 JIC had “the sole ability to calculate and disseminate the Closing
Indicative Value” of the XIV Notes. J. App. at 187.
5 The Offering Documents (to be described) state that “JIC or its affiliate

is responsible for computing and disseminating the Intraday Indicative
Value.” Id. at 135, 145.
6 An affiliate of Credit Suisse, Credit Suisse International (CSI), had “the

sole ability to make determinations with respect to . . . certain Acceleration
Events.” Id. at 187.
7 No. 19-3466-cv

Notes fell such that it was less than or equal to 20 percent of the prior
day’s closing indicative value. 7

2. Prior Episodes of Market Volatility Impacting XIV Notes

Due to sustained periods of stability in the market, XIV
noteholders for the most part saw the value of XIV Notes climb from
2010 until 2018. On three occasions in 2011, 2015, and 2016, however,
significant episodes of market volatility caused the value of VIX
futures contracts to spike and, correspondingly, the value of XIV
Notes to drop. During these three volatility spikes, Credit Suisse, as
well as other issuers of volatility-related ETNs, bought large
quantities of VIX futures contracts, which were increasing in value, in
order to offset or “hedge” against potential losses in the ETNs they
issued, which were decreasing in value. 8 Each time they attempted
to do so, however, there was insufficient liquidity in the VIX futures
market—that is, not enough VIX futures contracts to meet the
hedging demand. As a result of this liquidity squeeze, Credit Suisse’s
hedging purchases caused the price of VIX futures contracts to spike
over and above what would have been expected based on market
volatility alone. At the same time, these spikes caused the value of
XIV Notes—the inverse of the VIX Futures Index—to temporarily
plummet.

Pursuant to Credit Suisse’s internal risk protocols, all three of
these liquidity incidents were promptly reported to Credit Suisse’s
Capital Allocation and Risk Management Committee (CARMC), of
which the Individual Defendants were members. In response, Credit

7 Id. at 184.
8 In these circumstances, Credit Suisse routinely hedged by taking short

positions on VIX futures contracts. Thus, a drop in the VIX Futures Index
would increase Credit Suisse’s obligations to XIV noteholders but would
also allow Credit Suisse to profit from its short position. See Compl. ¶ 66.
8 No. 19-3466-cv

Suisse sought alternative ways to hedge its own exposure to XIV
Notes. On July 1, 2016, Credit Suisse announced (July 2016
Announcement) that it may condition all future sales of XIV Notes on
the counterparty’s agreement “to sell to Credit Suisse certain hedging
instruments consistent with Credit Suisse’s hedging strategy,
including but not limited to swaps.” 9

Following the July 2016 Announcement, Credit Suisse
increased the volume of XIV Notes in the market. On June 30, 2017,
it offered an additional 5,000,000 notes on top of the roughly 9,000,000
notes that were already issued and outstanding. And on January 29,
2018, it offered another 16,275,000 notes on top of the roughly
10,800,000 notes then-outstanding. While only a portion of the
16,275,000 notes were ultimately sold between January 29 and
February 5, this last offering flooded the market with millions of XIV
Notes just days before their value collapsed. 10 Notably, Credit Suisse
offered and issued these notes despite shareholder pressure to
eliminate sales of volatility-related ETNs. It also took these actions
even though increasing the volume of XIV Notes outstanding would
require Credit Suisse, in the event of another jump in market
volatility, to increase its hedging activity by purchasing additional
VIX futures contracts. As Credit Suisse knew, these purchases would
exacerbate the illiquidity that contributed to the three prior price
drops of XIV Notes in 2011, 2015, and 2016.

9Compl. ¶ 75.
Between January 29 and February 2, 2018, Credit Suisse issued at least
10

4,200,000 of the 16,275,000 XIV Notes offered, increasing the volume of XIV
Notes outstanding by more than 38.9%. This increase does not account for
additional sales of XIV Notes that may have occurred between February 3
and February 5, 2018, at which point the market for XIV Notes collapsed.
9 No. 19-3466-cv

3. Disclosures in the Offering Documents

Credit Suisse and Janus issued a prospectus for the XIV Notes
as well as a supplement (together, the Offering Documents) in
connection with their offering of the 16,275,000 notes on January 29,
2018. The Offering Documents detailed the structure of XIV Notes
(referred to in the documents as “ETNs”), the conditions under which
Credit Suisse would pay XIV noteholders, and the methods for
calculating the closing and intraday indicative values.

The Offering Documents also contained numerous warnings
concerning risks of investing in XIV Notes. They informed investors
that XIV Notes were “designed as short-term trading vehicles for
investors managing their portfolios on a daily basis.” 11 They warned
investors that “[t]he long term expected value of your ETNs is zero,”
and emphasized that “[i]f you hold your ETNs as a long term
investment, it is likely that you will lose all or a substantial portion of
your investment.” 12

The Offering Documents also cautioned investors that Credit
Suisse intended to hedge its exposure to XIV Notes through trading
in related securities, including VIX futures contracts used to calculate
the VIX Futures Index. In one section, the Offering Documents stated
that “this hedging activity could affect the value of the [VIX Futures]
Index, and accordingly the value of the ETNs.” 13 In another section,
they stated, “Although we and our affiliates have no reason to believe
that our or their hedging activities will have a material impact on the
level of the applicable underlying [VIX Futures] Index, there can be
no assurance that the level of the applicable underlying Index will not

11 J. App. at 166–67 (emphasis omitted).
12 Id. at 154 (emphases omitted).

13 Id. at 151.
10 No. 19-3466-cv

be affected.” 14 The Offering Documents acknowledged that Credit
Suisse’s hedging trades “may result in [Credit Suisse’s] receipt of a
profit, even if the market value of the ETNs declines,” 15 and further
warned that Credit Suisse’s trading activity “may present a conflict”
between the bank’s interests and the interests of investors. 16

The Offering Documents additionally advised investors of risks
related to the pricing of XIV Notes and Credit Suisse’s rights to
accelerate the notes. With respect to the pricing of XIV Notes, they
disclosed that the intraday indicative value may not accurately reflect
the economic value of XIV Notes traded on the secondary market.
They advised that “[t]he Intraday Indicative Value calculation is not
intended as a price or quotation, or as an offer or solicitation for the
purchase, sale, redemption, acceleration or termination of your ETNs,
nor will it reflect hedging or transaction costs, credit considerations,
market liquidity or bid-offer spreads.” 17 The Offering Documents
further warned that the published prices on the VIX Futures Index
could be subject to “delay or postponement,” which in turn would
affect the accuracy of the intraday indicative value. 18 With respect to
acceleration, they specifically advised investors that Credit Suisse
retained the right to accelerate the notes at any time 19 and warned
that, in the event of an acceleration, investors were “likely to lose part
or all of [their] initial investment.” 20

14Id. at 188.
15Id. at 151.
16 Id. at 163.

17 Id. at 177.

18 Id.

19 Credit Suisse could declare an optional acceleration on any business

day. See id. at 183. It could declare an Acceleration Event only in certain
circumstances. Id.
20 J. App. at 130, 140, 148, 152.
11 No. 19-3466-cv

Following their review of the Offering Documents, Set Capital
purchased XIV Notes during the class period of January 29 through
February 5, 2018. During this period, Credit Suisse sold XIV Notes
for prices as high as $135 per note, and the market cap for XIV Notes
increased to approximately $1.9 billion.

4. Market Volatility on February 5, 2018 and the Collapse of the
Market for XIV Notes

On February 5, 2018, the S&P 500 dropped 4.1 percent. As
before, this spike in market volatility increased prices for VIX futures
contracts comprising the VIX Futures Index and accordingly
decreased the value of XIV Notes. Over the course of regular trading
on February 5, the intraday indicative value of the nearly 15 million
XIV Notes outstanding dropped more than 30 percent from $108.37
to $72.59.

Within 15 minutes after the close of regular trading at 4:00 p.m.,
Credit Suisse purchased more than 105,000 VIX futures contracts to
hedge its exposure in sales of XIV Notes. Credit Suisse’s purchases
amounted to roughly one-fourth of the entire VIX futures market,
which drove up trading to more than 167 times the usual volume. As
was the case with the three prior incidents of market volatility, Credit
Suisse’s hedging trades contributed to a liquidity squeeze that caused
the prices of VIX futures contracts to skyrocket. By 4:09 p.m., just nine
minutes into Credit Suisse’s hedge, this further spike in prices on the
VIX Futures Index caused the value of XIV Notes to plummet to
approximately $20. Six minutes later, by 4:15 p.m., Credit Suisse’s
continued purchases of VIX futures contracts drove down the value
12 No. 19-3466-cv

of XIV Notes to just over $4—a drop of more than 96 percent from the
prior day’s closing indicative value. 21

On top of all this, for one hour from 4:09 p.m. to 5:09 p.m., the
intraday indicative value for XIV Notes was not updated every 15
seconds as required and did not reflect an accurate valuation of the
notes. Instead, during this hour, the intraday indicative value
updated only sporadically and valued the XIV Notes at about $24 to
$27 per note (the Flatline Value). This published Flatline Value
persisted notwithstanding that, in reality, each note almost
immediately was worth between $4.22 and $4.40. 22 It was not until
5:09 p.m. (and after more than thirty minutes during which the
intraday indicative value failed to update at all) that NASDAQ
disseminated the correct intraday indicative value of $4.22. 23 During
this hour, investors purchased more than $700 million in XIV Notes
at inflated secondary market prices based on their incorrect belief that
XIV Notes had weathered the spike in market volatility without
triggering an Acceleration Event.

21The complaint alleges that, based on historical data, a 4 percent drop
in the S&P 500 should have caused prices for VIX futures contracts to jump
by approximately 15 to 25 percent. As a result of Credit Suisse’s hedging
trades, those prices in fact increased by nearly 100 percent. See Compl.
¶ 170.
22 As Janus points out in its brief, the complaint does not allege that the

intraday indicative value failed to accurately track the inverse of the VIX
Futures Index, because that index had itself flatlined during the one hour
in question. See Br. of Def.-Appellee Janus at 30–31; J. App. at 414–71.
23 At 4:09:48 p.m., the intraday indicative value of the XIV Notes was

reported as $27.0855, before updating at 4:12:33 p.m. to a value of $27.1951,
updating at 4:12:47 p.m. to a value of $26.3182 and then, at 4:13:03 p.m.,
updating to a value of $24.8933. There were slight fluctuations in the
intraday indicative value until 4:38:34 p.m. when the value froze at
$24.6961. See Compl. ¶ 174. There was no update thereafter until 5:09:05
p.m. when the value was reported as $4.2217. Id.
13 No. 19-3466-cv

But, of course, an Acceleration Event had occurred: The
intraday indicative value of the XIV Notes plummeted more than 80
percent from the prior day’s closing indicative value. Accordingly,
on February 6, 2018, Credit Suisse issued a press release stating that
the XIV Notes had experienced an Acceleration Event and that Credit
Suisse would permanently cease issuing new XIV Notes. Shortly
thereafter, Credit Suisse delivered an irrevocable call notice for all
notes outstanding, selecting February 15 as the accelerated valuation
date. On February 21, Credit Suisse terminated all XIV Notes and
paid each investor $5.99 per note, the closing indicative value on
February 15, 2018. This resulted in approximately $1.8 billion in
market losses to investors, many of whom were Credit Suisse’s own
clients.

On April 25, 2018, Credit Suisse’s quarterly report stated that
its equity sales and trading division earned approximately $490
million for its own account in the prior fiscal quarter “due to more
favorable trading conditions, particularly higher levels of volatility
which benefited our derivatives business.” 24 Although Credit
Suisse’s records are not publicly available, Set Capital estimates that
Credit Suisse earned between $475 and $542 million in profits when
it redeemed the XIV Notes.

5. Prior Proceedings

After several plaintiffs sued Credit Suisse and Janus following
the collapse of the XIV Notes, the actions were consolidated and Set
Capital, one of the lead plaintiffs, filed a class action complaint. The
complaint principally asserts three theories of primary liability under
Sections 9(a) and 10(b) of the Securities Exchange Act of 1934
(Exchange Act) 25 and Section 11 of the Securities Act of 1933

24 Compl. ¶¶ 16, 194.
25 See 15 U.S.C. § 78i(a) (Section 9(a)); 15 U.S.C. § 78j(b) (Section 10(b)).
14 No. 19-3466-cv

(Securities Act). 26 First, Set Capital claims that Credit Suisse and the
Individual Defendants engaged in a scheme to manipulate the market
in violation of Section 10(b) by issuing millions of XIV Notes in
January and February 2018 knowing or recklessly disregarding that
their own hedging activity would trigger a liquidity squeeze in VIX
futures contracts, destroy the value of XIV Notes, and allow Credit
Suisse to accelerate the notes’ redemption at a substantial loss to
investors while locking in a profit for its own account. Second, Set
Capital claims that Credit Suisse and Janus made a material
misstatement or omission in violation of Sections 9(a) and 10(b) by
failing to correct the Flatline Value during afterhours trading on
February 5. Third, Set Capital claims that the Offering Documents
issued by Credit Suisse and Janus contained material misstatements
or omissions in violation of Sections 10(b) and 11 by repeatedly
warning of “risks” they knew were certain to occur. In addition, Set
Capital claims that Credit Suisse and Janus are secondarily liable as
“control persons” of Credit Suisse International (CSI) and JIC under
Section 15 of the Securities Act 27 and Section 20(a) of the Exchange
Act. 28

Credit Suisse, Janus, and the Individual Defendants moved to
dismiss the complaint on November 2, 2018. On August 16, 2019, the
magistrate judge (Netburn, J.) recommended dismissal of all claims
on the basis that Set Capital failed to plead a primary violation of
Section 10(b), which overlaps in substance with the elements of
Sections 9(a) and 11. Specifically, the magistrate judge concluded that
Set Capital failed to allege an actionable misstatement or omission in
the Offering Documents and that, although Set Capital sufficiently
alleged acts of market manipulation and a misrepresentation in the

26 See 15 U.S.C. § 77k (Section 11).
27 See 15 U.S.C. § 77o (Section 15).

28 See 15 U.S.C. § 78t(a) (Section 20(a)).
15 No. 19-3466-cv

Flatline Value, the complaint failed to support a strong inference of
scienter. Because in the magistrate judge’s view the complaint failed
to allege a primary violation, the magistrate judge also recommended
dismissal of Set Capital’s secondary claims under Sections 15 and
20(a). On September 25, the district court issued an order adopting
the recommendations of the magistrate judge in full and dismissing
the action with prejudice. This appeal followed.

DISCUSSION

We review a district court’s dismissal of a complaint for failure
to state a claim de novo, “accepting all factual claims in the complaint
as true, and drawing all reasonable inferences in the plaintiff’s
favor.” 29 “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.’” 30 A claim is facially plausible “when the
plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct
alleged.” 31

A complaint alleging securities fraud must also satisfy
heightened pleading requirements set forth in Federal Rule of Civil
Procedure 9(b) and the Private Securities Litigation Reform Act of
1995 (PSLRA). 32 Rule 9(b) requires litigants to “state with

Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98, 107 (2d Cir.
29

2012) (quoting Famous Horse Inc. v. 5th Ave. Photo Inc., 624 F.3d 106, 108 (2d
Cir. 2010)).
30 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 570 (2007)).
31 Cavello Bay Reinsurance Ltd. v. Shubin Stein, 986 F.3d 161, 165 (2d Cir.

2021) (quoting Iqbal, 556 U.S. at 678).
32 See ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir.

2007).
16 No. 19-3466-cv

particularity the circumstances constituting fraud.” 33 To do so, a
plaintiff must “(1) specify the statements that the plaintiff contends
were fraudulent, (2) identify the speaker, (3) state where and when
the statements were made, and (4) explain why the statements were
fraudulent.” 34 The PSLRA, in turn, requires a plaintiff alleging
securities fraud to (1) specify each misleading statement, (2) set forth
the facts on which a belief that a statement is misleading was formed,
and (3) state with particularity facts giving rise to a “strong inference”
that the defendant acted with scienter—the required state of mind. 35

In this appeal, Set Capital argues that the district court erred by
dismissing its market manipulation and Flatline Value claims for
failure to plead a strong inference of scienter. Set Capital also argues
that the district court erred when it concluded that the complaint does
not allege actionable misstatements or omissions in the Offering
Documents. For the reasons that follow, we agree with Set Capital in
part. We conclude that the complaint plausibly alleges a strong
inference of scienter to support Set Capital’s claim for market
manipulation, and that it has identified actionable misstatements or
omissions in the Offering Documents. We agree with the district
court, however, that the complaint does not support a strong
inference that Credit Suisse and Janus acted with scienter when they
failed to correct the Flatline Value during afterhours trading on
February 5.

Fed. R. Civ. P. 9(b).
33

34 In re Synchrony Fin. Sec. Litig., 988 F.3d 157, 167 (2d Cir. 2021) (quoting

Anschutz, 690 F.3d at 108).
35 15 U.S.C. § 78u–4(b)(2)(A); see also Anschutz, 690 F.3d at 108.
17 No. 19-3466-cv

I. The Manipulative Scheme

In proscribing the use of a “manipulative or deceptive device
or contrivance,” 36 Section 10(b) of the Exchange Act “prohibits not
only material misstatements but also manipulative acts.” 37 To state a
claim for market manipulation under Section 10(b), a plaintiff must
plausibly allege “(1) manipulative acts; (2) damage (3) caused by
reliance on an assumption of an efficient market free of manipulation;
(4) scienter; (5) in connection with the purchase or sale of securities;
(6) furthered by the defendant’s use of the mails or any facility of a
national securities exchange.” 38

As we have described above, Set Capital claims that Credit
Suisse and the Individual Defendants manipulated the market by
issuing millions of additional XIV Notes knowing or recklessly
disregarding the virtual certainty that their own hedging activity
would trigger a liquidity squeeze in VIX futures contracts, destroy the
value of XIV Notes, and allow Credit Suisse to accelerate and redeem
the notes at a substantial loss to investors while locking in a profit for
its own account. Credit Suisse and the Individual Defendants
contend that, even accepting these allegations as true, the complaint
fails to allege a “manipulative act” and does not plead a strong
inference of “scienter.” We disagree and hold that Set Capital has
alleged a plausible claim of liability for market manipulation.

See 15 U.S.C. § 78j(b) (Section 10(b)); see also 17 C.F.R. § 240.10b-5 (SEC
36

Rule 10b-5).
37 ATSI, 493 F.3d at 99; see also Lorenzo v. SEC, 139 S. Ct. 1094, 1101, 1105

(2019) (explaining that Section 10(b) of the Exchange Act and SEC Rule 10b-
5 “capture a wide range of conduct” and are “intended to root out all
manner of fraud in the securities industry”).
38 ATSI, 493 F.3d at 101.
18 No. 19-3466-cv

A. Manipulative Act

We turn first to the threshold question of whether Set Capital
has plausibly alleged a “manipulative act.” As the Supreme Court
has observed, the word “manipulative” is “virtually a term of art
when used in connection with securities markets.” 39 It “refers
generally to practices, such as wash sales, matched orders, or rigged
prices, that are intended to mislead investors by artificially affecting
market activity,” 40 and “connotes intentional or willful conduct
designed to deceive or defraud investors by controlling or artificially
affecting the price of securities.” 41 For market activity to “artificially”
affect a security’s price, we generally ask whether the transaction or
series of transactions “sends a false pricing signal to the market” 42 or
otherwise distorts estimates of the “underlying economic value” of
the securities traded. 43 While a defendant may manipulate the market
through open-market transactions, 44 some misrepresentation or
nondisclosure is required. 45 Deception is the gravamen of a claim for
market manipulation, and “the market is not misled when a
transaction’s terms are fully disclosed.” 46

39Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976).
40Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977).
41 Ernst & Ernst, 425 U.S. at 199.

42 ATSI, 493 F.3d at 100.

43 Id. (quoting Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857, 861 (7th

Cir. 1995)).
44 See id. at 100–02.

45 Wilson v. Merrill Lynch & Co., Inc., 671 F.3d 120, 130 (2d Cir. 2011); cf.

Lorenzo, 139 S. Ct. at 1100–01 (holding that “dissemination of false or
misleading statements with intent to defraud” can qualify as a
“manipulative or deceptive device” prohibited by Section 10(b) and SEC
Rule 10b-5(a) and (c)).
46 Wilson, 671 F.3d at 130 (internal quotation marks, alteration, and

citation omitted).
19 No. 19-3466-cv

The complaint alleges manipulative conduct that is actionable
under Section 10(b). Accepting the well-pleaded facts as true, three
prior volatility spikes in 2011, 2015, and 2016 demonstrated the
impact of Credit Suisse’s hedging trades. Each time volatility spiked,
Credit Suisse’s hedging contributed to a liquidity squeeze in VIX
futures contracts that depressed the value of XIV Notes further than
what would have been expected from market volatility alone. The
complaint alleges that Credit Suisse and the Individual Defendants
used this knowledge as part of an undisclosed scheme to profit at
their investors’ expense. By offering 5,000,000 XIV Notes on June 30,
2017 and another 16,275,000 notes on January 29, 2018—millions of
which were ultimately issued—Credit Suisse exacerbated the risk of
illiquidity in the VIX futures market and created conditions in which
it knew that its hedging trades would destroy the value of XIV Notes
during the next volatility spike. When that spike occurred days later
on February 5, 2018, Credit Suisse executed on the alleged scheme. It
purchased more than 105,000 VIX futures contracts, caused the price
of XIV Notes to plummet by more than 96 percent, and declared an
Acceleration Event to lock in its profit. If proven at trial, this alleged
conduct was manipulative under our precedents.

Credit Suisse argues that the complaint fails to allege any
“artificial” impact on the price of XIV Notes because its hedging
trades were “done openly” for the legitimate purpose of “manag[ing]
risk,” not deceiving investors. 47 To be sure, it is generally true that
short selling or other hedging activity is not, by itself, manipulative—
even when it occurs in high volumes and even when it impacts the
market price for a security. 48 But here, the complaint alleges more
than routine hedging activity: It alleges that Credit Suisse flooded the
market with millions of additional XIV Notes for the very purpose of

47 Br. of Def.-Appellee Credit Suisse at 45–46.
48 See ATSI, 493 F.3d at 101.
20 No. 19-3466-cv

enhancing the impact of its hedging trades and collapsing the market
for the notes. In this context, it is no defense that Credit Suisse’s
transactions were visible to the market and reflected otherwise legal
activity. Open-market transactions that are not inherently
manipulative may constitute manipulative activity when
accompanied by manipulative intent. 49 In some cases, as here,
“scienter is the only factor that distinguishes legitimate trading from
improper manipulation.” 50 To the extent Credit Suisse claims it
hedged for a legitimate purpose, its position contradicts the
complaint. As we discuss in detail below, Set Capital specifically
alleges that Credit Suisse executed its hedging trades on February 5
for a manipulative purpose—to trigger a liquidity squeeze that would
destroy the value of XIV Notes.

B. Scienter

We turn next to the element of scienter. To establish scienter,
“a complaint may (1) allege facts that constitute strong circumstantial
evidence of conscious misbehavior or recklessness, or (2) allege facts
to show that defendants had both motive and opportunity to commit
fraud.” 51 As the Supreme Court has instructed, we evaluate the
sufficiency of a complaint’s allegations of scienter “holistically,”
considering “all of the facts alleged, taken collectively,” rather than

49See id. at 100 (requiring only “market activity aimed at deceiving
investors as to how other market participants have valued a security”).
50 Id. at 102; see also Koch v. SEC, 793 F.3d 147, 153–54 (D.C. Cir. 2015),

cert. denied, 577 U.S. 1235 (2016) (holding that a “burst of trading” on the
open market, combined with manipulative intent, was enough to violate
the Exchange Act); Markowski v. SEC, 274 F.3d 525, 529 (D.C. Cir. 2001)
(holding that “manipulation can be illegal solely because of the actor’s
purpose” (internal quotation marks omitted)).
51 Rombach v. Chang, 355 F.3d 164, 176 (2d Cir. 2004) (quoting Rothman v.

Gregor, 220 F.3d 81, 90 (2d Cir. 2000)).
21 No. 19-3466-cv

“any individual allegation, scrutinized in isolation.” 52 For an
inference of scienter to be “strong,” as required by the PSLRA, “a
reasonable person must deem it cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.” 53
Accepting the facts alleged in the complaint as true, and drawing all
reasonable inferences in Set Capital’s favor, we conclude that the
allegations of scienter are at least as compelling as the competing
inferences urged by Credit Suisse.

Evidence of Conscious Misbehavior or Recklessness

The complaint alleges circumstantial evidence of conscious
misbehavior or recklessness that, when viewed holistically and
together with the allegations of motive and opportunity, supports a
strong inference of scienter.

First, the complaint plausibly alleges that Credit Suisse and the
Individual Defendants knew that, on days when market volatility
increased, Credit Suisse’s hedging trades would cause a spike in the
price for VIX futures contracts and an equally significant drop in the
price for XIV Notes. As alleged in the complaint, Credit Suisse and
the Individual Defendants would have become aware of this dynamic
by observing the impact of their hedging trades during the three prior
volatility spikes. On each of those occasions, Credit Suisse observed
a liquidity squeeze in the VIX futures market which, as it caused
prices for VIX futures contracts to spike, contributed to a sharp drop
in the price for XIV Notes. A juror could reasonably infer that Credit
Suisse was aware of this dynamic not only because the bank is a
highly sophisticated financial institution and had experienced it first-
hand on prior occasions, but also because of the actions that Credit

Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 323, 326 (2007).
52

53 ATSI, 493 F.3d at 99 (quoting Tellabs, 551 U.S. at 324) (alterations

omitted).
22 No. 19-3466-cv

Suisse and the Individual Defendants took in response. Just seven
days after the third spike in 2016, Credit Suisse (with approval from
CARMC) issued the July 2016 Announcement conditioning the sale of
new ETNs on the counterparty’s agreement to sell to Credit Suisse
additional hedging instruments. Drawing all inferences in favor of
Set Capital, a reasonable juror could conclude from this evidence that
Credit Suisse recognized the danger of illiquidity in the VIX futures
market and identified alternative ways to protect itself.

Second, the complaint plausibly alleges that Credit Suisse
knowingly or recklessly exacerbated the liquidity squeeze it had
already observed in the VIX futures market by increasing the number
of XIV Notes outstanding through its offerings of June 30, 2017 and
January 29, 2018. When Credit Suisse offered 16,275,000 XIV Notes
on the latter date, it knew that the scale of its hedging strategy would
have to increase to account for its additional sales even though the
liquidity in the VIX futures market would remain roughly the same.
From these facts, a reasonable juror could conclude that Credit Suisse
and the Individual Defendants sold millions of these notes either
knowing or recklessly disregarding a substantial risk that, when the
next volatility event occurred, Credit Suisse’s hedging trades would
have an even greater negative impact on the value of XIV Notes than
they had before. Moreover, the complaint specifically alleges that the
Individual Defendants were aware of this risk, as Credit Suisse’s
expansion of XIV Notes breached internal risk limits and thus
required approval by CARMC. Accepting these allegations as true,
the complaint invites a reasonable inference that Credit Suisse
increased the volume of XIV Notes for a manipulative purpose—
specifically, to ensure that Credit Suisse’s hedging trades would
23 No. 19-3466-cv

destroy the value of XIV Notes during the next volatility spike so that
Credit Suisse could profit by declaring an Acceleration Event.

In addition to these central facts, the complaint alleges
supporting evidence of conscious misbehavior or recklessness that
bolsters the inference of manipulative intent. Most significantly,
Credit Suisse made false or misleading public statements regarding
the expected impact of its hedging trades and the basis for Credit
Suisse’s decision to declare an Acceleration Event. In the Offering
Documents, for example, Credit Suisse minimized the expected
impact of its hedging trades by stating that its hedging activity “could
affect” the value of the VIX Futures Index 54 while at the same time
affirming that it had “no reason to believe” that any impact would be
“material.” 55 One of the Individual Defendants, Credit Suisse CEO
Tidjane Thiam, also stated on February 14, 2018 that Credit Suisse
announced an Acceleration Event because XIV Notes had “stopped
trading,” when in fact they had not. 56 Although these statements are
relevant only if we assume the truth of other allegations in the
complaint, they tend to support a culpable inference because the
complaint plausibly alleges that Credit Suisse and Thiam “knew facts
or had access to information suggesting that their public statements
were not accurate.” 57 In addition to these facts, the massive economic
impact of the alleged manipulation, as well as the SEC’s decision to

54J. App. at 151.
55Id. at 188.
56 Compl. ¶ 208.

57 Emps.’ Ret. Sys. of Gov’t of the Virgin Islands v. Blanford, 794 F.3d 297,

306 (2d Cir. 2015) (quoting ECA, Local 134 IBEW Joint Pension Tr. of Chicago
v. JP Morgan Chase Co., 553 F.3d 187, 199 (2d Cir. 2009)).
24 No. 19-3466-cv

investigate Credit Suisse following the collapse of the XIV Notes,
strengthen the inference that Set Capital asks us to draw. 58

Credit Suisse principally argues that inconsistencies and
contradictions in the complaint render Set Capital’s theory of scienter
“implausible on [its] face.” 59 In its view, the complaint alleges that
Credit Suisse had fully hedged itself by acquiring alternative hedging
instruments after the July 2016 Announcement. Thus, Credit Suisse
would have had no need to trade VIX futures contracts at all on
February 5, 2018 and therefore could not have manipulated the
market for XIV Notes by doing so. Credit Suisse further argues that,
if its positions in XIV Notes were indeed fully hedged, its sales of XIV
Notes in January and February 2018 would not have breached
internal risk limits and therefore would not have been brought to the
attention of the Individual Defendants. While the district court
credited this argument, we find it unpersuasive. Viewed in the light
most favorable to Set Capital, the complaint does not allege that
Credit Suisse had “fully” hedged its position. Rather, it alleges that
Credit Suisse had the right to obtain alternative hedging instruments
but did not significantly hedge its position until February 5, 2018,
when it purchased 105,000 VIX futures contracts and caused the value
of the XIV Notes to collapse.

Credit Suisse also contends that the July 2016 Announcement
does not qualify as a “specific document” demonstrating that Credit

58See Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000) (finding that the
magnitude of the fraud supported an inference of conscious misbehavior or
recklessness); In re Gentiva Sec. Litig., 932 F. Supp. 2d 352, 380 (E.D.N.Y.
2013) (observing that, “while the existence of an [SEC] investigation alone
is not sufficient to give rise to a requisite cogent and compelling inference
of scienter,” “courts have considered a governmental investigation as one
piece of the puzzle when taking a ‘holistic’ view”).
59 Br. of Def.-Appellee Credit Suisse at 28.
25 No. 19-3466-cv

Suisse understood the impact of its hedging activity and knew that a
future volatility spike would occur. 60 We disagree. At the time of the
July 2016 Announcement, Credit Suisse had observed five years of
low market volatility punctuated by three volatility spikes. During
each spike in volatility, Credit Suisse’s hedging trades created a
liquidity squeeze that depressed the value of XIV Notes. Although
we readily acknowledge that “no market movements are certain,” 61
sophisticated investors like Credit Suisse routinely analyze patterns
in market data to attempt to predict and profit from future market
activity. Here, the July 2016 Announcement was issued only seven
days after the most significant volatility spike in 2016 and it granted
Credit Suisse the right to obtain additional instruments to hedge its
exposure to sales of XIV Notes. Drawing all inferences in favor of Set
Capital, the announcement directly reflected Credit Suisse’s
awareness of the impact of its hedging strategy as well as its view that
occasional spikes in market volatility would likely continue.

Finally, Credit Suisse and the Individual Defendants argue that
the SEC’s investigation cannot animate Set Capital’s “far-fetched”
theory of scienter, and that the magnitude of the alleged fraud was
necessarily de minimis because Credit Suisse fully hedged its
position. 62 We agree with Credit Suisse that neither the SEC
investigation nor the magnitude of the alleged fraud independently
raises a compelling inference of manipulative intent; we view these
facts principally as supporting culpable inferences drawn from
stronger allegations discussed earlier. We disagree, however, with

60Id. at 29–31; see also Teamsters Loc. 445 Freight Div. Pension Fund v. Dynex
Capital Inc., 531 F.3d 190, 196 (2d Cir. 2008) (explaining that, to plead
scienter based on a defendant’s knowledge of facts showing its public
statements were inaccurate, a plaintiff “must specifically identify the
reports or statements” demonstrating knowledge of such facts).
61 See J. App. at 510 (Opinion of Netburn, J.).

62 Br. of Def.-Appellee Credit Suisse at 34–35.
26 No. 19-3466-cv

Credit Suisse’s renewed assertion that its hedging made it
economically impossible for the bank to profit. Accepting the facts
alleged in the complaint as true, even Credit Suisse’s own quarterly
report on April 25, 2018 acknowledged that it profited substantially
from “higher levels of volatility which benefited [its] derivatives
business.” 63 Thus, while not independently sufficient, these facts add
circumstantial evidence of conscious misbehavior or recklessness and
bolster the inference of manipulative intent.

Evidence of Motive or Opportunity

The complaint also points to evidence supporting Credit
Suisse’s motive and opportunity to engage in the alleged
manipulative scheme. First, the structure of the XIV Notes, which
would allow Credit Suisse to profit if the value of the notes collapsed,
provided both motive and opportunity for Credit Suisse to
manipulate the market. Credit Suisse’s effort, through its January 29
offering, to more than double the volume of XIV Notes outstanding
enhanced the opportunity for manipulative acts in the days leading
up to the market’s collapse. Second, the complaint plausibly alleges
that Thiam was under significant pressure to shift Credit Suisse’s
investment arm away from volatile assets like XIV Notes. Accepting
these allegations as true, Credit Suisse’s scheme to expand and then
destroy the value of XIV Notes would have allowed the bank to profit
substantially while realizing Thiam’s strategic goal of “right-sizing”
Credit Suisse’s investment division. 64 Third, the complaint alleges
that, in March 2018, Thiam was awarded a $10.2 million bonus for
successfully shifting Credit Suisse away from volatile assets such as
XIV Notes. We conclude that, on balance, these allegations support a

63 Compl. ¶¶ 16, 194.
64 Id. ¶¶ 119–20.
27 No. 19-3466-cv

strong inference of scienter when viewed together with the evidence
of conscious misbehavior or recklessness.

Credit Suisse first argues that the structure of the XIV Notes
does not demonstrate motive or opportunity to commit fraud because
Credit Suisse had fully hedged its exposure to sales of XIV Notes. We
have already rejected this argument in a related context, and we
conclude that it is no more persuasive here. Even assuming that
Credit Suisse had fully hedged its position, Credit Suisse’s argument
does not account for its offer to more than double the volume of XIV
Notes in the market, use its hedging trades to depress prices for XIV
Notes, and leverage the favorable redemption rights that it built into
the Offering Documents so that it could profit at investors’ expense.
As alleged in the complaint, this perfect storm was created through
Credit Suisse’s market activity, but it would not have been possible
without the self-dealing structure of the XIV Notes.

Credit Suisse also challenges Set Capital’s theory of Thiam’s
motive to manipulate the market. Specifically, it asserts that “it
would have been illogical for Mr. Thiam and Credit Suisse to attempt
to reduce Credit Suisse’s exposure to risky assets by increasing its
exposure to risky assets.” 65 Credit Suisse also points to the fact that it
“made good on Thiam’s promise” to reduce exposure to such assets
by closing two other VIX-related ETNs through the “simple exercise”
of its right to do so—without an allegation of fraud. 66 But these
arguments falter in the face of the facts alleged in the complaint. If
Thiam intended to reduce Credit Suisse’s exposure to XIV Notes, then
his decision to issue millions of additional XIV Notes makes sense
only if he knew that Credit Suisse could quickly eliminate its

65 Br. of Def.-Appellee Credit Suisse at 22.
66 See id. at 22–23; see also Compl. ¶ 214.
28 No. 19-3466-cv

exposure through the alleged manipulative scheme. 67 The fact that
Credit Suisse could have offloaded these risky assets without
expanding its position does not diminish the inference of scienter but
rather supports it.

Finally, Credit Suisse argues that Thiam’s $10.2 million bonus
had no connection to the February 2018 collapse of XIV Notes because
it was issued as compensation for the prior fiscal year. While Set
Capital emphasizes that the discretionary bonus was paid after the
XIV Notes collapsed and specifically celebrated that Thiam’s
“strategic shift” was “paying off,” 68 we agree with Credit Suisse that
the culpable inference here is not strong because the complaint alleges
that the bonus was compensation for 2017. We therefore accord this
fact only limited weight.

In summary, we conclude that the complaint plausibly alleges
both motive and opportunity to commit a manipulative act, as well as
strong circumstantial evidence of conscious misbehavior or
recklessness. Taken together, these allegations are “cogent and at
least as compelling as any opposing inference of nonfraudulent
intent.” 69 We therefore VACATE and REMAND to the district court
to reinstate the manipulative scheme claims. Because we remand as
to the primary violation, Set Capital’s secondary “control person”
claims under Section 20(a) of the Exchange Act are reinstated as well.

67The allegations here thus go beyond “ordinary profit motive,” Br. of
Def.-Appellee Credit Suisse at 24, which cannot alone establish a strong
inference of scienter. See Chill v. Gen. Elec. Co., 101 F.3d 263, 268 (2d Cir.
1996) (“[A] generalized motive, one which could be imputed to any
publicly-owned, for-profit endeavor . . . does not support a strong inference
of fraudulent intent.”).
68 See Compl. ¶ 212.

69 Tellabs, 551 U.S. at 314.
29 No. 19-3466-cv

II. The Failure to Correct the Flatline Value

Sections 9(a) and 10(b) of the Exchange Act prohibit materially
false or misleading statements in connection with the purchase or sale
of a security. 70 To state a claim for a material misrepresentation or
omission under these provisions, a plaintiff must allege “(1) a material
misrepresentation or omission by the defendant; (2) scienter; (3) a
connection between the misrepresentation or omission and the
purchase or sale of a security; (4) reliance upon the misrepresentation
or omission; (5) economic loss; and (6) loss causation.” 71

Set Capital claims that Credit Suisse and Janus, through their
subsidiaries CSI and JIC, made material misstatements by failing to
correct the intraday indicative value when it flatlined for nearly one
hour on the evening of February 5, 2018. CSI and JIC contend that
there was no misrepresentation in the Flatline Value because it
accurately reflected the inverse of the VIX Futures Index (which itself
had failed to update) and that, in any event, the complaint fails to
allege scienter. Assuming without deciding that the Flatline Value
materially misled investors, we agree that the complaint fails to allege
a strong inference of scienter for these claims.

The complaint does not allege any facts showing that either CSI
or JIC had motive or opportunity to falsify the Flatline Value. 72 The
complaint does not identify specific evidence that CSI profited by
selling XIV Notes in the secondary market at prices reflecting the

See 15 U.S.C. § 78i(a)(4) (Section 9(a)); 15 U.S.C. § 78j(b) (Section 10(b)).
70

Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, Inc., 552 U.S. 148, 157 (2008)
71

(Section 10(b) and Rule 10b-5). Section 9(a)(4) of the Exchange Act closely
parallels this standard. See I.B. Trading, Inc. v. Tripoint Glob. Equities, LLC,
280 F. Supp. 3d 524, 539–40 (S.D.N.Y. 2017) (Section 9(a)(4)).
72 See Rombach, 355 F.3d at 176 (holding that complaint may establish

scienter through facts showing that defendants “had both motive and
opportunity to commit fraud”).
30 No. 19-3466-cv

inflated Flatline Value. Nor does it allege that CSI benefitted by
delaying investors’ realization that an Acceleration Event had
occurred. Likewise, the complaint does not allege facts
demonstrating that JIC, which was simply a “Calculation Agent,”
materially benefitted by failing to correct the Flatline Value.

Without an adequate showing of motive or opportunity, Set
Capital argues that the complaint nonetheless alleges scienter based
on strong circumstantial evidence of conscious misbehavior or
recklessness. 73 Specifically, Set Capital argues as follows. According
to the Offering Documents, CSI and JIC were jointly listed as
“Calculation Agents” responsible for announcing a “Market
Disruption Event,” which could occur if S&P “fails to publish or
compute the [VIX Futures Index].” 74 In order to identify computing
errors in the VIX Futures Index, CSI and JIC would have been
required to monitor the VIX Futures Index and compare it to the
values of its underlying inputs—i.e., the real-time prices for VIX
futures contracts. Because careful monitoring would have allowed
CSI and JIC to observe the flatline in the VIX Futures Index, they must
have known that a derivative flatline was reflected in the intraday
indicative value. We are unpersuaded.

First and foremost, CSI was under no obligation to calculate or
monitor the intraday indicative value. Although the Offering
Documents referred to CSI as a “Calculation Agent” for some
purposes, the Offering Documents specified that “JIC or its
affiliate”—not CSI—was “responsible for computing and

73See Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001) (“Where motive is
not apparent, it is still possible to plead scienter by identifying
circumstances indicating conscious [misbehavior or recklessness] by the
defendant, though the strength of the circumstantial allegations must be
correspondingly greater.” (citation omitted)).
74 Compl. ¶ 152.
31 No. 19-3466-cv

disseminating the Intraday Indicative Value.” 75 Thus, we are not
convinced that CSI’s status as a “Calculation Agent” is specific
evidence of scienter.

Second, the complaint does not set forth facts raising a strong
inference that JIC knew that the intraday indicative value had
flatlined. As stated in the supplement, JIC calculated the intraday
indicative value every 15 seconds using an automated formula “based
on the most recent intraday level of [the VIX Futures] Index at the
particular time.” 76 The complaint alleges in a conclusory fashion that
JIC had access to real-time pricing data for VIX futures contracts such
that it could have monitored the accuracy of the VIX Futures Index.
But the complaint does not point to any “specific reports or
statements” showing that JIC could access this data or that it ever
monitored the Index. 77 The Offering Documents specified that JIC
would rely on a third party, S&P, to accurately calculate the VIX
Futures Index. It would be unreasonable to infer that, despite this
plain effort to reduce JIC’s administrative burden, JIC nonetheless
devoted resources to calculating a redundant pricing index for VIX
futures contracts.

Finally, the Offering Documents do not support a finding of
scienter. While the Offering Documents provide that a Market
Disruption Event may occur if S&P “fails to publish or compute the
[VIX Futures Index],” they afford CSI and JIC “discretion in making
[that] determination[].” 78 Because neither CSI nor JIC was required to

75J. App. at 135, 145, 195.
76Id. at 135.
77 See Teamsters, 531 F.3d at 196 (finding allegation of “access to . . . raw

data” insufficient to support strong inference of scienter where plaintiffs
did not “specifically identify the reports or statements containing this
information” (citation omitted)).
78 J. App. at 159.
32 No. 19-3466-cv

declare a Market Disruption Event—either immediately or at any
time—there can be no reasonable inference that either entity
“[n]ecessarily” monitored the accuracy of the VIX Futures Index. 79
Moreover, the Offering Documents warned investors that published
prices on the VIX Futures Index “may occasionally be subject to delay
or postponement,” which in turn “will affect” the accuracy of the
intraday indicative value. 80 In light of these facts, the complaint does
not allege a compelling inference of scienter.

In summary, we hold, as the district court found, that the
complaint fails to plausibly plead that CSI and JIC knowingly or
recklessly failed to correct the Flatline Value. We therefore AFFIRM
the district court’s dismissal of these claims. 81

III. Misstatements or Omissions in the Offering Documents

Section 10(b) of the Exchange Act and Section 11 of the
Securities Act also prohibit material misstatements or omissions in
registration statements filed with the SEC. 82 Unlike claims brought
under Section 10(b), a plaintiff bringing a claim under Section 11
“need not allege scienter, reliance, or loss causation.” 83 Instead,
Section 11 imposes absolute liability on the issuer of a registration
statement if: “(1) the statement ‘contained an untrue statement of a
material fact,’ (2) the statement ‘omitted to state a material fact
required to be stated therein,’ or (3) the omitted information was

79See Br. of Pls.-Appellants at 46.
80J. App. at 177.
81 Set Capital does not point to any circumstantial evidence showing that

the Individual Defendants knowingly or intentionally failed to correct the
Flatline Value. We therefore affirm the district court’s dismissal of these
claims as to the Individual Defendants as well.
82 See 15 U.S.C. § 78j(b) (Section 10(b)); 15 U.S.C. § 77k (Section 11).

83 In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 (2d Cir.

2010).
33 No. 19-3466-cv

‘necessary to make the statements therein not misleading.’” 84 In this
Circuit, “a statement or omission is material if a reasonable investor
would view it as significantly altering the total mix of information
made available.” 85

Set Capital claims that the Offering Documents misled
investors by repeatedly warning of “risks” they knew were certain to
occur. Among other things, they allege that the Offering Documents
misrepresented Credit Suisse’s knowledge of the impact of its
hedging activity and failed to disclose Credit Suisse’s plan to increase
the volume of XIV Notes in the market before triggering an
Acceleration Event. Credit Suisse disputes these claims and asserts
that the Offering Documents contained full and robust disclosures of
the very risks that came to pass. Although we acknowledge that
many risks were disclosed, we agree with Set Capital that the Offering
Documents contain actionable misrepresentations or omissions.

The Offering Documents warned investors of extensive risks
related to the purchase of XIV Notes. They urged that the notes were
intended for “sophisticated investors to manage daily trading risks” 86
and advised purchasers that, should they hold the notes long term,
“it is likely that [they] will lose all or a substantial portion of [their]
investment.” 87 They also prominently disclosed Credit Suisse’s
intention to hedge its exposure to sales of XIV Notes. 88 But, with
respect to the impact of that hedging, the Offering Documents

84Stadnick v. Vivint Solar, Inc., 861 F.3d 31, 36 (2d Cir. 2017) (quoting 15
U.S.C. § 77k(a)); see also Synchrony, 988 F.3d at 172.
85 Fed. Hous. Fin. Agency for Fed. Nat’l Mortg. Ass’n v. Nomura Holding Am.,

Inc., 873 F.3d 85, 146 (2d Cir. 2017) (internal quotation marks, alteration, and
citation omitted).
86 J. App. at 130.

87 Id. at 154 (emphasis omitted).

88 See, e.g., id. at 154–55, 161–62, 188.
34 No. 19-3466-cv

provided a more equivocal advisory. They stated that, while “there
can be no assurance that the level of the [VIX Futures] Index will not
be affected,” Credit Suisse and the Individual Defendants “have no
reason to believe that [their] . . . hedging activities will have a material
impact on the level of the [VIX Futures] Index.” 89

As we explained in Wilson v. Merrill Lynch & Co., Inc., “the law
is well settled that so-called ‘half-truths’—literally true statements
that create a materially misleading impression—will support claims
for securities fraud.” 90 In a similar vein, cautionary words about
future risk cannot insulate from liability an issuer’s failure to disclose
that the risk has, in fact, materialized in the past and is virtually
certain to materialize again. 91 As the D.C. Circuit explained in Dolphin
& Bradbury, Inc. v. SEC, there is a “critical distinction between
disclosing the risk a future event might occur and disclosing actual
knowledge that the event will occur”—particularly where that
distinction holds “enormous significance” for investors. 92

89Id. at 188.
90Wilson, 671 F.3d at 130 (alterations omitted) (quoting SEC v. Gabelli,
653 F.3d 49, 57 (2d Cir. 2011), rev’d on other grounds, 568 U.S. 442 (2013)); see
also In re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 239–40 (2d Cir. 2016)
(discussing the rule against half-truths).
91 Wilson, 671 F.3d at 130; see also Rombach, 355 F.3d at 173.

92 512 F.3d 634, 640 (D.C. Cir. 2008); see also In re Harman Int’l Indus., Inc.

Sec. Litig., 791 F.3d 90, 102–03 (D.C. Cir. 2015) (explaining that “[a] warning
that identifies a potential risk, but implies that no such problems were on
the horizon even if a precipice was in sight,” would not qualify as a
“meaningful cautionary statement” for purposes of safe harbor (citation
and alteration omitted)); Lormand v. US Unwired, Inc., 565 F.3d 228, 244, 247
(5th Cir. 2009) (holding that warnings “d[id] not qualify as meaningful
cautionary language” because they “did not disclose that defendants knew
from past experience that the [risks] posed an imminent threat of business
and financial ruin and that some damage from these risks had already
materialized”).
35 No. 19-3466-cv

Here, the complaint alleges that, following three prior volatility
spikes, Credit Suisse and the Individual Defendants knew with
virtual certainty that, upon the next volatility spike, their hedging
activity would significantly depress the value of XIV Notes. It further
alleges that Credit Suisse issued millions of additional XIV Notes
without disclosing its intent to capitalize on this dynamic and trigger
an Acceleration Event. Accepting these well pleaded allegations as
true, the Offering Documents misrepresented Credit Suisse’s
knowledge and intent when they warned that Credit Suisse’s hedging
activity “could” or “may” impact prices of XIV Notes but affirmed
that Credit Suisse had “no reason to believe” that it would. While
these warnings could have possibly sufficed when Credit Suisse first
issued XIV Notes, the bank conceded in its briefing below that the
warnings remained unchanged for nearly a decade despite three
episodes of market volatility putting to rest any uncertainty as to the
price-impact of Credit Suisse’s hedging. 93 Likewise, the Offering
Documents omitted material facts when they stated that Credit
Suisse’s hedging trades “may present” a conflict of interest. As
alleged in the complaint, Credit Suisse had already structured the
market for XIV Notes to ensure that the next volatility spike would
allow it to profit at its own investors’ expense. These misstatements,
if proven at trial, would materially alter the mix of information
available to Credit Suisse’s investors. 94

93See Slayton v. Am. Express Co., 604 F.3d 758, 773 (2d Cir. 2010) (finding
cautionary statement in Form 10-Q inadequate in light of “[t]he consistency
of the defendants’ language over time despite the new information they
received”).
94 We recognize that, in In re Proshares Tr. II Sec. Litig., we affirmed the

district court’s dismissal of claims arising out of similar market events—
namely, illiquidity in the VIX futures market during afterhours trading on
February 5, 2018. See 839 F. App’x 649, 651 (2d Cir. 2021) (summary order).
While there are superficial similarities between the two cases, our decision
36 No. 19-3466-cv

For the reasons discussed in Section I, above, we have already
concluded that the complaint alleges a strong inference of scienter
with respect to the manipulative scheme. Because the Offering
Documents misrepresented Credit Suisse’s knowledge and its intent
to engage in manipulative acts, we conclude that the complaint pleads
actionable misrepresentations or omissions that must be reinstated
and therefore REMAND these claims to the district court. Moreover,
because we remand as to the primary violations, Set Capital’s
secondary “control person” claims under Section 15 of the Securities
Act and Section 20(a) of the Exchange Act are reinstated as well. 95

* * *

To summarize this opinion, the dismissals of the market
manipulation claim, the actionable misstatements and omissions
claims, and the related “control person” claims are vacated. We
affirm the dismissal of the Flatline Value claims. Our decision today

in Proshares addressed different disclosures related to a different
underlying securities product—an exchange traded fund (ETF), which
bundles securities together. See In re Proshares Trust II Sec. Litig., No. 19 cv
0886 (DLC), 2020 WL 71007, at *1 (S.D.N.Y. Jan. 3, 2020). In part because of
the material differences between ETFs and ETNs, the complaint in Proshares
did not allege market manipulation or the failure to fully disclose a conflict
of interest. See id. Here, unlike in Proshares, the complaint plausibly alleges
that Credit Suisse gave itself the right to accelerate the notes it issued such
that it could use its own trading to depress their price, force redemptions,
and profit at its investors’ expense. Compl. ¶ 7.
95 Set Capital asserts a Section 15 claim against Janus in its capacity as an

alleged “control person” of Credit Suisse and the Individual Defendants.
See Compl. ¶¶ 317–21. While Janus argues that this last surviving claim
against it should be dismissed because it did not control either Credit Suisse
or the Individual Defendants, see Br. of Def.-Appellee Janus at 33–34, the
district court did not address the viability of Janus’s control person
allegations. We therefore leave it to the district court to address this claim
in the first instance on remand.
37 No. 19-3466-cv

to reinstate the foregoing claims is based on what we determine to be
plausible allegations by Set Capital in the complaint. We express no
view nor prediction as to how the proof of these claims may unfold
but simply hold that these claims cannot be dismissed at this stage of
the litigation.

CONCLUSION

For the foregoing reasons, we VACATE the judgment
dismissing the claims pertaining to the manipulative scheme, the
alleged misstatements or omissions in the offering documents, and
the corresponding liability of control persons. We therefore
REMAND those claims for further proceedings. We AFFIRM the
judgment dismissing the claims for failure to correct the Flatline
Value, while VACATING the district court’s denial of leave to amend
those claims.