- in United States
Plaintiff’s lawyers continue to flail away at Barclays PLC for not including their exchange traded notes (“ETNs”) in their 2022 rescission offer for inadvertent issuances of unregistered debt securities. The ETNs were not included in the rescission offer because ETNs are continuously distributed; i.e., all ETNs of a series have the same CUSIP number and therefore they cannot be traced to a particular registration statement. Consequently, issued and registered ETNs are fungible with ETNs that were issued off of a registration statement without the required filing fee having been paid. ETNs issued in the latter case would have been unregistered securities, issued in violation of Section 12(a)(1) of the Securities Act. Some ETNs, listed under the NYSE symbol VXX, were inadvertently issued as unregistered securities.
In the latest attempt, VXX owners argued that a 4:1 reverse split of the VXX ETNs undertaken during the time that unregistered VXX ETNs were being issued was a violation of Section 12(a)(1) of the Securities Act and that the unregistered VXX ETNs were issued under a registration statement containing material misstatements and omissions, in violation of Section 11 of the Securities Act.
The Second Circuit affirmed the lower court’s dismissal of both claims.
The stock split argument was particularly weak, given that the original VXX pricing supplement stated that the issuer might initiate a split or reverse split of the ETNs on any business day. Nonetheless, plaintiffs argued that the reverse split was an unregistered sale of new ETNs, made in violation of Section 12(a)(1) of the Securities Act.
The court responded that the “sale” prerequisite to a violation of Section 12(a)(1) was not met because “the term ‘sale’ or ‘sell’ [is defined as] every … disposition of a security … for value,” citing Section 2(a)(3) of the Securities Act. Citing treatises and cases, the court reasoned that a reverse stock split was not a sale because “[merely] recasting the number of securities that the investor holds” is not a new investment for value. Rather, a split is a “not-for-value reshuffling of assets.” Citing Judge Posner, the court stated that “a reverse … split generally does not even arguably involve[ ] any purchase or sale.” Investors did not lose or gain anything with the split. “Although [w]ords are protean in the hands of lawyers, even the most skilled verbal manipulation cannot transform such an involuntary and immaterial swap into a ‘sale.’”1
The stock split was announced in a pricing supplement dated April 23, 2021 (the “April Supplement”). Plaintiffs argued that under Item 512(a)(2) of Regulation S-K under the Securities Act, the April Supplement was a new registration statement incorporating “misleading” previous prospectuses, under which the issuer was liable under Section 11 of the Securities Act.
Plaintiffs, however, failed to trace their post-split ETNs to the April Supplement, meaning that they did not trace their post-split ETNs to a defective registration statement. The April Supplement stated that it covered the “’initial sale of the [post-split] ETNs’ that Barclays still held in its inventory” (emphasis added) and “’market making transaction[s],’ which it defines as sales from Barclays’ own cache of post-split ETNs to ‘dealers [who would] resell such ETNs to the public.”2 (Emphasis added.) Plaintiffs’ ETNs, by definition, were not covered in the April Supplement.
Footnotes
1 See Knapp v. Barclays, 25-1631 (2nd Cir. Mar. 24, 2026) at pp. 8-10.
2 Id. at pp. 13-15
Originally published in REVERSEinquiries: Volume 7, Issue 2.
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