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Credit Suisse Faces Revived Claims over Inverse VIX Crash


April 27, 2021

The Second Circuit ruled Tuesday that Credit Suisse will have to face claims that it triggered a liquidity crunch to bottom out the price of notes inversely tied to stock market volatility and pick up nearly half a billion dollars of profits.

An appellate panel vacated a New York federal judge’s ruling from 2019 that dismissed manipulation claims against the bank over the price crash for Inverse VIX Short exchange-traded notes, or XIV notes, after the close of regular trading hours on Feb. 5, 2018.

Unlike the lower court, the Second Circuit was swayed Tuesday by the investors’ allegations that Credit Suisse knew hedging against the notes during volatility spikes would sink their prices and capitalized on that strategy in February 2018 to cause an “acceleration event” that allowed the bank to redeem those notes at a cratered price and pull $475 million in gains.

“If proven at trial, this alleged conduct was manipulative under our precedents,” the appellate panel said.

The first of the several since-consolidated suits over the crash was filed in March 2018, roughly a month after a 4.1% drop in the S&P 500 led to a sudden spike in volatility that drove up prices for VIX Futures Index contracts. The price of Credit Suisse’s Inverse VIX Short ETNs started plummeting in tandem and at 4 p.m. that day, the bank hedged its XIV position by buying more than 100,000 VIX futures contracts — representing roughly a quarter of the entire market for the contracts.

This led the VIX Futures Index to again skyrocket and the value of XIV notes to again plummet — but according to investors, the listed value of XIV notes mysteriously stopped updating between 4:09 p.m. and 5:09 p.m. that day, leading them to buy more than $700 million worth of XIV notes at a price they soon learned was far above their actual, updated value.

The following morning, Credit Suisse announced that the extreme drop in XIV value had caused an “acceleration event” whereby the notes were prematurely redeemed at the price of $5.99, well below the $108.37 value they’d started at the previous day.

The investors claim Credit Suisse lied to them in the notes’ offering documents about the reliability of its pricing updates and the effect the bank’s hedging could have on the value of the XIV notes, and further alleged that the bank intentionally manipulated the market for XIV notes by offering more than 16 million of them in January 2018, with the plan to later crash their price and profit from an acceleration event.

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Tuesday’s ruling revives the suit’s manipulation claims as well as its allegations that the XIV notes’ offering documents misrepresented the bank’s “knowledge and its intent to engage in manipulative acts.”

“We believe that Credit Suisse and its former CEO intentionally misled and manipulated investors so that they could profit while investors suffered devastating losses, and we are pleased that this critical case is moving forward,” Michael B. Eisenkraft, an attorney for the investors, said in a statement. “We look forward to prosecuting these claims vigorously on behalf of our clients and the class.”

The investors are represented by Michael B. Eisenkraft, Laura H. Posner, Carol V. Gilden and Steven J. Toll of Cohen Milstein Sellers & Toll PLLC.

Read Credit Suisse Faces Revived Claims over Inverse VIX Crash.