Credit Suisse’s actions caused DGAZ to become “completely dislocated” from the index

Credit Suisse’s actions caused DGAZ to become “completely dislocated” from the index

“Credit Suisse has asked a New York federal judge to permanently toss a proposed class action alleging it caused retail investors substantial losses in delisting a popular exchange-traded note, arguing the investment banking company put out adequate warnings about the note’s risks.

Credit Suisse AG said in a memorandum filed Monday that the plaintiff, retail investor Adelina Gomez, is trying to make the financial institution the insurer of her “highly risky investment strategy” of seeking outsized returns by shorting the exchange-traded note, or ETN, known as DGAZ. […]

Gomez filed the proposed class action in January, alleging Credit Suisse “destroyed” DGAZ and sent retail investors scrambling to cover short positions at wildly inflated prices. Her proposed class includes all DGAZ short position holders who were caught in the short squeeze and purchased DGAZ notes through the over-the-counter market to cover their short positions in the first two trading weeks of August 2020.

DGAZ is an ETN that tracks the price of an underlying index or the numerical average of a securities price. ETNs do not pay interest, according to the complaint. Instead, their value is determined by the return of their underlying market index.

In DGAZ’s case, it was listed by Credit Suisse in 2012 on the NYSE Arca Exchange, and its underlying index was the S&P’s GSCI Natural Gas Index.

According to the complaint, if the index decreased, DGAZ’s “indicative value” would increase and vice versa. DGAZ was popular with so-called short sellers because those who shorted the product at a higher price could profit from the difference between the price at which they borrowed DGAZ and the price they later paid to cover their short, per the complaint.

Gomez said she initiated 10 short positions of DGAZ in May 2020, shortly before Credit Suisse announced the note’s delisting in June 2020. She said that throughout its existence, DGAZ functioned normally and stayed in line with the behavior of the index with little divergence.

Gomez claims that when she initiated the 10 short positions, she did it believing the index price would increase in the future, causing DGAZ’s value to decrease, which would allow her to profit off her short sales.

But in June 2020, Credit Suisse announced through a press release that DGAZ and other ETNs would be delisted from the NYSE Arca on July 10, 2020, and that the company would not issue any more DGAZ notes, effective immediately, according to the complaint.

Gomez claims that this announcement by Credit Suisse and the immediate suspension of DGAZ notes destroyed the product by “preventing it from achieving its sole objective of tracking the index.”

According to the complaint, Credit Suisse’s actions caused DGAZ to become “completely dislocated” from the index, raising the ask prices of the notes “higher with each passing hour regardless of the performance of the underlying index or the product’s indicative value.”

In the two weeks following the press release, the complaint claims DGAZ’s price peaked at approximately $25,000 per note while its indicative value remained around $110 to $130.

This proved detrimental to holders of short positions as they experienced a “short squeeze” and had to either close out their positions at artificially inflated prices or undergo margin calls or forced liquidations to cover the losses on their short positions. […]

Daniel Centner of Peiffer Wolf Carr Kane & Conway LLP, counsel for Gomez, said in an emailed statement that while Credit Suisse takes Gomez to task for a supposed risky investment strategy, the biggest risk she took was relying on the integrity of Credit Suisse.

“She trusted Credit Suisse to honor the terms under which it sold DGAZ, and she trusted Credit Suisse to communicate all material information about DGAZ to its customers. Credit Suisse failed in both respects, causing historic losses to Ms. Gomez and others,” Centner said. “Our suit does not attempt to make Credit Suisse a ‘guarantor’ for these historic losses, as Credit Suisse’s motion suggests. Our goal is to hold Credit Suisse accountable for causing those losses by breaching its duties to its investors.”

Counsel for Credit Suisse didn’t immediately respond to a request for comment Tuesday. […]

Gomez is represented by Joseph Peiffer, Daniel Centner and Jason Kane of Peiffer Wolf Carr Kane & Conway LLP and by Daren A. Luma of Daren A. Luma PLLC.

The case is Adelina Gomez v. Credit Suisse AG, case number 1:22-cv-00115, in the U.S. District Court for the Southern District of New York”

Full article: Law 360 | Sarah Jarvis | July 12, 2022

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