Jeffrey Knapp and other investors sued Barclays PLC and its executives over the British bank's handling of exchange-traded notes tracking market volatility under the ticker VXX. Barclays had issued these complex debt securities while enjoying 'well-known seasoned issuer' status, which allowed it to file open-ended shelf registration statements without pre-registering each batch with the SEC. However, after losing that status in 2017, Barclays inadvertently issued unregistered VXX notes between July 2019 and October 2021.
The court concluded that reverse splits generally don't qualify as statutory 'sales' because they don't meaningfully change the investment's nature. 'When an issuer announces a mandatory split, as happened here, investors ha[ve] no choice and ma[ke] no investment decision,' the per curiam opinion stated. The panel noted that while the split reduced investors' ability to redeem notes in 25,000-block minimums, the secondary market remained 'efficient' and 'highly liquid,' and the redemption risk was 'priced into [the] original sale price.'
U.S. District Judge Lewis Liman had dismissed the complaint in the Southern District of New York, finding that the reverse split didn't constitute a sale under Section 12 of the Securities Act and that investors failed to trace their post-split notes to a defective registration statement under Section 11. The investors argued that an April 2021 pricing supplement served as registration for the reverse split notes, but the court found the supplement only covered Barclays' remaining inventory of post-split notes.
The Second Circuit's ruling on these issues of first impression provides clarity for financial institutions conducting mandatory corporate actions involving complex securities. The decision reinforces that securities laws focus on protecting investors making investment decisions, rather than covering automatic exchanges that don't alter the underlying economic interest.