## Facts

- Former shareholders of Energy Conversion Devices, Inc. (ECD) sued Credit Suisse International and Credit Suisse Securities (USA) LLC as underwriters of ECD offerings, asserting federal securities-fraud claims.
- ECD raised capital through simultaneous offerings of convertible notes and common stock, with ECD providing Credit Suisse 3,444,975 common shares to facilitate note sales and hedging.
- Plaintiffs alleged Credit Suisse publicly represented the shares would support customary hedging by note investors.
- Plaintiffs alleged Credit Suisse instead lent out nearly all of the shares to hedge funds for short selling at nominal fees, enabling unusually large short positions and increasing short interest by about 48%.
- Plaintiffs alleged the resulting short selling artificially depressed ECD’s stock price (from about $72 to under $1 over several years), contributed to ECD’s bankruptcy, and caused investor losses.
- Plaintiffs also alleged the offering prospectuses contained misleading statements or omissions about the share use and related risks, and sought to hold Credit Suisse liable as the “maker” of those statements.
- The case, transferred to the Southern District of New York, was before the court on Credit Suisse’s Rule 12(b)(6) motion to dismiss.

## Issues

1. Whether plaintiffs plausibly pleaded a Section 10(b) and Rule 10b-5(a), (c) market-manipulation scheme by Credit Suisse, including manipulative acts, scienter, and loss causation.
2. Whether plaintiffs plausibly pleaded Rule 10b-5(b) misrepresentation liability by alleging Credit Suisse was the “maker” of prospectus statements (i.e., had ultimate authority over the statements) under Janus.

## Decision

- The court denied the motion to dismiss as to the Rule 10b-5(a), (c) scheme-based market-manipulation claims.
- The court granted the motion to dismiss as to the Rule 10b-5(b) misrepresentation claims based on prospectus statements, for failure to plead Credit Suisse’s “maker” status under Janus.

## Legal Principles

- A market-manipulation claim under Section 10(b) and Rule 10b-5(a), (c) may be adequately pleaded through specific factual allegations that an underwriter structured offerings and securities lending to facilitate heavy short selling that artificially affected price, together with plausible scienter and loss-causation allegations.
- Scienter at the pleading stage may be supported by allegations of motive and opportunity and strong circumstantial allegations of intentional or reckless conduct, consistent with the PSLRA standard.
- Loss causation is sufficiently pleaded where the complaint plausibly links the alleged manipulative conduct to artificial price impact and the plaintiffs’ economic loss.
- Under Janus, Rule 10b-5(b) liability for false statements requires alleging the defendant had “ultimate authority” over the statement’s content and its communication; participation in drafting or underwriting, without ultimate control, is insufficient.

## Conclusion

The court permitted the case to proceed on a theory that Credit Suisse executed a manipulative short-selling scheme tied to ECD’s offerings, but dismissed claims premised on alleged misstatements in the prospectuses because the complaint did not plausibly allege Credit Suisse had ultimate authority over those statements.


Sharette v. Credit Suisse Int'l, 127 F. Supp. 3d 60 (S.D.N.Y. 2015)