{"id":10267,"date":"2026-04-12T04:57:46","date_gmt":"2026-04-12T04:57:46","guid":{"rendered":"https:\/\/usatrustedlawyers.com\/blog\/second-circuit-affirms-dismissal-of-securities-claims-arising-from-reverse-split-of-exchange-traded-notes-cadwalader-wickersham-taft-llp\/"},"modified":"2026-04-12T04:57:46","modified_gmt":"2026-04-12T04:57:46","slug":"second-circuit-affirms-dismissal-of-securities-claims-arising-from-reverse-split-of-exchange-traded-notes-cadwalader-wickersham-taft-llp","status":"publish","type":"post","link":"https:\/\/usatrustedlawyers.com\/blog\/second-circuit-affirms-dismissal-of-securities-claims-arising-from-reverse-split-of-exchange-traded-notes-cadwalader-wickersham-taft-llp\/","title":{"rendered":"Second Circuit Affirms Dismissal of Securities Claims Arising from Reverse Split of Exchange-Traded Notes | Cadwalader, Wickersham & Taft LLP"},"content":{"rendered":"\n
\n<\/p>\n

The United States Court of Appeals for the Second Circuit recently issued a per curiam opinion in Knapp v. Barclays PLC<\/em>,1<\/a><\/sup> affirming the dismissal of a putative securities class action arising from a reverse split of exchange-traded notes. Addressing matters of first impression,2<\/a><\/sup> the Court rejected plaintiffs\u2019 attempt to frame the split as an unregistered \u201csale\u201d in violation of Section 12(a)(1) of the Securities Act of 1933, as the Court held that it did not meaningfully change the nature of plaintiffs\u2019 investment or the investment risks. The Court also held that a claim under Section 11 of the Securities Act\u2014applicable to misleading registration statements\u2014was not available because plaintiffs failed to identify any registration statement covering their post-split notes.<\/p>\n

The decision provides useful guidance for issuers and financial institutions on the scope of potential Securities Act liability for reverse splits\u2014and, by extension, other corporate actions that alter share count or price.<\/p>\n

I. Background<\/strong><\/p>\n

Exchange-traded notes (ETNs) are complex debt securities that derive their value from underlying indices of securities and typically trade on major stock exchanges. The notes in Knapp,<\/em> issued by Barclays Bank PLC, tracked expected future market volatility and enabled sophisticated investors to manage daily trading risks.3<\/a><\/sup> Investors could hold the notes to maturity and receive a cash payout, redeem them in blocks of 25,000 notes at an earlier date, or trade them on the New York Stock Exchange.4<\/a><\/sup><\/p>\n

On April 23, 2021, Barclays consummated a 4:1 reverse split with respect to the notes, replacing every four ETNs that an investor held with a single new ETN ostensibly worth four times the value.5<\/a><\/sup> That type of exchange conformed to the terms of the original pricing supplement, which had warned investors that Barclays might \u201celect to initiate a split . . . or a reverse split of [the] ETNs.\u201d6<\/a><\/sup> The same day as the split, Barclays circulated a new pricing supplement (the \u201cApril Supplement\u201d), which disclosed the split and indicated that the supplement would govern the \u201cinitial sale\u201d of any post-split notes that Barclays still held.7<\/a><\/sup><\/p>\n

Plaintiffs\u2014a group of investors\u2014sued Barclays, its parent, and certain executives under the Securities Act, asserting two claims in a putative class action on behalf of themselves and all others similarly situated. First, they alleged that the reverse split violated Section 12(a)(1), which prohibits the sale of unregistered securities.8<\/a><\/sup> Second, they asserted that the split contravened Section 11 because the post-split ETNs could be \u201ctrace[d] to\u201d the April Supplement, which incorporated earlier, allegedly inaccurate disclosures.9<\/a><\/sup> The district court\u2014Judge Liman\u2014dismissed both claims, and plaintiffs timely appealed<\/p>\n

II. The Second Circuit\u2019s Holding<\/strong><\/p>\n

The Second Circuit\u2014Judges Walker, Sullivan, and Bianco\u2014addressed plaintiffs\u2019 claims under both Section 12 and 11 of the Securities Act, rejecting each on independent grounds.<\/p>\n

A. The Section 12 Claim: Reverse Split Not a \u201cSale\u201d<\/strong><\/p>\n

The Court held that the reverse split did not constitute a \u201csale\u201d under the Securities Act, a prerequisite for liability under Section 12. Section 12 provides a private right of action to purchasers of unregistered securities, and it defines a \u201csale\u201d as \u201cevery . . . disposition of a security . . . for value.\u201d10<\/a><\/sup> The Court explained that, in determining whether a transaction involves a sale, courts must assess whether an exchange of securities has brought about \u201c\u2018such significant change in the nature of the investment or in the investment risks as to amount to a new investment.\u2019\u201d11<\/a><\/sup> Garden-variety splits seldom create the \u201csignificant change\u201d required, because they leave the underlying assets untouched and merely alter the form of the securities.12<\/a><\/sup><\/p>\n

Applying these principles, the Court held that the reverse split was not a sale because Barclays had an \u201cironclad right\u201d to split the ETNs, and plaintiffs did not lose or gain anything\u2014they simply traded four ETNs for one worth the same amount.13<\/a><\/sup><\/p>\n

The Court rejected several arguments from plaintiffs, who tried to classify the reverse split as a \u201csale.\u201d It dismissed the contention that the split should be treated differently because it involved debt rather than equity securities, noting that the inquiry focuses on whether there was a \u201c\u2018significant change in the nature of the investment or in the investment risks,\u2019\u201d not on the security\u2019s label.14<\/a><\/sup> The Court also found the argument that reduced redemption ability constituted a significant change unpersuasive, reasoning that investors could sell on the secondary market and that reduced redemption ability was priced into the original sale.15<\/a><\/sup><\/p>\n

B. The Section 11 Claim: Failure to Trace Post-Split Notes<\/strong><\/p>\n

The Court also affirmed dismissal of the Section 11 claim based on plaintiffs\u2019 inability to trace the post-split notes to a particular registration statement. Under Section 11, investors may sue when they have \u201cacquir[ed]\u201d securities pursuant to a registration statement containing \u201can untrue statement of material fact.\u201d16<\/a><\/sup> However, under the Supreme Court\u2019s 2023 Slack<\/em> decision, plaintiffs \u201cmust first plead that they acquired securities \u2018traceable to [that] allegedly defective . . . statement.\u2019\u201d17<\/a><\/sup><\/p>\n

Plaintiffs argued that the April Supplement was a new registration statement incorporating previous misleading prospectuses, as SEC rules permit a pricing supplement to be deemed \u201c\u2018a new registration statement relating to the securities offered therein.\u2019\u201d18<\/a><\/sup> The Court held that this logic failed because the securities offered in the April Supplement did not include ETNs transferred via the reverse split.19<\/a><\/sup> Rather, the April Supplement governed only the \u201cinitial sale of the [post-split] ETNs\u201d that Barclays held in its own inventory and \u201cmarket-making transaction[s],\u201d defined as sales from Barclays\u2019 own cache of post-split ETNs to dealers who would \u201cresell such ETNs to the public.\u201d20<\/a><\/sup><\/p>\n

Key Takeaways<\/strong><\/p>\n

The decision has several practical implications for issuers of exchange-traded products and other structured instruments.<\/p>\n