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Second Circuit Affirms Dismissal Of Putative Class Action Against Financial Institution In Connection With Reverse Split Of Exchange Traded Notes
04/23/2026On March 24, 2026, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a putative class action asserting claims under the Securities Act of 1933 against a financial institution, its subsidiary, and certain executives. Knapp v. Barclays PLC, —F.4th—, 2026 WL 806009 (2d Cir. Mar. 24, 2026). Plaintiffs asserted that the company’s 4:1 reverse split of exchange-traded notes (“ETNs”) violated Section 12 of the Securities Act because the new ETNs allegedly constituted unregistered securities and Section 11 of the Securities Act because the new ETNs allegedly were issued pursuant to a registration statement that purportedly contained misleading statements. After the district court dismissed the action, the Second Circuit affirmed, holding that the reverse split was not a “sale” within the meaning of Section 12 and that plaintiffs did not satisfy Section 11 because they failed to trace their ETNs to an allegedly misleading offering document.
The Second Circuit first held that plaintiffs failed to allege a Section 12 claim because the split did not constitute a statutory sale of securities under the Securities Act. The Court explained that a split does not qualify as a statutory “sale” unless it meaningfully changes the nature of the asset underlying the securities holders’ investment. Pointing to the statutory definition of a sale as requiring a “disposition for value,” the Second Circuit emphasized that a sale only occurs when there is a significant change in the nature of the investment or in the investment risks such as to amount to a new investment. The Court noted that a split merely recasts the form of the securities but does not modify the underlying asset. Moreover, the Court explained that a split does not implicate the concerns animating the Securities Act, which is designed to promote the full disclosure of information thought necessary to make informed investment decisions, because a split does not provide investors with a choice or an investment decision. Id. The Court held that these considerations governed regardless of whether the security at issue was equity or debt. The Court also rejected plaintiffs’ argument that the nature of their investment was changed because certain investors may not have been able to redeem the notes post-split because the ETNs could only be redeemed in blocks of 25,000 or more; the Court observed, however, that plaintiffs could simply sell their notes in the secondary market, which plaintiffs themselves alleged was efficient and highly liquid, and in any event the company always had the right to effect a split and that possibility would therefore have been factored into the original sale price for the ETNs.
With respect to the Section 11 claim, the Court explained, applying the U.S. Supreme Court’s holding in Slack Techs., LLC v. Pirani, 598 U.S. 759 (2023), that plaintiffs must plead they acquired securities traceable to an allegedly misleading offering document. While plaintiffs argued that they purchased pursuant to a pricing supplement that incorporated previous disclosures that were allegedly misleading, the Second Circuit concluded that the pricing supplement in question expressly did not govern the notes exchanged in the reverse split, but rather governed the sale of post-split notes which the company had maintained in its own inventory. The Second Circuit also rejected plaintiffs’ argument that the pricing supplement was issued pursuant to SEC Rule 416(b), which requires issuers to “amend[]” a registration statement following reverse splits, and that (according to plaintiffs) the pricing supplement therefore “concerned” the ETNs exchanged in the reverse split. The Court explained this was a “misread[ing]” of the SEC rule, which requires amendment before issuing previously undistributed securities after a split but does not require amendment before the split itself.
