Second Circuit shields Barclays from investor lawsuit over VXX reverse split

A federal appeals court ruled March 24 that Barclays' reverse split of its VXX notes was not a sale – investors cannot sue. 

If you manage client portfolios that include exchange-traded notes, this one is worth paying attention to. 

The Second Circuit sided with Barclays in a class action brought by five investors who held VXX, a volatility-linked ETN traded on the New York Stock Exchange. The investors argued that when Barclays consolidated their notes through a 4:1 reverse split in April 2021, that swap amounted to a sale of unregistered securities. The court disagreed, and the reasoning matters for anyone working with structured products. 

Here is how the bank got into trouble in the first place. Barclays had long enjoyed a special status with the SEC that allowed it to issue securities off a shelf registration without pre-clearing every new batch. The bank gave up that status in 2017 after settling cease-and-desist proceedings with the SEC. What followed was an administrative fumble. For more than two years – from July 2019 to October 2021 – Barclays kept issuing VXX notes without proper registration. 

Within that window, on April 23, 2021, Barclays executed a 4:1 reverse split. Every four VXX notes an investor held were swapped for a single note ostensibly worth the same total amount. The bank had reserved the right to do this on any business day under the original terms. On the same day, it put out a new pricing supplement describing the split and covering any post-split notes it still held in its own inventory. 

The investors filed suit in the Southern District of New York, claiming the reverse split itself was an unregistered sale and that the new pricing supplement tied their notes to a registration statement containing allegedly misleading information. The trial court threw both claims out, and the Second Circuit affirmed. 

The appeals court applied a straightforward test. For a swap of securities to count as a sale under the Securities Act, it has to meaningfully change the nature of the investment. This one did not. Investors had no say in the matter. They did not gain or lose anything. They simply ended up holding one note instead of four. The court found that forcing registration requirements onto that kind of compulsory, no-impact exchange would not serve the purpose the law was designed for – protecting people when they are actually making investment decisions. 

The investors also tried to argue that the reverse split hurt them by reducing their ability to redeem notes in required blocks of 25,000. The court was not persuaded. VXX trades on the New York Stock Exchange in what the investors themselves described as an efficient and highly liquid secondary market. If you wanted out, you could sell. 

On the second claim, the court found the April pricing supplement did not cover the notes investors received through the split. It covered notes Barclays still held in inventory for future sales. The supplement referred to the split in the past tense and never listed it as an issuance. There was simply no link between the investors' notes and the registration statement they were challenging. 

For advisors and portfolio managers, the takeaway is concrete. When an issuer executes a mandatory split or reverse split of debt securities, the Securities Act may offer less protection than you might expect – even when the issuer's own registration house is not in order. The law draws a line between transactions where investors make a choice and transactions where they do not. This case lands firmly on the side of no choice, no sale.