Caiola v. Citibank, N.A.

295 F.3d 312 (2002)

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Caiola v. Citibank, N.A.

United States Court of Appeals for the Second Circuit
295 F.3d 312 (2002)

Facts

Louis Caiola (plaintiff) was an investor and a client of Citibank, N.A. (defendant). In 1994 Citibank proposed to engage in synthetic trading for Caiola, explaining that the synthetic trading would reduce the risks associated with the high-volume trading in which Citibank was engaging for Caiola. Caiola agreed to two types of synthetic trades: equity swaps and cash-settled over-the-counter options. The agreement between Caiola and Citibank included a disclaimer explaining that the parties could not rely on statements made outside of the agreement. In 1998 Citibank representatives made oral promises that they would continue synthetic trading on Caiola’s behalf. After November 1998, without Caiola’s knowledge, Citibank began engaging in physical trades instead of synthetic trades. In 1999 Citibank told Caiola that it would not continue synthetic trading, and Caiola learned about Citibank’s physical trading. Because of Citibank’s actions, Caiola lost the chance to make millions of dollars from synthetic trading. Caiola filed a lawsuit in federal district court against Citibank, alleging that Citibank had committed securities fraud in violation of § 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. Citibank moved to dismiss the case, arguing that the cash-settled over-the-counter options were not securities because they were not traded on stock exchanges and because they were not physically settled with an asset. Citibank also argued that the equity swaps were not securities, and that Caiola was not entitled to rely on the representations made by Citibank. The district court granted the motion to dismiss. Caiola appealed.

Rule of Law

Issue

Holding and Reasoning (Parker, J.)

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