(CN) - Investors claim in a class action that Credit Suisse failed to warn clients of the risks associated with the popularity of its VelocityShares Daily 2x VIX Short Term (TVIX) exchange traded notes.
     The risk became reality when the bank suspended issuing the TVIX ETNs in February 2012 after it realized it could no longer hedge its underlying exposure to the notes because of market volatility and the value of the debt it had already taken on, according to the complaint.
     Exchange traded notes are securities issued as debt by banks and other financial service firms that can be held to maturity or traded at market value. The payout at maturity is guaranteed by the issuer to reflect the exact performance of the underlying index minus fees, and Credit Suisse's TVIX ETNs gave investors exposure to the VIX Index which measures the 30 day volatility of the S&P 500 Index. As volatility on the S&P Index increases so to does the value of the TVIX ETN and the notes generally tracked the S&P 500 inversely.
     According to the suit, once Credit Suisse suspended issuing the notes their market value became disconnected from the index they were supposed to track. Demand, and prices, increased as the supply of the notes was cut off.
     On March 22, the price of the TVIX ETNs plunged 29 percent as speculators began shorting the notes on rumors that Credit Suisse would begin reissuing the notes. A day later, Credit Suisse confirmed the rumors announcing that it would begin selling the notes on March 28. The market value of the notes plummeted another 30 percent, the class claims.
     Despite lengthy disclosures about risks associated with buying the notes, Credit Suisse allegedly didn't say that it had established an internal limit on the number of notes it would issue based on its ability to hedge the value of the debts or what would happen if that limit were reached.
     Credit Suisse also allegedly failed to reveal that it was the issuer, market-maker and swap provider for the notes. Such vertical integration meant that the bank was limited in its ability to hedge the value of the notes which made it likely it would eventually have to stop selling them.
     Meanwhile, if other firms were active in the buying and selling of the notes, the hedging on their face value could have been shared in the market and Credit Suisse would have been less likely to stop selling them the suit.
     But Credit Suisse made it a condition that future sales to major market makers would depend on their willingness to sell Credit Suisse hedges against the value of the increasing number of TVIX notes on the market.
     Lead plaintiffs Grace Trading LLC and Ann Nicolosi are represented by Gregory Nespole and Matthew Guiney with Wolf Haldenstein Adler Freeman & Herz in New York and David Guin, Tammy Stokes and Star Tuner with Donaldson & Guinn in Birmingham.