ETF Managers Group (ETFMG), Nasdaq, and PureShares have agreed on a settlement that resolves two lawsuits pertaining to the alleged theft of several exchange-traded funds including the world’s first dedicated cybersecurity ETF.
The dispute primarily centered around the world’s first cybersecurity ETF.
While the exact terms of the settlement are not yet public, ETFMG is expected to transfer certain cash payments to both Nasdaq and PureShares as well as intellectual property (understood to be the ETFs) to a Nasdaq affiliate.
The agreement brings to a close what has been a bitter, nearly four-year battle amongst the three firms.
The dispute
While the lawsuits cover the misappropriation of five funds, the dispute is primarily centered on the $1.2bn ETFMG Prime Cyber Security ETF (HACK US).
HACK was created in 2014 through a partnership between PureShares, an ETF start-up co-founded by trader Andrew Chanin, International Securities Exchange (ISE), which provided seed capital and indexing capabilities, and ETF Managers Group, a white-label ETF platform that arose out of the repurposing of the FactorShares Trust.
At the time, HACK was known as the PureFunds ISE Cyber Security ETF.
Being the first dedicated cybersecurity ETF on the market, and coinciding with several high-profile online breaches at the time, HACK quickly found its footing with assets under management growing to nearly $1.5 billion within nine months.
The relationship between the firms began to sour in May 2017 when ETFMG cut HACK’s fee from 0.75% to 0.60%, a move that was not agreed by the other partners.
Then in July 2017, ETFMG surprised the industry by announcing it was terminating its agreement with PureShares, alleging that the firm had violated existing agreements.
ETFMG took sole control of all PureShares ETFs, rebranded them with the ETFMG prefix, and dropped ISE as index provider. Both PureShares and Nasdaq, which had acquired ISE in 2016, launched legal battles against ETFMG.
While HACK is the blockbuster fund – current assets under management above $1.2bn equates to earnings of over $7.2 million in annual management fees – the suite also includes the PureFunds ISE Mobile Payments ETF (IPAY US), now rebranded as the ETFMG Prime Mobile Payments ETF. IPAY generates over $4m in annual management fees thanks to AUM of $540m and an expense ratio of 0.75%.
The other funds involved in the lawsuits include the $140m ETFMG Prime Junior Silver Miners ETF (SILJ US), the $80m ETFMG Video Game Tech ETF (GAMR US), and the ETFMG Drone Economy Strategy ETF (IFLY US) which was recently repurposed as the Wedbush ETFMG Global Cloud Technology ETF (IVES US), a cloud computing fund managed in partnership with Wall Street technology analyst Daniel Ives.
The first of the two cases to appear before the courts was that between Nasdaq and ETFMG. In December 2019, US District Court Judge Paul Engelmayer decidedly found in favour of the plaintiff, ordering ETFMG to pay nearly $80 million in compensation and punitive damages.
In a damning verdict against ETFMG and its management team, the judge labeled the firm’s conduct as “little more than an act of theft”.
“The court further finds that ETFMG blatantly breached its contractual duty to furnish those profits to Nasdaq and PureShares by appropriating these profits for itself, as it continues to do this day,” Engelmayer wrote in his ruling.
While ETFMG appealed the ruling and was still battling the separate case brought by PureShares, the outcome likely shook the firm’s confidence, leading it to seek a resolution outside of the courts.
As noted previously, the terms of the agreement are still unclear and questions do remain as to the role each firm will play once the dust settles. This may be especially complicated in the case of the repurposed Wedbush ETFMG Global Cloud Technology ETF which is now co-sponsored by a party not linked to the dispute.
Most importantly, however, the transaction is not expected to have any material impact on investors in the ETFs, according to people familiar with the matter.