ProShares exonerated as New York judge throws out leveraged ETF lawsuit

Sep 11th, 2012 | By | Category: ETF and Index News

A class action lawsuit filed in 2009 against ProShares, a US-based provider of alternative exchange-traded funds (ETFs), has been dismissed, in its entirety, by a New York judge.

ProShares exonerated as New York judge throws out leveraged exchange-traded funds (ETF) lawsuit relating to ProShares Ultra and UltraShort leveraged and inverse funds

A class action lawsuit filed against ProShares alleging that the firm provided misleading registrations statements, has been dismissed, in its entirety, by a New York judge.

The United States District Court for the Southern District of New York rejected the plaintiffs’ claim that certain risks associated with holding leveraged and inverse ETFs for periods longer than one day were omitted from the disclosures set forth in the registration statements.

The case alleged that ProShares provided misleading registrations statements by failing to disclose the risks associated with holding leveraged and inverse leveraged ETFs for a time period longer than one day, and the extent to which performance of the funds would inevitably diverge from the performance of the underlying index.

The plaintiffs claimed that ProShares range of “Ultra” and “UltraShort” ETFs were marketed as “simple” directional plays, but were in fact risky short-term investments that should not have been marketed to retail clients. The plaintiffs argued that, as a consequence, investors experienced substantial losses over varying time periods, despite underlying indices moving in a direction that the investors expected to be favourable.

For example, with respect to the ProShares UltraShort Financials ETF (SKF), the Dow Jones US Financials Index, on which the two-times leveraged inverse SKF is based, experienced a 52% decline over the 18-month period between January 2008 and June 2009 (around the time of the financial crisis). However, rather than experiencing a 104% gain during this period, SKF experienced a 61% decline.

Similarly, with respect to the ProShares Ultra Financials ETF (UYG), the plaintiffs alleged that, for example, the Dow Jones US Financials Index experienced a 5.9% gain over the four-month period between January 15 and April 9, 2009.  However, rather than experiencing an 11.8% gain, the UYG experienced an 11.8% decline.

Despite the plaintiffs’ alleged grievances, Judge John G. Koeltl ruled that the disclosures in the registration statements accurately conveyed the specific risk that the plaintiffs assert materialised.

In dismissing the case, Judge Koeltl determined that the registration documents accompanying ProShares’ leveraged and inverse ETFs, such as the prospectus, stated “in plain English” their daily performance objectives and clearly disclosed the possibility that “the ETFs’ value could diverge significantly from the underlying index when the ETFs were held for longer than one day.”

The ruling concluded that ProShares’ disclosures “addresse[d] the relevant risk directly” in a way that any “reasonably prudent investor would have understood.”

Commenting on the ruling, Amy Doberman, ProShares’ General Counsel, said: “We have maintained since the beginning of this case that the allegations were wholly without merit, and we are pleased that the claims have been dismissed in their entirety. ProShares has demonstrated a long-standing commitment to educating investors about our products and their risks and benefits, so it is gratifying that Judge Koeltl’s ruling rests on the strength and quality of our disclosures.”

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