Investors have filed a class action complaint against Proshares Advisors LLC and others for violating anti-fraud provisions of the federal securities laws by misrepresenting and failing to disclose material risks associated with an inverse leveraged exchange traded fund (“ETF”), reported Evan Weinberger in his recent 360Law article entitled “Class Alleges ProShares ETF Is ‘Defective Product.'” That fund is the UltraShort Real Estate ProShares fund offered by ProShares Trust. The Complaint notes that sales of such products have “exploded in popularity” in recent years, that ProShares Trust is the fifth largest provider of ETFs in the United States and managed 99% of the inverse and leveraged ETFs in the country.
The Complaint alleges that ProShares sold the fund as a “simple” directional play that was designed to go up when the market goes down. The strategy was desirable because it depended on reliable math ? if the investor was right about the market’s direction, the fund would deliver the expected return like clockwork, supposedly. Thus, in the summer of 2007, ProShares made hedging against the gathering storm in the financial and real estate markets seem simple. It wasn’t.
The fund actually sought to achieve twice the inverse daily performance of the Dow Jones U.S. Real Estate Index. The Index declined by 39.2% from January 2, 2008 through December 17, 2008. The fund, therefore, was supposed to increase by 78% but it actually declined by 48.2%, according to the Complaint. The wrong-way fund has gotten worse in 2009: the index fell 7.4%, but instead of increasing 14.8%, the fund has fallen a whopping 68%. Due to this spectacular “tracking error,” Plaintiff compares the fund to a “defective product,” because not only does it not do what it was designed and advertised to do, it performed “precisely the opposite of investor’s reasonable expectations.”
ProShares notes that the fund “does not seek to achieve its stated investment objective over a period of time greater than one day.” It’s right there in the fine print. But the Plaintiffs say this does not warn investors that holding the fund for more than a day would lead to those enormous losses. Plaintiffs also allege that ProShares knew very well that investors did not view the fund as a day-trading vehicle and would hold the fund longer than one day. Indeed, ProShares registration statement provides hypothetical examples of fees that investors may encounter over 1-year, 3-year, 5-year and 10-year periods, according to the Complaint.
The Complaint further points out that the Financial Industry Regulatory Authority (“FINRA”) has warned that “inverse and leveraged ETFs ‘ typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets,” and that sales materials must be fair and accurate. The complaint seeks class action status, rescission and money damages.
Securities class actions are designed to provide relief to multiple investors who experienced similar misconduct. Such actions are particularly beneficial for investors whose losses are too small to make an individual lawsuit economically viable.
Investors in leveraged and inverse ETFs who have suffered significant losses or who believe that leveraged or inverse ETFs were unsuitable may want to consider opting out of a class action in which they are class members, and pursuing individual actions or arbitrations represented by experienced counsel. Suitability claims are generally not permitted in class actions and appear particularly compelling in light of FINRA’s statements about the securities. Such cases are often handled on a contingent fee basis because many clients prefer that arrangement. Hourly or blended arrangements, however, may be appropriate and desirable in other circumstances.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their ETF investment problems. For further information, please contact us.