The ProShares lawsuit victory in defending the risk and operating disclosures of its inverse and leveraged exchange-traded funds (ETFs) may be short-lived as an appeal is in progress. The lawsuit was decided in favour of ProShares in New York's Southern District Court, in September.
Jacob Zamansky, co-lead attorney in the intended class action lawsuit in which 32 investors sued ProShares, its executives, its underwriter and independent trustees, has confirmed to SRP that an appeal is now in progress.
An "intent to appeal" the 7 September decision by New York Southern District's Court Judge John G. Koeltl, was filed on 3 October. The full appeal will be filed in a District appellate court within the next few weeks, Zamansky confirmed.
"We believe the judge gave too narrow a reading to the (ETF's) materials and to the law," Zamansky told SRP. "We think the judge got this wrong." The appeal will focus on what Zamansky called the "Grand Canyon doctrine."
"If someone tells me there's a hole in the ground but I find the Grand Canyon, it is apparent there should have been a better, larger warning," he said.
A spate of lawsuits, originally filed as early as 5 August 2009, charged that ProShares misled prospective investors in its inverse and leverage ETFs by not providing the proper and necessary disclosures.
The complaints alleged that the regulatory-required registration statements for the ProShares ETF's did not warn investors that the funds were meant as a one-day trading vehicle rather than a long-term directional bet; that they inherently carried the likelihood of a "spectacular tracking error;" and that high market volatility would cause severe consequences to returns, amongst other complaints.
The lawsuits alleged that although some risk disclosures were present, they were completely inadequate. "…ProShares' ‘greater than one-day' risk disclosure is tantamount to a kennel selling a dog that is a cat, while disclosing that the dog may have defects," one of the lawsuits charged.
In April 2010, individual lawsuits were consolidated into one and allowed to proceed.
In the September decision handed down by Judge Koeltl, he noted that the ETF documents clearly stated, "(T)he funds do not seek to achieve their stated investment objective over a period of time greater than one day because mathematical compounding prevents the funds from achieving such results." He added, "(A) registration statement need not disclose every possible permutation of the risk, nor predict the precise manner in which the risks will manifest themselves." Rather, "…the standard is whether a reasonably prudent investor, having read the (registration) statement, would have understood the specific risks at issue."
A spokesman for ProShares, headquartered in Bethesda, Maryland, pointed SRP to the firm's earlier public comments. "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," said ProShares general counsel, Amy Doberman. "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."
By Lori Pizzani
Published at StructuredRetailProducts.com