ProShares Capital Management LLC ("ProShares") manages various investment funds and offers dozens of exchange traded fund (ETF) products.
The first filed Complaint alleges that as marketed by ProShares, Ultra ETFs are designed to go up when markets go up; UltraShort ETFs are designed to go up when markets go down. The SRS Fund is one of ProShares' UltraShort ETFs. The SRS Fund seeks investment results that correspond to twice the inverse (-200%) daily performance of the Dow Jones U.S. Real Estate Index ("DJREI"), which measures the performance of the real estate sector of the U.S. equity market. Accordingly, the SRS Fund is supposed to deliver double the inverse return of the DJREI, which fell approximately 39.2 percent from January 2, 2008 through December 17, 2008, ostensibly creating a profit for investors who anticipated a decline in the U.S. real estate market. In other words, the SRS Fund should have appreciated by 78.4 percent during this period. However, the SRS Fund actually fell approximately 48.2 percent during this period -- the antithesis of a directional play.
The Complaint alleges the Defendants violated the Securities Act by failing to disclose that the SRS Fund is altogether defective as a directional investment play. Defendants failed to disclose the following risks in the Registration Statement: (1) inverse correlation between the SRS Fund and the DJREI over time would only happen in the rarest of circumstances, and inadvertently if at all; (2) the extent to which performance of the SRS Fund would inevitably diverge from the performance of the DJREI -- i.e., the probability, if not certainty, of spectacular tracking error; (3) the severe consequences of high market volatility on the SRS Fund's investment objective and performance; (4) the severe consequences of inherent path dependency in periods of high market volatility on the SRS Fund's performance; (5) the role the SRS Fund plays in increasing market volatility, particularly in the last hour of trading; (6) the consequences of the SRS Fund's daily hedge adjustment always going in the same direction as the movement of the underlying index, notwithstanding that it is an inverse leveraged ETF; (7) the SRS Fund causes dislocations in the stock market; (8) the SRS Fund offers a seemingly straightforward way to obtain desired exposure, but such exposure is not attainable through the SRS Fund.
On April 28, 2010, Judge John G. Koeltl signed the Order consolidating numerous actions under one consolidated lead action. According to the Order, since August 5, 2009, thirty-three related putative securities class actions (the "Related Actions") have been filed against ProShares Trust and other individual and entity Defendants (collectively, "Defendants") and assigned to this Court. All thirty-three actions allege violations of Sections 11 and 15 of the Securities Act of 1933 arising from Plaintiffs' investments in certain inverse and leveraged ETFs offered by ProShares Trust. Currently at issue are sixteen ETFs. On October 20, 2009, Defendants filed a motion pursuant to Rule 42(a) of the Federal Rules of Civil Procedure seeking consolidation for all purposes of all pending actions. On April 23, 2010, the Court held a pretrial conference. For the reasons stated on the record at the pretrial conference, Defendants' motion to consolidate was granted. All thirty-three actions, shall be consolidated into one action (the "Consolidated Action") bearing the caption "In Re ProShares Trust Securities Litigation," case number 09-cv-6935(JGK), and the Clerk was directed to close the other thirty-two dockets. All filings in the Consolidated Action shall bear the above caption and shall be filed only in the docket indicated above. In the event that any future related actions are assigned to this Court, the Court shall - if appropriate, and upon due consideration of Rule 42(a) factors - enter an order consolidating any such actions with the Consolidated Action. The Clerk was directed to close all pending motions in the 33 Related Actions.
On July 13, 2010, an order was issued by the court appointing lead Plaintiff and lead Counsel in the in this action.
On September 25, 2010, an Amended Consolidated Class Action Complaint was filed by the lead Plaintiffs against the Defendants. The Defendants responded by filing a motion to dismiss on March 17, 2011.
On September 7, 2012, the Court issued an Order granting the Defendants' motion to dismiss. The clerk was directed to close this case. On August 20, 2013, the United States Court of Appeals for the Second Circuit issued a Mandate affirming the order of the district court.
