889 F. Supp. 2d 644
S.D.N.Y.2012Background
- This is a putative class action by investors in forty-four ProShares ETFs alleging Section 11 and 15 securities fraud claims, plus a New York breach of contract claim.
- The class period runs from August 6, 2006 through June 23, 2009, covering ProShares Trust and ProShares Trust II structures and related officers and entities.
- Plaintiffs contend the registration statements contained material misstatements or omissions regarding the ETFs’ ability to achieve goals beyond a one-day period.
- Defendants allegedly disclosed the daily objective and warned of leverage-related risks, but plaintiffs claim the risk of large losses over multi-day holding periods was underdisclosed.
- In 2008–2009 the ETFs reportedly suffered significant losses despite favorable index movements, allegedly due to a hidden “must lose” risk.
- The court has previously allowed amendment and the current motion to dismiss is directed at the Third Amended Complaint.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Section 11 misstatement/omission plausibility | Plaintiffs allege omissions of the ‘must lose’ risk in registration statements. | Statements warned about volatility and daily objectives; no undisclosed risk. | Plaintiffs' Section 11 claim dismissed. |
| Rule 9(b) vs Rule 8 governing Section 11 claims | Claims rely on fraud and require Rule 9(b) pleading. | Claims can be evaluated under Rule 8 if not pleading fraud. | Rule 8 governs Section 11 claims in this case. |
| Section 15 control liability viability | Controllers should be liable for primary §11 violations. | Without a viable §11 claim, §15 claim fails. | §15 claims against individuals dismissed because §11 claim failed. |
| Materiality and disclosure of risk | Omission of the magnitude of risk was material. | Registration statements plainly disclosed daily objective and related risks. | Disclosure language addressed the risk; no material omission. |
| Reliance on projections and SEC-mandated disclosures | Long-term projections implied a longer-horizon performance. | SEC-required projections do not negate the daily objective disclosures. | Projections do not create liability; no misstatement. |
Key Cases Cited
- In re Flag Telecom Holdings, Ltd. Secs. Litig., 618 F.Supp.2d 311 (S.D.N.Y. 2009) (statements about liability must be evaluated for materiality and misstatement)
- Herman & MacLean v. Huddleston, 459 U.S. 375 (U.S. 1983) (strict liability under §11 for misstatements; due diligence burden on others)
- Litwin v. Blackstone Grp., L.P., 634 F.3d 706 (2d Cir. 2011) (no scienter, reliance, or loss causation required for §11/§12 claims)
- In re Morgan Stanley Info. Fund. Sec. Litig., 592 F.3d 347 (2d Cir. 2010) (unifies pleading standards for securities actions; no need to plead scienter for §11)
- Panther Partners Inc. v. Ikanos Communic’ns, Inc., 681 F.3d 114 (2d Cir. 2012) (materiality depends on probability and magnitude; hindsight not allowed)
- In re Direxion Shares ETF Trust, 279 F.R.D. 221 (S.D.N.Y. 2012) (considered similar ETF disclosures and held claims not undercut by daily objective statements)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (establishes materiality standard for omissions)
- Castellano v. Young & Rubicam, Inc., 257 F.3d 171 (2d Cir. 2001) (materiality balancing for contingent events)
- Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2 (2d Cir. 1996) (not every bad investment is misrepresentation)
- In re AES Corp. Secs. Litig., 825 F.Supp. 578 (S.D.N.Y. 1993) (risk disclosures need not predict every permutation of risk)