New York judge dismisses class-action over leveraged ETFs

Mon Sep 10, 2012 5:14pm EDT

* Suit pertained to 44 ProShares ETFs

* Judge finds plaintiff's assertions "implausible"

By Jessica Toonkel

NEW YORK, Sept 10 (Reuters) - A New York judge has dismissed a class-action lawsuit by exchange traded fund investors who claimed that the funds' advisor and distributor did not fully disclose risks associated with investing in the ETFs.

The lawsuit, originally filed in August 2009, pertains to 44 leveraged and inverse ETFs managed by ProShares Advisors LLC. In the suit, the plaintiffs alleged that ProShares Advisors LLC and SEI Investments Distribution Co did not disclose the risks of holding on to the ETFs for longer than a day.

Furthermore, the suit alleged that ProShares knew in advance, through a mathematical formula, that investors could suffer large losses.

Leveraged ETFs are designed to amplify short-term returns by using debt and derivatives, and are designed for short-term professional traders, rather than long-term investors.

The U.S. Securities and Exchange Commission has been looking into whether leveraged ETFs have caused some of the market volatility over the past several months.

But in its Sept. 10 dismissal of the class action suit, Judge John G. Koeltl in the U.S. District Court in the Southern District of New York, wrote that ProShares was explicit in disclosing the risks involved with investing in its products.

Furthermore, in his dismissal Judge Koeltl wrote that the idea that ProShares knew in advance that investors could suffer large losses through a mathematical formula was "implausible."

"That the plaintiffs held the ETF shares over long periods of time, despite the language in the registration statement, is not enough to support a cause of action," the judge wrote in his dismissal.

ProShares and SEI did not immediately return calls seeking comment.

As of Aug. 31, ProShares had $10.9 billion in leveraged and inverse ETF assets, making it the biggest provider of these funds in the United States, according to Lipper. The firm had $22.5 billion in fund assets overall.

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