On July 22, the United States Court of Appeals for the Second Circuit affirmed a District Court ruling dismissing all claims against Ropes & Gray client ProShares Advisors, LLC (ProShares) in In re ProShares Trust Securities Litigation, a case that could have important implications for investors and securities issuers alike. ProShares is the market’s leading provider of leveraged and inverse exchange-traded funds (ETFs), which seek to achieve returns equal to specified multiples of a benchmark index or its inverse on a daily basis. After the financial crisis in 2008-2009, investors in ProShares brought more than 30 separate class actions challenging the registration statement disclosures of more than 40 of the ProShares funds. The plaintiffs in these actions generally alleged that they suffered losses after holding on to their ETF investments for longer than one day and ProShares failed to disclose this risk in its registration statements, in violation of Sections 11 and 15 of the Securities Act of 1933. After the actions were consolidated into one large class action, ProShares moved to dismiss the complaint. Ropes & Gray argued the motion in the United States District Court for the Southern District of New York and Judge John G. Koeltl dismissed the action, finding that the registration statements repeatedly disclosed “in plain English” the precise risk at issue in the case. Plaintiffs appealed the case to the Second Circuit and oral argument was held on May 2.
The Ropes & Gray litigation team was led by Boston-based business & securities litigation partner Rob Skinner and included Washington, D.C.-based appellate and Supreme Court practice leader Doug Hallward-Driemeier.The ProShares action is one of three major putative class actions to be brought on behalf of investors against ETF issuers. The other two actions survived motions to dismiss at the District Court level before settling. Judge Koeltl found, however, that ProShares’ registration statements made repeated clear disclosures of the daily objective of the ETF funds and the risks of holding these funds for longer periods of time. As the only ETF case to reach the Second Circuit, the Court’s decision in In re ProShares could have important consequences for securities issuers as a whole, implicating, among other things, the level of detail about a risk that an issuer must include in its registration statement, an issuer’s obligation to warn investors about potential future events, and whether the placement of the relevant disclosures within an issuer’s registration statement impacts that issuer’s potential liability.
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