United States District Court, S.D. New York
plaintiffs: Samuel H. Rudman, David A. Rosenfeld, Erin W.
Boardman, Lindsay La Marca, Magdalene Economou Robbins Geller
Rudman & Dowd LLP Steve W. Berman, Karl Barth Hagens
Berman Sobol Shapiro LLP Reed R. Kathrein, Lucas E. Gilmore,
Hagens Berman Sobol Shapiro LLP
defendants ProShares Trust II, ProShare Capital Management
LLC, Michael L. Sapir, Louis M. Mayberg, Edward J. Karpowicz,
and Todd B. Johnson: Robert A. Skinner Amy D. Roy Jessica M.
Bergin Ropes & Gray LLP
defendants ABN AMRO Clearing Chicago LLC (f/k/a Fortis
Clearing Americas LLC), Deutsche Bank Securities Inc.,
Goldman, Sachs & Co., J.P. Morgan Securities LLC (f/k/a
J.P. Morgan Securities Inc.), Knight Execution & Clearing
Services, LLC (n/k/a Virtu Americas LLC), Merrill Lynch
Professional Clearing Corp., SG Americas Securities, LLC (on
behalf of itself and as successor to Newedge USA, LLC), and
Virtu Financial BD LLC: Adam S. Hakki Daniel Lewis
Agnès Dunogué Shearman & Sterling LLP
OPINION AND ORDER
COTE, DISTRICT JUDGE.
a derivative financial product that loses value when stock
market volatility rises and gains value when the market is
calm. On February 6, 2018, the New York Stock Exchange
(“NYSE”) halted trading for several hours in
SVXY.When trading resumed in the late morning,
the SVXY share price had suffered a sharp drop. This putative
class action is brought on behalf of investors who purchased
or otherwise acquired SVXY shares between May 15, 2017 and
February 6, 2018 (the “Class Period”).
principally assert that a May 15, 2017 Registration Statement
and related filings for the SVXY Fund (collectively the
“Registration Statement”) contained material
omissions. On September 27, 2019, defendants moved to dismiss
plaintiffs' Second Amended Complaint (the
“SAC”) pursuant to Rule 12(b)(6), Fed.R.Civ.P.
For the reasons that follow, defendants' motion is
following facts are taken from the SAC and documents attached
to and incorporated in it by reference, including the
Registration Statement. They are taken in the light most
favorable to plaintiffs.
Trust II (“ProShares”) is a Delaware statutory
trust that manages investment funds with combined assets of
$29 billion. Among the investment funds managed by ProShares
are inverse and leveraged exchange-traded funds
(“ETFs”). The SAC alleges that ProShares is one
of the world's largest managers of these types of ETFs.
The SVXY Fund
contains a detailed description of the securities at issue
here. An ETF is a financial product that bundles securities
together to offer investors the ability to invest in
diversified portfolios. Unlike a mutual fund, shares of which
trade at the fund's net asset value (“NAV”),
its total assets minus its total liabilities, ETF shares
trade on stock exchanges throughout the trading day at
varying prices. ETFs are usually designed, however, to keep
their market price close to their NAV per share.
to the SAC, most ETFs track an index. Inverse ETFs are
designed to deliver the opposite of the performance of the
index they track.
litigation concerns ProShares' inverse ETF called the
SVXY Fund (the “Fund”), which ProShares created
in 2011. In particular, this litigation concerns SVXY shares
that were offered pursuant to the 2017 Registration Statement
or that were traded in the period following the filing of the
inverse ETF, the Fund was designed to deliver the opposite
performance of the VIX Short-Term Futures Index. The VIX is
an index that seeks to measure the expected (i.e.
future) volatility of the S&P 500 Index over the next 30
days.Volatility is the range of price change
that a security experiences over a given period of time. The
VIX is sometimes referred to as the market's “fear
gauge” because it measures expected market swings.
is not tradeable and cannot be invested in directly. Instead,
an investor can purchase shares of the VIX Short-Term Futures
Index. The VIX Short-Term Futures Index is comprised of VIX
futures contracts. A futures contract is an agreement to buy
or sell a predetermined amount of a commodity -- here,
volatility itself -- at a specific price on a specific date
in the future. The VIX Short-Term Futures Index essentially
represents the market's expectation as to how the VIX
will perform over the next 30 days.
the Class Period, the Fund's declared “investment
objective” was to achieve results that corresponded to
the inverse (-1x) of the daily performance of the VIX
Short-Term Futures Index. For example, if the VIX Short-Term
Futures Index decreased by 5% on a given day due to low
market volatility, the Fund's investment objective was to
increase by 5% that same day. Purchasing SVXY shares allowed
investors to hedge investment risk and diversify investment
the Class Period, substantially all of the Fund's assets
were invested in VIX futures contracts. Each day, defendant
ProShare Capital Management LLC (the “Sponsor”),
bought and sold VIX futures contracts to fulfill the
Fund's investment objective of replicating the inverse
value of the VIX Short-Term Futures Index. When the VIX
Short-Term Futures Index increased in value during the
trading day, the Fund's value -- as measured by its NAV
-- was designed to decrease. This decrease in NAV was
accomplished by purchasing VIX futures contracts (i.e.
increasing its liabilities). When the VIX Short-Term Futures
Index decreased in value during the trading day, the Fund
would sell futures contracts in order to increase its NAV
(i.e. reducing its liabilities).
alleges that this “rebalancing” occurred each day
between 4:00 p.m., the time the stock market closes, and 4:15
p.m., the time the VIX futures market closes. This was the
same time period in which other volatility-related ETFs
rebalanced their portfolios through the purchase and sale of
futures contracts. Because the Fund's investment
objective was simply to achieve the inverse value of the VIX
Short-Term Future Index -- not to achieve the greatest return
for investors -- the purchase and sale of VIX futures
contracts would occur each day, regardless of the price of
the futures contracts. The Fund was thus price insensitive.
markets experienced a period of historic low volatility in
2017. As a result, the VIX Short-Term Futures Index dropped
to historic lows throughout 2017 and investments in
volatility-related ETFs increased. By May 31, 2017, aggregate
gross capital subscriptions in the Fund had increased to $7.9
investment poured into inverse-volatility ETFs, the quantity
of VIX futures contracts necessary to rebalance each
ETF's portfolio grew, too. According to the SAC, however,
the growth in demand for VIX futures contracts that was
fueled by the volatility-related ETFs' daily rebalancing
needs outpaced the growth in the supply of VIX futures
contracts, eventually creating a “liquidity gap.”
February 5, 2018, the S&P 500 Index fell approximately 4%
amid concerns about rising bond yields and higher inflation.
At 4:00 p.m., the close of markets, the VIX Short-Term
Futures Index had risen 33% from the prior day's close.
The SVXY share price fell roughly 32%, from the prior
day's close of $105.60 per share to $71.82 per share at
4:00 p.m. on February 5. According to the SAC, the Fund was
then rebalanced so that its NAV reflected the 32% decline in
the SVXY share price. To rebalance, the Fund purchased
hundreds of millions of dollars of VIX futures contracts
before 4:15 p.m., the close of the market for VIX futures
contracts. During this brief time period, between 4:00 and
4:15 p.m., other volatility-related ETFs also purchased and
sold VIX futures contracts in order to rebalance their
portfolios. The outsized demand for and limited supply of VIX
futures contracts led to a liquidity gap that caused massive
Fund's NAV was not published at 4:15 p.m. on February 5,
and was still not published at 4:00 a.m. on February 6, when
pre-market trading began. This led the NYSE to halt trading
in SVXY shares. When trading resumed at 11:35 a.m. on
February 6, the opening SVXY share price was $11.11, a
precipitous drop from the $71.82 trading price at 4:00 p.m.
the previous day.
February 27, 2018, ProShares announced that the investment
objective for the Fund would change. Its new investment
objective would be to seek results that correspond to
one-half the inverse (-0.5x) of the VIX Short-Term Futures
Index for a single day.