ETFs: The Hot New Securities Lawsuit Targets?
Where securities class action lawsuits are concentrated tends to vary over time. At various times over the past several years, companies in the high tech sector, telecommunications category and, more recently, in the financial services industries, have found themselves for a period to be the most popular targets for plaintiffs’ securities class action attorneys. However, beginning in August of this year and accelerating since then, exchange-traded funds (ETFs) appear become among the hottest new targets for securities class action lawsuits. Signs are that there could be more ETF-related securities suits ahead.
By my count there have been at least eight or nine and arguably as many as eleven (or more) new securities class action lawsuits filed against ETFs since August. (See my note below about the difficulty in counting these cases.) Though these lawsuits are separate and are separately filed on behalf of separate investors against separate ETFs, the allegations of these suits are quite similar – indeed, in many cases, virtually identical.
Two recent cases filed against ProShares Ultra Short Dow 30 Fund (refer here) and Direxion Shares Daily Financial Bear 3X Fund (refer here) illustrate the nature of this category of securities suits. The lawsuits overall, like these two, generally are filed against some variation of the funds themselves, the funds’ investment advisors or managers as well as the funds’ distributors, and the funds’ individual trustees. The ETFs themselves allegedly were designed to provide some multiple of the return (or of the inverse of the return) of some benchmark index or measure.
The complaints basically allege that the defendants failed to disclose to investors the risks associated with the investments, and in particular allegedly did not disclose the significant likelihood of losses to the value of the funds’ shares if held over time or even just for more than a single day, nor did the funds disclose the extent to which the funds’ results would likely diverge from their benchmark over time.
Though there have been many of these ETF-related securities lawsuits filed recently, there may be many more yet to come. Among other things, as inevitably seems to happen when plaintiffs’ lawyers start racing to stake out their piece of a hot property, at least one plaintiffs’ firm has issued a press release (here) announcing that it is investigating a whole raft of ETFs – indeed, the particular plaintiffs’ firm’s press release lists 75 different ETFs the firm is investigating.
Whether these cases will ultimately succeed or fail of course remains to be seen, but the plaintiffs’ firms’ actions clearly suggest that they think they are on to something.
These lawsuits already represent a significant part of the total number of securities class action lawsuits this year (depending on how you count, between five and ten percent of the total). If as seems likely at this point new ETF-related cases continue to be filed, the ETF cases will not only represent an even more significant portion of the total number of new securities cases this year, but they could also produce a material increase in the overall number of lawsuits that are filed this year.
But whatever the ultimate number of ETF-related cases ultimately proves to be, I believe that we have already reached the point where these cases represent their own separate phenomenon and therefore worthy of tracking on that basis.
Accordingly, I have created a separate list of the ETF lawsuit filings, which can be accessed here.
It is entirely possible that this list is incomplete, and I would be grateful if readers would let me know about any cases I may have missed. I will be updating this list as new ETF-related cases come in.
I should add that trying to keep track of these cases and to tell them apart is a particularly vexing task. Many of the ETFs have bewilderingly similar names, and some of the lawsuits purport to file claims on behalf of investors in multiple ETFs. Figuring out which suits are separate and which are duplicates is a considerable challenge. For each case presented separately on this list there have been multiple other apparently duplicate other filings that I have not listed. Some of these cases do overlap and there may well be consolidation of some (or, who knows, perhaps many or all) of these cases before all is said and done. I have tried as best as I can to identify separate cases separately. I welcome readers’ observations and comments about the list.
Though there have been a number of these suits, and though there could be many more, most of these suits are filed against ETFs within one single fund family. As a result, the extent of the contagion effect from this lawsuit outbreak so far has been relatively isolated. This concentration of many suits within a single fund family may diminish the insurance impact of this category event, as the single fund family likely carried only a single insurance program for all of the funds in the family. I stress that I have no direct knowledge one way or the other, but it is relatively unlikely that each new lawsuits represents a significant new insurance related loss or loss exposure.
Perhaps the Theory is "Better Late Than Never"?: In recent posts (most recently here), I have noted another trend, which is the apparently belated filing of securities class action lawsuits, where the date of the proposed class period cut off is well in the past. For example, the new suit filed on October 28, 2009 against Pitney Bowes (refer here) has a proposed class period cut off date of October 29, 2007, suggesting that the case was filed just prior to the expiration of the two-year statute of limitations cut off date.
Well, if the cases I previously discussed could fairly be described as "belated," then the securities class action filed in the Southern District of California on October 30, 2009 against Avanir Pharmaceuticals and certain of its directors and officers can only be described as superannuated. Or more succintly, old. Perhaps even stale.
The actiion purports to be filed on behalf of persons who acquired shares of the company's stock between July 1995 and October 31, 2006. That is, the complaint (a copy of which can be found here) was not filed until nearly three years after the proposed class action cutoff date.
There is no way of telling from the face of the complaint how the plaintiffs intend to try to overcome the rather obvious statute of limitations objection that the defendants will raise, expecially given that the complaint expressly alleges that the company's true condition was revealed in an October 31, 2006 disclosure. It will be interesting to see how the plaintiffs attempt to respond to the statute of limitations defense.
Here is an interesting response to your interesting commentary:
I am the lead plaintiff in the action that was recently filed against Avanir Pharmaceuticals.
The story of Avanir Pharmaceuticals presents what, in my opinion, is a fascinating story -- if you dig beneath the surface (something that I would encourage that you do).
One thing that you will find is that the company spent a lot of money trying to silence the warnings of a prominent person who believed that Avanir was not being entirely forthcoming with its shareholders.
As the company's announcement on October 31, 2006 seemed to suggest, this person's warnings appear to have been quite accurate. Too bad Avanir succeeded in having him silenced.
It is also worth noting that Avanir tried to silence several anonymous message board participants as well -- people whose message board posts similarly expressed concerns about potential corporate malfeasance.
I wonder why a company would spend their limited resources trying to silence statements from the public that, by hindsight, seem to have had merit?
I won't even go into the details surrounding the company's false press release and the surreptitious website alterations they made to this same press release. Doing so would be too wordy, I'm afraid. This is hardly the place. Good to mention it though, since I'm sure that all of us value the truth.
So, let's address the main point of your commentary...
Why so close to the statute, you ask?
A good starting place would be for you to look up the case: Kralick v. Avanir that was filed in San Diego Superior Court in 2008. This case was originally intended to be converted to a group, or class action, assuming that it got past the motions to dismiss and discovery was obtained.
Well, you see, it did survive Avanir's Demurrers and was then scheduled for jury trial to begin in just a few months from now.
Here is the crux of the issue at hand: The plaintiff in that case voluntarily dropped it around the beginning of October 2009 -- merely weeks before statute expiration. It is hard to say why, and he hasn't seemed too keen on discussing the matter with me.
As an advocate for truth, and a believer in the concept that evil makes its way if the good man fails to fight, I felt it necessary to bring another action against the company that, in my opinion, defrauded me.
Hopefully, that clears up the issue that you raised with regard to the timing of this suit.
Thanks for reading.
Tamara L. Vaughn