On July 22, 2013, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a class action lawsuit against ProShares Trust and ProShares Trust II (ProShares) in In re ProShares Trust Securities Litigation. The plaintiffs were investors in leveraged ProShares exchange-traded funds (the ETFs), each of which pursued an investment objective whereby it sought a return equal to a stated multiple of a benchmark index on a daily basis. The complaint alleged that the plaintiffs suffered losses due to ProShares’ failure—in violation of Sections 11 and 15 of the Securities Act—to adequately disclose the risks of holding investments in the ETFs for periods longer than one day.

Affirming the ruling of the U.S. District Court for the Southern District of New York, the Second Circuit found that ProShares adequately disclosed the risks of long-term investments in the ETFs. The court rejected the plaintiffs’ primary argument that ProShares made a material omission by not disclosing that an ETF investor could experience an “actual loss” despite correctly predicting the direction of the underlying index’s movement over the period of investment. The court found that the disclosure clearly contemplated this scenario by stating that the value of a longterm investment in an ETF may “diverge significantly” from the value of the underlying index. Given the robust risk disclosure contained throughout the registration statements, the court found it implausible that the decision of a reasonable investor would be influenced by the allegedly material omission. The court further stated that subsequent disclosure revisions, which clarified that volatility could cause an investment in an ETF to “move in [the] opposite direction as the index,” did not constitute an admission of the inadequacy of the prior disclosure. The plaintiffs also alleged that ProShares possessed an “undisclosed mathematical formula” and was aware that certain market conditions could place long-term ETF investors in a “must lose” position. In dismissing this allegation, the Second Court noted that ProShares “cannot be expected to predict and disclose all possible negative results across any market scenario.”