The leveraged funds worries have led a New York law firm to file suit against ProShares Advisors. The WSJ Fund Track reports that Labaton Sucharow LLP filed the suit (pdf) in the U.S. District Court for the Southern District of New York.

The defendants in Novick v. Proshares Trust et al include ProShares officers and directors, Michael Sapir (its chairman and CEO), Louis Mayberg (president), Russell S. Reynolds, III, Michael Wachs, and Simon D. Collier.

ProShare Advisors executives released a statement that: "The allegations reported in the complaint are wholly without merit. We plan to defend against this suit vigorously."

The suit claims that ProShares failed to disclose eight risks inherent in ProShares UltraShort Real Estate fund to investors that the firm failed to disclose to shareholders, including:

inverse correlation between the SRS Fund and the DJREI over time would only happen in the rarest of circumstances, and inadvertently if at all;

the extent to which performance of the SRS Fund would inevitably diverge from the performance of the DJREI -- i.e., the probability, if not certainty, of spectacular tracking error;

the severe consequences of high market volatility on the SRS Fund's investment objective and performance;

the severe consequences of inherent path dependency in periods of high market volatility on the SRS Fund's performance;

the role the SRS Fund plays in increasing market volatility, particularly in the last hour of trading;

the consequences of the SRS Fund's daily hedge adjustment always going in the same direction as the movement of the underlying index, notwithstanding that it is an inverse leveraged ETF;

the SRS Fund causes dislocations in the stock market;

the SRS Fund offers a seemingly straightforward way to obtain desired exposure, but such exposure is not attainable through the SRS Fund.

The ProShares fund is intended to provide two times the inverse performance of the Dow Jones U.S. Real Estate Index. 

Edited by: Sean Hanna, Editor in Chief


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