Only in America

September 3, 2009 in Finance

The law firms of Pearson, Simon, Warshaw & Penny, LLP and Tydings & Rosenberg, LLP have just announced a class-action lawsuit against ProShares Trust on behalf of everyone who has ever owned shares of SKF, the double-short financials leveraged ETF. Key quote from the press release:

For example, in a six week period from September 15, 2008 through October 31, 2008, the DJFI declined by over 17%. Despite a reasonable expectation based upon Defendants' disclosures that SKF would rise by up to 34% during this period, SKF actually fell by nearly 6%.

"Reasonable expectation?" I have written not once but twice on why leveraged ETFs will fail to track their underliers over time by explicit design. There is no mystery here; there is no reason for the tracking to persist over any period longer than one day, much less six weeks! Not only does ProShares makes that point quite clear in their prospecti, but it should be plainly obvious to anyone who stops to think about how the ETFs work. Only in America can you completely misunderstand a product and still sue someone for failing to meet your expectations.

Then again, perhaps these law firms stand to collect fees no matter whether they win or lose this baseless lawsuit. In that case, the investors who sign on will have been duped twice.

{ 1 comment… read it below or add one }

Leave a Comment

Previous post:

Next post: