New Exchange Traded Funds Lawsuit Filed

March 18, 2010, 10:30AM. By Heidi Turner

New York, NYA lawsuit related to Exchange Traded Funds (ETFs) has been filed against ProShares Trust. The lawsuit alleges that the investment company, which offered shares in the Ultra Basic Materials fund (UYM fund), gave false and misleading information in the Registration Statement, Prospectuses and Statements of Additional Information.

The lawsuit, filed March 10, 2010, seeks to recover damages on behalf of class members who obtained shares of ProShares Ultra Basic Materials fund. This includes investors who lost money on the transaction or who still hold the shares.

According to the lawsuit, Ultra Exchange Traded Funds are designed to go up along with the markets. The UYM Fund was one of ProShares' Ultra ETFs and should have performed at 200 percent the performance of the Dow Jones US Basic Materials Index (DJBMI).

From February 1, 2007, through July 30, 2009, the Dow Jones US Basic Materials Index fell approximately 22.75 percent. The UYM Fund should have fallen approximately 45.50 percent (two times that of the Dow Jones Basic Materials Index) but actually fell more than 54 percent.

The lawsuit alleges that investors were not informed that they were at high risk of catastrophic losses if UYM Fund shares were held for longer than one day. It further alleges that investors were not informed about the risk of the UYM Fund diverging from the performance of the Dow Jones US Basic Materials Index.

Exchange Traded Funds are not meant to be held for longer than one trading session. In June 2009 the Financial Industry Regulatory Authority (FINRA) issued regulatory notice 09-31, stating that "inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session."

Since the regulatory notice was issued, some companies have banned or temporarily halted the sales of leveraged and short Exchange Traded Funds.