IN RE: PROSHARES TRUST II SECURITIES LITIGATION. (2021)

SUMMARY ORDER

Plaintiffs-Appellants (Thomas Butler III, et al., “Butler”) appeal from the District Court's January 3, 2020 Judgment granting Defendants-Appellees’ (ProShares Trust II, et al., “ProShares”) motion to dismiss Butler's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).¹ Butler alleged material omissions from the ProShares Registration Statement for SVXY, a derivative financial product.² The complaint asserts strict liability and negligence claims under: Sections 11 and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77o; Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; and Regulation S-K, 17 C.F.R. §§ 229.303(a)(3)(ii), 229.105, Items 303 and 105. We assume the parties’ familiarity with the underlying facts, the procedural history of the case, and the issues on appeal.

Butler argues that the ProShares Registration Statement failed to warn investors that SVXY's own conduct of rebalancing in an overly crowded VIX futures market could itself drive up the price of VIX futures contracts, the level of expected market volatility, and the level of the Index—thereby driving down the value of SVXY shares. He emphasizes that the ProShares Registration Statement only warns of the effects of an illiquid market, not that ProShares's rebalancing conduct could cause such illiquidity, and that ProShares should have warned investors that this risk increased significantly over time as SVXY grew.

We review the dismissal of a complaint under Rule 12(b)(6) de novo.³ “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.”⁴ We must “constru[e] the complaint liberally, accept[ ] all factual allegations as true, and draw[ ] all reasonable inferences in the plaintiff's favor.”⁵

We agree with the District Court that the ProShares Registration Statement was not misleading, and adequately warned investors of the risks alleged in the complaint.⁶ Substantially for the reasons stated by Judge Cote in her thorough Opinion and Order, we affirm the judgment of the District Court.

CONCLUSION

We have reviewed all of the arguments raised by Butler on appeal and find them to be without merit. For the foregoing reasons, we AFFIRM the January 3, 2020 judgment of the District Court.

FOOTNOTES

1.   In re ProShares Trust II Sec. Litig., No. 19-cv-886, 2020 WL 71007 (S.D.N.Y. Jan. 3, 2020).

2.   As described by the District Court, “SVXY is a derivative financial product that loses value when stock market volatility rises and gains value when the market is calm.” ProShares Trust II, 2020 WL 71007, at *1. To meet its “investment objective” of reflecting the inverse of the VIX Short-Term Futures Index (the “Index”), SVXY buys and sells futures contracts during a set “rebalancing” period at the end of the trading day. When SVXY attempted to rebalance on February 5, 2018, a day of heightened volatility, demand outstripped supply for these futures contracts, leading to a liquidity gap that caused massive investor losses.

3.   Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002).

4.   Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation marks omitted).

5.   Coal. for Competitive Elec. v. Zibelman, 906 F.3d 41, 48–49 (2d Cir. 2018) (internal quotation marks omitted). For fraud claims brought under Exchange Act Section 10(b), there is a heightened pleading standard requiring the complaint to “specify each misleading statement ․ and state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, 752 F.3d 173, 184 (2d Cir. 2014) (internal alterations and quotation marks omitted).

6.   ProShares Trust II, 2020 WL 71007, at *7–9.