Second Circuit Addresses Materiality of Alleged Omissions at the Pleading Stage

Earlier this week, the United States Court of Appeals for the Second Circuit issued a noteworthy decision regarding the standard for judging the materiality of alleged omissions in a class action lawsuit brought under Section 11 of the Securities Act of 1933. In In re ProShares Trust Securities Litigation, 2013 WL 3779634 (2d Cir. July 22, 2013), the Second Circuit articulated a standard for pleading materiality that emphasizes the need to read disclosures as a whole and from a common sense perspective. ProShares will be of interest to defendants in many Section 11 cases alleging omissions of material fact.

Background -

ProShares is a provider of exchange-traded funds (ETFs) that seek to achieve returns equal to specified multiples of a benchmark index or its inverse on a daily basis. From August 2006 through June 2009, ProShares ETFs were offered to investors through several registration statements, all of which disclosed that the ETFs pursued daily investment objectives and daily investment results through aggressive investment techniques that exposed the ETFs to “potentially dramatic” losses. The registration statements also disclosed that the ETFs were “speculative,” “volatile,” subject to “large losses” from small movement in market prices and involved a high degree of risk. Finally, the prospectuses disclosed that the ETFs could not pursue their stated objectives for beyond-a-day periods because mathematical compounding and leveraging prevented the ETFs from reaching those results. Despite these warnings, Plaintiffs alleged that the registration statements were inadequate because they failed to specifically disclose the magnitude and probability of loss for beyond-a-day investments.

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