Suit Slapped on Leveraged ETF Provider

A lawsuit has been filed against the creators of ProShares UltraShort Real Estate(SRS Quote) in what is the latest chapter in the war against leveraged ETFs. ProShares, creator of some of the first "ultralong" and "ultrashort" funds, is now facing a complaint filed by New York-based law firm Labaton Sucharow LLP in the U.S. District Court for the Southern District of New York.

The lawsuit claims that "as marketed by ProShares, Ultra ETFs are designed to go up when markets go up; UltraShort ETFs are designed to go up when markets go down." Anyone who has been following funds like Direxion Shares Daily 3X Financial Bull(FAS Quote) and Direxion Shares Daily 3X Financial Bear(FAZ Quote) (FAZ) or SRS for that matter, can claim that this statement does not always hold true.

According to Morningstar, in a one-year period ending July 23, the Dow Jones U.S. Real Estate Index dropped 38%, but the ProShares UltraShort Real Estate fund lost 82%. Year-to-date through July 23, SRS' index is down 3.5%, but the ETF has fallen 67%.

Direxion faced a similar challenge with FAS and FAZ as the funds dropped nearly 70% and 90% respectively from inception through July. The low price points and high volume prodded Direxion to execute a reverse split in both funds to defray transactional costs. Needless to say, both the bull and the bear strategy had moved in the same direction: down.

ProShares Advisors has issued a statement vehemently denying the claims. The rebuttal states: "The allegations reported in the complaint are wholly without merit. ProShares' registration statements have always been accurate and complete, contained all material information, and complied with all legal requirements. We plan to defend against this suit vigorously."