More ETFs Get Sued

NEW YORK (TheStreet) -- New lawsuits are adding to leveraged ETF woes, putting ProShares' UltraShort MSCI Emerging Markets (EEV Quote) and UltraShort Financials ETF (SKF Quote) under fire. The new lawsuits, which criticize ProShares' disclosure about these ETFs, come in the wake of a lawsuit against the ProShares UltraShort Real Estate (SRS Quote) and criticism of leveraged funds at large.

Both complaints allege similar misleading practices on the part of ETF issuer ProShares. While Direxion and Rydex also offer leveraged ETF products, ProShares is widely regarded as a pioneer in the leveraged ETF business, offering a range of sector and international leveraged funds.

The complaint against EEV, filed by U.S. firm Gilman and Pastor, notes that the fund was designed to track twice the inverse of the MSCI Emerging Markets index. From Jan. 2, 2008 to Dec. 17, 2008, the MSCI Emerging Markets index fell by 52%, while EEV fell approximately 30%. If the fund tracked twice the inverse of the index for this period, EEV should have risen 104%. (Emphasis mine.)

SKF and SRS have also deviated enormously from their perceived stated objectives, along with other popular leveraged funds like Direxion Daily Financial Bull (FAS Quote) and Direxion Daily Financial Bear (FAZ Quote). The reason for this deviation, the daily tracking objectives of the funds, was evidently not clear to the investors initiating the lawsuits.

It is of no surprise that these lawsuits are cropping up now, in the midst of a spate of new financial regulations for the ETF industry. FINRA reminded investors back in June that leveraged ETFs had daily tracking objectives, and were not appropriate for long-term buy-and-hold investors.