12-3981

In Re ProShares Trust Sec. Litig.

1 UNITED STATES COURT OF APPEALS

2

3 FOR THE SECOND CIRCUIT

4

5 

6

7 August Term, 2012

8

9 (Argued: May 2, 2013 Decided: July 22, 2013)

10

11 Docket No. 12-3981

12 

13

14 IN RE PROSHARES TRUST SECURITIES LITIGATION

15 

16 MARK KARASICK, STEVEN S. NOVICK, SUSAN ASAI, STEPHEN C. HERMAN,

17 CHARLES SANKOWICH, MICHAEL A. HYMAN, HOWARD SCHWACK, FRANCISCO JAVIER

18 DE LION DIAZ, RENE LACROIX, ANTHONY KOURI, ANTHONY ALEXANDER, JAY

19 BILYEU, JUDY BILYEU, MICHAEL ERIC CODLIN, WENDY ROCKWELL-GOFF, ROBERT

20 SCHUMACHER, JAMES HERSHMAN, DOROTHY HERSHMAN, SCOTT TESSLER, RICHARD

21 RHOADS, MARTIN GARY NORRIS, DOROTHY LOWELL, NANCY HITCHINS, THOMAS

22 TRUONG, EDWARD CISNEROS, CHRIS HONCIK, STEPHEN SHOAP, DMITRI ROUTSKI,

23 ELENA LAVENDER-BOWEN, DAVID BOWMAN, DAVID CHOW, MARK EVERETT BROWN,

24 JONATHAN DEAN, LAWRENCE LEWIS SINSEL, JR., KENNETH L. KRAMER, LAWRENCE

25 I. WEINER, JOHN E. KILLOUGH, ALAN PARKER, SCOTT A. SMELTZ, HOWARD

26 SCHWACK, DOUGLAS JONES, STEPHEN HERMAN, ON BEHALF OF THEMSELVES AND ALL

27 OTHERS SIMILARLY SITUATED, STEVEN SCHNALL, SHERRI SCHNALL, ON BEHALF OF

28 THEMSELVES,

29

30 Plaintiffs-Appellants,

31

32 –v.– 

33

34 PROSHARES TRUST, PROSHARE ADVISORS LLC, SEI INVESTMENTS DISTRIBUTION

35 CO., MICHAEL L. SAPIR, LOUIS M. MAYBERG, RUSSELL S. REYNOLDS, III,

36 MICHAEL WACHS, SIMON D. COLLIER, PROSHARES TRUST II, EDWARD KARPOWICZ,

37 WILLIAM E. SEALE, CHARLES TODD, BARRY PERSHKOW,

38

39 Defendants-Appellees.

40

41 

42
1 Before:

WESLEY, CARNEY, WALLACE,* 2 Circuit Judges.

3

4 Appeal from an order of the United States District

5 Court for the Southern District of New York (John G. Koeltl,

6 Judge), entered on September 12, 2012, dismissing

7 Plaintiffs-Appellants’ third amended complaint, with

8 prejudice, pursuant to Federal Rule of Civil Procedure

9 12(b)(6). Plaintiffs complain that Defendants offered

10 investments in forty-four leveraged exchange-traded funds

11 (“ETFs”) through prospectuses that failed to warn them about

12 the magnitude and probability of loss in beyond-a-day

13 investments even when investors correctly predicted the

14 overall direction of the ETFs’ underlying index. 

15 Furthermore, Plaintiffs allege that Defendants included

16 various contra-indicators of successful long-term

17 investments in the prospectuses which the alleged omissions

18 made misleading. Accordingly, Plaintiffs seek to hold

19 Defendants liable for the alleged omissions and misleading

20 statements pursuant to sections 11 and 15 of the Securities

21 Act of 1933, 15 U.S.C. §§ 77k & 77o. After a comprehensive

22 review of the relevant prospectuses, the district court

23 concluded that the alleged omissions were immaterial as a

24 matter of law because the prospectuses warned of the risks

25 that materialized and no reasonable investor who read them

26 would have been misled about the risks of leveraged-ETF

27 investments. After our own review of the complaint and of

28 the prospectuses, we agree with that conclusion. 

29

30 AFFIRMED.

31 

32

33 CHRISTOPHER LOVELL, Lovell Stewart Halebian

34 Jacobson LLP, New York, NY (Jacob H. Zamansky,

35 Zamansky & Associates LLC, New York, NY, on

36 the brief), for Plaintiffs-Appellants.

37

38 ROBERT A. SKINNER, Ropes & Gray LLP, Boston, MA

39 (Nick W. Rose, Ropes & Gray LLP, Boston, MA;

*

The Honorable J. Clifford Wallace, of the United States

Court of Appeals for the Ninth Circuit, sitting by designation. 

2
1 Douglas H. Hallward-Driemeier, Ropes & Gray

2 LLP, Washington, D.C., on the brief), for

3 Defendants-Appellees ProShares Trust,

4 ProShares Trust II, ProShare Advisors LLC, SEI

5 Investments Distribution Co., Michael Sapir,

6 Louis Mayberg, Edward Karpowicz, William

7 Seale, Simon Collier, Charles Todd, and Barry

8 Pershkow.

9

10 Arthur H. Aufses III, Steven S. Sparling,

11 Kramer Levin Naftalis & Frankel LLP, New York,

12 NY, for Defendants-Appellees Russell Reynolds

13 and Michael Wachs. 

14 

15

16 WESLEY, Circuit Judge:

17 In this putative class action, Plaintiffs collectively

18 purchased shares in forty-four leveraged ProShares exchange19 traded funds (“ETFs”) during the August 6, 2006 through June

20 23, 2009 class period. Third Amended Complaint (“TAC”)

21 ¶¶ 1-2. They seek to hold Defendants-Appellees ProShares

22 Trust and ProShares Trust II (collectively, “ProShares”)

23 liable for material omissions and misrepresentations in the

24 prospectuses for those ETFs pursuant to sections 11 and 15

25 of the Securities Act of 1933 (“‘33 Act”), 15 U.S.C. §§ 77k

& 77o.1 26

1

Defendant-Appellee ProShares Trust (“ProShares I”)

registered with the Securities and Exchange Commission (“SEC”) as

an open-end management investment company under the Investment

Company Act of 1940. TAC ¶ 62(a). Defendant-Appellee ProShares

Trust II (“ProShares II,” collectively with ProShares I

“ProShares”) registered with the Commodity Futures Trading

3
1 A. Exchange-Traded Funds

2 In a series of press releases, ProShares indicated

3 that their ETFs were for “investors interested in pursuing

4 more sophisticated” trading strategies. See TAC ¶¶ 104-08

5 (internal quotation marks omitted). With ProShares ETFs,

6 investors could hedge and manage risk without having “‘to go

7 through the process of setting up margin accounts or

8 covering margin calls - they [could] simply trade

9 ProShares.’” TAC ¶ 104 (quoting June 21, 2006 Press

10 Release). “‘And unlike a margin account,[an investor] can’t

11 lose more than [she] invest[s].’” TAC ¶ 106 (quoting Feb.

12 1, 2007 Press Release). This is because ETFs operate like

13 indexed mutual funds but trade like stocks. TAC ¶ 82. 

14 “ETFs frequently track an index, a sector of stocks, or

15 a commodity or currency.” TAC ¶ 81. They are considered to

16 be “indexed mutual funds that trade like stocks,” TAC ¶ 82,

17 but they differ from mutual funds because they are generally

18 sold to institutional investors in large blocks of shares,

Commission as a commodity pool. TAC ¶ 62(b). ProShares I

offered thirty-eight of the ETFs underlying this action;

ProShares II offered six. TAC ¶ 62(a), (b). Plaintiffs have not

identified any meaningful distinction between ProShares I’s and

ProShares II’s securities or registration statements such that

one of the fund defendants would be subject to liability while

the other would not.

4
1 called Creation Units. These investors generally purchase

2 Creation Units in exchange for “baskets” of securities that

3 mirror the securities in the ETF portfolio. Investors who

4 purchase Creation Units often split up the Units into

5 individual shares and sell them on a secondary market to

6 retail investors who otherwise might not be able to access

7 ETFs because of the cost of Creation Units. These retail

8 investors are then able to sell shares of ETFs on the

9 secondary market, but they generally cannot redeem shares

10 with the ETFs because the ETFs often redeem shares only when

11 they are packaged in Creation Units. TAC ¶ 82. 

12 ProShares offered three types of ETFs: (1) an Inverse

13 ETF, (2) an Ultra Long ETF, and (3) an Ultra Short ETF. TAC

14 ¶ 93(a)-(c). An Inverse ETF aimed to “replicate the inverse

15 movement of the specified index over one day.” TAC ¶ 93(a). 

16 An Ultra Long ETF tried to “double the performance of the

17 underlying index or benchmark on a daily basis.” TAC ¶

18 93(b). And an Ultra Short ETF was designed to “double the

19 inverse of the performance of the underlying index or

20 benchmark on a daily basis.” TAC ¶ 93(c). Accordingly, if

21 the “specific index, benchmark, sector or commodity on which

22 an ETF [was] based[] increase[d] by 1% on a given day, then

5
1 [the Inverse ETF] would decrease by 1%; the [Ultra Long ETF]

2 would increase by 2%; and [the Ultra-Short ETF] would

3 decrease by 2%.” TAC ¶ 94. Each one of the ETFs in this

4 case is leveraged.

5 B. Registration Statements

6 ProShares I filed its registration statement on SEC

7 Form N-1A. TAC ¶ 89. ProShares II filed its registration

8 statement on Forms S-1 and S-3. TAC ¶ 91. The registration

9 statements consisted of, inter alia, a prospectus and a

10 statement of additional information (“SAI”). Though

11 ProShares I and ProShares II provided investors with several

12 different offering documents relevant to this appeal,

13 ProShares’ key disclosures relating to the ETFs at issue

14 here were materially consistent across all of the documents.

15 All relevant ProShares registration statements

16 disclosed that the ETFs pursued daily investment objectives

17 and daily investment results. See Skinner Decl., App’x A,

18 Item 1; App’x B, Item 1. ProShares I’s offering documents

19 make clear that these daily objectives were bets that it

20 could return a stated multiple of an ETF’s underlying index

21 each day by investing in different components of the

22 underlying index through various financial instruments. For

6
1 example, “principal investment strategies include[d

2 i]nvesting in equity securities and/or financial instruments

3 (including derivatives) that ProShare Advisors believe[d],

4 in combination, [w]ould have similar daily price return

5 characteristics” of a stated multiple of the ETF’s

6 underlying index. June 19, 2006 ProShares I Reg. Stmt at 7.

7 To achieve the predicted daily investment results,

8 ProShare Advisors or a Sponsor would determine the type,

9 quantity, and mix of investment positions that an ETF should

10 hold. In addition, ProShares reserved the right to

11 substitute a different index or security for an ETF’s

12 underlying index and disclosed that it might over-weight or

13 under-weight certain components contained in the underlying

14 index. See, e.g., id. at 59-60; see also, e.g., Nov. 17,

15 2008 ProShares II Reg. Stmt. at 33-34. Furthermore, the

16 ETFs never took a defensive position and would remain “fully

17 invested at all times in securities and/or financial

18 instruments that provide exposure to its [u]nderlying

19 [i]ndex without regard to market conditions, trends, or

20 direction.” June 19, 2006 ProShares I Reg. Stmt at 60; see

21 also Nov. 17, 2008 ProShares II Reg. Stmt. at 33. The ETFs’

22 views were expressly myopic: long-term objectives were

7
1 blurred because they were focused only on meeting a

2 benchmark tied to an underlying index one day at a time with

3 a portfolio of different securities. 

4 Moreover, ProShares warned that its decision to invest

5 in a particular stock or financial instrument was not based

6 on the “investment merit of a particular security,

7 instrument, or company” and that it did not use

8 “conventional stock research or analysis, or forecast stock

9 movement or trends” in managing the assets of the funds. 

10 June 19, 2006 ProShares I Reg. Stmt at 60; see also Nov. 17,

11 2008 ProShares II Reg. Stmt. at 34. Instead, ProShares ETFs

12 pursued daily results through aggressive investment

13 techniques. For ProShares I, each registration statement

14 warned that the ETFs used financial instruments and

15 “investment techniques . . . that may be considered

16 aggressive, including the use of futures contracts, options

17 on futures contracts, securities and indices, forward

18 contracts, swap agreements, and similar instruments.” See

19 Skinner Decl., App’x A, Item 6. ProShares I also disclosed

20 that use of these techniques and financial instruments

21 exposed the ETFs to “potentially dramatic” losses. Id. 

22 Similarly, each relevant ProShares II prospectus warned that

8
1 the aggressive financial instruments had “volatile [trading

2 prices, and that] even a small movement in market prices

3 could cause large losses” because an ETF investment was

4 “speculative” and involved a high degree of risk. See id.,

5 App’x B, Item 6. 

6 ProShares also warned that ETFs could not pursue their

7 stated objectives for beyond-a-day periods because

8 mathematical compounding and leveraging prevented the ETFs

9 from reaching those results. See id., App’x A, Item 2;

10 App’x B, Item 2. In that regard, ProShares disclosed that

11 “[o]ver time, the cumulative percentage increase or decrease

12 in the net asset value of the [ETFs] may diverge

13 significantly from the cumulative percentage increase or

14 decrease in the multiple of the return of the Underlying

15 Index” due to a compounding effect of daily gains and

losses.2 16 For ProShares II, the warning was even more

17 direct: “[u]sing leverage . . . should be considered . . .

18 speculative and could result in the total loss of an

19 investor’s investment.” See id., App’x B, Item 6. In its

20 brief, ProShares provided a hypothetical illustration of two

2

Beginning with its September 2007 registration statement,

this information was moved to the SAI.

9
1 investors who invested in an Ultra Long ETF at separate

2 times to illustrate the effect an index’s volatility would

3 have on those investments’ returns. We have provided that

4 example in Appendix A.

5 C. Alleged Omissions and Misstatements 

6 Plaintiffs principally complain that ProShares failed

7 to disclose the magnitude and probability of loss for

8 beyond-a-day investments in ProShares ETFs despite

9 investors’ correct predictions regarding the overall

10 movement of the indices underlying the ETFs. Furthermore,

11 Plaintiffs allege that the registration statements contained

12 various “contra-indicators” of successful long-term

13 investments which the above omissions made materially

14 misleading. The district court rejected these arguments and

15 dismissed the complaint with prejudice pursuant to Federal

16 Rule of Civil Procedure 12(b)(6). In re ProShares Trust

17 Sec. Litig., 889 F. Supp. 2d 644 (S.D.N.Y. 2012). In sum,

18 the district court concluded that ProShares warned of the

19 risks that materialized. For the reasons that follow, we

20 agree.

21

22

10
1 DISCUSSION

2 The standard of review is neither contested nor

determinative.3 3

4 A. Alleged Omissions

5 Liability attaches to a security’s issuer, its

6 underwriter, and certain other statutorily enumerated

7 parties pursuant to section 11 of the `33 Act if “any part”

8 of the operative registration statements “omitted to state a

9 material fact required to be stated therein or necessary to

10 make the statements therein not misleading.” 15 U.S.C. §

11 77k(a); see also In re Morgan Stanley Info. Fund Sec.

12 Litig., 592 F.3d 347, 360 (2d Cir. 2010). To state a

13 plausible section 11 claim based on an alleged omission, a

14 complaint must pass two distinct hurdles: it must identify

15 an omission that is (1) unlawful and (2) material. See

16 Morgan Stanley, 592 F.3d at 360. In other words,

17 “[m]ateriality alone does not demand disclosure, nor does

18 the duty to disclose encompass non-material information.” 

3

“We review de novo the dismissal of a complaint under

[Federal] Rule [of Civil Procedure] 12(b)(6), accepting all

factual allegations as true and drawing all reasonable inferences

in favor of the plaintiff.” Litwin v. Blackstone Grp., L.P., 634

F.3d 706, 715 (2d Cir. 2011) (internal quotation marks omitted).

11
1 Panther Partners, Inc. v. Ikanos Commc’ns, Inc., 538

2 F.Supp.2d 662, 668 (S.D.N.Y. 2008). 

3 A plaintiff who plausibly pleads an unlawful omission

4 comes close to stating a section 11 claim because

5 materiality “will rarely be dispositive in a motion to

6 dismiss.” See Morgan Stanley, 592 F.3d at 360. 

7 Nevertheless, the materiality hurdle remains a meaningful

8 pleading obstacle, and we will dismiss a section 11 claim

9 where the alleged omission was “so obviously unimportant to

10 a reasonable investor” that reasonable minds would agree on

11 that omission’s unimportance. Id. (internal quotation marks

12 omitted). In fact, the Supreme Court has been “‘careful not

13 to set too low a standard of materiality,’ for fear that

14 management would ‘bury the shareholders in an avalanche of

15 trivial information.’” Matrixx Initiatives, Inc. v.

16 Siracusano, 131 S.Ct. 1309, 1318 (2011) (quoting Basic

17 Inc. v. Levinson, 485 U.S. 224, 231 (1988)). 

18 In judging whether an alleged omission was material in

19 light of the information already disclosed to investors, we

20 consider whether there is “‘a substantial likelihood that

21 the disclosure of the [omitted material] would have been

22 viewed by the reasonable investor as having significantly

12
1 altered the total mix of information [already] made

2 available.’” DeMaria v. Andersen, 318 F.3d 170, 180 (2d

3 Cir. 2003) (emphasis added) (quoting TSC Indus., Inc. v.

4 Northway, Inc., 426 U.S. 438, 449 (1976)). “It is not

5 sufficient to allege that the investor might have considered

6 the misrepresentation or omission important.” Ganino v.

7 Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000). 

8 While the “objective of a prospectus is to solicit

9 investment by the general public” and “the intended audience

10 . . . encompasse[s] both sophisticated financial analysts

11 and untutored lay persons,” Greenapple v. Detroit Edison

12 Co., 618 F.2d 198, 210 (2d Cir. 1980), the prospectuses are

13 not “‘required to address [reasonable investors] as if they

14 were children in kindergarten,’” id. (quoting Richland v.

15 Crandall, 262 F. Supp. 538, 554 (S.D.N.Y. 1967)). In the

16 words of the district court below, “[w]hen a registration

17 statement warns of the exact risk that later materialized, a

18 [s]ection 11 claim will not lie as a matter of law.” 

19 ProShares, 889 F. Supp. 2d at 653. 

20 Here, the district court concisely summarized

21 Plaintiffs’ allegations: the “thrust of the [P]laintiffs’

22 [s]ection 11 claim is that the registration statements

13
1 omitted the risk that the ETFs, when held for a period of

2 greater than one day, could lose substantial value in a

3 relatively brief period of time, particularly in periods of

4 high volatility.” Id. at 654. The district court dismissed

5 that claim in equally concise language: “the disclosures in

6 the registration statements accurately conveyed the specific

7 risk that the [P]laintiffs assert materialized: when

8 investors held the ETFs for periods longer than one day the

9 funds’ performance widely diverged from the performance of

10 the underlying indices sometimes resulting in losses despite

11 the overall direction of the underlying indices.” Id. at

12 656. We agree that the relevant prospectuses adequately

13 warned the reasonable investor of the allegedly omitted

14 risks.

15 1. The Magnitude of Beyond-A-Day Losses

16 Plaintiffs allege that the registration statements

17 omitted the risk that correctly predicting the long-term

18 movement in an ETF’s underlying index could result in a

19 substantial loss in their investment over that same period

20 of time. Plaintiffs acknowledge that the prospectuses

21 warned that the value of long-term ETF investments “may

22 diverge significantly” from that ETF’s underlying index. 

14
1 Pls. Br. at 42. The complaint even recognizes that the

2 ProShares ETFs “did not seek to achieve long[-]term

3 cumulative investment returns in their ETFs” and that they

4 “could not seek such returns.” TAC ¶ 100. Plaintiffs

5 assert, however, that the “diverge significantly” disclosure

6 does not speak to a divergence that results in actual,

7 substantial loss. 

8 “In evaluating a prospectus, we read it as a whole.” 

9 DeMaria, 318 F.3d at 180 (internal quotation omitted). As

10 we read the prospectus cover-to-cover, we consider whether

11 the disclosures and representations, “taken together and in

12 context, would have misl[ed] a reasonable investor about the

13 nature of the [securities].’” Id. (quoting McMahan & Co. v.

14 Wherehouse Entm’t, Inc., 900 F.2d 576, 579 (2d Cir. 1990)). 

15 “As we have explained, ‘[a] prospectus will violate federal

16 securities laws if it does not disclose material objective

17 factual matters, or buries those matters beneath

18 information, or treats them cavalierly.’” DeMaria, 318 F.3d

19 at 180 (quoting Olkey v. Hyperion 1999 Term Trust, Inc., 98

20 F.3d 2, 5 (2d Cir. 1996) (internal quotation marks

21 omitted)). 

22 

15
1 Here, the district court concluded that it was “not

2 possible to read the registration statements . . . without

3 understanding that the ETFs were particularly risky and

4 speculative and were intended to meet their stated goal only

5 over the course of a single day.” ProShares, 889 F. Supp.

6 2d at 656. The district court reasoned that while “some

7 [P]laintiffs lost money while guessing correctly on the

8 direction of the underlying index, this possibility is

9 plainly consistent with the significant divergence that was

10 disclosed in the registration statements.” Id. On appeal,

11 Plaintiffs maintain that the district court overvalued the

12 “diverge significantly” disclosure because “‘[d]iverge

13 significantly’ is not a synonym for ‘loss’” and “refers only

14 to [an ETFs’] outperforming or underperforming” a perfect

15 long-term correlation with its index. At the very least,

16 they argue, “diverge significantly” does not include large,

17 rapid losses. Pls. Br. at 42-43. 

18 We are unpersuaded by this argument, and Plaintiffs’

19 efforts to find a meaningful distinction between “diverge

20 significantly” and “actual loss” strains the plain meaning

21 of the former phrase. Because one might expect the long22 term value of an ETF to correlate with the long-term value

16
1 of its underlying index, ProShares warned that the actual

2 results might diverge significantly from that prediction. 

3 “Significant” means large or important; in the context of

4 the offering documents, “divergence” means the opposite from

5 one’s expectation. ProShares’ “significant divergence”

6 disclosures, fairly read, put investors on notice that an

7 ETF’s value might move in a direction quite different from

8 and even contrary to what an investor might otherwise

9 expect.

10 Plaintiffs use a linguistic preference to read out of

11 the prospectuses a scenario which the ProShares disclosures

12 clearly contemplate. Time and again, we have said that

13 “disclosure is not a rite of confession or exercise in

14 common law pleading.” Morgan Stanley, 592 F.3d at 365

15 (internal quotation marks omitted). Because the “role of

16 the materiality requirement is not to attribute to investors

17 a child-like simplicity,” we presume that a reasonable

18 investor can comprehend the basic meaning of plain-English

19 disclosures and will not credit Plaintiffs’ narrow reading

20 of “diverge significantly.” See Basic, 485 U.S. at 234

21 (citations omitted). 

22 Perhaps more importantly, the “diverge significantly”

23 disclosure takes on additional meaning within the context of

17
1 the prospectus as a whole. The earliest relevant

2 prospectuses make absolutely clear that the ETFs operated

3 pursuant to daily investment objectives, that they utilized

4 leveraged investment techniques to achieve those objectives,

5 and that mathematical compounding combined with leveraging

6 prevented the ETFs from achieving their stated objectives

7 over a period of time greater than one day. All the

8 ProShares I prospectuses make clear that ETFs used

9 aggressive financial instruments and investment techniques

10 that exposed the ETFs to potentially “dramatic” losses “in

11 the value of its portfolio holdings and imperfect

12 correlation to the index underlying”; ProShares II warned

13 that volatility could result in a “total loss of an

14 investor’s investment.” See Skinner Decl., App’x A, Item 6;

15 App’x B, Item 6.

16 Accordingly, we conclude that it is implausible that

17 substituting “actual loss” for “diverge significantly” is a

18 change substantially likely to be viewed by a reasonable

19 investor as having significantly altered the import of the

20 total mix of information ProShares made available. 

21 See Basic, 485 U.S. at 232. 

22 2. The Probability of Long-Term Loss

23 Plaintiffs also complain that ProShares omitted that

18
1 certain market circumstances would “necessarily [cause]

2 quick and potentially large losses” despite an investor’s

3 correct prediction of the overall, beyond-a-day direction of

4 an ETF’s underlying index. Pls. Br. at 1 (emphasis added);

5 see also id. at 24-25; TAC ¶¶ 12-26. The complaint further

6 asserts that ProShares possessed an “undisclosed

7 mathematical formula” which “very accurately predicted and

8 described the relationship between the movements in each

9 type of ETF’s price and the movements in the index

10 underlying the ETF in any market scenario.” See TAC ¶ 13. 

11 Based on this formula, Plaintiffs allege that ProShares knew

12 and omitted that certain market conditions could materialize

13 that would put investors “who held ProShares products for

14 extended periods of more than a day” in “a ‘must lose’

15 position.” TAC ¶ 15. These market conditions existed,

16 Plaintiffs maintain, when “the volatility (i.e., the day-to17 day changes in prices) of the underlying index significantly

18 exceeded its performance over time.” TAC ¶ 16. 

19 The district court concluded that the existence of the

20 undisclosed mathematical formula was implausible on its

21 face. ProShares, 889 F. Supp. 2d at 656. In the

22 alternative, the district court concluded that such a

23 formula would “rely on inputs from the underlying index or

19
1 benchmark, that those inputs could not be known in advance,”

2 and that failure to predict future market performance was an

3 immaterial omission. Id.

4 Here, Plaintiffs continue to pursue the argument and

5 allege that ProShares “knew and could simulate from their

6 mathematical formula exactly what was going to happen to

7 investors for each market scenario, including the

8 continuation of the actual, existing current daily

9 volatility circumstances.” Pls. Br. at 11 (emphasis in

10 original) (complaint citations omitted). According to

11 Plaintiffs, ProShares knew “to the day when, if current

12 actual volatility circumstances continued, their ETFs would

13 become dysfunctional and an investor necessarily would lose

14 from a correct judgment about the market.” Pls. Br. at 24-

15 25 (complaint citations omitted).

16 We remain unpersuaded. Assuming, arguendo, that

17 ProShares possessed an undisclosed mathematical formula that

18 accurately predicted potential market conditions and the

19 effect market volatility would have on ETF shares,

20 Plaintiffs’ argument amounts to nothing more than an

21 allegation that ProShares failed to disclose that the more

22 an ETF’s underlying index changed value day-to-day for a

23 particular investor, the more likely it became that the

20
1 investor would experience long-term losses depending on when

2 she invested. That does not constitute an actionable

3 omission of an objective fact, but rather a general omission

4 regarding the risks associated with (1) hypothetical

5 investments over (2) hypothetical periods of time during (3)

6 hypothetically volatile market conditions. ProShares cannot

7 be expected to predict and disclose all possible negative

8 results across any market scenario. Appendix A illustrates

9 this point.

10 In tandem with this argument, Plaintiffs assert that

11 ProShares failed to disclose the risks of “excess daily

12 index volatility” which its mathematical formula predicted

and that eventually materialized.4 13 ProShares, however,

14 consistently disclosed the effect market volatility had on

15 ETFs. The first relevant ProShares I prospectus warned,

16 under Principal Risk Considerations, that the “equity

17 markets are volatile, and the value of securities, futures,

18 options, contracts and other instruments correlated with the

19 equity markets may fluctuate dramatically from day-to-day.” 

4

Plaintiffs make a distinction between “inherent facts” and

“materialization facts.” For example, Plaintiffs argue that ETFs

were subject to an inherent risk of excess market volatility

which ProShares omitted and that once the markets became

excessively volatile those inherent risks became materialized

risks. For the purpose of our analysis, this distinction is

without a difference. 

21
1 June 19, 2006 ProShares I Prospectus at 8, 64. “This

2 volatility may cause the value of an investment in a[n ETF]

3 to decrease.” Id. at 65. ProShares also warned that the

4 net asset value of an ETF and its market price would be made

5 more volatile than its underlying index on account of

6 leveraged investment techniques that magnify exposure to the

7 underlying index. Finally, ProShares highlighted and

8 bullet-pointed the risk: “Volatility Risk – [Leveraged ETFs]

9 seek to achieve a multiple of an index and therefore will

10 experience greater volatility than the index underlying its

11 benchmark and consequently ha[ve] the potential for greater

12 losses.” Id. at 9. In addition, the earliest ProShares II

13 prospectus warned that price “volatility, which is

14 exacerbated by the use of leverage, may possibly cause the

15 total loss of an investor’s investment.” Nov. 17, 2008

16 ProShares II Reg. Stmt. at 4.

17 While “it is not sufficient that overtones might have

18 been picked up by the sensitive antennae of investment

19 analysts,” Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281,

20 1297 (2d Cir. 1973) (Friendly, Judge), no reasonable

21 investor could read these prospectuses without realizing

22 that volatility, combined with leveraging, subjected that

23

22
1 investment to a great risk of long-term loss as market

2 volatility increased. 

3 B. Misleading Statements

4 “Our conclusion that the [`33 Act] did not directly

5 require defendants to disclose the allegedly omitted

6 information does not mark the end of our inquiry.” Morgan

7 Stanley, 592 F.3d at 365. “Section 11 [also] call[s] for

8 the disclosure of information that is necessary to avoid

9 rendering misleading the representations in prospectuses.” 

10 Id. (citing 15 U.S.C. § 77k(a)). Our inquiry here is the

11 same as it was above: “we review documents holistically and

12 in their entirety.” Id. (citing Olkey, 98 F.3d at 5). “The

13 literal truth of an isolated statement is insufficient; the

14 proper inquiry requires an examination of defendants’

15 representations, taken together and in context.” Id.

16 (quotation marks and citation omitted). 

17 Plaintiffs complain that ProShares prospectuses

18 included “numerous” misleading statements about the positive

19 results of 1, 3, 5, and 10 year investments in ProShares

20 ETFs. See Pl. Br. at 38 (complaint citations omitted). 

21 Indeed, Plaintiffs provide us with a string citation to the

22 complaint outlining at least eight categories of misleading

23 statements across various prospectuses. See, e.g., TAC ¶

23
1 102(a)-(h). Plaintiffs’ appeal, however, focuses on only

2 three specific alleged misrepresentations. See Tolbert v.

3 Queens College, 242 F.3d 58, 75 (2d Cir. 2001) (“[I]ssues

4 adverted to in a perfunctory manner, unaccompanied by some

5 effort at developed argumentation, are deemed waived.”

6 (internal quotation omitted)).

7 1. 1, 3, 5, and 10 Year Cost Projections

8 Plaintiffs contend that ProShares provided tables which

9 illustrated the hypothetical costs of investing in ProShares

10 I ETFs for 1, 3, 5, and 10 year periods, which misleadingly

11 implied that ProShares ETFs were suitable 1, 3, 5, and 10

12 year investments. See TAC ¶ 102(a). The district court

13 dismissed the argument for two reasons. First, it reasoned

14 that the “various projections . . . fall far short of

15 undercutting the emphasis on the daily nature of the ETFs.” 

16 ProShares, 889 F. Supp. 2d at 655. Second, it concluded

17 that because Form N-1A required disclosure of that exact

18 information, ProShares could not expect that the SEC would

19 require that information be specifically “identified,

20 qualified, or tempered.” Id. We agree with the first half

21 of the district court’s analysis and affirm its conclusion.

22 The contested tables are presented as an example of the

23 costs of investing in ProShares I ETFs assuming a $10,000

24
1 investment for time periods spanning 1, 3, 5, and 10 years -

2 assuming a 5% return each year. Form N-1A requires those

3 assumptions. This makes sense because the example is

4 intended to help investors compare the cost of investing in

5 ProShares with the cost of investing in other funds. It

6 would be difficult to cross-compare the costs of investing

7 in different funds were prospectuses to use different time

8 periods, different assumptions about annual returns, and

9 different assumptions about the amount invested. The

10 ProShares I prospectuses also tie cautionary language to the

11 tables, which Form N-1A does not expressly require: the

12 table was for “illustration purposes only” and was not

13 “meant to suggest actual or expected fees and expenses or

14 returns, all of which may vary.” See, e.g., Sept. 28, 2007

15 Reg. Stmt. at 20.

16 We conclude that the cost tables, placed in context,

17 would not lead a reasonable investor into thinking that

18 ProShares I ETFs were safe 1, 3, 5, and 10 year investments. 

19 We also agree with the district court that the tables do not

20 undercut the disclosures regarding the ETFs’ daily

21 objectives with all the attendant warnings already described

22 in this opinion. Accordingly, we are unpersuaded by

23 Plaintiffs’ attempt to isolate and construe a single element

25
1 of ProShares I’s prospectuses. See DeMaria, 318 F.3d at

2 180. It is therefore implausible that a reasonable investor

would have been misled by the cost tables.5 3

4 2. Correlation Risks and Line Graphs

5 Beginning with the September 28, 2007 ProShares I

6 prospectus, Plaintiffs assert that ProShares I included

7 correlation-risk disclosures which included line-graph

8 examples that misled them into thinking that an ETF’s

9 divergence from its underlying index would be somewhere in

10 the ballpark of 0.6%-2.2%. TAC ¶¶ 29-43, 102, 203-220.

11 The correlation-risk disclosure expressly warns that

12 there is no guarantee that an ETF will achieve a high degree

13 of correlation with its benchmark and lists factors that

14 prevent perfect correlation. For Plaintiffs’ leveraged

15 funds “there [was] a special form of correlation risk[:] for

16 periods greater than one day, the use of leverage tends to

5

 The district court also commented that the tables did not

create liability because the “plaintiffs point[ed] to no case

that holds that information that the SEC requires must be

specifically identified, qualified, or tempered.” ProShares, 889

F. Supp. 2d at 655. While Form N-1A requires the allegedly

misleading table, it also requires this information to be “in

plain English under rule 421(d) under the Securities Act.” See

Skinner Decl. Ex. 5 at 11 (SEC Form N-1A). Rule 421(d) requires

that financial data be presented in “an understandable manner”

and that any information provided “must not be misleading.” 17

C.F.R. § 230.421(d)(3). Accordingly, there remains a possibility

that an issuer might present required information in a misleading

manner. That, however, is not this case.

26
1 cause the performance of an [ETF] to be either greater than

2 or less than the index performance.” See Sept. 28, 2007

3 ProShares I Reg. Stmt at 8.

4 To “illustrate” how leveraging increases correlation

5 risk, the prospectus included three line graphs that

6 “simulated [a] hypothetical one year performance of an index

7 compared with the performance of a fund that perfectly

8 achieved its investment objective of twice (200%) the daily

9 index return.” Id. “Each of the graphs [assumed] a

10 volatility rate of 15%, which [was] an approximate average

11 of the five-year historical volatility rate” of certain

12 indices. Id. But, “[o]ther indexes to which the [ETFs] are

13 benchmarked ha[d] different historical volatility rates;

14 certain of the [ETFs] historical volatility rates [were]

15 substantially in excess of 15%.” Id.

16 The line graphs show that where a leveraged ETF meets

17 its daily objectives each day, with the above assumptions,

18 its value could diverge from the index’s performance by 2.2%

19 in a flat market, 0.7% in an upward-trending market, and

20 0.6% in a downward-trending market. After the presentation

21 of the graphs, the prospectus referred potential investors

22 to the SAI “for a further discussion of how both index

23 volatility and index performance can impact” ETF

24 performance. The SAI includes a “wedge graph” that

27
1 represents the effect market volatility would have on a

2 leveraged ETFs’ annual correlation with index volatility

3 ranging from 0%-40% at 5% intervals. The wedge graphs

4 clearly demonstrate that at high levels of volatility an

5 ETF’s value could move in the opposite direction from its

6 underlying benchmark. We have included an example wedge

7 graph in Appendix B.

8 Plaintiffs complain that the line graphs misled them

9 into believing that annual ETF returns ran the risk of only

10 a slight disconnection (.6% - 2.2%) from an index’s

11 performance. We have already concluded that the ProShares

12 prospectuses, absent the wedge graphs, clearly described the

13 daily investment objectives, the nature of ETFs, and, in

14 plain English, warned that leveraging, volatility, and

15 compounding could cause an ETF’s performance to

16 significantly diverge from its underlying index. We have

17 also already concluded that the relevant prospectuses

18 disclosed that aggressive investment techniques exposed the

19 ETFs to dramatic losses and an imperfect correlation with

20 its index. 

21 The addition of the line graphs does not alter those

22 conclusions, and we agree with the district court that this

23 one-year representation does not undercut the

24 representations throughout the rest of the prospectuses. 

28
1 This is especially true because the disclosure introducing

2 the line graphs clearly explained that the line graphs

3 assumed 15% volatility and that many of the ETF indices have

4 historically experienced volatility substantially in excess

5 of 15%. It is therefore implausible that a reasonable

6 investor would expect that an ETF’s divergence from its

7 underlying index would be only minimal.

8 3. SAIs and Wedge Graphs

9 Plaintiffs argue that the district court impermissibly

10 relied upon the wedge graphs to dilute their cost-table and

11 line-graphs arguments and to bolster ProShares’ disclosures. 

12 See Pls. Br. at 46-47. That argument is misplaced, however,

13 because the district court concluded, as we do here, that it

14 was “not possible to read the registration statements - even

15 those issued before the wedge graphs were added in September

16 2007 - without understanding that the ETFs were particularly

17 risky and speculative and were intended to meet their stated

18 goal only over the course of a single day.” ProShares, 889

19 F. Supp. 2d at 655. Moreover, the district court also

20 concluded that the “diverge significantly” disclosures

21 plainly contemplated the possibility that certain investors

22 would lose money despite correctly predicting the direction

23 of an underlying index. Accordingly, the district court did 

24

29
1 not rely on the wedge graphs to reach its conclusions; nor

2 do we.

3 Plaintiffs also contend that the wedge graphs

4 constitute a unique principal-risk disclosure that ProShares

5 impermissibly buried in the SAI. Plaintiffs’ argument,

6 however, merely repackages what they argued earlier:

7 ProShares failed to disclose the effect of excess daily

8 volatility in the principal-risk portion of the

9 prospectuses. Because we concluded that ProShares’

10 volatility disclosures and prospectuses sufficiently warned

11 of the effects excess market volatility would have on an

12 ETF, spelling out the details of those disclosures in the

13 SAI does not violate the securities laws. As we have

14 recognized: “to avoid prospectus disclosures that are too

15 long and complex, Form [N-1A] calls for a streamlined,

16 simplified prospectus” and an SAI which “offer[s] issuers

17 the opportunity to provide more detailed discussions of

18 matters required to be in the prospectus.” Morgan Stanley, 

19 592 F.3d at 352 n.2 (quotation marks and citations

omitted).6 20

6

ProShares asserts that the law of this Circuit permits

reliance on information contained in the SAI in evaluating

section 11 claims. See ProShares’ Br. at 53 (citing Hunt v.

Alliance N. Am. Gov’t Income Trust, Inc., 159 F.3d 723, 730-31

(2d Cir. 1998)). Hunt, however, only looked at an SAI to

30
1 Finally, Plaintiffs allege that the wedge graphs

2 themselves were materially misleading for not contemplating

3 the effects of volatility above 40% and the effect

volatility would have on short-term investments.7 4 But, as

5 the district court concluded, no reasonable investor could

6 read the prospectuses without understanding beyond-a-day

7 risk exposure or that risks increased as volatility

8 increased above 40%. In fact, the complaint itself

9 acknowledges that ProShares could not meet its objectives

10 beyond a day, TAC ¶ 100, and all of the ProShares

11 prospectuses made clear that leveraging, compounding,

12 volatility, and aggressive investment techniques subject the

ETFs to high degrees of risk.8 13 Accordingly, it is

contextualize a prospectus’ disclosures. Id. Accordingly,

Hunt does not permit relegating to the SAI material risk

disclosures that Form N-1A requires to be in the prospectus; nor

could it. 

7

We note a bit of an internal inconsistency in Plaintiffs’

theories of liability: Plaintiffs argue that the district court

impermissibly relied upon the wedge graphs “buried” in the SAI in

analyzing the complaint while simultaneously maintaining that

this same buried information misled them about ETF risks. 

Plaintiffs’ complaint actually presents the point heading

“Additional Misleading Statements in the SAI.” TAC ¶¶ 44-47.

It’s curious that Plaintiffs could not find this information to

get a more in-depth understanding of the funds but have no

trouble using that same information to shoulder ProShares with

liability. 

8

Plaintiffs argue that In re Direxion Shares ETF Trust

counsels against reliance on the “daily objective” disclosures. 

279 F.R.D. 221 (S.D.N.Y. 2012). The district court here,

31
1 implausible that a reasonable investor would read these

2 offering documents without understanding the potential for

3 rapid, substantial loss.

4 C. Corrective Disclosures

5 Plaintiffs allege that ProShares made new disclosures

6 beginning on the last day of the class period, thereby

7 tacitly conceding that the class-period disclosures failed

8 to reveal critical facts. These new disclosures include,

9 inter alia, (1) acknowledging that volatility could cause an

10 ETF to “move in [the] opposite direction as the index,” TAC

11 ¶ 181 (quoting July 31, 2009 Am. No. 16 of Reg. Stmt. at

12 410); (2) stating that an “investor’s views on the future

13 direction and volatility of the markets can be useful tools

14 for investors,” TAC ¶ 185-186 (quoting July 31, 2009

15 Amendment No. 16 of Reg. Stmt. at 410); and (3) advising

16 that investors should be willing to “monitor and/or

17 periodically rebalance their portfolios,” id. 

18 We have previously noted that where the “quality of [a]

19 disclosure could have been improved[,] the advisability of

20 revision does not render what was done deceptive or

however, relied on the total mix of ProShares’ disclosures and

correctly identified significant differences between Direxion’s

offering documents and ProShares’ offering documents. Without

commenting on Direxion’s merits, Plaintiffs have not persuaded us

that the district court erred in parsing these differences.

32
1 misleading.” Greenapple, 618 F.2d at 211. The question

2 always remains “whether the prospectuses, as written,

3 adequately apprise the reader of the essential nature” of

4 the securities. See id. Accordingly, these revisions do

5 not alter our conclusion that the earlier ProShares

6 prospectuses adequately warned of volatility’s effect on the

7 magnitude and probability of loss. It is of no matter that

8 ProShares came to use different, arguably clearer language. 

9 To hold an issuer who alters disclosures deemed adequate in

10 the first instance suddenly liable because it found a better

11 way to say what has already been said would perversely

12 incentivize issuers not to strive for better, clearer

13 disclosure language. Accordingly, the “corrective

14 disclosures” do not alter our conclusions.

15 D. Section 15

16 Plaintiffs also brought claims under section 15 of the

17 `33 Act against the individual defendants. “To establish

18 [section] 15 liability, a plaintiff must [first] show a

19 ‘primary violation’ of [section] 11 . . . .” Hutchinson v.

20 Deutsche Bank Secs. Inc., 647 F.3d 479, 490 (2d Cir. 2011)

21 (internal quotation marks omitted). Having affirmed the

22 dismissal of Plaintiffs’ section 11 claims, we also affirm

23 the dismissal of their section 15 claims. See id.

33
1 CONCLUSION

2 The order of the United States District Court for the

3 Southern District of New York (John G. Koeltl, Judge.),

4 entered on September 12, 2012, dismissing Plaintiffs5 Appellants’ third amended complaint, with prejudice,

6 pursuant to Federal Rule of Civil Procedure 12(b)(6), is

7 hereby AFFIRMED.

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

34
1 APPENDIX A

2 Hypothetical ETF Investments Seeking to Double the Daily Return of its Underlying Index

3

4

5

6

35
1 APPENDIX B

2 Example Wedge Graph

3

36