Court Opinion

ID: 4667653
Source: CourtListenerOpinion
Date Created: 2021-03-15 15:00:29.363254+00
Date Added: 2024-06-11T08:02:58.369975
License: Public Domain

20-419-cv
Butler v. ProShares Trust II, et al.

                                       UNITED STATES COURT OF APPEALS
                                          FOR THE SECOND CIRCUIT

                                              SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary order filed
on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate
Procedure 32.1 and this Court’s Local Rule 32.1.1. When citing a summary order in a
document filed with this Court, a party must cite either the Federal Appendix or an
electronic database (with the notation “summary order”). A party citing a summary order
must serve a copy of it on any party not represented by counsel.

       At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York,
on the 15th day of March, two thousand twenty-one.

PRESENT:              PIERRE N. LEVAL,
                      JOSÉ A. CABRANES,
                      REENA RAGGI,
                                   Circuit Judges.

IN RE: PROSHARES TRUST II SECURITIES LITIGATION.

**************************************************

THOMAS BUTLER, III, ANTHONY LUDOVICI,
LISA LUDOVICI,
                     Plaintiffs-Appellants,

DAVID A. FORD, INDIVIDUALLY AND ON BEHALF OF
ALL OTHERS SIMILARLY SITUATED,

                                 Plaintiff,

                                 v.                               20-419-cv

PROSHARES TRUST II, PROSHARE CAPITAL
MANAGEMENT LLC, TODD B. JOHNSON, EDWARD
KARPOWICZ, MICHAEL L. SAPIR, LOUIS M. MAYBERG,
ABN AMRO CLEARING CHICAGO LLC, DEUTSCHE
BANK SECURITIES INC., GOLDMAN SACHS & CO., J.P.
MORGAN SECURITIES LLC, KNIGHT EXECUTION &
CLEARING SERVICE, LLC, MERRILL LYNCH

                                                     1
PROFESSIONAL CLEARING CORP., SG AMERICANS
SECURITIES, LLC, VIRTU FINANCIAL BD LLC,
NEWEDGE USA LLC,

                         Defendants-Appellees,

BANCA IMI SECURITIES CORP., BARCLAYS CAPITAL
INC., BNP PARIBAS SECURITIES CORP., CREDIT
SUISSE SECURITIES (USA) LLC, HRT FINANCIAL
LLC, JEFFERIES LLC, MIZUHO SECURITIES USA LLC,
NOMURA SECURITIES INTERNATIONAL, INC., RBC
CAPITAL MARKETS, LLC, TIMBER HILL, LLC, UBS
SECURITIES LLC, WEDBUSH SECURITIES, INC., LEON
FIDEL,

                         Defendants.

FOR PLAINTIFFS-APPELLANTS:                                   STEVEN F. HUBACHEK (Samuel H.
                                                             Rudman, David A. Rosenfeld, on the brief),
                                                             Robbins Geller Rudman & Dowd LLP,
                                                             San Diego, CA.

FOR DEFENDANTS-APPELLEES:                                    ROBERT A. SKINNER (Amy D. Roy,
                                                             Jessica M. Bergin, Ropes & Gray LLP;
                                                             Adam S. Hakki, Daniel Lewis, Agnès
                                                             Dunogué, Shearman & Sterling LLP on the
                                                             brief), Ropes & Gray LLP, Boston, MA.

     Appeal from a judgment of the United States District Court for the Southern District of
New York (Denise Cote, Judge).

     UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the District Court be and hereby is
AFFIRMED.

        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

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

                                                     2
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

    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 (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.

                                                      3
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.

                                                    FOR THE COURT:
                                                    Catherine O’Hagan Wolfe, Clerk

                                                4