In Re ProShares Trust Sec. Litig.

12-3981
In Re ProShares Trust Sec. Litig.
UNITED STATES COURT OF APPEALS 1
2
FOR THE SECOND CIRCUIT 3
4
5
6
August Term, 2012 7
8
(Argued: May 2, 2013 Decided: July 22, 2013) 9
10
Docket No. 12-3981 11
12
13
IN RE PROSHARES TRUST SECURITIES LITIGATION 14
15
M ARK K ARASICK , S TEVEN S. N OVICK , S USAN A SAI , S TEPHEN C. H ERMAN , 16
C HARLES S ANKOWICH , M ICHAEL A. H YMAN , H OWARD S CHWACK , F RANCISCO J AVIER 17
D E L ION D IAZ , R ENE L A C ROIX , A NTHONY K OURI , A NTHONY A LEXANDER , J AY 18
B ILYEU , J UDY B ILYEU , M ICHAEL E RIC C ODLIN , W ENDY R OCKWELL -G OFF , R OBERT 19
S CHUMACHER , J AMES H ERSHMAN , D OROTHY H ERSHMAN , S COTT T ESSLER , R ICHARD 20
R HOADS , M ARTIN G ARY N ORRIS , D OROTHY L OWELL , N ANCY H ITCHINS , T HOMAS 21
T RUONG , E DWARD C ISNEROS , C HRIS H ONCIK , S TEPHEN S HOAP , D MITRI R OUTSKI , 22
E LENA L AVENDER -B OWEN , D AVID B OWMAN , D AVID C HOW , M ARK E VERETT B ROWN , 23
J ONATHAN D EAN , L AWRENCE L EWIS S INSEL , J R ., K ENNETH L. K RAMER , L AWRENCE 24
I. W EINER , J OHN E. K ILLOUGH , A LAN P ARKER , S COTT A. S MELTZ , H OWARD 25
S CHWACK , D OUGLAS J ONES , S TEPHEN H ERMAN , ON BEHALF OF THEMSELVES AND ALL 26
OTHERS SIMILARLY SITUATED , S TEVEN S CHNALL , S HERRI S CHNALL , ON BEHALF OF 27
THEMSELVES , 28
29
Plaintiffs-Appellants, 30
31
–v.– 32
33
P ROSHARES T RUST , P ROSHARE A DVISORS LLC, SEI I NVESTMENTS D ISTRIBUTION 34
C O ., M ICHAEL L. S APIR , L OUIS M. M AYBERG , R USSELL S. R EYNOLDS , III, 35
M ICHAEL W ACHS , S IMON D. C OLLIER , P RO S HARES T RUST II, E DWARD K ARPOWICZ , 36
W ILLIAM E. S EALE , C HARLES T ODD , B ARRY P ERSHKOW , 37
38
Defendants-Appellees. 39
40
41
42

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Before: 1
W ESLEY , C ARNEY , W ALLACE , * Circuit Judges. 2
3
Appeal from an order of the United States District 4
Court for the Southern District of New York (John G. Koeltl, 5
Judge), entered on September 12, 2012, dismissing 6
Plaintiffs-Appellants’ third amended complaint, with 7
prejudice, pursuant to Federal Rule of Civil Procedure 8
12(b)(6). Plaintiffs complain that Defendants offered 9
investments in forty-four leveraged exchange-traded funds 10
(“ETFs”) through prospectuses that failed to warn them about 11
the magnitude and probability of loss in beyond-a-day 12
investments even when investors correctly predicted the 13
overall direction of the ETFs’ underlying index. 14
Furthermore, Plaintiffs allege that Defendants included 15
various contra-indicators of successful long-term 16
investments in the prospectuses which the alleged omissions 17
made misleading. Accordingly, Plaintiffs seek to hold 18
Defendants liable for the alleged omissions and misleading 19
statements pursuant to sections 11 and 15 of the Securities 20
Act of 1933, 15 U.S.C. §§ 77k & 77o. After a comprehensive 21
review of the relevant prospectuses, the district court 22
concluded that the alleged omissions were immaterial as a 23
matter of law because the prospectuses warned of the risks 24
that materialized and no reasonable investor who read them 25
would have been misled about the risks of leveraged-ETF 26
investments. After our own review of the complaint and of 27
the prospectuses, we agree with that conclusion. 28
29
AFFIRMED. 30
31
32
CHRISTOPHER LOVELL, Lovell Stewart Halebian 33
Jacobson LLP, New York, NY (Jacob H. Zamansky, 34
Zamansky & Associates LLC, New York, NY, on 35
the brief), for Plaintiffs-Appellants. 36
37
ROBERT A. SKINNER, Ropes & Gray LLP, Boston, MA 38
(Nick W. Rose, Ropes & Gray LLP, Boston, MA; 39
*The Honorable J. Clifford Wallace, of the United States
Court of Appeals for the Ninth Circuit, sitting by designation.
2

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Douglas H. Hallward-Driemeier, Ropes & Gray 1
LLP, Washington, D.C., on the brief), for 2
Defendants-Appellees ProShares Trust, 3
ProShares Trust II, ProShare Advisors LLC, SEI 4
Investments Distribution Co., Michael Sapir, 5
Louis Mayberg, Edward Karpowicz, William 6
Seale, Simon Collier, Charles Todd, and Barry 7
Pershkow. 8
9
Arthur H. Aufses III, Steven S. Sparling, 10
Kramer Levin Naftalis & Frankel LLP, New York, 11
NY, for Defendants-Appellees Russell Reynolds 12
and Michael Wachs. 13
14
15
WESLEY, Circuit Judge: 16
In this putative class action, Plaintiffs collectively 17
purchased shares in forty-four leveraged ProShares exchange- 18
traded funds (“ETFs”) during the August 6, 2006 through June 19
23, 2009 class period. Third Amended Complaint (“TAC”) 20
¶¶ 1-2. They seek to hold Defendants-Appellees ProShares 21
Trust and ProShares Trust II (collectively, “ProShares”) 22
liable for material omissions and misrepresentations in the 23
prospectuses for those ETFs pursuant to sections 11 and 15 24
of the Securities Act of 1933 (“‘33 Act”), 15 U.S.C. §§ 77k 25
& 77o. 1
26
1Defendant-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

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A. Exchange-Traded Funds 1
In a series of press releases, ProShares indicated 2
that their ETFs were for “investors interested in pursuing 3
more sophisticated” trading strategies. See TAC ¶¶ 104-08 4
(internal quotation marks omitted). With ProShares ETFs, 5
investors could hedge and manage risk without having “‘to go 6
through the process of setting up margin accounts or 7
covering margin calls - they [could] simply trade 8
ProShares.’” TAC ¶ 104 (quoting June 21, 2006 Press 9
Release). “‘And unlike a margin account,[an investor] can’t 10
lose more than [she] invest[s].’” TAC ¶ 106 (quoting Feb. 11
1, 2007 Press Release). This is because ETFs operate like 12
indexed mutual funds but trade like stocks. TAC ¶ 82. 13
“ETFs frequently track an index, a sector of stocks, or 14
a commodity or currency.” TAC ¶ 81. They are considered to 15
be “indexed mutual funds that trade like stocks,” TAC ¶ 82, 16
but they differ from mutual funds because they are generally 17
sold to institutional investors in large blocks of shares, 18
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

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called Creation Units. These investors generally purchase 1
Creation Units in exchange for “baskets” of securities that 2
mirror the securities in the ETF portfolio. Investors who 3
purchase Creation Units often split up the Units into 4
individual shares and sell them on a secondary market to 5
retail investors who otherwise might not be able to access 6
ETFs because of the cost of Creation Units. These retail 7
investors are then able to sell shares of ETFs on the 8
secondary market, but they generally cannot redeem shares 9
with the ETFs because the ETFs often redeem shares only when 10
they are packaged in Creation Units. TAC ¶ 82. 11
ProShares offered three types of ETFs: (1) an Inverse 12
ETF, (2) an Ultra Long ETF, and (3) an Ultra Short ETF. TAC 13
¶ 93(a)-(c). An Inverse ETF aimed to “replicate the inverse 14
movement of the specified index over one day.” TAC ¶ 93(a). 15
An Ultra Long ETF tried to “double the performance of the 16
underlying index or benchmark on a daily basis.” TAC ¶ 17
93(b). And an Ultra Short ETF was designed to “double the 18
inverse of the performance of the underlying index or 19
benchmark on a daily basis.” TAC ¶ 93(c). Accordingly, if 20
the “specific index, benchmark, sector or commodity on which 21
an ETF [was] based[] increase[d] by 1% on a given day, then 22
5

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[the Inverse ETF] would decrease by 1%; the [Ultra Long ETF] 1
would increase by 2%; and [the Ultra-Short ETF] would 2
decrease by 2%.” TAC ¶ 94. Each one of the ETFs in this 3
case is leveraged. 4
B. Registration Statements 5
ProShares I filed its registration statement on SEC 6
Form N-1A. TAC ¶ 89. ProShares II filed its registration 7
statement on Forms S-1 and S-3. TAC ¶ 91. The registration 8
statements consisted of, inter alia, a prospectus and a 9
statement of additional information (“SAI”). Though 10
ProShares I and ProShares II provided investors with several 11
different offering documents relevant to this appeal, 12
ProShares’ key disclosures relating to the ETFs at issue 13
here were materially consistent across all of the documents. 14
All relevant ProShares registration statements 15
disclosed that the ETFs pursued daily investment objectives 16
and daily investment results. See Skinner Decl., App’x A, 17
Item 1; App’x B, Item 1. ProShares I’s offering documents 18
make clear that these daily objectives were bets that it 19
could return a stated multiple of an ETF’s underlying index 20
each day by investing in different components of the 21
underlying index through various financial instruments. For 22
6

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example, “principal investment strategies include[d 1
i]nvesting in equity securities and/or financial instruments 2
(including derivatives) that ProShare Advisors believe[d], 3
in combination, [w]ould have similar daily price return 4
characteristics” of a stated multiple of the ETF’s 5
underlying index. June 19, 2006 ProShares I Reg. Stmt at 7. 6
To achieve the predicted daily investment results, 7
ProShare Advisors or a Sponsor would determine the type, 8
quantity, and mix of investment positions that an ETF should 9
hold. In addition, ProShares reserved the right to 10
substitute a different index or security for an ETF’s 11
underlying index and disclosed that it might over-weight or 12
under-weight certain components contained in the underlying 13
index. See, e.g., id. at 59-60; see also, e.g., Nov. 17, 14
2008 ProShares II Reg. Stmt. at 33-34. Furthermore, the 15
ETFs never took a defensive position and would remain “fully 16
invested at all times in securities and/or financial 17
instruments that provide exposure to its [u]nderlying 18
[i]ndex without regard to market conditions, trends, or 19
direction.” June 19, 2006 ProShares I Reg. Stmt at 60; see 20
also Nov. 17, 2008 ProShares II Reg. Stmt. at 33. The ETFs’ 21
views were expressly myopic: long-term objectives were 22
7

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blurred because they were focused only on meeting a 1
benchmark tied to an underlying index one day at a time with 2
a portfolio of different securities. 3
Moreover, ProShares warned that its decision to invest 4
in a particular stock or financial instrument was not based 5
on the “investment merit of a particular security, 6
instrument, or company” and that it did not use 7
“conventional stock research or analysis, or forecast stock 8
movement or trends” in managing the assets of the funds. 9
June 19, 2006 ProShares I Reg. Stmt at 60; see also Nov. 17, 10
2008 ProShares II Reg. Stmt. at 34. Instead, ProShares ETFs 11
pursued daily results through aggressive investment 12
techniques. For ProShares I, each registration statement 13
warned that the ETFs used financial instruments and 14
“investment techniques . . . that may be considered 15
aggressive, including the use of futures contracts, options 16
on futures contracts, securities and indices, forward 17
contracts, swap agreements, and similar instruments.” See 18
Skinner Decl., App’x A, Item 6. ProShares I also disclosed 19
that use of these techniques and financial instruments 20
exposed the ETFs to “potentially dramatic” losses. Id. 21
Similarly, each relevant ProShares II prospectus warned that 22
8

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the aggressive financial instruments had “volatile [trading 1
prices, and that] even a small movement in market prices 2
could cause large losses” because an ETF investment was 3
“speculative” and involved a high degree of risk. See id., 4
App’x B, Item 6. 5
ProShares also warned that ETFs could not pursue their 6
stated objectives for beyond-a-day periods because 7
mathematical compounding and leveraging prevented the ETFs 8
from reaching those results. See id., App’x A, Item 2; 9
App’x B, Item 2. In that regard, ProShares disclosed that 10
“[o]ver time, the cumulative percentage increase or decrease 11
in the net asset value of the [ETFs] may diverge 12
significantly from the cumulative percentage increase or 13
decrease in the multiple of the return of the Underlying 14
Index” due to a compounding effect of daily gains and 15
losses. 2 For ProShares II, the warning was even more 16
direct: “[u]sing leverage . . . should be considered . . . 17
speculative and could result in the total loss of an 18
investor’s investment.” See id., App’x B, Item 6. In its 19
brief, ProShares provided a hypothetical illustration of two 20
2Beginning with its September 2007 registration statement,
this information was moved to the SAI.
9

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investors who invested in an Ultra Long ETF at separate 1
times to illustrate the effect an index’s volatility would 2
have on those investments’ returns. We have provided that 3
example in Appendix A. 4
C. Alleged Omissions and Misstatements 5
Plaintiffs principally complain that ProShares failed 6
to disclose the magnitude and probability of loss for 7
beyond-a-day investments in ProShares ETFs despite 8
investors’ correct predictions regarding the overall 9
movement of the indices underlying the ETFs. Furthermore, 10
Plaintiffs allege that the registration statements contained 11
various “contra-indicators” of successful long-term 12
investments which the above omissions made materially 13
misleading. The district court rejected these arguments and 14
dismissed the complaint with prejudice pursuant to Federal 15
Rule of Civil Procedure 12(b)(6). In re ProShares Trust 16
Sec. Litig., 889 F. Supp. 2d 644 (S.D.N.Y. 2012). In sum, 17
the district court concluded that ProShares warned of the 18
risks that materialized. For the reasons that follow, we 19
agree. 20
21
22
10

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DISCUSSION 1
The standard of review is neither contested nor 2
determinative. 3
3
A. Alleged Omissions 4
Liability attaches to a security’s issuer, its 5
underwriter, and certain other statutorily enumerated 6
parties pursuant to section 11 of the `33 Act if “any part” 7
of the operative registration statements “omitted to state a 8
material fact required to be stated therein or necessary to 9
make the statements therein not misleading.” 15 U.S.C. § 10
77k(a); see also In re Morgan Stanley Info. Fund Sec. 11
Litig., 592 F.3d 347, 360 (2d Cir. 2010). To state a 12
plausible section 11 claim based on an alleged omission, a 13
complaint must pass two distinct hurdles: it must identify 14
an omission that is (1) unlawful and (2) material. See 15
Morgan Stanley, 592 F.3d at 360. In other words, 16
“[m]ateriality alone does not demand disclosure, nor does 17
the duty to disclose encompass non-material information.” 18
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

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Panther Partners, Inc. v. Ikanos Commc’ns, Inc., 538 1
F.Supp.2d 662, 668 (S.D.N.Y. 2008). 2
A plaintiff who plausibly pleads an unlawful omission 3
comes close to stating a section 11 claim because 4
materiality “will rarely be dispositive in a motion to 5
dismiss.” See Morgan Stanley, 592 F.3d at 360. 6
Nevertheless, the materiality hurdle remains a meaningful 7
pleading obstacle, and we will dismiss a section 11 claim 8
where the alleged omission was “so obviously unimportant to 9
a reasonable investor” that reasonable minds would agree on 10
that omission’s unimportance. Id. (internal quotation marks 11
omitted). In fact, the Supreme Court has been “‘careful not 12
to set too low a standard of materiality,’ for fear that 13
management would ‘bury the shareholders in an avalanche of 14
trivial information.’” Matrixx Initiatives, Inc. v. 15
Siracusano, 131 S.Ct. 1309, 1318 (2011) (quoting Basic 16
Inc. v. Levinson, 485 U.S. 224, 231 (1988)). 17
In judging whether an alleged omission was material in 18
light of the information already disclosed to investors, we 19
consider whether there is “‘a substantial likelihood that 20
the disclosure of the [omitted material] would have been 21
viewed by the reasonable investor as having significantly 22
12

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altered the total mix of information [already] made 1
available.’” DeMaria v. Andersen, 318 F.3d 170, 180 (2d 2
Cir. 2003) (emphasis added) (quoting TSC Indus., Inc. v. 3
Northway, Inc., 426 U.S. 438, 449 (1976)). “It is not 4
sufficient to allege that the investor might have considered 5
the misrepresentation or omission important.” Ganino v. 6
Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000). 7
While the “objective of a prospectus is to solicit 8
investment by the general public” and “the intended audience 9
. . . encompasse[s] both sophisticated financial analysts 10
and untutored lay persons,” Greenapple v. Detroit Edison 11
Co., 618 F.2d 198, 210 (2d Cir. 1980), the prospectuses are 12
not “‘required to address [reasonable investors] as if they 13
were children in kindergarten,’” id. (quoting Richland v. 14
Crandall, 262 F. Supp. 538, 554 (S.D.N.Y. 1967)). In the 15
words of the district court below, “[w]hen a registration 16
statement warns of the exact risk that later materialized, a 17
[s]ection 11 claim will not lie as a matter of law.” 18
ProShares, 889 F. Supp. 2d at 653. 19
Here, the district court concisely summarized 20
Plaintiffs’ allegations: the “thrust of the [P]laintiffs’ 21
[s]ection 11 claim is that the registration statements 22
13

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omitted the risk that the ETFs, when held for a period of 1
greater than one day, could lose substantial value in a 2
relatively brief period of time, particularly in periods of 3
high volatility.” Id. at 654. The district court dismissed 4
that claim in equally concise language: “the disclosures in 5
the registration statements accurately conveyed the specific 6
risk that the [P]laintiffs assert materialized: when 7
investors held the ETFs for periods longer than one day the 8
funds’ performance widely diverged from the performance of 9
the underlying indices sometimes resulting in losses despite 10
the overall direction of the underlying indices.” Id. at 11
656. We agree that the relevant prospectuses adequately 12
warned the reasonable investor of the allegedly omitted 13
risks. 14
1. The Magnitude of Beyond-A-Day Losses 15
Plaintiffs allege that the registration statements 16
omitted the risk that correctly predicting the long-term 17
movement in an ETF’s underlying index could result in a 18
substantial loss in their investment over that same period 19
of time. Plaintiffs acknowledge that the prospectuses 20
warned that the value of long-term ETF investments “may 21
diverge significantly” from that ETF’s underlying index. 22
14

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Pls. Br. at 42. The complaint even recognizes that the 1
ProShares ETFs “did not seek to achieve long[-]term 2
cumulative investment returns in their ETFs” and that they 3
“could not seek such returns.” TAC ¶ 100. Plaintiffs 4
assert, however, that the “diverge significantly” disclosure 5
does not speak to a divergence that results in actual, 6
substantial loss. 7
“In evaluating a prospectus, we read it as a whole.” 8
DeMaria, 318 F.3d at 180 (internal quotation omitted). As 9
we read the prospectus cover-to-cover, we consider whether 10
the disclosures and representations, “taken together and in 11
context, would have misl[ed] a reasonable investor about the 12
nature of the [securities].’” Id. (quoting McMahan & Co. v. 13
Wherehouse Entm’t, Inc., 900 F.2d 576, 579 (2d Cir. 1990)). 14
“As we have explained, ‘[a] prospectus will violate federal 15
securities laws if it does not disclose material objective 16
factual matters, or buries those matters beneath 17
information, or treats them cavalierly.’” DeMaria, 318 F.3d 18
at 180 (quoting Olkey v. Hyperion 1999 Term Trust, Inc., 98 19
F.3d 2, 5 (2d Cir. 1996) (internal quotation marks 20
omitted)). 21
22
15

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Here, the district court concluded that it was “not 1
possible to read the registration statements . . . without 2
understanding that the ETFs were particularly risky and 3
speculative and were intended to meet their stated goal only 4
over the course of a single day.” ProShares, 889 F. Supp. 5
2d at 656. The district court reasoned that while “some 6
[P]laintiffs lost money while guessing correctly on the 7
direction of the underlying index, this possibility is 8
plainly consistent with the significant divergence that was 9
disclosed in the registration statements.” Id. On appeal, 10
Plaintiffs maintain that the district court overvalued the 11
“diverge significantly” disclosure because “‘[d]iverge 12
significantly’ is not a synonym for ‘loss’” and “refers only 13
to [an ETFs’] outperforming or underperforming” a perfect 14
long-term correlation with its index. At the very least, 15
they argue, “diverge significantly” does not include large, 16
rapid losses. Pls. Br. at 42-43. 17
We are unpersuaded by this argument, and Plaintiffs’ 18
efforts to find a meaningful distinction between “diverge 19
significantly” and “actual loss” strains the plain meaning 20
of the former phrase. Because one might expect the long- 21
term value of an ETF to correlate with the long-term value 22
16

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of its underlying index, ProShares warned that the actual 1
results might diverge significantly from that prediction. 2
“Significant” means large or important; in the context of 3
the offering documents, “divergence” means the opposite from 4
one’s expectation. ProShares’ “significant divergence” 5
disclosures, fairly read, put investors on notice that an 6
ETF’s value might move in a direction quite different from 7
and even contrary to what an investor might otherwise 8
expect. 9
Plaintiffs use a linguistic preference to read out of 10
the prospectuses a scenario which the ProShares disclosures 11
clearly contemplate. Time and again, we have said that 12
“disclosure is not a rite of confession or exercise in 13
common law pleading.” Morgan Stanley, 592 F.3d at 365 14
(internal quotation marks omitted). Because the “role of 15
the materiality requirement is not to attribute to investors 16
a child-like simplicity,” we presume that a reasonable 17
investor can comprehend the basic meaning of plain-English 18
disclosures and will not credit Plaintiffs’ narrow reading 19
of “diverge significantly.” See Basic, 485 U.S. at 234 20
(citations omitted). 21
Perhaps more importantly, the “diverge significantly” 22
disclosure takes on additional meaning within the context of 23
17

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the prospectus as a whole. The earliest relevant 1
prospectuses make absolutely clear that the ETFs operated 2
pursuant to daily investment objectives, that they utilized 3
leveraged investment techniques to achieve those objectives, 4
and that mathematical compounding combined with leveraging 5
prevented the ETFs from achieving their stated objectives 6
over a period of time greater than one day. All the 7
ProShares I prospectuses make clear that ETFs used 8
aggressive financial instruments and investment techniques 9
that exposed the ETFs to potentially “dramatic” losses “in 10
the value of its portfolio holdings and imperfect 11
correlation to the index underlying”; ProShares II warned 12
that volatility could result in a “total loss of an 13
investor’s investment.” See Skinner Decl., App’x A, Item 6; 14
App’x B, Item 6. 15
Accordingly, we conclude that it is implausible that 16
substituting “actual loss” for “diverge significantly” is a 17
change substantially likely to be viewed by a reasonable 18
investor as having significantly altered the import of the 19
total mix of information ProShares made available. 20
See Basic, 485 U.S. at 232. 21
2. The Probability of Long-Term Loss 22
Plaintiffs also complain that ProShares omitted that 23
18

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certain market circumstances would “necessarily [cause] 1
quick and potentially large losses” despite an investor’s 2
correct prediction of the overall, beyond-a-day direction of 3
an ETF’s underlying index. Pls. Br. at 1 (emphasis added); 4
see also id. at 24-25; TAC ¶¶ 12-26. The complaint further 5
asserts that ProShares possessed an “undisclosed 6
mathematical formula” which “very accurately predicted and 7
described the relationship between the movements in each 8
type of ETF’s price and the movements in the index 9
underlying the ETF in any market scenario.” See TAC ¶ 13. 10
Based on this formula, Plaintiffs allege that ProShares knew 11
and omitted that certain market conditions could materialize 12
that would put investors “who held ProShares products for 13
extended periods of more than a day” in “a ‘must lose’ 14
position.” TAC ¶ 15. These market conditions existed, 15
Plaintiffs maintain, when “the volatility (i.e., the day-to- 16
day changes in prices) of the underlying index significantly 17
exceeded its performance over time.” TAC ¶ 16. 18
The district court concluded that the existence of the 19
undisclosed mathematical formula was implausible on its 20
face. ProShares, 889 F. Supp. 2d at 656. In the 21
alternative, the district court concluded that such a 22
formula would “rely on inputs from the underlying index or 23
19

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benchmark, that those inputs could not be known in advance,” 1
and that failure to predict future market performance was an 2
immaterial omission. Id. 3
Here, Plaintiffs continue to pursue the argument and 4
allege that ProShares “knew and could simulate from their 5
mathematical formula exactly what was going to happen to 6
investors for each market scenario, including the 7
continuation of the actual, existing current daily 8
volatility circumstances.” Pls. Br. at 11 (emphasis in 9
original) (complaint citations omitted). According to 10
Plaintiffs, ProShares knew “to the day when, if current 11
actual volatility circumstances continued, their ETFs would 12
become dysfunctional and an investor necessarily would lose 13
from a correct judgment about the market.” Pls. Br. at 24- 14
25 (complaint citations omitted). 15
We remain unpersuaded. Assuming, arguendo, that 16
ProShares possessed an undisclosed mathematical formula that 17
accurately predicted potential market conditions and the 18
effect market volatility would have on ETF shares, 19
Plaintiffs’ argument amounts to nothing more than an 20
allegation that ProShares failed to disclose that the more 21
an ETF’s underlying index changed value day-to-day for a 22
particular investor, the more likely it became that the 23
20

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investor would experience long-term losses depending on when 1
she invested. That does not constitute an actionable 2
omission of an objective fact, but rather a general omission 3
regarding the risks associated with (1) hypothetical 4
investments over (2) hypothetical periods of time during (3) 5
hypothetically volatile market conditions. ProShares cannot 6
be expected to predict and disclose all possible negative 7
results across any market scenario. Appendix A illustrates 8
this point. 9
In tandem with this argument, Plaintiffs assert that 10
ProShares failed to disclose the risks of “excess daily 11
index volatility” which its mathematical formula predicted 12
and that eventually materialized. 4 ProShares, however, 13
consistently disclosed the effect market volatility had on 14
ETFs. The first relevant ProShares I prospectus warned, 15
under Principal Risk Considerations, that the “equity 16
markets are volatile, and the value of securities, futures, 17
options, contracts and other instruments correlated with the 18
equity markets may fluctuate dramatically from day-to-day.” 19
4Plaintiffs 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

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June 19, 2006 ProShares I Prospectus at 8, 64. “This 1
volatility may cause the value of an investment in a[n ETF] 2
to decrease.” Id. at 65. ProShares also warned that the 3
net asset value of an ETF and its market price would be made 4
more volatile than its underlying index on account of 5
leveraged investment techniques that magnify exposure to the 6
underlying index. Finally, ProShares highlighted and 7
bullet-pointed the risk: “Volatility Risk – [Leveraged ETFs] 8
seek to achieve a multiple of an index and therefore will 9
experience greater volatility than the index underlying its 10
benchmark and consequently ha[ve] the potential for greater 11
losses.” Id. at 9. In addition, the earliest ProShares II 12
prospectus warned that price “volatility, which is 13
exacerbated by the use of leverage, may possibly cause the 14
total loss of an investor’s investment.” Nov. 17, 2008 15
ProShares II Reg. Stmt. at 4. 16
While “it is not sufficient that overtones might have 17
been picked up by the sensitive antennae of investment 18
analysts,” Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 19
1297 (2d Cir. 1973) (Friendly, Judge), no reasonable 20
investor could read these prospectuses without realizing 21
that volatility, combined with leveraging, subjected that 22
23
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investment to a great risk of long-term loss as market 1
volatility increased. 2
B. Misleading Statements 3
“Our conclusion that the [`33 Act] did not directly 4
require defendants to disclose the allegedly omitted 5
information does not mark the end of our inquiry.” Morgan 6
Stanley, 592 F.3d at 365. “Section 11 [also] call[s] for 7
the disclosure of information that is necessary to avoid 8
rendering misleading the representations in prospectuses.” 9
Id. (citing 15 U.S.C. § 77k(a)). Our inquiry here is the 10
same as it was above: “we review documents holistically and 11
in their entirety.” Id. (citing Olkey, 98 F.3d at 5). “The 12
literal truth of an isolated statement is insufficient; the 13
proper inquiry requires an examination of defendants’ 14
representations, taken together and in context.” Id. 15
(quotation marks and citation omitted). 16
Plaintiffs complain that ProShares prospectuses 17
included “numerous” misleading statements about the positive 18
results of 1, 3, 5, and 10 year investments in ProShares 19
ETFs. See Pl. Br. at 38 (complaint citations omitted). 20
Indeed, Plaintiffs provide us with a string citation to the 21
complaint outlining at least eight categories of misleading 22
statements across various prospectuses. See, e.g., TAC ¶ 23
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102(a)-(h). Plaintiffs’ appeal, however, focuses on only 1
three specific alleged misrepresentations. See Tolbert v. 2
Queens College, 242 F.3d 58, 75 (2d Cir. 2001) (“[I]ssues 3
adverted to in a perfunctory manner, unaccompanied by some 4
effort at developed argumentation, are deemed waived.” 5
(internal quotation omitted)). 6
1. 1, 3, 5, and 10 Year Cost Projections 7
Plaintiffs contend that ProShares provided tables which 8
illustrated the hypothetical costs of investing in ProShares 9
I ETFs for 1, 3, 5, and 10 year periods, which misleadingly 10
implied that ProShares ETFs were suitable 1, 3, 5, and 10 11
year investments. See TAC ¶ 102(a). The district court 12
dismissed the argument for two reasons. First, it reasoned 13
that the “various projections . . . fall far short of 14
undercutting the emphasis on the daily nature of the ETFs.” 15
ProShares, 889 F. Supp. 2d at 655. Second, it concluded 16
that because Form N-1A required disclosure of that exact 17
information, ProShares could not expect that the SEC would 18
require that information be specifically “identified, 19
qualified, or tempered.” Id. We agree with the first half 20
of the district court’s analysis and affirm its conclusion. 21
The contested tables are presented as an example of the 22
costs of investing in ProShares I ETFs assuming a $10,000 23
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investment for time periods spanning 1, 3, 5, and 10 years - 1
assuming a 5% return each year. Form N-1A requires those 2
assumptions. This makes sense because the example is 3
intended to help investors compare the cost of investing in 4
ProShares with the cost of investing in other funds. It 5
would be difficult to cross-compare the costs of investing 6
in different funds were prospectuses to use different time 7
periods, different assumptions about annual returns, and 8
different assumptions about the amount invested. The 9
ProShares I prospectuses also tie cautionary language to the 10
tables, which Form N-1A does not expressly require: the 11
table was for “illustration purposes only” and was not 12
“meant to suggest actual or expected fees and expenses or 13
returns, all of which may vary.” See, e.g., Sept. 28, 2007 14
Reg. Stmt. at 20. 15
We conclude that the cost tables, placed in context, 16
would not lead a reasonable investor into thinking that 17
ProShares I ETFs were safe 1, 3, 5, and 10 year investments. 18
We also agree with the district court that the tables do not 19
undercut the disclosures regarding the ETFs’ daily 20
objectives with all the attendant warnings already described 21
in this opinion. Accordingly, we are unpersuaded by 22
Plaintiffs’ attempt to isolate and construe a single element 23
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of ProShares I’s prospectuses. See DeMaria, 318 F.3d at 1
180. It is therefore implausible that a reasonable investor 2
would have been misled by the cost tables. 5
3
2. Correlation Risks and Line Graphs 4
Beginning with the September 28, 2007 ProShares I 5
prospectus, Plaintiffs assert that ProShares I included 6
correlation-risk disclosures which included line-graph 7
examples that misled them into thinking that an ETF’s 8
divergence from its underlying index would be somewhere in 9
the ballpark of 0.6%-2.2%. TAC ¶¶ 29-43, 102, 203-220. 10
The correlation-risk disclosure expressly warns that 11
there is no guarantee that an ETF will achieve a high degree 12
of correlation with its benchmark and lists factors that 13
prevent perfect correlation. For Plaintiffs’ leveraged 14
funds “there [was] a special form of correlation risk[:] for 15
periods greater than one day, the use of leverage tends to 16
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

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cause the performance of an [ETF] to be either greater than 1
or less than the index performance.” See Sept. 28, 2007 2
ProShares I Reg. Stmt at 8. 3
To “illustrate” how leveraging increases correlation 4
risk, the prospectus included three line graphs that 5
“simulated [a] hypothetical one year performance of an index 6
compared with the performance of a fund that perfectly 7
achieved its investment objective of twice (200%) the daily 8
index return.” Id. “Each of the graphs [assumed] a 9
volatility rate of 15%, which [was] an approximate average 10
of the five-year historical volatility rate” of certain 11
indices. Id. But, “[o]ther indexes to which the [ETFs] are 12
benchmarked ha[d] different historical volatility rates; 13
certain of the [ETFs] historical volatility rates [were] 14
substantially in excess of 15%.” Id. 15
The line graphs show that where a leveraged ETF meets 16
its daily objectives each day, with the above assumptions, 17
its value could diverge from the index’s performance by 2.2% 18
in a flat market, 0.7% in an upward-trending market, and 19
0.6% in a downward-trending market. After the presentation 20
of the graphs, the prospectus referred potential investors 21
to the SAI “for a further discussion of how both index 22
volatility and index performance can impact” ETF 23
performance. The SAI includes a “wedge graph” that 24
27

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represents the effect market volatility would have on a 1
leveraged ETFs’ annual correlation with index volatility 2
ranging from 0%-40% at 5% intervals. The wedge graphs 3
clearly demonstrate that at high levels of volatility an 4
ETF’s value could move in the opposite direction from its 5
underlying benchmark. We have included an example wedge 6
graph in Appendix B. 7
Plaintiffs complain that the line graphs misled them 8
into believing that annual ETF returns ran the risk of only 9
a slight disconnection (.6% - 2.2%) from an index’s 10
performance. We have already concluded that the ProShares 11
prospectuses, absent the wedge graphs, clearly described the 12
daily investment objectives, the nature of ETFs, and, in 13
plain English, warned that leveraging, volatility, and 14
compounding could cause an ETF’s performance to 15
significantly diverge from its underlying index. We have 16
also already concluded that the relevant prospectuses 17
disclosed that aggressive investment techniques exposed the 18
ETFs to dramatic losses and an imperfect correlation with 19
its index. 20
The addition of the line graphs does not alter those 21
conclusions, and we agree with the district court that this 22
one-year representation does not undercut the 23
representations throughout the rest of the prospectuses. 24
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This is especially true because the disclosure introducing 1
the line graphs clearly explained that the line graphs 2
assumed 15% volatility and that many of the ETF indices have 3
historically experienced volatility substantially in excess 4
of 15%. It is therefore implausible that a reasonable 5
investor would expect that an ETF’s divergence from its 6
underlying index would be only minimal. 7
3. SAIs and Wedge Graphs 8
Plaintiffs argue that the district court impermissibly 9
relied upon the wedge graphs to dilute their cost-table and 10
line-graphs arguments and to bolster ProShares’ disclosures. 11
See Pls. Br. at 46-47. That argument is misplaced, however, 12
because the district court concluded, as we do here, that it 13
was “not possible to read the registration statements - even 14
those issued before the wedge graphs were added in September 15
2007 - without understanding that the ETFs were particularly 16
risky and speculative and were intended to meet their stated 17
goal only over the course of a single day.” ProShares, 889 18
F. Supp. 2d at 655. Moreover, the district court also 19
concluded that the “diverge significantly” disclosures 20
plainly contemplated the possibility that certain investors 21
would lose money despite correctly predicting the direction 22
of an underlying index. Accordingly, the district court did 23
24
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not rely on the wedge graphs to reach its conclusions; nor 1
do we. 2
Plaintiffs also contend that the wedge graphs 3
constitute a unique principal-risk disclosure that ProShares 4
impermissibly buried in the SAI. Plaintiffs’ argument, 5
however, merely repackages what they argued earlier: 6
ProShares failed to disclose the effect of excess daily 7
volatility in the principal-risk portion of the 8
prospectuses. Because we concluded that ProShares’ 9
volatility disclosures and prospectuses sufficiently warned 10
of the effects excess market volatility would have on an 11
ETF, spelling out the details of those disclosures in the 12
SAI does not violate the securities laws. As we have 13
recognized: “to avoid prospectus disclosures that are too 14
long and complex, Form [N-1A] calls for a streamlined, 15
simplified prospectus” and an SAI which “offer[s] issuers 16
the opportunity to provide more detailed discussions of 17
matters required to be in the prospectus.” Morgan Stanley, 18
592 F.3d at 352 n.2 (quotation marks and citations 19
omitted). 6
20
6ProShares 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

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Finally, Plaintiffs allege that the wedge graphs 1
themselves were materially misleading for not contemplating 2
the effects of volatility above 40% and the effect 3
volatility would have on short-term investments. 7 But, as 4
the district court concluded, no reasonable investor could 5
read the prospectuses without understanding beyond-a-day 6
risk exposure or that risks increased as volatility 7
increased above 40%. In fact, the complaint itself 8
acknowledges that ProShares could not meet its objectives 9
beyond a day, TAC ¶ 100, and all of the ProShares 10
prospectuses made clear that leveraging, compounding, 11
volatility, and aggressive investment techniques subject the 12
ETFs to high degrees of risk. 8 Accordingly, it is 13
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.
7We 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.
8Plaintiffs 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

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implausible that a reasonable investor would read these 1
offering documents without understanding the potential for 2
rapid, substantial loss. 3
C. Corrective Disclosures 4
Plaintiffs allege that ProShares made new disclosures 5
beginning on the last day of the class period, thereby 6
tacitly conceding that the class-period disclosures failed 7
to reveal critical facts. These new disclosures include, 8
inter alia, (1) acknowledging that volatility could cause an 9
ETF to “move in [the] opposite direction as the index,” TAC 10
¶ 181 (quoting July 31, 2009 Am. No. 16 of Reg. Stmt. at 11
410); (2) stating that an “investor’s views on the future 12
direction and volatility of the markets can be useful tools 13
for investors,” TAC ¶ 185-186 (quoting July 31, 2009 14
Amendment No. 16 of Reg. Stmt. at 410); and (3) advising 15
that investors should be willing to “monitor and/or 16
periodically rebalance their portfolios,” id. 17
We have previously noted that where the “quality of [a] 18
disclosure could have been improved[,] the advisability of 19
revision does not render what was done deceptive or 20
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

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misleading.” Greenapple, 618 F.2d at 211. The question 1
always remains “whether the prospectuses, as written, 2
adequately apprise the reader of the essential nature” of 3
the securities. See id. Accordingly, these revisions do 4
not alter our conclusion that the earlier ProShares 5
prospectuses adequately warned of volatility’s effect on the 6
magnitude and probability of loss. It is of no matter that 7
ProShares came to use different, arguably clearer language. 8
To hold an issuer who alters disclosures deemed adequate in 9
the first instance suddenly liable because it found a better 10
way to say what has already been said would perversely 11
incentivize issuers not to strive for better, clearer 12
disclosure language. Accordingly, the “corrective 13
disclosures” do not alter our conclusions. 14
D. Section 15 15
Plaintiffs also brought claims under section 15 of the 16
`33 Act against the individual defendants. “To establish 17
[section] 15 liability, a plaintiff must [first] show a 18
‘primary violation’ of [section] 11 . . . .” Hutchinson v. 19
Deutsche Bank Secs. Inc., 647 F.3d 479, 490 (2d Cir. 2011) 20
(internal quotation marks omitted). Having affirmed the 21
dismissal of Plaintiffs’ section 11 claims, we also affirm 22
the dismissal of their section 15 claims. See id. 23
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CONCLUSION 1
The order of the United States District Court for the 2
Southern District of New York (John G. Koeltl, Judge.), 3
entered on September 12, 2012, dismissing Plaintiffs- 4
Appellants’ third amended complaint, with prejudice, 5
pursuant to Federal Rule of Civil Procedure 12(b)(6), is 6
hereby AFFIRMED. 7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
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APPENDIX A 1
Hypothetical ETF Investments Seeking to Double the Daily Return of its Underlying Index 2
3
4
5
6
35

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APPENDIX B 1
Example Wedge Graph 2
3
36

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