ProShares Ultra Bloomberg Crude Oil Class Action Lawsuit
- Company Name
- ProShares Ultra Bloomberg Crude Oil
- Stock Symbol
- Class Period
- March 6, 2020 to April 27, 2020
- Southern District of New York
The ProShares Ultra Bloomberg Crude Oil class action lawsuit charges UCO, its sponsor, and certain of its officers with violations of the Securities Exchange Act of 1934 and seeks to represent purchasers of UCO securities between March 6, 2020 and April 27, 2020, inclusive (the “Class Period”). The UCO class action lawsuit was commenced on July 28, 2020 in the Southern District of New York and is captioned Di Scala v. ProShares Ultra Bloomberg Crude Oil, No. 20-cv-05865.
UCO is an exchange traded fund (“ETF”) purportedly designed to reflect the performance of crude oil as measured by the price of West Texas Intermediate (“WTI”) sweet, light crude oil futures contracts traded on the New York Mercantile Exchange.
The UCO class action lawsuit alleges that during the Class Period, defendants stated that UCO would achieve its investment objective by seeking daily investment results, before fees and expenses, that correspond to two times the performance of its benchmark for a single day, and not for any other period. However, unbeknownst to investors, extraordinary market conditions in early 2020 made UCO’s purported investment objective and strategy unfeasible. Oil demand fell precipitously as governments imposed lockdowns and businesses halted operations in response to the COVID-19 pandemic. Moreover, in early March 2020, Saudi Arabia and Russia launched an oil price war, increasing production and slashing export prices in a bid to increase the global market share of their domestic petrochemical enterprises. As excess oil supply increased and oil prices waned, the facilities available for storage in Cushing, Oklahoma approached capacity, ultimately causing a rare market dynamic known as “super contango,” in which the futures prices for oil substantially exceed the spot price. At the same time, retail investors began pouring hundreds of millions of dollars into UCO in an attempt to “buy the dip,” believing (correctly) that the price of oil would rebound as economies exited lockdown periods and the Russia/Saudi oil price war ended. Because of the nature of UCO’s investment strategy, these converging factors caused UCO to suffer exceptional losses and undermined UCO’s ability to meet its ostensible investment objective.
Moreover, according to the UCO class action lawsuit, defendants possessed unique insider knowledge about the negative consequences to UCO as a result of these converging adverse events. However, rather than disclose the known impacts and risks to UCO as a result of these exceptional threats, defendants decided to conduct a massive offering of UCO shares to public investors. Even though the risk profile for UCO had profoundly changed, solicitation materials for the offering substantially mirrored the UCO’s prior disclosures. Indeed, unbeknownst to investors, the offering itself materially increased the risks to UCO because it heightened liquidity constraints in the WTI futures market and pushed UCO towards position limits as UCO’s sponsor piled hundreds of millions of dollars from offering proceeds into UCO’s purported investment strategy.
The UCO class action lawsuit further alleges that UCO quickly deteriorated, as a result of the nature and extent of defendants’ fraud being revealed to investors and the market. Ultimately, UCO suffered billions of dollars in losses and was forced to abandon its investment strategy. Through a series of investment overhauls, UCO was forced to transform from the passive ETF to an actively managed fund struggling to avoid a total implosion. In April and May 2020, defendants belatedly acknowledged the threats and adverse impacts that UCO had been experiencing at the time of the March 2020 offering, but which they had failed to disclose to investors in a timely manner.
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