Di Scala v. ProShares Ultra Bloomberg Crude Oil

Background

Luciano Di Scala brought a putative class action on behalf of investors who purchased or otherwise acquired UCO securities from March 6, 2020, through April 27, 2020. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The defendants are ProShares Ultra Bloomberg Crude Oil, ProShare Capital Management LLC, ProShares Trust II, Michael L. Sapir, Timothy N. Coakley, and Todd B. Johnson.

The motions before the court concerned who should serve as lead plaintiff—the person authorized to direct the class litigation—and which law firm should serve as lead counsel. Six applicants initially sought appointment, but after withdrawals and a notice of non-opposition, Edmund Jin, Pinchas Dan Danino, and Honggui Qu remained in contention.

Legal standard

Under the Private Securities Litigation Reform Act, the court generally presumes that the proposed plaintiff with the largest financial interest is the most adequate lead plaintiff if that person satisfies the relevant class-action requirements. The court focused on typicality and adequacy. Typicality asks whether the proposed lead plaintiff’s claims arise from the same conduct and injuries as the other class members’ claims. Adequacy asks whether the plaintiff and counsel can fairly and vigorously represent the class without conflicts or unique defenses that would dominate the case.

Analysis

Jin claimed losses of $18,208,257.26, Qu claimed losses of $2,401,783.33, and Danino claimed losses of $1,975,737.50. The court noted that Jin likely would have had the largest financial interest if losses alone controlled. But Qu and Danino argued that most of Jin’s losses resulted from writing put options rather than ordinary purchases of UCO shares. Jin did not deny that a large portion of his losses came from those transactions; the court stated that 82% of his losses were attributable to options-related transactions.

The court concluded that Jin’s options trading raised questions about whether he belonged in the proposed class of investors who purchased or otherwise acquired UCO securities and whether his incentives matched those of investors who traded UCO shares on the open market. The court determined that these unique factual issues could become a focus of the litigation and therefore declined to appoint Jin as lead plaintiff.

Danino challenged Qu’s loss calculation under the method discussed in Dura Pharmaceuticals, Inc. v. Broudo, arguing that Qu’s losses included trades occurring before the first alleged corrective disclosure. The court declined to apply that method at the lead-plaintiff stage because the complaint alleged multiple partial disclosures during the class period. The court found that the complaint’s allegation about UCO’s April 3, 2020 announcement of an impending reverse share split was insufficient, by itself, to establish the date of the first corrective disclosure. The court therefore accepted Qu’s claimed loss of $2,401,783.33.

The court found Qu typical because he traded UCO shares and allegedly suffered losses from the defendants’ statements, as did the other proposed class members. The court also found Qu adequate because he retained experienced counsel, had managed his own portfolio for approximately 25 years, and had a significant financial incentive to advocate for the class.

Lead counsel and disposition

The court approved Qu’s selection of Glancy Prongay & Murray LLP as lead counsel because the firm had experience prosecuting securities class actions and the court found no reason to doubt its ability to represent the class adequately.

Judge Naomi Reice Buchwald appointed Honggui Qu as lead plaintiff and Glancy Prongay & Murray LLP as lead counsel. The parties were instructed to submit an agreed schedule for filing any amended complaint and the response to it. The Clerk of Court was directed to terminate the specified pending motions.