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Richard Greenberg and Epic, LLC v. Pro Shares Trust and Pro Fund Advisors

July 7, 2011

RICHARD GREENBERG AND EPIC, LLC, PLAINTIFFS-APPELLANTS,
v.
PRO SHARES TRUST AND PRO FUND ADVISORS, LLC, DEFENDANTS-RESPONDENTS.



On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket No. L-1101-09.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued April 4, 2011

Before Judges C.L. Miniman and LeWinn.

Plaintiffs Richard Greenberg (Greenberg) and Epic, LLC (Epic), appeal from the dismissal of their second amended complaint against defendants Pro Shares Trust (Pro Shares) and Pro Fund Advisors, LLC (Pro Fund), with prejudice on July 9, 2010. They also appeal from a September 22, 2010, order denying their motion for reconsideration. We now affirm.

Plaintiffs' second amended complaint alleges that Greenberg is a Florida resident "who invests from time to time in publicly-traded securities." Epic is a Delaware company with offices in Parsippany. Greenberg is Epic's Manager and "invests with it from time to time." Pro Shares is a Delaware business trust with principal offices in Maryland. It is a registered investment company with several exchange-traded funds (the Funds) listed on the American Stock Exchange. Pro Fund is affiliated with Pro Shares and allegedly provides advisory services to the Funds.*fn1 It maintains offices with Pro Shares.

The second amended complaint further alleges that Pro Shares establishes investment securities through the Funds and publishes and disseminates a Prospectus. The Prospectus "generally represent[s] [t]he Funds to be investments whose values correlate to the performance of an established benchmark or index." Some of the Funds are established as "long purchases" that fluctuate with the price performance of an indeX or benchmark; others are "short purchases" that fluctuate inversely to an index or benchmark; and others fluctuate based on a designated multiple of an index or benchmark. "Ultra Pro Shares" are investments that "have price[-]return characteristics double (200%) of the underlying index." "Short Pro Shares" and "Ultra Short Pro Shares" have "price[-]return characteristics equal to, or equal to a multiple of, the inverse of the underlying index," respectively.

According to the second amended complaint, Michael P. Warren (Warren), Regional Vice President of Pro Fund, made a sales visit and presentation at Greenberg's offices on or about August 1, 2008. Greenberg's registered investment advisor and a second registered investment advisor were also present. "Warren provided assurances and made material representations about the performance of Pro Shares, with a particular emphasis upon the performance of the Ultra Pro Shares and Ultra Short Pro Shares." He "expressly represented that the Ultra Short Pro Shares price performance for indices, including international indices, would fluctuate at a price of 200% of the inverse of the designated index and the Ultra Pro Shares would fluctuate at a price of 200% of the designated index." He also "represented that these securities could be held as long-term investments; and[] they would perform as represented regardless of the time period involved." Further, "Warren knew, or should have reasonably known, that the aforesaid representations were false or misleading[, and] were made with the intent that Greenberg rely upon same and make investment purchases in the Funds offered by Pro Shares."

Plaintiffs alleged that they invested heavily in Ultra Pro Shares and Ultra Short Pro Shares, but the securities did not have a price performance equal to twice the performance or twice the inverse of the performance of the designated indices and benchmarks. They alleged that they were induced to make these purchases based on material misrepresentations or omissions of fact. They pled in their first count deceit and a scheme or artifice to defraud, unknown to Greenberg, which violated the New Jersey Uniform Securities Law (NJUSL), N.J.S.A. 49:3-71, and sought compensatory damages, interest, counsel fees, and costs of suit. In their second count, plaintiffs reserved the right to tender the return of their shares and seek a refund pursuant to the NJUSL. In their third count, plaintiffs alleged common law fraud, seeking compensatory and punitive damages.

On or about March 19, 2010, defendants filed a motion to dismiss and submitted a copy of the October 1, 2008, Prospectus for Pro Shares Trust. Defendants argued that plaintiffs' reliance on Warren's alleged statements was not reasonable because the alleged oral statements were "expressly contradicted by the disclosure included in the Prospectus cited in Paragraph 10" of the second amended complaint. They urged that reliance on oral statements in connection with securities sales that are expressly contradicted by the Prospectus is not, as a matter of law, reasonable. They also asserted that plaintiffs had not sufficiently pled injury and scienter.

In Greenberg's opposing certification, he stated that the 2008 Prospectus was "not the Prospectus that [he] received when the initial decision was made to invest." He appended "a true copy of the Prospectus [he] received, which is dated October 1, 2007."*fn2 He further asserted:

I am aware the [d]efendants contend that the Investment Objective Section of the Prospectus provided notice to investors that the Pro Shares investments would only perform as represented if "day traded."

This characterization is inaccurate. I did not read this Section of the Prospectus, and do not now read this Section of the Prospectus, to caution or warn an investor that these securities must be "day traded."

Greenberg also claimed that the Prospectus contained inconsistencies and did not state that there was a risk associated with holding the securities for more than a day. Instead, it suggested that the securities would "perform as represented for a period well in excess of one day," as reflected in various charts, citing numerous pages of the Prospectus.

At oral argument, defendants argued that the Prospectus, which Greenberg admitted to having, clearly indicated that the investments were designed to perform according to a daily benchmark and described the high risks involved with the investments. Plaintiffs, on the other hand, argued that their second amended complaint referenced the Prospectus "just to reiterate the fact that there was [sic] some machinations---- representations that bolster what was orally represented to [Greenberg]. Not that [plaintiffs] relied on the [P]rospectus."

When Judge W. Hunt Dumont asked if Greenberg had the Prospectus, plaintiffs' counsel responded, "[H]e did get a [P]rospectus at some point." Counsel further advised the judge that the date when Greenberg received the Prospectus was "certainly a fact that's not set forth in the pleadings." Counsel also maintained that the Prospectus suggested the securities would "perform as represented for well in excess of a day." The judge also asked plaintiffs' counsel whether the investments were high-risk securities in which average investors would not be involved. Counsel replied that he would not admit that they were high risk securities, but did admit that Greenberg was a sophisticated investor who had a company handling his investments. Counsel asserted that common-law fraud and claims under the NJUSL did not have identical elements, with common-law fraud requiring reasonable reliance, and asked to proceed with discovery on the issue of reliance.

Defense counsel then argued that, as a matter of law, "[w]hen the [P]rospectus is directly contradicted by what you are allegedly told, . . . there cannot be reasonable reliance." Further, he argued that both common law and statutory claims required reliance, and there was not "a difference between reliance and reasonable reliance."

The judge held, "[W]here the complaint references and . . . incorporates a document, that document is deemed part of the complaint, and the [c]court may consider that evidence in the context of a motion to dismiss." The elements of common-law fraud were "a material misrepresentation of a presently existing or past fact, knowledge or belief by the defendant of its falsity, an[] intention that the other person rely on it, reasonable reliance thereon by the other person [and] resulting damages." He observed that more securities cases were brought at the federal level under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (2010) (Rule 10b-5), but the NJUSL had similarities to Rule 10b-5. Relying on an unreported decision by the United States District Court for the District of New Jersey, he found that both common law fraud and the NJUSL contain substantially the same elements, with the latter requiring an untrue act or omission, scienter, causation, and injury to the plaintiff.

The judge questioned whether Warren's alleged misrepresentations satisfied the first element as his statements were "basically his opinion, or the opinion of the company." He noted that "the defense points out that [Greenberg] had a prospectus," which was "referred to" in the second amended complaint. He ...


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