XShares Sues Founders, CEOs and Managers

XShares Group, the ETF sponsor of the HealthShares family of ETFs, filed a lawsuit against its own founders, Jeffrey Feldman and Anthony Dudzinski, its former and current chief executive officers, and seven other company managers or officers, alleging actions that enriched the officers to the detriment of the company.

According to a filing with the Supreme Court of New York state Donald Aven, XShares executive vice president of national sales, and Samuel Aven, charged the 11 defendants with breach of fiduciary duty, breach of loyalty duty, theft of business opportunity, corporate mismanagement, misappropriation of corporate assets, self-dealing, and fraud.

The lawsuit lists a series of charges:

  • That former CEO William Henson and current interim CEO Joseph Schocken received bonuses and other compensation that represented a conflict of interest with XShares
  • That the defendants diverted a corporate opportunity by allowing investor Grail Partners to misappropriate XShares business model.
  • That the company failed to meet capital and regulatory requirements by not maintaining separate books and records for XShares and its subsidiaries.
  • That the directors failed to provide adequate or not misleading disclosures to investors.
  • That the defendants failed to secure proper legal opinions for corporate actions.
  • That the defendants allowed the payment of excessive compensation to the officers.
  • That the defendants provided liquidation and other preference to third party investors to the detriment of XShares.

Representatives for XShares declined to comment on the lawsuit.

It’s been a rough year for the small ETF sponsor. At the end of the first quarter, after just five months on the job, CEO Henson left the firm for an unexplained leave of absence. Then in July, Dudzinski unexpectedly left “to pursue some other opportunities.” He had served as president and board member of XShares Group, the parent company, and as chief executive officer of XShares Advisors, the ETF provider. Around the same time the firm cut a large part of its sales staff.

The turmoil in the executive suite was mirrored on the product line. The firm closed its AdelanteShares family of seven real estate ETFs in June. In their nine months of existence they accumulated only $17 million of assets under management. Then in August, the firm’s flagship ETF family, the HealthShares, underwent a major overhaul. XShares closed 15 of the 19 ETFs focuses on highly specialized areas of the health-care industry. At the time of the reorganization, the 19 HealthShares held a total of $100 million in assets under management, with about half of that in the four surviving funds.

The four remaining ETFs:

  • HealthShares Cancer Exchange Traded Fund (HHK)
  • HealthShares European Drugs ETF (HRJ)
  • HealthShares Diagnostics ETF (HHD)
  • HealthShares Enabling Technologies ETF (HHV), which will be renamed HealthShares Drug Discovery Tools ETF.

In October, the benchmark indexes for all four were redesigned to hold between 28 and 35 stocks, up from the 22 with which they originally launched. All four also lowered their expense ratios to 0.60%, except for European Drugs, which charges 0.72%. The TDAX series of lifecycle ETFs that XShares launched in partnership with TD Ameritrade continue to trade.

 

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