Tag Archives: lawsuit

Select Sector SPDRs Sue Over Shadow Symbols

The Select Sector SPDR Trust sued INVESCO PowerShares Capital Management over ticker symbols. Filed Thursday in U.S. District Court in Houston, the suit charges PowerShares with trademark infringement and misappropriation.

Select Sector SPDRs offers a family of ETFs that divides the S&P 500 into nine individual sector funds. In April, PowerShares launched a family of nine sector ETFS for the small-cap market based on the S&P 600, a small-cap index. (Blog Postings: Small-Cap Investors Get Sector Funds and Sector ETFs Help You Avoid Single-Stock Risk)

The PowerShares funds, which trade on the Nasdaq Stock Market, use four-letter ticker symbols that add an “S” to the end of the ticker for the Select Sector SPDR funds covering the same industry. Those trade on the NYSE Arca.

“This is a deliberate and unconscionable act on the part of PowerShares to confuse both institutional and retail investors,” said Dan Dolan, director of wealth management strategies for the Select Sector SPDR Trust in a written statement. “PowerShares has succeeded in casting an unfortunate shadow on Wall Street’s efforts to eliminate financial opacity.”

Dolan noted that 101 out of 102 ETFs previously launched by PowerShares have tickers that start with “P.” The sector funds in question are the only products in PowerShares ETF family that begin with an “X.”

Below is a list of the funds side-by-side:

Sector SPDR Consumer Discretionary (XLY)
PowerShares S&P SmallCap Consumer Discretionary Portfolio (XLYS)

Sector SPDR Consumer Staples (XLP)
PowerShares S&P SmallCap Consumer Staples Portfolio (XLPS)

Sector SPDR Energy (XLE)
PowerShares S&P SmallCap Energy Portfolio (XLES)

Sector SPDR Financials (XLF)
PowerShares S&P SmallCap Financials Portfolio (XLFS)

Sector SPDR Health Care (XLV)
PowerShares S&P SmallCap Health Care Portfolio (XLVS)

Sector SPDR Industrials (XLI)
PowerShares S&P SmallCap Industrials Portfolio (XLIS)

Sector SPDR Materials (XLB)
PowerShares S&P SmallCap Materials Portfolio (XLBS)

Sector SPDR Technology (XLK)
PowerShares S&P SmallCap Information Technology Portfolio (XLKS)

Sector SPDR Utilities (XLU)
PowerShares S&P SmallCap Utilities Portfolio (XLUS)

Calling the PowerShares symbols “astoundingly similar,” Dolan told the Wall Street Journal: “I don’t think there’s any other way of looking at it than they’re trying to jump on our back.”

He’s right, of course. If PowerShares planned to latch onto this already understood product, it was a brilliant marketing strategy. The Select Sector SPDRs are probably the most recognizable ETFs in the world. Their marketing campaign of spiders making webs in the shapes of industry icons, such as an oil rig for its energy ETF or a stethoscope for the health care ETF, has been a huge success, both in explaining that ETFs are financial products and what a select sector is. Traders, large and small, call stocks by their tickers not their company names. So, if you wanted the small-cap fund for energy, instead of XLE, you would simply remember the “S” for small.

The question becomes who owns a ticker symbol and can you trademark the first two or three letters of a ticker symbol? Currently, the Intermarket Symbols Reservation Authority, run by the Options Clearing Corp., or OCC, assigns ticker symbols to companies and ETFs. “The ISRA operates a uniform, transparent system for the selection, reservation, assignment and transfer of securities trading symbols by NMS Plan participants.”

Since there are only so many possibilities for three- and four-letter combinations, aren’t there always going to be tickers similar to yours? For instance, most people assume INTL is the ticker for Intel, but it’s not; it’s INTC. Surprisingly, among the many media outlets that reported this story, no one seems to have called the OCC for its opinion.

I did, but the OCC hasn’t gotten back to me.

Meanwhile, I would say the amount of market confusion is minimal. The Journal says the nine Select Sector SPDRS have $31 billion in assets under management. Meanwhile, the nine PowerShares funds in question hold only $50 million. Most hold less than $6 million, and have an average daily trading volume of less than 10,000 shares a day. The Select Sector SPDRS see average daily volumes in the tens of millions.


Court Dismisses XShares Lawsuit

Jeffrey Feldman and the rest of the XShares executive suite caught a break.

The Supreme Court of New York dismissed the lawsuit XShares Group, the ETF firm he founded, filed against Feldman, his former partner Anthony Dudzinski, its former and current chief executive officers, and seven other company managers or officers.

In a story first reported on this blog, Donald Aven, a former executive vice president of national sales for the XShares Group, the parent company of XShares Advisors, the ETF sponsor; and his brother, Samuel Aven, an investor in the company; filed the suit in August. They alleged that the 11 defendants committed breach of fiduciary duty, breach of loyalty duty, theft of business opportunity, fraud, and other actions that enriched the officers to the detriment of the company.

According to a written statement XShares released Tuesday, Supreme Court Justice Charles E. Ramos stated on Nov. 25 that no proper amended complaint had been put before the court. Judge Ramos also found that the caption was incorrect in naming XShares Group, as the plaintiff instead of the Avens’ as plaintiffs individually and on behalf of the company, said XShares. As a result, the court ordered that the caption be changed accordingly and that the action be dismissed outright,

“We are pleased with the Court’s decision,” said Feldman, founder and chief strategist at XShares, in a written statement.

And why wouldn’t he be. It’s the first good news the firm has had all year.

One should note, the lawsuit wasn’t dismissed for lack of cause, but rather on a technicality. Still, it’s an early Christmas present for a firm that hasn’t had much to cheer about this year.

Just a few weeks ago, the firm closed the four remaining HealthShares ETFs that had been the firm’s flagship product. Launched in January 2007 with 19 ETFs tracking narrow niches of the health care industry, HealthShares was XShares first family of ETFs. Earlier this summer, XShares also closed down its family of ETFs that tracked the real estate market.

XShares continues to manage the TDAX lifecycle ETFs for TD Ameritrade. These funds are currently outperforming the S&P 500 according to a TD Ameritrade spokesperson.

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.