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 to Liquidate Last Four HealthShares

XShares Advisors announced on Wednesday that it plans to liquidate the four remaining HealthShares ETFs at the end of the year and subsequently dissolve the HealthShares registered investment company.

The four ETFs are the HealthShares Cancer Exchange Traded Fund (HHK), HealthShares European Drugs ETF (HRJ), HealthShares Diagnostics ETF (HHD), HealthShares Drug Discovery Tools ETF.(HHV).

The funds’ board of directors decided to take the action in light of the current market conditions. Since their inception the HealthShares funds had been unable to attract significant market interest. Launched in January 2007 as a family of 19 funds, HealthShares offered portfolios that tracked extremely narrow, highly specialized areas of the health-care industry, such as cardiology, orthopedics and dermatology.

In August, with only a total of $100 million in assets under management, Xshares, the investment advisor to the fund, closed 15 of the 19 ETFs. The four remaining funds held about half the total assets. Then in October, the benchmark indexes for the surviving 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 charged 0.72%. This move came on the heels of Xshares closing 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. Also in June, Xshares sued its chairman, founders, current and former CEOs and others for fraud and other charges.

The HealthShares board on Wednesday said the funds’ future viability and prospects for growth in assets in the foreseeable future were not encouraging. Thus, the board determined that it was in the best interests of the funds and their shareholders to liquidate
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“We continue to believe in the fundamentals of the healthcare industry. Unfortunately under these tough market conditions, the Funds were unable to achieve meaningful investor traction,” said Joseph L. Schocken, chairman and chief executive officer of XShares Group, parent company of Xshares, in a written statement. “We remain strongly committed to bringing our products now under review to market. In 2009, we expect to launch additional products related to the environment and infrastructure.”

The TDAX series of lifecycle ETFs that XShares launched in partnership with TD Ameritrade continue to trade.

The HealthShares last day of trading on the NYSE Arca and the last day share may be purchased or redeemed will be Dec. 23. Trading will halt before the open Dec. 24. From Dec. 24, through Dec. 31, shareholders may sell their Shares to certain broker-dealers who may determine to continue to purchase such shares, but there can be no assurance that any broker-dealer will be willing to purchase the shares or that there will be a market for the shares. All shareholders remaining on Dec. 31, 2008 will receive cash equal to the amount of the net asset value of their shares that day.

For additional information about the liquidation, shareholders may call XShares at 1-800-925-2870.

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.