ETF Issuer Ordered To Pay $80M To Nasdaq

December 20, 2019

A two-year court battle over the allegedly stolen ETF fees came to a head Friday when a judge ordered ETF Managers Group (ETFMG) to pay almost $80 million to its former partner Nasdaq Inc.

At the heart of the dispute is who is entitled to the profits from the former PureFunds ETFs, especially the popular cybersecurity exchange-traded fund best known by its ticker ETFMG Prime Cyber Security ETF (HACK).

Fee Fund Fight

Nasdaq filed a civil suit in October 2017 in the U.S. District Court for the Southern District of New York alleging that ETFMG illegally kept millions of dollars in management fees generated by the funds.

On Friday, U.S. District Court Judge Paul Engelmayer sided with Nasdaq.

The court further funds that ETFMG blatantly breached its contractual duty to furnish those profits to Nasdaq and PureShares by appropriating these profits for itself, as it continues to do this day,” Engelmayer wrote in his 166-page ruling.

ETFMG issued a statement Friday saying they disagree with Engelmayer's ruling and will appeal. 

Joint Venture Agreement

The funds were a joint venture among ETFMG, PureFunds and the International Stock Exchange (ISE), which was bought by Nasdaq in 2016.

ISE, and later Nasdaq, paid the operating costs for the funds in exchange for most of the profits. The funds traded under the PureFunds brand, but ETFMG had significant operational control. 

HACK, which now has $1.5 billion in assets, was by far the most successful, generating about $300,000 a month in operating profits, according to estimates Nasdaq provided to the court.

The relationship among Nasdaq, PureFunds and ETFMG soured after Nasdaq purchased ISE. In 2017, ETFMG ousted PureFunds, stripped the PureFunds brand from the funds and replaced it with the ETFMG name.

Nasdaq Claims

Nasdaq claimed that ETFMG also began pocketing the operating profits for HACK and two other profitable PureFunds ETFs: a mobile payments fund, ETFMG Prime Mobile Payments ETF (IPAY) and ETFMG Prime Junior Silver Miners ETF (SILJ), a silver-mining fund. The damages awarded to Nasdaq by Judge Engelmayer includes lost and prospective profits for the three ETFs.

“Nasdaq is pleased with the court’s ruling that acknowledged the significant damages we suffered from ETFMG’s breach of its contractual obligations,” Matthew Sheahan, a Nasdaq spokesman, said in an emailed statement. “This is a victory for the ETF industry.”

The damages award includes the share Nasdaq would have forwarded to PureShares “but for ETFMG’s theft of all profits,” Engelmayer wrote.

Andrew Chanin, founder and CEO of PureShares, said Friday that he’s pleased Nasdaq prevailed. “It’s clearly not done yet but it’s really nice to see something positive.” Chanin has a separate lawsuit against ETFMG that is still pending in New Jersey Superior Court.

For the time being, Friday’s ruling does not appear to change ETFMG’s role as the adviser of the funds, the ETFs continue to trade under the ETFMG brand.

Asjylyn Loder is a freelance writer in New York. She can be reached at [email protected].

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