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California Court Rules for BlackRock in ETF Risk Disclosure Case

The California Superior Court in San Francisco recently found that plaintiffs did not have standing to bring 1933 Act claims against BlackRock in litigation resulting from the August 2015 ETF “flash crash” that caused extreme volatility and significant losses for ETF investors. Lawyers cited in a Wall Street Journal report said the court’s decision may limit investors’ ability to sue ETF providers for leaving out or misrepresenting risks in fund registration statements. The plaintiffs had purchased shares of ETFs in the secondary market and claimed that the shares were sold pursuant to an unlawful registration statement that did not disclose the liquidity risk posed by situations such as flash crashes.  The defendants argued that the plaintiffs had standing to sue only if they could trace their ETF shares back to shares that were originally sold pursuant to a materially false or misleading registration statement or prospectus. The plaintiffs could not trace their shares back to the registration statements at issue and argued that no tracing was required. A key dispute in the case focused on the applicability of the different standing requirements under the 1933 Act and 1940 Act. The court agreed with defendants that the applicable standing requirement does not apply to sales of shares on the open, or secondary, market, but only to the initial sale of shares to the authorized participants of an ETF, consistent with the 1933 Act.