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Nasdaq Admits Over $1 Billion In Exchange-Traded Funds Stolen (#GotBitcoin?)

Adena Friedman appeared in court as exchange pursues claims against former business partner. Nasdaq Admits Over $1 Billion In Exchange-Traded Funds Stolen (#GotBitcoin?)

Nasdaq Inc. Chief Executive Adena Friedman testified Thursday morning in the exchange’s lawsuit against a former business partner that Nasdaq contends stole more than $1 billion in exchange-traded funds.

Nasdaq’s civil suit, filed in October 2017 in the U.S. District Court for the Southern District of New York, alleges that ETF Managers Group LLC improperly kept millions of dollars in management fees generated by funds including a popular cybersecurity ETF best known by its ticker HACK.

Nasdaq is asking the court for compensatory and punitive damages, and to enjoin ETF Managers Group from involvement in the funds. ETF Managers Group says Nasdaq engaged in a “pervasive pattern of misconduct” and is liable to ETFMG for millions of dollars.

Ms. Friedman’s brief testimony was the highlight of the two-week trial, which has drawn interest across the $4 trillion U.S. ETF industry. ETFMG hopes Ms. Friedman’s testimony will bolster their claim that Nasdaq is trying to “bully its way out” of contracts inherited in 2016 when the exchange acquired the International Securities Exchange, an options and data firm.

ETFMG’s attorney tried Thursday to paint Ms. Friedman as the director of Nasdaq’s efforts to get out of its contracts with ETFMG at any cost. Ms. Friedman testified that she had limited knowledge of the relationship with ETFMG, which is a small part of Nasdaq’s business. In the summer of 2017, after she was told by her staff that ETFMG wasn’t paying money owed to Nasdaq, she recommended that her staff find out what Nasdaq’s legal options were, she said.

Both Nasdaq And Etf Managers Group Declined To Comment

HACK—formally known as the PureFunds ISE Cyber Security ETF—launched in November 2014. The fund was the brainchild of the ISE, which brought the idea for a cybersecurity fund to Andrew Chanin, a former ETF trader who had co-founded an ETF startup called PureShares LLC.

ISE agreed to pay most of the operating costs for Mr. Chanin’s PureFunds ETFs in exchange for the lion’s share of any profits. Mr. Chanin’s slice would be as much as 30%.

To manage the day-to-day operations, ISE and Mr. Chanin brought in a firm led by Sam Masucci, a former Bear Stearns mortgage trader turned ETF entrepreneur. Mr. Masucci had been hired to turn a faltering ETF business, now ETF Managers Group, into a firm that helps other companies launch their own funds.

HACK was a surprise hit. Shortly after its debut, a network breach at Sony Pictures made cybersecurity a hot topic, and the fund raised more than $1 billion in its first year.

Though the ETF bore Mr. Chanin’s PureFunds brand, Mr. Masucci had significant control. As the adviser, Mr. Masucci’s firm oversaw the day-to-day management of the ETFs, including the fees paid by investors, court records show. For years, Mr. Masucci paid subcontractors, collected his own fees and then forwarded any profits to ISE, which paid Mr. Chanin’s cut. Mr. Masucci is also president of the fund’s three-member board of trustees.

Mr. Masucci, who is named as a defendant in Nasdaq’s suit against ETFMG, declined to comment.

After Nasdaq bought ISE in June 2016, the relationship with ETF Managers Group quickly soured.

“ETFMG saw its opportunity to push Nasdaq out of HACK and the PureFunds ETFs,” Nasdaq wrote in an April memo to the court. “Indeed, ETFMG calculated just how much money—more than $1.4 million a year—it stood to gain by ending its relationship with Nasdaq.”

ETF Managers Group denies this, and said Nasdaq reneged on its agreements, including a separate ETF marketing contract.

In July 2017, ETF Managers Group cut ties with Nasdaq and renamed HACK as the ETFMG Prime Cyber Security ETF. In May 2017, Mr. Chanin filed his own lawsuit against ETF Managers Group, which is pending in New Jersey Superior Court. Mr. Chanin declined to comment.

Ms. Friedman’s testimony may not have much bearing on the outcome of the litigation. The case hinges on a series of contracts that governed the financial relationship among Pure Funds, ETF Managers Group and Nasdaq. Judge Paul Engelmayer’s decision isn’t expected for several weeks.

Updated: 12-20-2019

Nasdaq Prevails in Lawsuit Over Alleged ETF Theft

Judge rules against ETF Managers Group, resolving long legal battle.

Nasdaq Inc. prevailed in its lawsuit against a former business partner it accused of stealing more than $1 billion in exchange-traded funds, including a popular cybersecurity ETF.

The former business partner, ETF Managers Group LLC, owes Nasdaq $80.6 million for improperly siphoning off fees for managing the funds, a federal judge in New York ruled on Friday.

ETF Managers Group “blatantly breached its contractual duty to furnish those profits to Nasdaq,” Judge Paul Engelmayer of the U.S. District Court for the Southern District of New York wrote in an opinion accompanying his ruling.

The ruling resolved a legal battle that lasted more than two years, culminating in a trial in May. At its heart was a $1.5 billion fund that invests in cybersecurity companies and is best known by its ticker, HACK.

Launched just days before the 2014 breach of Sony Pictures Entertainment, HACK became one of the most successful niche ETFs in history, attracting over $1 billion in seven months after it began trading. HACK investors have been largely unaffected by the legal squabble, which revolved around who had the rights to collect fees for running the fund.

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

ETF Managers Group said it disagreed with Judge Engelmayer’s opinion and would appeal. “His findings are not consistent with relevant case law and fail to include numerous important factors,” the firm said in a statement.

New Jersey-based ETF Managers Group runs ETFs and helps would-be ETF providers launch new funds by handling their back-office operations. Its funds include the largest cannabis-themed ETF in the U.S., which trades under the ticker MJ.

In October 2017, Nasdaq sued the firm, saying it “fabricated frivolous legal claims” to take control of HACK and several other funds, depriving Nasdaq of millions of dollars of profits. At the time Nasdaq said HACK was generating profits of more than $300,000 a month through collecting fees from investors.

ETF Managers Group said no theft occurred because Nasdaq wasn’t the rightful owner of the funds. The firm said Nasdaq owed it money, rather than the other way around.

ETFs have gained popularity in recent years by offering investors an easy way to get exposure to dozens or hundreds of stocks or bonds, often in a particular industry or country. But most investors know little about their complex inner workings.

The roots of the dispute date to 2012, when ETF Managers Group entered into an agreement with the International Securities Exchange, an options-exchange operator that also had an ETF business, court filings show. Under that agreement, ETF Managers Group was to handle back-office operations for several ETFs that had been conceived by a third firm, PureShares LLC, which does business as PureFunds.

Nasdaq acquired ISE in 2016, inheriting its ETF business. Nasdaq and ETF Managers Group fell out soon afterwards, and ETF Managers Group rebranded the PureFunds ETFs under its own name.

Nasdaq accused ETF Managers Group of unlawfully seizing control over the funds. ETF Managers Group said it acted lawfully and took profits from HACK to compensate for funds that Nasdaq owed it for a separate contract.

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