Court orders ETF provider to pay Nasdaq $78 million for breach of contract

ETF Managers Group, a $3.8 billion asset manager has been ordered to pay Nasdaq nearly $80 million for violating a joint venture contract agreement.

The ruling last Friday in the U.S. District Court for the Southern District of New York wraps up a legal battle that began in October 2017, when Nasdaq filed a civil suit claiming that ETFMG illegally kept millions of dollars in management fees that were supposed to be shared with Nasdaq.

According to the lawsuit, ETFMG failed to honor a joint venture contractual profits agreement that involved PureFunds and the International Stock Exchange, which was acquired by Nasdaq in 2016. 

The suit claims that by mid-2017, the relationship between ETFMG and Nasdaq “ruptured,” resulting in “reciprocal allegations of breaches and, eventually, letters purporting to terminate parties’ contracts.” 

According to the lawsuit, Nasdaq was owed some of the asset management revenues from three ETFMG funds: the $1.6 billion ETFMG Prime Cyber Security ETF (HACK), the $821 million ETFMG Prime Mobile ETF (IPAY), and the $131 million ETFMG Prime Junior Silver Miners ETF (SILJ). 

ETFMG declined to comment for this story but in a statement said that the company will appeal the ruling of U.S District Court Judge Paul Engelmayer. 

“His findings are not consistent with relevant case law and fail to include numerous important factors. For example, Nasdaq cut off access to our indexes during the trading day to disadvantage ETF Managers Group at the risk of hurting investors in our funds,” the statement reads in part. 

ETFMG’s statement also argues that Nasdaq had a conflict of interest as the developer and index provider of First Trust Nasdaq Cybersecurity ETF (CIBR), a competitor to HACK. 

“In addition to our appeal, we will petition the SEC to investigate this abuse of power by Nasdaq and its abusive behavior toward smaller ETF issuers," the ETFMG statement said. “We continue to believe the contracts at issue are clear and that Nasdaq’s insistence that the terms be disregarded will be rejected on appeal.”  

According to Judge Engelmayer’s 166-page ruling, “ETFMG blatantly breached its contractual duty” to Nasdaq. 

The court also rejected ETFMG’s claims of an oral agreement that allowed ETFMG to retain the ETF profits. 

“Neither ISE nor Nasdaq waived their general preapproval right at any time, nor was ETFMG’s netting practice justified by any of Nasdaq’s business practices. Rather, it was blatant power grab by [ETFMG founder Sam] Masucci in an attempt to gain leverage over a partner that, Masucci felt, was ignoring or slighting him,” according the court ruling. 

A Nasdaq spokesman declined to comment beyond the following statement: “Nasdaq is pleased with the court’s ruling that acknowledged the significant damages we suffered from ETFMG’s breach of its contractual obligations. This is a victory for the ETF industry.” 

While ETFMG has stated that it plans to appeal, securities attorney Adam Gana, who was not involved in this case, said the chances of overturning the ruling on appeal are slim. 

“From the contours of the order, it seems pretty clear that Nasdaq has won their breach of contract case, and this looks like a done deal,” Mr. Gana said. “When you enter into a joint venture agreement, be prepared to follow through. You can’t just decide one day to walk away without suffering the consequences.”