Nasdaq sues operators of cyber security ETF, alleging theft

By Jonathan Stempel and Trevor Hunnicutt

NEW YORK (Reuters) – Nasdaq Inc on Thursday deepened a fierce battle over a $1.1 billion cyber security fund, suing a former business partner it said stole the exchange-traded fund (ETF) and several others, as well as the millions of dollars of profit they generate annually.

In a complaint filed in Manhattan federal court, Nasdaq accused ETF Managers Group LLC (ETFMG) and its founder Samuel Masucci of concocting frivolous reasons to take control of the ETFs, including the fund now known as the ETFMG Prime Cyber Security ETF.

Masucci said in a phone interview that he was unaware of the lawsuit, but that Nasdaq had violated terms of its agreements.

The lawsuit opened a new front over who may collect profits generated by the cyber fund, a one-time collaboration between a group now owned by Nasdaq, PureShares LLC and ETFMG.

Launched in 2014, the fund was among a relatively small group of ETFs that found success despite not having the backing of asset managers BlackRock Inc, Vanguard Group and State Street Corp, which attract the vast majority of ETF assets.

Smaller companies with ideas for new ETFs can take them to “white-label” providers like Summit, New Jersey-based ETFMG, who help get those products up and running.

Yet Nasdaq said the defendants breached an agreement to turn over some of the funds’ profits, and breached a wholesaling agreement by hiring an inexperienced Masucci-owned company to collect even more.

It said matters worsened on July 28 when ETFMG said the PureFunds name would be dropped from the cyber fund, whose ticker is “HACK,” and five others. PureShares also sued ETFMG in May.

“Nasdaq invested millions of dollars building the PureFunds line of ETFs into a valuable asset that produced hundreds of thousands of dollars in profits a month,” the complaint said.

Nasdaq is seeking a variety of compensatory and punitive damages, and an order preventing ETFMG and Masucci from any role in running the ETFs.

A spokesman for Nasdaq declined to elaborate.

ETFMG, in a statement, called the lawsuit “frivolous and based on a gross mischaracterization of the relationships and agreements at issue.”

Andrew Chanin, PureFunds’ chief executive, said “we’re looking forward to getting in front of the courts,” and that the issue could establish new precedents for the ETF industry.

“Nothing like this has ever gone to verdict before,” he said.

The case is Nasdaq Inc v Exchange Traded Managers Group LLC et al, U.S. District Court, Southern District of New York, No. 17-08252.

(Reporting by Jonathan Stempel and Trevor Hunnicutt; editing by Jennifer Ablan and G Crosse)