(Bloomberg) -- Running an exchange-traded fund doesn't come cheap -- but the rewards are there for those who build something big.
That's the takeaway for wannabe issuers from a lawsuit filed last week by Nasdaq Inc. regarding several funds, including HACK, a $1.1 billion cyber-security ETF. The exchange operator -- which in 2016 bought International Securities Exchange, the firm that helped develop HACK -- is suing a company that ran the fund's day-to-day operations for breach of contract, among other complaints. The sponsor, PureShares LLC, sued that same company as well in May.
Nasdaq alleges that ETF Managers Group LLC, ETFMG's parent and ETFMG's chief executive “misappropriated” the funds. In August, the formerly named PureFunds ISE Cyber Security ETF became the ETFMG Prime Cyber Security ETF, regulatory filings show.
“We had to take steps that allowed for the proper operation and continuity within the funds,” Sam Masucci, ETFMG's CEO said by phone on Oct. 27. The lawsuit arose from a disagreement over repricing HACK that turned sour, he said. ETFMG's lawyers described the case as “frivolous” in a statement last week.
Andrew Chanin, founder of PureShares, which does business as PureFunds, is “still digesting” the Nasdaq suit and “looking forward” to getting his own case in front of the courts, he said by phone on Monday.
Matthew Sheahan, a spokesman for Nasdaq, declined to comment beyond the lawsuit.
While the court has plenty to consider, here's what investors can learn about the fund's finances from the filing:
- HACK allegedly generated a profit of more than $300,000 per month.
- Nasdaq, and formerly ISE, took home 70 percent of the earnings.
- ETFMG allegedly received between $30,000 and $50,000 to start each fund, plus more than $200,000 per year to operate them. Masucci said the figure's higher: from $50,000 to $75,000 to start the funds and as much as $300,000 to run them.
- ETFMG spent $102,000 in 2015 and $131,000 in 2016 in wholesaling expenses. That exceeded a $50,000 ceiling that Nasdaq, which had to pay “certain expenses,” says applied in this instance. Masucci maintains the higher expenses had been agreed upon and that there were no complaints until Nasdaq acquired ISE.
- ETFMG spent $432,000 in 2015 and $396,000 in 2016 on wholesalers' compensation. That exceeded the $250,000 that Nasdaq says it agreed to pay for two salespeople. Masucci says ETFMG hired four salespeople and that ISE approved this.
The lawsuit was filed in federal court in Manhattan on Oct. 26.
To contact the reporters on this story: Rachel Evans in New York at revans43@bloomberg.net, Sarah Ponczek in New York at sponczek2@bloomberg.net.
To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Eric J. Weiner, Andrew Dunn
©2017 Bloomberg L.P.
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