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Law360 (September 17, 2020, 8:32 PM EDT) -- Robbins Geller Rudman & Dowd LLP will lead a consolidated securities suit in New York federal court accusing the United States Oil Fund LP of misleading investors about the risks posed by "exceptional threats" like an oil price war between Russia and Saudi Arabia and the COVID-19 pandemic.
U.S. District Judge Paul G. Gardephe said Wednesday that Robbins Geller's client, Nutit A.S., has claimed the most losses as a result of USO's alleged decision to belatedly disclosed those threats and their impacts in April and May, after the fund had already lost billions of dollars and was forced to transform its investment strategy.
Three investor sets were vying for lead plaintiff in the case, but Nutit, a Czech Republic-based joint stock company, claimed to have lost more than $13.5 million compared with Nevada-based Heritage Investment Corp.'s alleged $6.2 million in losses and a group of investors' $1.5 million.
"Given that Nutit's losses are more than double Heritage's losses, the court concludes that Nutit has the largest financial interest in this litigation and is therefore the presumptive lead plaintiff," Judge Gardephe. "Heritage's arguments to the contrary are not persuasive." The judge also consolidated the three suits.
Founded in 2006 by sponsor United States Commodity Fund LLC, USO is an exchange-traded fund that gives retail investors exposure to the oil market by using near-term futures contracts to track the price of West Texas Intermediate light sweet crude oil, which declined a record 306% on April 20 to minus $36.98 per barrel.
The crash, attributed to a worldwide collapse in oil demand due to the COVID-19 pandemic and a lack of storage for crude oil, led to huge losses for USO, whose investment strategy was to automatically sell its front-month futures contracts and buy up the following month's if the latter has a higher contract price.
The strategy forced USO to replace its futures contracts with more expensive ones as oil prices crashed, leading the fund to state in late April that it may no longer be able to reflect the spot prices of oil and would reshuffle its funds to futures contracts with later expiration dates. On April 21, the fund said it had issued all of its remaining shares and announced a one-for-eight reverse stock split the following day.
The reverse split dramatically reduced USO's number of outstanding shares while increasing their price, which had fallen about 30% between April 20 and April 22.
USO has received notices from both the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission that the agencies were separately considering enforcement actions over the fund's disclosures surrounding the oil price crash.
Since June, USO investors have targeted the fund, USCF and its CEO John Love with three securities fraud suits in New York federal court, and on Aug. 10, another shareholder filed derivative claims against USO's top brass for allegedly failing to act in good faith in connection with a March stock offering and to acknowledge the consequences of extraordinary market conditions, like a shortage of capacity at an oil storage facility in Oklahoma or the Saudi Arabia-Russia price war, until after the April crash.
"Because of the nature of USO's investment strategy, these converging factors caused the fund to suffer exceptional losses and undermined the fund's ability to meet its ostensible investment objective," the investors claim.
USO hasn't filed a motion to dismiss the three securities suits, but it has said in regulatory filings that it will "vigorously contest such claims and move for their dismissal."
Labaton Sucharow LLP and Pomerantz LLP each put in bids for appointment as lead counsel in the case, but Robbins Geller will be taking up the case alongside Bronstein Gewirtz & Grossman LLC.
Each of the firms' lead plaintiff applicants calculated their losses based on the same class period, but after learning that Nutit was alleging the highest losses, the Labaton-backed Heritage asked the court to use a shortened class period to assess losses, which would have given Heritage an edge over Nutit.
But Judge Gardephe said Heritage's "change of approach," having come after learning of Nutit's lead, "is all the more reason to reject Heritage's attempt to truncate the class period."
"Nutit has retained competent and experienced counsel, and has pleaded a loss suggesting that it will have a strong interest in advocating on behalf of class members," the judge said.
Counsel for Nutit declined to comment. Counsel for the other parties did not immediately respond to requests for comment Thursday.
Nutit is represented by Samuel H. Rudman, David A. Rosenfeld, Vincent M. Serra, Danielle S. Myers, Juan Carlos Sanchez and Brian E. Cochran of Robbins Geller Rudman & Dowd LLP and Peretz Bronstein and Eitan Kimelman of Bronstein Gewirtz & Grossman LLC.
Heritage is represented by Christopher J. Keller, Eric J. Belfi, Francis P. McConville and David J. Schwartz of Labaton Sucharow LLP and Brian Schall and Rina Restaino of The Schall Law Firm.
The third investor set is represented by Jeremy A. Lieberman, J. Alexander Hood II and Patrick V. Dahlstrom of Pomerantz LLP and Lesley F. Portnoy of the Portnoy Law Firm.
US Oil Fund is represented by Amy D. Roy, Jessica M. Bergin and Robert A. Skinner of Ropes & Gray LLP.
The case is In re: United States Oil Fund LP Securities Litigation, case number 1:20-cv-04740, in the U.S. District Court for the Southern District of New York.
--Editing by Brian Baresch.
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