The United States Oil Fund (USO US), the largest ETP globally to track changes in oil prices, is facing a class-action lawsuit related to an alleged breach of the 1934 Securities Exchange Act.
USO is facing scrutiny from law firm Robbins Geller Rudman & Dowd.
The lawsuit, filed in the Southern District of New York under Lucas v. United States Oil Fund, was brought by Robbins Geller Rudman & Dowd, a law firm specializing in securities litigation.
The charges against USO, as well as its sponsor United States Commodity Funds (USCF), refer to the fund’s management during extraordinary market conditions in early 2020.
Crude oil prices sunk to record lows this year due to a supply glut driven by sparring oil-producing nations and the Covid-19 pandemic’s impact on global demand.
The price of West Texas Intermediate (WTI) crude oil was overly affected due to acute storage issues associated with oil produced in the US. In April, the expiring WTI contract for May delivery remarkably sank far below zero as traders were desperate not to be stuck with oil they were unwilling or unable to take delivery of.
The price crash drove the futures market for crude oil into a state of ‘super contango’ where the price of futures contracts with later delivery was significantly higher than those with nearer delivery, leading to high rolling costs for investors.
During this turbulent period, USO, which historically provided exposure to front-month WTI oil futures contracts trading on NYMEX and ICE, began experiencing strong inflows from a mix of speculative traders – bullish investors seeking long exposure in case of a rebound in oil prices, as well as bearish investors seeking new shares to enact short positions. Over $5.8bn flowed into the ETF during March and April.
USO’s rapid growth caused the ETF to reach its position limit on individual futures contracts – regulation from the Commodity Futures Trading Commission states that no single investor may purchase over 25% of a given futures contract.
According to the complaint, due to USO accumulating a massive position in oil futures markets, the ETF served to exacerbate volatility by magnifying trading inefficiencies.
The firm of Robbins Geller Rudman & Dowd argues that USCF, as the operator of the largest oil ETF globally, possessed inside knowledge about the potential for negative consequences due to these trading inefficiencies. The firm alleges that by focusing on boosting its fee revenue, without regard for protecting investors from these negative consequences, USCF has breached its fiduciary duty to investors.
Moreover, USCF was eventually forced to adopt substantial changes to USO’s investment strategy. In a series of filings, USCF revised USO’s mandate to invest in a mix of WTI futures contracts with delivery dates stretching out as far as June 2021. The sponsor also expanded the mandate to include futures contracts for other types of oil and hydrocarbon fuel.
The plaintiff alleges that the change in strategy reduced investors’ exposure to the subsequent recovery in spot oil prices which began trending upwards near the end of April.
The class-action lawsuit has been brought on behalf of all investors that purchased shares of USO between 19 March and 28 April 2020.