It had to happen… But the first class action against Fazzie (as FAZ is affectionately known at Rebel Traders)  has just begun in New York, alleging the wrong tracking of the Russels Financial, an incorrect inverse relationship, the consequences of market volatility on the return (Note of RT: no seriously? You invest in a 3x fund and you complain about how leverage decay kills you?!), the role of FAZ in increasing market volatility, FAZ causing dislocations in the stock market, etc, etc…

A number of these complaints have to do with ignorance from investors about the investing or trading tools they play with (I don’t count the number of people playing with ETF’s and posting on the RT chat, but who don’t ever seem to have read the prospectuses).

Another series of these complaints is linked to the commonly admitted “fantasies” some harbor about FAZ and leveraged inverse ETF’s.

As a lawyer, I would say that the only complaint that would stand some chance in court would be the imperfect correlation of FAZ to the index. The other points made are rather related to the ignorance or the stupidity of the investors. Now, it is known that US courts have often given a “premium for stupidity” in many precedents.

At any rate, FAZ is about to make other victims: the people joining the class action. Just like Direxion, the lawyers are going to be able to profit of people ignorant of the workings of law and of finance.

On September 18, 2009, Federman & Sherwood filed the first class action lawsuit in the United States District Court for the Southern District of New York against Direxion Shares ETF Trust and others on behalf of any and all investors who purchased or otherwise acquired shares of Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) (the “FAZ Fund”) during the Class Period of November 3, 2008 through April 9, 2009. The Complaint alleges violations of federal securities laws, including Sections 11 and 15 of the Securities Act of 1933.

The FAZ Fund seeks investment results that correspond to three times the inverse (-300%) daily performance of the Russell 1000 Financial Services Index (“RFSI”), which measures the performance of the financial services sector of the U.S. equity market. The complaint alleges the Defendants violated the Securities Act by failing to disclose that the FAZ Fund is altogether defective as a directional investment play. Defendants failed to disclose the following risks in the Company’s Registration Statement: (1) inverse correlation between the FAZ Fund and the RFSI over time would only happen in the rarest of circumstances, and inadvertently, if at all; (2) the extent to which performance of the FAZ Fund would inevitably diverge from the performance of the RFSI — i.e., the probability, if not certainty, of spectacular tracking error; (3) the severe consequences of high market volatility on the FAZ Fund’s investment objectives and performance; (4) the severe consequences of inherent path dependency in periods of high market volatility on the FAZ Fund’s performance; (5) the role the FAZ Fund plays in increasing market volatility, particularly in the last hour of trading; (6) the consequences of the FAZ Fund’s daily hedge adjustment always going in the same direction as the movement of the underlying index, notwithstanding that it is an inverse leveraged ETF; (7) the FAZ Fund causes dislocations in the stock market; and (8) the FAZ Fund offers a seemingly straightforward way to obtain desired exposure, but such exposure is not attainable through the FAZ Fund.

Plaintiff is represented by Federman & Sherwood, who seeks to recover damages on behalf of the Class. If you are a member of the Class as described above, you may move the Court no later than Tuesday, November 17, 2009, to serve as a lead plaintiff for the Class. However, in order to do so, you must meet certain legal requirements pursuant to the Private Securities Litigation Reform Act of 1995.