A lawsuit seeking class-action status against ProShare Advisors, sponsor of the ProShares ETFs was filed in early August.

The complaint, filed by New York-based Labaton Sucharow, alleges ProShares violated securities law and didn’t properly disclose all risks associated with its UltraShort Real Estate ETF (SRS) in its prospectus and registration filings with the Securities and Exchange Commission.

SRS is designed to deliver double the daily inverse performance of the Dow Jones U.S. Real Estate Index. Over longer time periods, however, it’s failed to do so. This is not unusual though, because the impact of index volatility, tracking error and fees compounded over time often causes the longer-term performance of such funds to deviate from daily index returns.

The one-year performance through June 30th, 2009 for the Dow Jones U.S. Real Estate Index is negative 42.59 percent. Over the same period of time, SRS has fallen by 79.73 percent. Currently, SRS has around $1.2 billion in assets.

The lawsuit is another dramatic turn in a series of recent events that has seen leveraged and short ETFs come under fire.

In June, the Financial Industry Regulatory Authority (Finra) issued a regulatory warning to brokerage firms and brokers concerning these particular ETFs. It said in part, “Inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.”

Negative publicity still hasn’t quelled investor’s appetite for leveraged and short ETFs.

At the end of June, the two largest providers of these specialized ETFs (ProShares and Direxion Shares) amassed $32.6 billion in such funds.

Despite soaring assets and popularity among active traders, a number of brokerage firms like Ameriprise, Edward Jones, LPL Financial, Morgan Stanley Smith Barney and UBS have either banned or temporarily halted the sale of leveraged ETFs. Firms say this stance against leveraged ETFs is because they aren’t compatible with the long-term investment objectives of their clients.