California regulators on Monday filed a securities fraud lawsuit against brokerage house Edward D. Jones alleging the firm failed to disclose shelf space payments it received from seven mutual funds to promote and sell those funds.
"Edward Jones broke the law The documents we have obtained show Jones blatantly disregarded investors' interests as it collected some $300 million in secret payments from mutual funds," said Attorney General Bill Lockyer, in a prepared statement. "California law requires full disclosure of information that raises questions about whether broker-dealers' recommendations serve clients' best interests. Investors deserve nothing less. I will settle for nothing less from Edward Jones."
The St. Louis, Missouri-based firm racked up $300 million in shelf space payments from January 2000 through the present from seven mutual fund firms known internally as "preferred funds", according to the complaint. The list of fund companies includes American Funds, Federated Investors, Goldman Sachs, The Hartford, Lord Abbett, Putnam Investments and Van Kampen Investments. The sale of these funds made up roughly 98% of all Jones' mutual fund sales during that time frame, the complaint said.
Evidence obtained by Lockyers office illustrates that Jones maintained policies and procedures, including contests for vacation trips, to ensure that its representatives sold only the preferred funds despite knowing that many of the funds underperformed. One email from a Jones employee, in response to a newspaper article regarding revenue sharing, read, "How can we in good faith encourage clients to own funds that over five and even 10 years have not done well relative to peers? I feel like weve been caught red-handed."
Another email noted that the preferred mutual funds kept spreadsheets to show investor reps their recent bonus check and calculated how much bigger it would be if they sold their mutual funds instead. "Without question, this information has tainted my objectivity and has the potential to change the pattern of my investment recommendations," one rep indicated in a correspondence dated Dec. 17, 2003.
The suit seeks disgorgement of all profits Jones gained as a result of violating anti-fraud provisions of the state Corporate Securities Law (CSL). It also seeks restitution and damages on behalf of investors who purchased fund shares from Jones. In addition, the complaint calls for civil penalties for each violation of the CSL code. The maximum fine for each violation is $25,000, according to Lockyers office. Lockyer is also pushing for injunctive relief requiring Jones to disclose at the point of sale the payments it receives from mutual funds.
Meanwhile, Jones reportedly has reached a tentative $75 million settlement with the Securities and Exchange Commission over allegations of improper mutual fund marketing, Reuters reports, citing a source familiar with the matter. The Jones probe is part of a larger effort by the SEC to root out any misconduct that exists between mutual funds and the brokerage community.
The case against Jones is similar to a case involving Morgan Stanley last year. In November 2003, Morgan Stanley agreed to pay $50 million to settle charges that it failed to tell investors about compensation it received for selling certain fund shares. More recently, PIMCO mutual fund groups adviser and two of its affiliates were hit with a $20 million fine for failing to disclose payments made to brokers for touting PIMCO funds.