Atty. Gen. Bill Lockyer had been temporarily defeated by a recent ruling that prevents him from suing American Funds, the Los Angeles Times reports.
Los Angeles Superior Court Judge Carl J. West tentatively ruled that the state does not have the jurisdiction to sue the firm for allegedly hiding the $426 million in "shelf-space" payments it paid to brokerages that sold its funds over the past five years.
According to the suit, the 20 million shareholders were not informed of the "shelf space" payments, which, Lockyer said, caused brokers to push funds that paid these fees, rather than those that were best suited for the investors.
Unlike other fund companies that have settled with federal and state regulators over the past two years over improper sales and trading practices, American Funds decided to fight the charges. The firm used a 1996 federal law that says a state cannot pass any governance laws that go beyond what Securities and Exchange Commission rules dictate. The company also said that the money in question was necessary for broker education. Such payments are permitted under SEC rules.
Judge West sided with American Funds, saying that Lockyer's suit "seeks to impose disclosure requirements beyond those deemed necessary by the SEC." West also noted that if Locker wanted to sue anyone it should be the brokers, not American Funds, because they are the ones who are in direct contact with the customers.
The attorney general's spokesman, Tom Dresslar, defended the suit by saying "the legislative history is replete with Congress' clear intent that states be allowed to enforce their securities fraud laws."
American Funds spokesman Chuck Freadhoff said the firm was "gratified at the judge's tentative ruling,"
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.