The Dreyfus Corporation of New York has tentatively agreed to pay $20.5 million to settle a federal class action lawsuit and a state lawsuit which were brought against the fund company in the summer of 1998 by investors in two Dreyfus mutual funds.
A joint hearing to approve the settlement, proposed Jan. 30, is scheduled before a federal and state court judge on May 30 in State Supreme Court in New York. The judges will have to decide if the settlement is fair, reasonable and adequate, and in the best interest of the plaintiffs, according to a notice of settlement document filed on behalf of all parties.
The proposed Dreyfus settlement marks the second very large settlement announced among mutual fund companies in recent weeks. Two weeks ago, First Union Corp. of Charlotte, N.C. reached a preliminary settlement for $26 million in two lawsuits brought against it by more than 150,000 former employees. The suits charged First Union with self-dealing in managing the employees' 401(k) retirement plans by investing the assets in First Union's proprietary mutual funds.
The suits against Dreyfus charged former Dreyfus portfolio manager Michael Schonberg of "front running" or personally buying securities that he subsequently purchased for the Dreyfus Aggressive Growth Fund and the Premier Aggressive Growth Fund in hopes of causing a rise in the companies' stock prices. The suits further charged Dreyfus with willfully concealing Schonberg's actions.
The suits also accused Dreyfus of misrepresenting that the Dreyfus funds would invest in small-, mid- and large-cap stocks, while Schonberg, with Dreyfus' consent, invested almost exclusively in small and volatile micro-cap companies, according to the settlement documents. The lawsuits charged that Dreyfus had made material misrepresentations and omissions in the fund's registration statements.
Moreover, the state lawsuit charged that Dreyfus breached its fiduciary duty by allowing Schonberg to invest in speculative penny stocks without explicit shareholder approval instead of the capital growth stocks in which the funds' prospectuses stipulated that the fund would invest.
Three law firms acted as co-lead counsel in the federal lawsuit. They included Shalov Stone & Bonner and Stull, Stull & Brody, both of New York, and Spector Roseman & Kidroff of Philadelphia. Counsel for the plaintiffs in the state lawsuit was Wolf Popper, LLP of New York.
If the Dreyfus settlement is approved, investors that are parties to the federal lawsuit will share a cash settlement of $18.5 million, before attorneys' fees and expenses are deducted. Federal class members are identified as those investors who purchased shares of the Dreyfus Aggressive Growth Fund, or its predecessor fund, and the Premier Aggressive Growth Fund, or its predecessor fund, between Oct. 1, 1995 and June 8, 1998.
The state lawsuit includes those investors who held shares of the same two funds, or their predecessor funds, from Aug. 1, 1995 through Sept. 30, 1995. These Dreyfus investors will split a $2 million settlement if final approval is granted on May 30.
Dreyfus and Schonberg deny all of the plaintiffs' claims, according to the settlement documents. But the defendants have agreed that continuation of the suit could be expensive, and that it would be preferable to settle the lawsuits, according to the settlement documents.
Dreyfus declined to discuss the pending settlement.
Schonberg was relieved of his duties as lead portfolio manager for the funds in April 1998 and later resigned from the company, Dreyfus said in a statement last May.
Investors began filing complaints in the federal case against Schonberg and Dreyfus in June, 1998. On Sept. 20 of last year, the court granted class action status to the federal lawsuit.
The state lawsuit was originally filed Aug. 25, 1998. On March 3, 2000, defendants in the state case sought court approval to elevate the suit to class action status. But the court had not yet ruled on this motion when the settlement agreement was reached Jan. 30.