Funds Say Private Lawsuits Duplicate Settlements

Published July 15, 2004, 1:00 a.m. EDT

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At least 18 mutual fund companies that agreed to pay $2.5 billion to settle charges brought by securities regulators who accused the firms of improper trading are now in negotiations to snuff out roughly 300 private lawsuits filed by disgruntled shareholders, The Wall Street Journal reports.

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The preliminary discussions with the plaintiffs attorneys are no guarantee of a favorable settlement for the mutual fund companies, sources close to the matter said. Lawyers for the shareholders predictably smelled a big verdict after the massive regulatory settlement, but a judge overseeing some of the proceedings cautioned the investors should not expect a financial windfall from the litigation. Alliance Capital Holdings, Bank of America Corp.and Janus Capital Group are reportedly participants in the discussions.

The negotiations also highlighted how securities litigation has changed after the Sarbanes-Oxley Act was adopted in 2002. After the act became law, securities regulators received new powers to distribute penalties and unwarranted profits among aggrieved shareholders. Previously, these types of damages were transferred to the U.S. government despite the fact that investors damages typically outweighed the sums distributed n disgorgement.

Investors in mutual funds owned by nine companies that settled with the Securities and Exchange Commission are expected to net roughly $1.6 billion in damages. Mutual fund shareholders are also looking forward to $855 million in fee reductions negotiated by New York Attorney General Eliot Spitzer, who accused numerous mutual fund providers of improper trading activities.