Huge Class-Action Suits Against Funds in the Works

High-profile tort attorneys, most notably those who won huge lawsuits against tobacco firms, are preparing a series of class-action suits against mutual fund companies, charging them with violating their fiduciary duties through excessive fees, FundDirections reports.

While the $8.4 trillion fund industry has successfully lobbied Washington since the passage of the 1940 Act, South Carolina Law School Professor John Freeman tells FundDirections, many in the industry fear they have now met their match in trial judges willing to take a fresh look at fund fees.

In the past, the courts have routinely dismissed lawsuits charging excessive fees, citing Gartenberg vs. Merrill Lynch as precedent, which held that as long as fees are in line with what other companies are charging, they are justifiable. Now, Freeman said, courts will accept plaintiffs' argument that due to economies of scale, fund fees should be lower.

"Fund insiders are now running scared," Freeman said. "Their special-interest lobby can control Congress, the SEC and the White House, but they can't buy the judges."

Freeman predicts more than two dozen federal cases over the next year against the nation's largest fund companies, including Fidelity, Federated, Franklin Templeton, MFS Investments and AIM.