According to an expert on shareholder activism, many angry investors are looking into taking legal action against mutual funds holding Refco. Lawsuits have already been filled against Grant Thornton, Refco's auditor, as well as investment banks who disregarded the initial public offering by the futures broker a few months ago, and now more lawsuits are a possibility, MarketWatch reports.

"As we move down the food chain, I'm sure some investors will start looking sideways at their investment managers and the mutual funds in which they invest, so it's inevitable that some suits will be brought," said Patrick McGurn, senior vice president and special counsel at Institutional Shareholder Services.

However, a number of lawyers, including those who sued mutual fund companies for market timing, say that it would be hard to put any investment manager on trial for not spotting trouble at Refco. "I think that would be a very difficult case," said Melvyn I. Weiss, founding partner of Milberg Weiss Bershad & Schulman, who is playing a lead role in bringing a consolidated shareholder lawsuit against many mutual funds over market timing.

Barry Barbash, a partner at Shearman & Sterling, said such cases would have to prove fund managers were not doing proper due diligence on Refco and that this would be hard to prove, as investment banking analysts were singing the company's praises up until only a few weeks ago.

Further, most fund companies' exposure to Refco has been minimal. TIAA-CREF, Oppenheimer Funds, T. Rowe Price Group ,and The Vanguard Group are among funds that recently held Refco, but in each case the outstanding shares they controlled was small.

"From the standpoint of the shareholders suing, it doesn't happen unless you have special facts that show that the advisor was grossly negligent," said Michael Rosella, a partner in the law firm Paul, Hastings, Janofsky & Walker LLP, which represents some mutual funds companies,

In fact, fund investors usually see corporate fallouts as a non-event, said Roy Weitz, publisher of FundAlarm. Blowups like the Refco scandal are almost a non-event for 401(k) participants since the plans are so diversified, said Rick Meigs, president of Certainly, such crises do have an impact on the 401(k) plan of the entangled company.

The Refco mess will spur more talk on the due-diligence topic, according to McGurn. "Refco is going to be the wake-up call for IPOs," said McGurn. "It begs the question of whether you can be sold a pig in a poke in the IPO market."

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