The Securities and Exchange Commission released monetary distribution details for the sweeping $1.4 billion research settlement last week, indicating how mutual fund advisors can recoup losses in companies that Wall Street analysts unabashedly touted, including AT&T, Global Crossing and WorldCom.
Under the plan detailed last Monday, both retail and institutional investors who owned securities in companies recommended by conflicted Wall Street analysts hoping to secure plush investment banking deals with those firms, will get a shot at claiming a slice of the collective $432.75 million restitution pool. The remainder of the settlement will flow to individual states, pay for investor education programs and cover the cost of providing independent research sources at the sanctioned firms.
But mutual funds with larger stakes in the affected companies will have to line up behind smaller investors. The SEC has vowed that smaller investors will get first dibs at recouping losses. Larger investors that likely had "greater and more diverse informational resources than smaller investors" will be served last as the restitution fund is drained.
The SEC's distribution plan has yet to get a final blessing. However, that is expected to take place April 11 in a New York court.
Unclaimed Settlements
In another lawsuit over restitution, fund companies and their boards of directors have found themselves on the defensive yet again. In mid-January, a flurry of lawsuits were filed in 11 states against 44 investment management companies. The suits, filed on behalf of a group of investors by Baron & Budd of Dallas and Cauley Bowman Carney & Williams of Little Rock, Ark., charge the firms breached their fiduciary duties by not collecting billions of dollars in at least 136 class-action securities settlements to which the funds and these investors were entitled.
The lawsuits claim that the defendants failed to properly file proofs of claim for class-action periods dating as far back as the 1990s, and in one case to 1977, and that "the settlement funds would have increased the total assets held by the funds."
Defendants include many of the biggest mutual fund companies, including AIM Management, American Century Investments, American Funds managed by Capital Research & Management, Dreyfus, Eaton Vance, Federated Investors, Franklin Templeton, Janus Capital, Merrill Lynch Investment Management, Van Kampen Investments and Vanguard.
Many defendants declined comment, while others noted that they already have a process in place to file for settlement monies and have done so.
In fact, the lawsuit against American Century has already been dropped because the firm provided evidence that it had filed for proof of claims in several of the cases, said spokesman Chris Doyle. Some of the other lawsuits have been dropped, as well, because companies furnished the necessary proof that they properly filed for claims, said Randall Pulliam, an attorney with Baron & Budd. He declined, however, to specify the names of those fund companies.
One Size Fits All
The lawsuits are short on the specific details of which funds owned which of the listed securities and in what proportion, nor do they detail the specific damages in dollars that fund investors had suffered. Without providing specific dollar amounts, however, the lawsuits are requesting both compensatory and punitive damages, in addition to the return of all sales commissions and costs paid by the investors, as well as they cost of their attorney's fees.
Because the suits are so numerous and filed within such a short period of time, they are structured so that each would be similar in their allegations, Pulliam explained. That makes them easier to track and manage, he said. Pulliam noted that his firm undertook to file suit against the dozens of fund companies after six months of research and noticing, as a class-action litigator with his previous employer, that only a small percentage of eligible investors ever file for a piece of these settlements. Moreover, his research revealed that over $1 billion per year is left on the table and never properly collected.
The flurry of lawsuits has, by design, left the class period open-ended, allowing it to go beyond the lawsuit filing date, Pulliam noted. That means that those fund advisors eligible to file a proof of claim under the global research analyst settlement will definitely be expected to do so. Baron & Budd has largely made a name for itself winning awards for clients in lawsuits related to asbestos and other toxic substances claims.
Crunching the Numbers
Brad Heffler, CEO of Claims Compensation Bureau, a Conshohocken, Pa., law firm that specializes in class-action settlement claims, estimated that over the past 10 years, as many as 75% of investors, both large and small, haven't asked for their fair share of settlements. "Institutions are realizing that they have left billions on the table. Now they are starting to get sued by their mutual fund shareholders because recoveries would have added to the net asset values of these funds," he said.
Industry insiders believe this spate of lawsuits is an attempt by lawyers looking for fat fees to kick the fund industry while it is down. "This is another effort to wring money out of the mutual fund industry in suggesting that mutual funds were not pursuing settlements," said Tom Zaccaro, an attorney with Akin, Gump, Strauss, Hauer & Feld of Los Angeles. He predicts the suits may cause funds to ask the court for monetary sanctions, claiming that the lawsuits do not have an adequate factual basis, he said.
"It's unfair to characterize this as piling on the mutual funds," countered Pulliam, noting funds' fiduciary responsibilities.
Responsibility for filing these types of settlement claims doesn't usually fall to the board, but typically is the responsibility of the investment advisor or a law firm hired to specifically handle its settlement claims, said Carl Frischling, a partner with Kramer Levin Naftalis & Frankel in New York. But this could be a wake-up call, especially to smaller funds, to be sure the advisor and the board have a process for handling claims securely in place, he added.
In at least some of the cases, fund advisors have likely determined that returns on settlements would have been minuscule for the funds and wouldn't have been worth the time and effort, said Tom Westle, a partner with Blank Rome in New York. Moreover, settlements aren't always in cash. Sometimes settlements take the form of coupons good for use on future purchases, or some other non-monetary form. "What is a mutual fund going to do with that?" he asked.
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