The STI Classic Funds is on the verge of settling a portion of a class action lawsuit which it brought against Bollinger Industries, the exercise equipment manufacturer, and securities firms which participated in Bollinger's Nov., 1993 initial public offering.
Lawyers for the STI Classic Funds, the mutual fund affiliate of SunTrust Bank Atlanta, said earlier this month that STI stands to share a still-to-be determined portion of a $1.5 million settlement with Bollinger's underwriters. They include more than 20 securities firms. A hearing on the proposed settlement is scheduled for Jan. 4 in Texas state court where the STI suit was filed.
In the state case against Bollinger of Irving, Texas, and in a similar complaint filed in U.S. District Court in Texas, STI alleges that Bollinger and its top officials committed fraud in its financial statements. The defendants deny the allegations. Bollinger company officials and Bollinger's auditor, Grant Thornton, have not settled the state case. The underwriters and Grant Thornton are not defendants in the federal court action.
Both the state and federal cases are scheduled to go to trial early next year, said Ira A. Schochet, a lawyer at Goodkind Labaton Rudoff & Sucharow in New York and one of STI's lawyer's in the case.
The cases are unusual because STI appears to have been the first and perhaps only mutual fund group to serve as lead plaintiff in a class action suit since Congress enacted the Private Securities Litigation Reform Act of 1995, according to class action lawyers and SEC reports. The act was intended to encourage institutional investors such as mutual funds and pension funds to serve as lead plaintiffs in class action suits.
Mutual funds have avoided serving as lead plaintiffs in class actions for several reasons, including cost, said Jonathan L. Alpert, an lawyer at Alpert, Barker & Calcutt in Tampa, Fla. Alpert has represented shareholders in class action suits against mutual fund companies and bank brokerage affiliates. Alpert said that the potential benefit for funds -- increased damage awards and the fulfillment of funds' fiduciary duties to shareholders -- may be overridden by the potential distraction the cases can cause key fund officials.
In addition, a class action suit may highlight a fund's poorly performing investments rather than its strong ones, Alpert said. And fund companies could find themselves in the position of suing firms which distribute their funds, Alpert said.
Institutional investors have said as much. In a friend of the court brief filed in September in an unrelated case, the SEC said that institutional investors have been reluctant to assume lead status in class action cases. In an April, 1997 report on the Litigation Reform Act, the SEC said that institutional investors wanted to avoid the costs and the time commitment of serving as lead plaintiff. Also, in at least some instances, mutual fund officials believed what a fund recovered in a class action case would be insignificant in relation to the fund's overall performance, the SEC reported.
Cases such as STI could change that, however because other fund companies may be encouraged by STI's experience to bring comparable suits, Schochet said. Institutional investors other than funds have served as lead plaintiffs in a number of actions, Schochet said.
STI's damages were not identified in the complaint filed in federal court. Lawyers' expenses will help determine how much STI receives in the cases. Limiting plaintiffs' lawyers expenses in class action cases was one of the reasons for the Securities Reform Act, according to the SEC.