Investors Backlash Against 401(k)s Via Class-Actions

Investors are increasingly bringing dramatically worded lawsuits against 401(k) sponsors and fiduciaries for what they allege are shady fee practices, Mondaq reports. The inspiration for the lawsuits has come primarily from recent investigations by the Securities and Exchange Commission, Department of Labor and Congress into hidden or excessive fees.

Specifically, Congress and the SEC have pointed out that 401(k) consultants may be in revenue-sharing arrangements with the investment advisory firms whose products they recommend, without disclosing those arrangements. In addition, some of the lawsuits charge that plan fiduciaries don't offer investors less-expensive share classes as assets in a plan grow.

To date, the majority of the lawsuits have been filed in Illinois, although there are a few in Missouri, Connecticut and California-most of them aimed at Fortune 50 firms.

Although the majority of the lawsuits have been filed by one law firm, others are joining the fray, and scores of additional lawsuits are expected.

Ex-Bond Fund Manager Sues U.S. Treasury

A former MFS Investment Management bond fund manager has sued the U.S. Treasury to obtain access to their files that he says is critical to his defense in a case the Securities and Exchange Commission has brought against him, The Patriot Ledger reports. Steven Nothern filed the suit, claiming that under the Freedom of Information Act, he should have access to the documents.

Nothern sued the agency already, in February, asking a judge to order the Treasury to allow him to depose five of their officials. Nothern's case essentially claims that the government agency is stonewalling him to protect itself.

"We're disappointed that the Treasury department seems to wish to avoid disclosing embarrassing information that we believe is critical to Steve Nothern's defense," said his attorney, John Shope, of Foley Hoag. "It seems to me that the government is trying to blame Steve Nothern for its own mistakes."

A Treasury spokeswoman declined to comment for The Patriot-Ledger on the pending litigation.

The case against Nothern stems from a Treasury announcement on Oct. 31, 2001 that it would no longer issue 30-year bonds. The Treasury held a 9 a.m. press conference but said that the information would be embargoed until 10 a.m.

Peter Davis, a consultant whose clients included MFS, was at that press conference but left 30 minutes early to call clients with the news. Davis settled with the SEC in 2003, agreeing to pay $150,000.

The Commission then brought civil charges against Nothern and a Goldman Sachs economist, who, acting on Davis's tip, purchased 30-year bonds ahead of the 10 a.m. embargo. The SEC originally dropped its case against Nothern but then refilled it again in 2005.

Nothern said that not only had Davis left a voicemail message for him at around 9:40 that day, but a broker called at 9:30 to say there were rumors the Treasury would stop issuing 30-year bonds. Then, when he saw an announcement on the Treasury's website before 10 a.m., he began tracking the price of the bonds. Seeing them rising, he decided to buy some, not knowing about the embargo and believing the information to be public knowledge.

According to Nothern's lawsuit, the Treasury said it has 637 pages documenting what it did that day but won't release 272 of those pages. He also wants the Treasury to release a computer disc that will show when the Treasury posted the news on its website.

"Treasury has encouraged the SEC's prosecution of this action as a means of deflecting criticism from its many mistakes and misjudgments relating to the Oct. 31, 2001 announcement," Nothern's lawsuit states. "Because of Treasury's interest in placing all the blame for Oct. 31, 2001 on private parties like Nothern, it has an incentive to deny him the testimony and other information he needs to defend himself."

Ed Jones Offers Investors $127.5 Million Settlement

Edward Jones is proposing paying investors $127.5 million in vouchers to settle class-action lawsuits charging the firm with accepting revenue from mutual fund companies in exchange for recommending their funds, the St. Louis Post-Dispatch reports.

The firm would pay current customers $72.5 million in credit vouchers and past customers $55 million in cash.

Edward Jones investors filed lawsuits in federal and state courts two years ago after the firm paid $75 million in fines to Missouri, the Securities and Exchange Commission and the NASD.

The courts are scheduled to hold hearings on the proposal on July 20.

Fidelity Starts $200 Million Expansion Outside Dallas

As part of a $200 million expansion into Texas that will eventually employ 1,535 additional employees, Fidelity Investments recently signed a 10-year lease for 160,000 square feet in Lewisville, Texas, outside of Dallas to support as many as 1,000 employees, reports.

Fidelity currently employs 2,900 people in Westlake, Texas. The company plans to build a 600,000-square-foot building at that location.

As to Fidelity's decision to sign a lease in Lewisville to meet its immediate expansion needs, Johnny Johnson, a principal with the office complex's managing agent, CapStar Commercial Real Estate Services, said: "Fidelity wanted a quality, campus environment for their people. The mature campus setting and the flexibility to grow and to meet their needs in the long term were very important to them."

Hedge Funds Rise 2.1% in First Quarter: Morningstar

The hedge funds that reported returns to Morningstar rose an average of 2.1% in the first quarter, outperforming major indexes, including the S&P 500 and the MSCI World Index.

Hedge funds delivered the strongest returns in January, rising 1.15%, and continued to fare well in the following two months of market turbulence, rising 0.52% in January and 0.54% in February.

Emerging-market hedge funds did the best during the quarter, climbing 5.5%, followed by convertible arbitrage funds, which rose 4.67%, event-driven funds, up 4.21%, and funds that concentrate on distressed companies, up 4.15%.

Those that didn't do so well included managed futures, down 2%, global macro funds, down 0.47%, and equity net neutral funds, up 1.51%.

Billions Keep Pouring Into China Mutual Funds

Proving that Chinese investors continue to be overwhelmingly optimistic about their stock markets, four newly launched China mutual funds attracted billions of dollars apiece as soon as they hit the market-and for good reason. The Shanghai Composite Index, which rose 130% in 2006, is already up 27.6% this year.

Within days of its launch, China International Fund Management's new fund took in $11.7 billion and Harvest Fund Management's new fund reaped $5.4 billion.

Then, just last Monday alone, Hua An Fund Management raised $1.3 billion for a small-cap fund that it converted from a closed-end fund, and Lord Abbett China Asset Management raised $1.03 billion for an equity fund.

Meanwhile, China's top securities regulator is delaying approval of new funds and has asked investment firms to apprise investors of the risks of investing in the stock market, according to People's Daily. In fact, the China Securities Regulatory Commission has asked fund companies to voluntarily set up an investor education fund and use various media outlets-television, newspapers, magazines, pamphlets, the Internet and outdoor advertising-to reach consumers.

Real Estate Funds Gaining Steam Outside the U.S.

Real estate's hot run may be over in the U.S., due to sub-prime lending woes and a fully priced commercial sector, but overseas, the sector is experiencing a far different picture, according to BusinessWeek.

The favorable outlook for real estate overseas could be due to regulatory and market changes. In the past few years, 20 countries have implemented the real estate investment trust structure allowing real estate companies that go public to avoid taxes as long as they pay out most of their earnings as dividends.

With access to capital markets, companies can build more, obtain prime properties and increase earnings.

The outlook for global real estate makes it the best among 32 domestic and international asset classes, said Clark Winter, global chief strategist of Citigroup Global Wealth Management. Areas like Asia and Latin America, where interest rates have remained low and stable, have attracted new developers, whereas before, they stayed away from these areas, Winter said.

The easiest way to get a piece of the global real estate boom is through specialty mutual funds. Sam Lieber, manager of Alpine International Real Estate Equity Fund, the oldest real estate equity fund, lists Brazil as one of his favorite areas. "Eighteen months ago, there were only three publicly traded Brazilian real estate companies," he said. "Now there are 16 and more on the way."

Other managers see Asia as the hot spot. Cohen & Steers International Realty Fund has 43% of its assets in Asia. Japanese real estate has the potential for a major recovery after 15 years of decline, said Joseph Harvey, chief investment officer at Cohen.

Exchange-traded funds also offer a way to take advantage of real estate funds. The new SPDR DJ Wilshire International Real Estate ETF carries a low 0.60% expense ratio. A few closed-end funds focus on the area, as well.

Institutional Investors Look To International Stocks

The trend of pension funds and endowments shifting money to international stocks and hedge funds will most likely continue, according to The Wall Street Journal.

A study by Greenwich Associates also found that institutional investors are increasing the amount of money they are putting into alternative investments. Typically, they have placed money in more traditional investment products, such as domestic stocks and bonds.

"In a very short period of time, this big, stable, slow-moving industry may be completely shifting gears," said Dev Clifford, a consultant at Greenwich Associates.

Greenwich conducted interviews with 1,000 pension funds, endowments and foundations that collectively oversee $7.2 trillion in assets.

Forty-two percent of public pension funds surveyors stated they are planning to put significantly more money in hedge funds over the next two years. Last year, hedge funds only made up an average of 0.5% of the total investments in those portfolios. For corporate pension plans, the number was 2.2%.

On average last year, institutional investors reduced the percentage of their portfolios allocated to U.S. stocks by two percentage points to 44.7%. The money taken out was allocated to international stocks, hedge funds, private equity and real estate.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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