Mutual Fund Probe Spurs String of Lawsuits
New York Atty. Gen. Eliot Spitzer’s probe of trading practices in the mutual fund industry is already creating a wave of lawsuits on behalf of investors -- including one filed in federal court in Los Angeles on Friday.
The law firm Weiss & Yourman, which has offices in Los Angeles and New York, said it filed suit in U.S. District Court in Los Angeles against Bank of America Corp., one of four companies accused by Spitzer of engaging in illegal or questionable mutual fund trading practices.
The suit, which is seeking class-action status, accuses Charlotte, N.C.-based Bank of America of allowing some of its large investors to execute after-hours trades -- which is illegal -- and to engage in profitable market-timing trades, which isn’t illegal but is generally discouraged for individual investors.
Also Friday, a lawsuit filed in state court in Colorado alleges that Denver-based Janus Capital Group Inc. engaged in improper trading practices, including after-hours trading.
The lawsuits follow a complaint filed Wednesday by Spitzer against Janus, Bank of America and two other mutual fund providers. Spitzer alleged that the firms let a hedge fund, Canary Capital Partners, make short-term trades in exchange for fees and deposits in longer-term accounts.
The Janus suit, which also seeks class-action status, goes beyond Spitzer’s allegations in accusing Janus of allowing Canary to make trades in its mutual funds after the market closed at 4 p.m. Eastern time.
So-called late trading is prohibited for mutual funds by New York law and Securities and Exchange Commission regulations because it lets a favored investor take advantage of post-market events not reflected in the share price at that day’s close.
“This allowed Canary and other mutual fund investors who engaged in the same wrongful course of conduct to capitalize on post 4 p.m. information, while those who bought their mutual fund shares lawfully could not,” said New York law firm Bernstein Liebhard & Lifshitz, which filed the Janus suit.
Janus shares Friday rose 10 cents to $15.70 on the New York Stock Exchange. They have fallen 12% since Spitzer unveiled his allegations. BofA’s stock fell 9 cents to $76.15 on the NYSE.
Bernstein Liebhard filed a similar suit against Strong Capital Management Inc. in Wisconsin on Thursday and said it intended to sue BofA and the other company named by Spitzer, Chicago-based Bank One Corp.
In addition, law firm Wolf Popper sued all four companies Friday in New York, accusing them of making “false and misleading statements and omissions in the prospectuses, and breach of fiduciary duty.”
Shelley Peterson, a spokeswoman for Janus, said, “We are currently reviewing the situation.” A spokesman for Strong had no immediate comment. Bank of America couldn’t be reached for comment.
Also Friday, Janus said it might make restitution and pay back fees to investors who may have been hurt by the trading practices. The company said it would hire an outside firm to determine whether funds were affected by the trades
In another development, Valley Forge, Pa.-based Vanguard Group, the second-largest U.S. mutual fund manager, said it had received a subpoena from Spitzer. Vanguard is cooperating with Spitzer, spokesman Brian Mattes said. A subpoena is a request for information and doesn’t always mean a firm is under investigation.
Vanguard said it hadn’t done anything wrong. “To be clear, this request for information and documents, which arrived in the form of a subpoena, in no way implies any wrongdoing by Vanguard,” the company said.
