Capital Group loses appeal to block suit
State prosecutors got a green light Friday to continue their fraud case against the Los Angeles-based company that manages American Funds, the largest U.S. stock and bond mutual fund group.
A California Court of Appeal panel in Los Angeles ruled that Atty. Gen. Jerry Brown had the right to pursue the state’s 2-year-old suit alleging that the fund company failed to adequately explain to its shareholders how it compensated brokerages that pitched its products.
Capital Group Cos., parent of the $1-trillion-asset American Funds, had sought to have the case dismissed on grounds that the state was encroaching on the turf of federal regulators, who have primary oversight of the securities industry.
A Superior Court judge agreed with the company in November 2005. But the Court of Appeal reversed that decision, ruling that federal statutes were “sufficiently broad” to allow California to take its case to trial.
Congress “intended to preserve the states’ anti-fraud authority to control the conduct of brokers and dealers,” the three-judge panel wrote.
An American Funds spokesman said Friday that the ruling was “just one of many steps in the litigation process.” He said the company had not decided whether to appeal the decision to the California Supreme Court.
At issue are agreements that American Funds’ management company has long had with brokerages that sell its funds to investors. In addition to standard commissions that brokers collect from buyers of fund shares, American Funds pays the brokerages what it says are fees to defray “the cost and efforts involved in educating financial advisors about American Funds.”
Such fee agreements between fund companies and brokerages have become relatively common over the last decade.
When he filed the state’s case in 2005, then-Atty. Gen. Bill Lockyer alleged that those payments were in effect kickbacks aimed at getting brokers to favor American Funds over others. Lockyer, now state treasurer, said American Funds defrauded investors by failing to fully inform them of the payments.
The appeal panel sent the case back to Superior Court.
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