A wide-reaching and drawn-out legal fight over alleged trading violations in the mutual fund industry could soon be over, with federal judges in Baltimore expected to decide this fall whether to approve settlements that could total hundreds of millions of dollars.
Numerous class-action lawsuits were filed on behalf of millions of investors across the U.S. as early as 2003, accusing mutual fund companies of breaching securities laws. Investor complaints in separate cases against 17 mutual fund families were transferred in 2004 to U.S. District Court in Baltimore for coordinated proceedings.
All but one have reached settlement, and the court gave preliminary approval to those in April. Judges in October might approve or modify the settlements — which could mark the end of litigation and the beginning of reimbursements to investors.
"These cases started a little over six years ago when it became public knowledge that mutual fund companies were allowing certain traders to trade in funds in ways that most shareholders could not," said John Isbister, a partner at Tydings and Rosenberg LLP in Baltimore and the plaintiffs' administrative chair. "Everyone is very happy to see it wrapped up and see investors in the mutual funds are being compensated."
Attorneys representing investors in Federated Funds during a five-year period that ended in September 2003 announced last week a $1.6 million settlement. The money would be distributed directly to certain Federated Funds.
That case is one of the smaller ones, representing just part of the total dollar amount expected to come from settlements with a number of defendants in each of the cases. But while Isbister said the total amount is likely to reach hundreds of millions of dollars, it would be divided among millions of shareholders.
The proposed settlements resolve allegations that the funds engaged in "market-timing," permitting some favored traders to trade in and out of the fund more frequently than others, and "late-trading," the practice of allowing certain favored investors to buy and sell mutual fund shares after trading is closed to other investors.
Proposed settlements have been reached with several mutual fund families, including a $31.5 million settlement with Pilgrim Baxter Funds; $20.4 million with Invesco/AIM Funds and $14 million with Deutsche Investment Management Americas for shareholders in its Scudder funds. Other defendants include Janus, Putnam and Charles Schwab.
"It has been a long litigation, and certainly we all value finality," said Mark A. Perry, an attorney with Gibson Dunn in Washington representing Janus funds, which denied any wrongdoing in its settlement agreement.
Former New York Attorney General Eliot Spitzer first shed light on the mutual fund misconduct with a 2003 lawsuit against Canary Capital Partners, a hedge fund accused of improper trading in several funds.
Settlement payments to investors come on top of more than $2 billion the companies previously had agreed to pay in separate settlements with federal regulators.
Janus, like some of the other defendants, had reached an earlier settlement with regulators. That agreement "made civil litigation unnecessary," Perry said. The settlement now being considered in federal court "is welcomed as putting an end to most of the civil litigation, which is time-consuming and expensive and distracting."
Attorneys representing plaintiffs in the class-action cases have been notifying investors of the court hearing schedule and advising them how to make claims, file objections or request to be excluded from the case.
A hearing is scheduled for Oct. 21 and Oct. 22 in Baltimore federal court. Judges Catherine C. Blake and J. Frederick Motz are expected to decide whether the settlements and the plans for allocating settlement proceeds should proceed.
"It would put an end to most of the mutual fund market timing cases that are out there," said U. Seth Ottensoser of Bernstein Liebhard LLP, which is representing plaintiffs in the Federated Funds case.
Investors can find more information on each case at mutualfundsettlements.com.