High court upholds shareholder rights


WASHINGTON -- The Supreme Court handed mutual fund shareholders a victory yesterday as it upheld state laws letting them go directly to court to challenge alleged wrongdoing by fund managers.

Although a fund shareholder, in Maryland and elsewhere, ordinarily is required to demand first that directors sue to protect fund assets against internal misconduct, some states -- like Maryland -- provide that that kind of demand can be bypassed if it would be "futile."

If a fund investor can show the directors would not be likely to sue on their own, then state law often will free that investor to file a federal court case on behalf of the fund to recover assets allegedly impaired by wrongdoing in fund management. That option was protected by yesterday's Supreme Court decision.

In a case involving Cash Equivalent Fund, a Kemper Corp. mutual fund incorporated under Maryland law, a federal appeals court had ruled in July that federal law requires a "universal demand" rule, thus wiping out any "futility exception" that might exist under any state's corporate law.

Two influential legal groups -- the American Law Institute and the American Bar Association -- had endorsed the idea that no corporate investor should be allowed to sue based on a claim that it would be "futile" to request a corporate board to act first.

The Supreme Court rejected that approach and overturned the appeals court.

James J. Hanks Jr., a Baltimore lawyer and author of a major volume on Maryland corporate law, said the ruling followed the court's recent practice of leaving key matters of internal corporate government to the states.

The Supreme Court ruling, in the case of Kamen vs. Kemper Financial Services (No. 90-516), grew out of a Chicago investor's complaint against Kemper Corp.'s Cash Equivalent Fund, a money market fund.

The investor, Jill S. Kamen, put money into that fund but sued over what she claimed were fraudulent assertions in a proxy statement over the fees being paid to Kemper Financial as the fund's investment adviser.

She sued the fund directors to recover what she considered to be "excessive" fees.

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