Investors Pile Into Class-Action Suits

United we sue.

More than a dozen plaintiff law firms have brought class-action lawsuits against major mutual fund companies since New York Attorney General Eliot Spitzer unearthed the industry scandal in September. From Alliance to Invesco, fund firms are finding themselves on court dockets nationwide.

It may be too early to tell how much the suits will cost the industry, but many legal experts agree that courts are unlikely to go easy on firms that engaged in abusive trading.

Donald Langevoort, a law professor at Georgetown University, says dismissals of class-action cases are highly unlikely, because of the amount of evidence against the funds. "It's not whether the cases can go forward; they should survive any motions trying to bat them away. The hard question is measuring damages," says Langevoort.

As for investors, how much they get back will depend in part on whether their firms settle with regulators -- and experts agree that many mutual funds are expected to settle. A settlement, however, doesn't necessarily prohibit class-action cases from going forward. If a judge feels the damages were above the public settlement, then he may allow the case to proceed.

Some settlements, such as the $1.4 billion Wall Street investment bank agreement, leave the door open for individuals to go ahead with their class-action cases. However, when it comes to the market-timing or frequent-trading charges, some legal experts see some wiggle room for mutual funds making their case.

"Breach of fiduciary duty works for [Spitzer and the SEC], but it is tougher to show fraud," says Langevoort. "You need to review the prospectuses, which discuss market-timing and get into the semantics. They might say they discourage market-timing but never give an exact definition."

Stephen Bainbridge, a securities law professor at UCLA, agrees that the mutual funds can try to move the court's opinion of their actions from misrepresentation to exaggeration. "Legal 'puffery' is one defense to securities fraud which says 'we weren't misrepresenting, we were exaggerating," he says. "Like a used-car salesman, nobody is supposed to wholeheartedly believe what they say, so you can't sue for fraud."

Langevoort adds that there have been stories written about market-timing trades in the press for the last few years and that mutual fund companies can point to this public knowledge in their defense.

Mutual Fund Cases to Date
Defendant	Date Filed	Court
Nations Funds Inc.	9/8/2003	USDC - New York (Southern)
Strong Capital Management	9/9/2003	USDC - Wisconsin (Eastern)
Bank One (One Group) Mutual Funds	9/9/2003	USDC - New York (Southern)
Janus Funds	9/9/2003	USDC - New York (Southern)
AllianceBernstein Family of Funds	10/2/2003	USDC - New York (Southern)
Morgan Stanley Family of Funds	10/16/2003	USDC - New York (Southern)
Putnam Funds Family of Funds	10/21/2003	USDC - New York (Southern)
Federated Family of Mutual Funds	10/24/2003	USDC - Pennsylvania (Western)
Alger Mutual Funds	10/31/2003	USDC - New York (Southern)
Morgan Stanley/Van Kampen Mutual Funds	11/12/2003	USDC - New York (Southern)
PBHG Mutual Funds	11/14/2003	USDC - Pennsylvania (Eastern)
Excelsior Family of Funds (Charles Schwab)	11/20/2003	USDC - California (Northern)
Invesco Funds	12/2/2003	USDC - Colorado
MFS Mutual Funds	12/11/2003	USDC - Massachusetts
Source: Institutional Shareholder Services

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