News reports trickling out of Chile say high-profile
emerging markets specialist Mark Mobius is threatening to file a $1.12 billion suit against
Compania de Telecomunicaciones de Chile
for neglecting its shareholders in a deal with its parent, Spain's
. Ironically, Mobius' own shareholders are accusing him of shareholder neglect in a separate suit in the U.S.
The globe-trotting Mobius, today's authority on emerging markets investing, has publicly and successfully championed shareholder rights in the past. His beef with the Chilean telecom is in character, but the suit against him is a biting role reversal. It's not clear how either situation will shake out, but let's look at Chile first.
"We don't have much to say about it. Basically, Mobius is considering all options, and litigation is one of them. No litigation is happening currently," says Lisa Gallegos, a Franklin Templeton spokeswoman. Mobius, who manages seven open- and closed-end funds worth more than $11 billion, was not available for comment.
He's alleging the Chilean telecom, known as CTC, recently sold its Internet service provider to Telefonica for a song. Reportedly, the sales price equaled $649 per customer, compared with the more than $13,000 per customer investors paid when Telefonica brought its own Internet unit,
, public on Nov. 17.
But part of the deal with Telefonica gave CTC the right to buy $40 million worth of Terra's stock at the initial public offering price. Although CTC has to hold the stock for a year, it could dull the pain. Terra was up more than 200% from its IPO price as of Thursday's close.
Still, Mobius says the deal left CTC shareholders out in the cold, according to published reports in Chile. Franklin Templeton declined to elaborate.
Foreign Equity and
Emerging Markets funds were among the top three mutual fund holders of CTC as of June 30, according to Chicago fund-tracker
. None of Mobius' funds own shares of Telefonica.
Observers say this type of alleged shareholder abuse -- where parent companies strike one-sided, intracompany deals -- is more common overseas.
"Many foreign countries are years behind the U.S. in terms of protecting shareholders from conflict of interest. In many countries the party with the majority of shares rules and others have little opportunity to redress. It's a significant risk in foreign investing," says Syl Marquardt, director of research at $31.7 billion
John Hancock Funds
Mobius has played activist before. In a similar situation in 1995, Mobius successfully urged fellow shareholders of Hong Kong's
East Asiatic Co.
to vote down a low buyout offer from its Danish parent
East Asiatic Co. Ltd.
, saying the deal favored the parent company's stockholders.
"When you invest in foreign companies you're going to hit potholes. I'd want a manager who's an activist -- who rings the bell when he finds something wrong. We need someone out there working for transparency," says Stewart Welch III, a financial adviser based in Birmingham, Ala.
But don't schedule any parades yet. Shareholders of Mobius' closed-end
Vietnam and Southeast Asia
allege that Mobius, the fund's directors, and the fund company are no better than CTC's managers.
Filed February 1998, the $40 million class action complaint names Mobius, the fund's directors and various Franklin Templeton units as defendants, and accuses Mobius of failing to invest in accordance with the fund's prospectus. It also alleges that Mobius' significant, long-term bet on plunging, thinly traded Thai securities following the baht's devaluation in July 1997 made it difficult for shareholders to exercise their right to liquidate the fund. (For more details on the suit, see our previous
The suit touched off a complicated legal battle. In an odd twist, one of the plaintiffs, Michael Wetta of Colorado Springs, Colo., now represents Mobius' fund, according to Wetta's lawyer, Karl Barth of
Hagens & Berman
in Seattle. Wetta was appointed to that position by a judge who found that the fund's directors were too likely to act in Franklin Templeton's interest, not shareholders', Barth says.
Franklin Templeton has filed "a nonstop parade of motions" to stop the complaint from coming to trial, Barth says. Last week a Florida judge allowed Wetta's complaint to stand but dismissed a complaint filed by James Roumell, a 38-year-old Chevy Chase, Md., money manager who specializes in closed-end funds. He and his clients dumped their shares soon after the baht devaluation in 1997, losing an average of 40% by his calculation.
Barth, who also represents Roumell, says he'll refile Roumell's complaint and is confident both complaints will reach trial around next October in a consolidated suit. Franklin Templeton says the suit has "no merit."
If the suit goes to trial, it will question the objectivity of the Vietnam fund directors and fund directors in general. Barth says Mobius, who is often based in Singapore, will be subpoenaed, but isn't required to testify because he is a German citizen.
Whether he testifies or not, Mobius' recent performance is already a looming question. Over the past year his main open-end fund, the $2.6 billion
Developing Markets fund, lags the average emerging markets fund by more than 10 percentage points, and its three-year annualized return is just 1.9%, ranking 77th of 119 similar funds, according to
Many investors have already passed judgement, yanking $304 million more than they've invested out of the fund over the past three years, according to
Financial Research Corp.