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| 2003
News and Press Releases |
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HEADLINE:
Lawyers Unleash Mutual Fund Suits; 27 Firms File Against 10 Funds; Some Experts See $1 Billion In Payouts
By: Aaron Elstein
Crain's New York Business. December 1, 2003
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EXCERPT: Ever since the mutual fund scandal surfaced three months ago, money management firms accused of wrongdoing have tried to make amends. They've fired senior executives, pledged to change their business practices and even promised to offer restitution to investors. That's not nearly enough for class-action lawyers like Melvyn Weiss. ''You can bet your bottom dollar that their idea of restitution is not the same as ours,'' says Mr. Weiss, a senior partner at Milberg Weiss Bershad Hynes & Lerach in Manhattan. A massive new wave of litigation is under way. Some 27 law firms, including Milberg Weiss, have filed suits against 10 mutual funds that collectively manage $2 trillion. The cases allege that the funds permitted favored investors to trade illegally or unethically to the detriment of all others. While none of those suits puts a dollar figure on the damages done or restitution sought, some early estimates of the total payout stretch into the hundreds of millions of dollars. ''The sharks are circling,'' says Brad Hintz, a securities industry analyst at brokerage firm Sanford C. Bernstein & Co. Bernstein is owned by Alliance Capital Management Holding, one of the firms facing suits from investors and potential charges from regulators. Mr. Hintz calculates that the industry will ultimately pay $600 million in penalties to regulators and another $600 million to settle with shareholders. Just last week, the point was driven home that for some firms the stakes could be high indeed. On Tuesday, Security Trust Co., a processor of fund trades, was shut down cold by regulators after admitting its role in facilitating blatantly illegal trades. But as big as the possible fines and settlements sound at this early point in the investigation, the industry could easily absorb them. ''This isn't something they want to pay, but it won't hurt them,'' says Alexander Bono, chairman of the corporate litigation practice group at law firm Blank Rome. ''It's a one-year blip on revenue.'' To put the penalties in perspective, Manhattan-based Alliance Capital, the largest publicly traded fund manager, posted revenues of $699 million in the last quarter alone. While preliminary estimates of the costs of the scandal are sizable, independent legal experts suggest that the final sums may be far higher. Mr. Bono, for example, predicts that the cost of settling with shareholders alone could top $1 billion. He and others note that these cases rest on far more solid ground than the mostly unsuccessful suits brought in the last year against brokerage firms over tainted research. That's because in the fund cases, the plaintiffs are charging the money managers not only with ethical lapses, as they did in the research cases, but also with violations of federal law. Those violations have been richly detailed by regulators and can be easily grasped by people who aren't financial or legal experts. ''The mutual fund cases are much more focused,'' says Fred Dunbar, a senior vice president at NERA Economic Consulting. For example, in his firm's suit against Alliance Capital, Mr. Weiss plainly spells out how the funds treated their customers as dupes. He documents how the firm's warm and fuzzy marketing message-''A little planning goes a long way''-clashed with the firm's alleged actions. The suit contends that as early as 1998, Alliance was engaged in ''fraudulent and wrongful'' short-term trading schemes that ''enabled certain favored investors to reap many millions of dollars in profit at the expense of (ordinary) investors.''
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