Progress on class-action suits slow and uneven
Efforts to settle the numerous class-action lawsuits filed against Putnam Investments, MFS Investment Management, and other mutual fund companies for their role in the market-timing scandals are moving at an uneven pace, and any deal that may be worked out is likely months away, principals involved in the case said.
The settlement talks remain at initial stages, and involve only some of the 20 fund companies that have been sued by plaintiffs attorneys who contend the firms defrauded shareholders by allowing certain privileged investors to trade freely in and out of their funds, in violation of fund rules. The talks that are underway largely involve swapping material that could inform either side's decision to move forward with offers to settle, attorneys involved in the case said.
The hundreds of class-action lawsuits have been consolidated into a proceeding known as multidistrict litigation in US District Court in Baltimore. It's so large that four federal judges are required to track the cases, and at least one hearing had to be held in a federal courtroom that has banked, movie-theatre-style stadium seating to accommodate the scores of attorneys present.
Market timing is the rapid trading in and out of mutual funds to take advantage of inefficiencies in the pricing of their underlying securities. Because the trading can hurt fund performance and disrupt managers' strategy, most fund companies prohibit it. But the disclosures last year that fund companies either failed to stop market-timing or even encouraged the business because of the fees it generated earned the industry an enormous black eye with investors.
Many of the firms named in the class-action suits, or individuals at those companies, already have settled fraud and other charges related to the market-timing activities with federal and state securities regulators. Those companies, which neither admitted or denied guilt, nonetheless collectively agreed to pay around $2 billion in penalties to regulators and reimbursements to shareholders.
"None is particularly close to settling, but there have been some contacts and discussions," said Seth Schwartz, an attorney at Skadden, Arps, Slate, Meagher & Flom LLP in New York who represents Putnam. In April, Putnam agreed to pay $110 million to federal and Massachusetts regulators to settle charges that it failed to stop six investment professionals from rapidly trading in and out of mutual funds they either oversaw or were involved in.
Putnam declined to comment. An MFS spokesman said the company would not comment on legal matters.
Some of the nation's leading class-action law firms are representing plaintiffs, including Milberg Weiss Bershad & Shulman LLP, the New York firm that has brought thousands of such cases. Milberg Weiss has been appointed the lead counsel for the lawsuits against Putnam. Milberg Weiss partner David Bershad did not return phone calls seeking comment, nor did several attorneys at other firms who are leading some of the other cases against the fund companies.
The suits seek an unspecified amount of damages from the mutual fund companies. But an attorney for one of the defendants said that for the plaintiffs to receive any money, they will have to show that damages collectively total more than the $2 billion that fund companies have already agreed to reimburse shareholders under their settlements with regulators.
Meanwhile, other fund firms appear to be in no mood to settle with plaintiffs. For example, T. Rowe Price has not been charged by any federal or state regulator, yet has so far been included as a defendant in the federal proceeding. T. Rowe's lead counsel in the case, Daniel A. Pollack, said the plaintiffs are "picking on the wrong fund group."
Pollack also is representing Franklin Templeton Investments in the class-action case. The San Mateo, Calif., fund giant yesterday agreed to pay $5 million to Massachusetts, and $50 million in August to federal regulators, to settle charges that it allowed some investors to market-time its funds. But Pollack said Franklin has no interest in negotiating a deal with the class-action plaintiffs because the firm believes the timing incidents were isolated, and that it otherwise took "strong" steps to stop such trading in its funds.
Pollack added that he did not think a settlement between one fund firm and its plaintiffs would serve as a template for other settlements because the circumstances differed so much from company to company.
Another company that apparently isn't discussing a settlement is the Columbia Funds unit of the former FleetBoston Financial Corp., said attorneys in the proceeding. In March Columbia agreed to pay $140 million to settle its market-timing case with regulators. A spokeswoman for Bank of America Corp., which bought Fleet in March and is combining the Columbia operations with its own Nations Funds unit, declined to comment. Bank of America agreed in March to pay $375 million to settle a myriad of improper trading charges, and Nations Funds is a defendant in the class-action proceeding.
Meanwhile, plaintiffs are required to file amended complaints against the fund companies by the end of September, and the judges in the case have scheduled hearings in February and March on motions by the companies to dismiss the case.
Andrew Caffrey can be reached at firstname.lastname@example.org.
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