Investors Withdraw Some Lawsuits Over Settlement-Claim Filing

By Ted Allen, Managing Editor

Investors have withdrawn almost half of the 44 lawsuits they filed against Vanguard, American Funds and other mutual fund companies over their alleged failure to file claims for securities settlements, according to defense lawyers.

In those cases, lawyers for investors voluntarily dismissed their lawsuits, without court action, but they may decide to file revised complaints after gathering more information. In some of the cases, mutual fund defendants have turned over evidence to demonstrate that they have filed settlement claims, lawyers say. At least four fund companies have publicly stated that they have been filing claims properly.

"I think a significant number of the other cases are currently in a posture where the defendants are investigating whether, in fact, they owned the securities that were named in the complaint and whether claims were made," William "Ned" Dodds, a partner in the New York office of Dechert, a law firm that represents several mutual fund companies, told IM Insight News. "That can take a little bit of doing, but I think they are doing that with a view towards getting similar dismissals, or potentially narrowing the case."

Investors sued Janus, Dreyfus, MassMutual, Putnam, Merrill Lynch, Neuberger Berman, Wells Fargo, Van Kampen and other fund companies in early January, claiming the fund managers failed to collect as much as $2 billion in settlement payouts in about 1,500 class-action lawsuits between 1996 and 2003.

The existing cases and any new complaints may be consolidated before a single judge because they involve common legal questions, Thomas S. Richey, a partner with Powell Goldstein LLP in Atlanta, told SCAS Alert. His firm doesn't represent any of the parties in the mutual fund lawsuits, but he is monitoring these cases for his firm's clients, which include trustees and other fiduciaries.

No Settlements
So far, it doesn't appear that any of the fund companies have settled, defense lawyers say.

Richey, who represents defendants in securities cases, said he expects that the investors' lawyers will abandon those cases where the mutual funds have turned over claim-filing documentation and instead focus their attention on the fund companies that haven't come forward with proofs of claim. Those defendants in time will file motions to dismiss and try to get the lawsuits thrown out on legal grounds.

"We will have to wait to see how those cases shake out," noted Richey, who believes that some of the investors' legal theories are "real sketchy."

In addition to the investor lawsuits, the Securities and Exchange Commission has initiated a fact-finding inquiry into the claims-filing procedures of mutual funds and other investment advisers. [For more on the SEC inquiry, see the March 2005 issue of the SCAS Alert.]

Class-action lawsuits have generated almost $20 billion in settlements during the past five years, according to SCAS data. Despite that recovery, less than 30 percent of institutional investors with provable losses file claims, according to research by Professor James Cox of Duke University and Professor Randall Thomas of Vanderbilt University.

"Surprising and Unfortunate"
Defense attorneys have criticized investors' lawyers for filing their lawsuits before fully reviewing publicly available data, such as information on the fund portfolios in the SEC's EDGAR system.

"This is a situation where they shot first and asked questions later," Thomas Zaccaro, a lawyer with Akin Gump Strauss Hauer & Feld who represents independent directors at American Funds, told Investment News.

"The way the cases were initially filed was surprising and unfortunate," Dodds told IM Insight News." But since the cases were filed, investors' lawyers have "been willing to listen," Dodds said.

Public Denials
In recent months, several fund companies have stated publicly that they already have procedures in place for filing settlement claims.

Merrill Lynch and Dreyfus told the New York Times that "they regularly file claims on behalf of their investors."

Vanguard spokesman John Woerth said the fund company has an established process for identifying cases and filing proofs of claim.

"Over the past five years, Vanguard has pursued recovery as members of hundreds of class-action suits and has successfully recovered hundreds of millions of dollars for our clients," Woerth told Investment News.

Around the Country
The suits originally were filed in federal courts in 11 states, including New York, Massachusetts, Illinois, Pennsylvania, Texas, California, and Colorado. At least 16 suits were filed in the Southern District of New York.

Of course, investors can't recover from settlement funds once the deadlines for filing claims have passed and the funds have been disbursed. "It's not possible for the funds to go back and get the money. They can't remedy it," Randall Pulliam, one of the lead lawyers for investors, told Investment News.

Investors alleged that the funds' failure to claim this money was a breach of fiduciary duty, an act of negligence and a violation of Sections 36(a) and (b) of the Investment Company Act (ICA) of 1940. The suits also allege that the fund managers violated Section 47(b) of the ICA and seek to recover management fees collected in the past four years.

The lawsuits were filed by Baron & Budd, a firm based in Dallas that is best known for representing plaintiffs in environmental tort cases, and Cauley Bowman Carney & Williams, a firm based in Little Rock, Arkansas, that specializes in securities litigation.

Investors' lawyers did not return calls seeking comment.

Potential Defenses
Not surprisingly, defense lawyers have questioned the viability of the investor lawsuits. In a recent commentary in Metropolitan Corporate Counsel, a legal trade publication, Akin Gump lawyers Kim Koopersmith, Andrew Rossman and Nancy Chung outlined various defenses that may be available to the fund companies.

They noted that the investors might not have legal standing to bring direct claims against the fund companies based on either state common law or Section 36(a) of the ICA. Rather, investors may only be allowed to sue derivatively on behalf of the mutual fund.

Derivative lawsuits are subject to various procedural requirements, Richey said. For instance, investors may need to first ask the fund's independent directors to review the allegations before they can sue on behalf of the fund.

Section 36(a) authorizes lawsuits by the SEC, but it does not explicitly permit suits by private investors. While some courts have allowed such suits, the U.S. Supreme Court has never recognized that plaintiffs have a private right of action under Section 36(a), the Akin Gump lawyers wrote.

Richey noted that a federal judge in the Eastern District of New York ruled Jan. 21 that there is no private right of action under Section 36(a) to allow an investor to sue a mutual fund. While that case did not involve claim filing, the court's interpretation of Section 36(a) may be persuasive to the judges who decide the claim-filing cases, Richey said.

Furthermore, investors may not be able to meet the requirement of Section 36(a) to show there was a "breach of fiduciary duty involving personal misconduct."

Likewise, investors may not have valid fiduciary duty claims under Section 36(b). That provision generally only applies to allegations that investment adviser fees were excessive or obtained in violation of a fiduciary duty, according to Koopersmith, Rossman and Chung.

To prevail on their negligence and fiduciary duty counts, the investors must show that the fund companies violated the prevailing standard of care in the industry. However, there may not be a uniform industry practice to file proofs of claims for settlements, and thus a fund manager's failure to do so would not violate the standard of care, the Akin Gump lawyers noted in their commentary.

Fiduciary Obligations
Even if the investors mostly fail in their lawsuits against the mutual funds, other institutions that manage assets--including banks, investment advisers, retirement plan administrators and trust companies--should still be sure that they have procedures in place to monitor securities settlements, Richey said. These fiduciaries won't be able to rely on the same legal defenses as the mutual fund companies if they are sued in state court by beneficiaries.

"Some of these securities class actions can lead to large settlements," Richey said. "You won't know--unless you keep on top of that."

Commentary: WorldCom 360° By Bruce T. Carton, Vice President and Executive Director, Securities Class Action Services

The final days of winter 2005 appear to have been the crescendo of nearly three years of fallout from the financial fraud at WorldCom Inc. that first came to light in June 2002. On March 15, former CEO Bernie Ebbers was found guilty by a jury of nine counts relating to the accounting fraud at WorldCom. He now faces up to 85 years in prison and is to be sentenced on June 13.

In addition, J.P. Morgan's agreement on March 16 to settle the claims against it in the WorldCom securities class action for $2 billion capped a whirlwind two-week period in which 13 banks and all 12 former WorldCom directors named as defendants in that case settled for a combined $3.486 billion. When this is combined with the $2.575 billion settlement with co-defendant Citigroup that was announced May 10, 2004, the total settlement fund in WorldCom securities class action now stands at a staggering $6.061 billion. [See the chart on the first page for a breakdown of these settlements.]

Although there are still a few loose ends, here is a 360-degree view of the WorldCom legal landscape as it heads toward closure.

Criminal Charges
With the jury verdict in the Ebbers trial, the federal criminal prosecutions of WorldCom executives appear to be completed. In addition to the Ebbers verdict, five other executives, including the company's former CFO, Controller and Accounting Director, previously pleaded guilty to charges of securities fraud and each faces a sentence ranging from probation to between 15 and 25 years in prison.

It is unclear what will become of any remaining state criminal prosecutions against WorldCom executives. In August 2003, the state of Oklahoma filed felony charges against Ebbers and former CFO Scott Sullivan, which were later dismissed pending the conclusion of the federal case. After Ebbers was convicted, Oklahoma's Attorney General stated that he intended to re-file these state fraud charges but offer concurrent sentences to Ebbers, Sullivan and possibly others on the state fraud charges if the federal sentences were "appropriate." Otherwise, the Attorney General stated, the state would prosecute these individuals on its own.

SEC
The SEC has filed settled enforcement actions against five of the six WorldCom executives who have pleaded or been found guilty of securities fraud. To date, however, the SEC has not sued Ebbers. In addition, in 2003, the SEC settled the lawsuit it filed against WorldCom itself. WorldCom agreed to pay $500 million in cash and $250 million worth of stock, all of which will be returned to investors under the Fair Funds provision of the Sarbanes-Oxley Act. To recover a share of this $750 million, investors must file a claim form no later than July 19, 2005. This SEC settlement and claims process are completely separate from the high-profile settlements in the private securities class actions, which are discussed in greater detail below.

Securities Class Action
In May 2004, Citigroup became the first WorldCom defendant to settle when it agreed to pay $2.575 billion. At the time, that settlement by itself made the WorldCom case the second-largest settlement in history behind only the $3.1 billion settlement in 2000 in the Cendant case. As discussed above, the recent flurry of settlements in this case has raised the total settlement fund to an unprecedented $6.061 billion. J.P. Morgan's recent settlement was notable not only for its enormous size (the third-largest settlement in history), but for the way it came about: J.P. Morgan reportedly was offered a settlement in May 2004 for $1.37 billion, but the bank chose to reject that offer. Less than a year later, J.P. Morgan settled the case for $2 billion, or $630 million more. Numerous other settlements in this case, such as Bank of America ($460.5 million), Deutsche Bank Securities ($325 million), and ABN Amro ($278.3 million), are among the top 25 largest settlements of all-time.

Most recently, between March 18 and March 21, all 12 former directors of WorldCom who are defendants in the securities class action settled the claims against them for a combined $60.75 million. Significantly, the directors have agreed to pay $24.75 million out of their own pockets, with the other $36 million coming from insurance proceeds. The directors' settlement is extraordinary because it is one of less than a handful of instances in which directors have agreed to settle using personal funds. The lead plaintiff, the New York State Common Retirement Fund, reportedly insisted from the beginning of the case that such personal payments would be a required part of any potential settlement with the directors.

Following the barrage of recent settlements, the only remaining defendant was WorldCom's auditor, Arthur Andersen. Although Andersen no longer functions as an accounting firm, lawyers for investors decided to take Andersen to trial because they reportedly believe that the firm may still have significant assets. A jury heard opening arguments on March 29. If the case does not settle, the trial against Arthur Andersen may provide the final exclamation point to the WorldCom saga.

TENTATIVE SETTLEMENTS

WorldCom Inc.
In addition to the 2004 settlement made by Citigroup Inc. for $2.575 billion, all of the other major banks still pending in the WorldCom class litigation have settled. In all, six additional settlements have been reached, including Bank of America for $460.5 million, Lehman Brothers, Credit Suisse First Boston, Goldman Sachs & Co., and UBS Warburg for $100.3 million, ABN Amro Inc., Tokyo Mitsubishi Int'l, BNP Paribas Securities Corp., and Mizuho International for $428.4 million, Deutsche Bank for $325 million, WestLB AG and Caboto Holding SIM for $112.5 million, and J.P. Morgan Chase for $2 billion.

All of the WorldCom settlements combine for a total settlement fund of just over $6 billion. The lawsuit, originally filed in April 2002 in the U.S. District Court for the Southern District of New York, is on behalf of investors who purchased or otherwise acquired WorldCom stock and bonds from April 29, 1999, to June 25, 2002.

Global Crossing Ltd.
Citigroup has agreed to pay $75 million to settle the litigation filed in February 2002 in U.S. District Court for the Southern District of New York by Global Crossing investors. This is a second partial settlement in addition to one reached in July 2004 for $245 million by employees and others of Global Crossing. Investors who purchased the securities of Global Crossing from Feb. 1, 1999, to Dec. 8, 2003, are expected to be eligible to take part in the latest settlement.

Global Crossing provides telecommunications solutions over a global Internet protocol-based network, which reaches various countries around the world.

PriceSmart Inc.
PriceSmart has agreed to pay $2.35 million to settle a class-action lawsuit filed in November 2003 in U.S. District Court for the Southern District of California. Investors who purchased PriceSmart shares from Dec. 20, 2001, to Nov. 7, 2003, are expected to be eligible to take part in the settlement.

The lawsuit alleges that the company and its officers issued numerous statements and filed quarterly and annual reports with the SEC that overstated the company's net income and financial results.

Amazon.com Inc.
Amazon.com Inc. has agreed to pay $27.5 million to settle a class-action lawsuit filed in March 2001 in U.S. District Court for the Western District of Washington. Investors who purchased the securities of Amazon.com from Oct. 29, 1998, to Oct. 23, 2001, are expected to be eligible to take part in the settlement.

The lawsuit claims that Amazon.com overstated revenue from investments in various joint ventures in order to increase its cash flow and make its losses appear smaller.

Amazon.com sells books, music, videotapes, audiotapes, and other products online.

DISMISSALS

Vertex Pharmaceuticals Inc.
A class-action lawsuit that was filed in September 2003 in U.S. District Court for the District of Massachusetts against Vertex Pharmaceuticals has been dismissed. The lawsuit was filed on behalf of investors who purchased or acquired the company's securities.

The investors alleged that Vertex and its officers artificially inflated the company's stock price by issuing false and misleading statements regarding its development of compound VX-745, an inhibitor of p38 mitogen-activated protein kinase, which is associated with the onset and progression of inflammation.

Vertex discovers, develops, and commercializes novel pharmaceuticals for the treatment of diseases for which there are currently limited or no effective treatments.

Valassis Communications Inc.
A class-action lawsuit by Valassis Communications investors has been dismissed. The suit was filed in October 2004 in U.S. District Court for the Eastern District of Michigan.

The investors alleged that the company and its officers issued materially false and misleading statements concerning Valassis's performance and future prospects, causing the company's shares to trade at artificially inflated levels.

Valassis prints and publishes coupons and other consumer-purchase incentives primarily for package goods manufacturers.

American Pharmaceutical Partners Inc.
A class-action lawsuit filed in December 2004 in U.S. District Court for the Central District of California against American Pharmaceutical Partners and others has been dismissed. The suit was filed on behalf of investors who purchased or acquired the securities of American Pharmaceutical.

The investors alleged that the company and its officers made materially false and misleading statements about the breast-cancer drug Abraxane, a reformulated version of Taxol, which caused the company's shares to trade at artificially inflated prices.

American Pharmaceutical develops, manufactures and markets injectable pharmaceutical products.

• Enron Corp.
• Enterasys Networks Inc.

With all the attention on WorldCom, don't forget about other deadlines

In the past few months, there has been a heavy focus on the WorldCom Inc. securities litigation, both in the SCAS Alert newsletters and other publications. The first major WorldCom settlement--$2.6 billion accord with Citigroup in May 2004--generated great interest. This settlement alone was large enough to be the second largest of all-time. Combine the Citigroup settlement with all of the other settlements made in the past couple weeks by the other investment bank defendants and the total potential recovery for investors in the WorldCom litigation now exceeds $6 billion!

Even though the first WorldCom settlement deadline passed on March 4, it is easy to see why investors may not be focusing on other pending settlements with rapidly approaching claim deadlines.

As of March 21, there were 34 settlements worth more than $1.2 billion overall with claim deadlines in the coming months. A few of the larger settlements to keep an eye on include:

There is a large amount of money that can be recovered by investors even outside of the WorldCom settlements. For a full list of cases pending currently and throughout the future, please check the Pending Settlements Hot List on the SCAS website frequently.