Mutual funds face 170 suits in court here

Three-judge federal panel gets litigation 'Olympics'

Legions of lawyers expected

Market timing, late trades alleged against six firms

March 14, 2004|By Paul Adams | Paul Adams,SUN STAFF

Slammed for months by late-trading and market timing scandals, embattled mutual fund representatives have been dragged before Senate panels and federal regulators as they try to defend industry practices that some say have cost investors billions of dollars.

Now, executives at several companies will have to go before federal judges in Baltimore in what one securities attorney said could be the "Olympics" of civil litigation surrounding the $7.5 trillion industry.

To the surprise of many in the legal community, a federal judicial panel decided Feb. 20 to transfer more than 170 lawsuits against six scandal-torn mutual fund companies to U.S. District Court in Baltimore. The cases, which seek millions of dollars in damages, will be handled by three judges, with scheduling determined by Judge J. Frederick Motz, an 18-year veteran who has most recently gained recognition for presiding over dozens of lawsuits against software giant Microsoft Corp.

The transfer order means Baltimore will play host to legions of lawyers who will argue the fate of a large swath of an industry that counts nearly half of all American households among its customers. And, in addition to filling hotel rooms, it will add to the Baltimore court's growing reputation for sophisticated handling of complicated, high-stakes corporate cases that garner national headlines.

"We're talking about some of the biggest securities fraud cases in the history of capital markets," said Paul Geller, a Boca Raton, Fla., attorney representing investors who are suing several of the companies named in the trading scandals.

Some of Baltimore's biggest law firms likely will share in the spotlight as the embattled fund companies seek local counsel to assist their defense. Some admit privately that their phones have been ringing since the panel issued its order.

The investment firms doing the calling are a who's who of mutual fund families. They include Putnam Investments, Strong Capital Management Inc., Alliance Capital Management Holdings LP, Bank of America Corp., Bank One Corp. and Janus Capital Group. Other companies are expected to be added to the list.

While the companies vary, the cases focus on the same practices -- market timing and late trading -- and will involve common witnesses and defendants.

Widespread trading abuses in the industry first surfaced Sept. 3, when New York Attorney General Eliot Spitzer revealed that hedge fund Canary Capital Partners had arrangements with several mutual fund companies to purchase shares after the 4 p.m. market close. Late trading, which is illegal, allowed Canary to profit by taking advantage of market-moving news that occurred after hours.

The investigation also revealed widespread market timing by Canary and other companies. Market timing is when a trader makes rapid trades in and out of funds in order to take advantage of pricing inefficiencies. While not illegal, most funds tell investors they don't allow the practice, which can hurt returns for long-term investors.

The allegations have led to a broad probe of the industry and spawned hundreds of civil lawsuits filed in jurisdictions stretching from California to New York.

The Judicial Panel on Multidistrict Litigation, which meets periodically to consider requests to consolidate cases that cross district lines, chose to transfer the cases to Baltimore. The move was made despite arguments by various plaintiffs and defendants to have the cases transferred to the Southern District of New York or separated and parceled out to courthouses closer to the headquarters of each of the fund companies involved.

"No district stands out as the geographical focal point for this nationwide litigation," the panel said in its ruling. "Thus, we have searched for a transferee district with the capacity and experience to steer this litigation on a prudent course."

Legal experts say the Baltimore court faces a monumental task.

"You're talking about a massive number of cases," said Howard S. Suskin, a securities litigation expert with Jenner & Block in Chicago. "It's really going to be a challenge, I think, for any one court to handle that -- particularly a court that might not historically have had as much securities-related litigation."

Big securities cases often wind up in Manhattan -- home of Wall Street and the heart of the U.S. financial community. But New York's Southern District is swamped with securities cases that emerged from the stock market excesses of the late 1990s.

Among those crowding the docket are hundreds of cases brought by shareholders claiming they were cheated out of profits from initial public stock offerings, or "IPOs," because the process was rigged to favor certain large clients.

By comparison, legal experts say, Baltimore has a lighter docket, allowing it to move the mutual fund cases along swiftly. And unlike several other big cities with large financial centers, Baltimore is just a train-ride away for lawyers and potential witnesses in both New York and Washington.

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