Mutuals case may be near its end

Judges narrow scope by dismissing claims against some brokerages


The mammoth legal battle over double-dealing and favoritism in the mutual fund industry, which is being heard in federal court in Baltimore, could be winding toward a settlement as judges overseeing the case recently dismissed a number of the legal claims.

In a series of rulings filed with the court, a panel of three judges are winnowing the case by throwing out investor claims against some brokerages, such as Wachovia Securities, and allowing only certain claims against mutual fund companies such as Janus Capital and Putnam Investments, and traders such as the investment management business Trautman Wasserman and Co.

Legal experts say the judicial opinions are a mixed bag that could prod an army of lawyers for both sides to the negotiating table rather than into a complicated and potentially lengthy trial.

The civil actions are seeking restitution for thousands of investors on top of more than $2 billion that the companies have agreed to pay as part of settlements with regulators.

"It brings the lawyers closer to settlement any time you have a ruling like this," said Andrew Stoltmann, a Chicago securities lawyer who isn't involved in this case. "It makes it more difficult for the plaintiffs to establish liability and damages, but it certainly isn't a fatal blow, and plaintiffs still have the remaining claims."

The lawsuits from across the country have been moved to U.S. District Court in Baltimore, which has established a record in trying complex corporate litigation. Securities lawyers are watching the case closely because many of the legal issues are novel ones. The mutual fund industry, unlike Wall Street and corporate America, had been considered free from scandal before the misconduct surfaced.

The case stems from "market-timing" and "late-trading" allegations that rocked the industry several years ago. Those practices allowed favored investors to game the system and make easy trading profits while enabling mutual fund companies to rake in more fees. Ordinary investors lost out because the practices hurt the overall performance of the funds.

Late trading, which is buying and selling mutual fund shares after trading is closed to other investors, is illegal. Market timing isn't illegal, and defendants in the case have argued that the practice was endemic to the industry and widely known. However, many mutual fund companies told investors that market timing was discouraged or not allowed.

Judge J. Frederick Motz described the stakes of the case in sweeping terms in his ruling. He said that for markets to function, "uniform rights and obligations" must be enforceable in the court system. He said the public must have confidence in the markets, including "average citizens in the heartland of America, who have been drawn into the securities markets through mutual fund investments."

Motz warned that those investors might not be entitled to monetary damages if it is determined that the regulatory settlements fully compensated them. So even if plaintiffs press their case and win, it could be "hollow victory with no money recovered," Stoltmann said.

That warning from Motz, contained in a footnote to his ruling, has drawn much attention from the lawyers involved and could influence how they decide their next move, observers said.

"Lawyers in cases like this tend to try to read the tea leaves," said Howard S. Suskin, a securities litigation expert. "I would expect that every single line of a judge's opinion is being parsed by both sides to try to determine how the judge may ultimately rule."

Motz handles lawsuits in one "track" of the case, while the other suits have been assigned to Judge Catherine C. Blake and Judge Andre M. Davis. Motz's original ruling, which allowed fraud claims against Janus as well as Bear Stearns & Co. and Bank of America Corp., set a framework for the case to proceed and has been applied to other lawsuits through orders issued this month.

Piecemeal settlements have been reached over the past year with a few of the defendants, including Canary Capital Partners, according to court documents.

New York Attorney General Eliot Spitzer, who brought the mutual fund shenanigans to light, made his first case in 2003 against Canary, a hedge fund alleged to have engaged in unlawful trading in several funds.

"It is a big case with a lot of parties and there are ongoing settlement negotiations actively on a number of fronts," said Alan Schulman, one of the lead attorneys for investors, "and we are seeing some progress."

The terms of those settlements are confidential. Their existence was revealed in court documents seeking an order from the judges to stop the proceedings against those parties.

"That suspends discovery," said Richard A. Booth, a University of Maryland law professor. "Witnesses wouldn't have to show up; people wouldn't have to be digging through files. All of that can be expensive."

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