Steven Schulman, a partner in the New York office of Milberg Weiss Bershad Hynes & Lerach LLP, concedes that “very few, if any” pension or 401(k) plans have joined in the close to 100 suits filed to date. However, the firm, which has brought suits on behalf of investors who purchased Janus, Strong, One Group, Nations, and Alliance mutual funds, expects that to change, particularly as other practices come to light, he told PLANSPONSOR.com . “Canary was a fairly simple case,” notes Schulman, but the problem practices are “quite widespread” he said, based on the firm’s independent investigations. “Our sense is this is part of a pattern,” Schulman warns.
Indeed, while most of the specific mutual funds directly involved in the Canary trading practices are international offerings, and perhaps not on the typical 401(k) menu, Milberg Weiss has brought actions on behalf of the holders of all mutual funds in the family, not just the named funds. Furthermore, Milberg says that individual shareholders in the funds – including 401(k) participants – are eligible to participate in the class, so long as they bought shares during the class period.
Since September 3, one mutual fund after another has announced that it (a) has received a subpoena about its trading practices, (b) is conducting its own investigation of same, and/or (c) is cooperating with the investigation(s). Manager and broker firings/resignations have already been announced at Bank of America’s NationsFunds, Prudential’s Boston office, Alliance Capital, and Security Trust Company, albeit for very different types of activities, and not all related to the alleged Canary trading abuses (see Bank One Fund Unit Head Departs ).
Nor can plan sponsors afford to wait for regulatory relief, according to Schulman. “This is a gross abuse of investor trust. Plan sponsors can’t rely on regulators alone to provide a remedy,” says Schulman, who is looking for lead plaintiffs in the class actions brought to date. A lead plaintiff is a representative party that acts on behalf of other class members in directing the litigation. In order to be appointed lead plaintiff, the court must determine that the class member’s claim is typical of the claims of other class members, and that the class member will adequately represent the class. The lead plaintiff, who works with the court-appointed “lead counsel” in determining how the litigation should proceed and eventually be resolved, generally has the largest financial interest in the outcome of the case.
The Spitzer complaint said Canary obtained special trading opportunities with Strong Capital Management, Bank of America's Nations Funds, Banc One, and Janus Capital Group by promising to take substantial positions in various funds managed by these institutions.
Two types of trading violations have been alleged: late trading, or buying mutual-fund shares after the market close at that day's closing price; and market timing, which involves taking advantage of market-moving events after the close of the market, when the funds' daily prices are set based on the net-asset value of the portfolios. While the latter activity is not against the law, most mutual fund companies prohibit it as costly to other fund investors - and most claim to discourage such activities in their prospectuses. On the other hand, most daily valuation retirement programs rely on agreements whereby the recordkeeper captures participant trading instructions prior to the 4 p.m. cutoff, but do not communicate those movements to the fund companies until later in the evening.
Calls for Action
Mutual funds rating firm Morningstar has called for investors to dump their holdings in the four named funds (see Morningstar Cautions Investors in Wake of Canary Scandal ), and Lipper just noted that investors appear to be responding to those type calls (see Lipper: Four Scandal-Linked Fund Firms Lost $8B in September ). A development of possible concern to plan sponsors and providers alike: The SEC says it is considering one proposal that would require that fund officials (rather than an intermediary such as a broker-dealer) have to have trades in hand before the fund sets that day's price - typically 4 p.m. Eastern time (see SEC to Consider Post-Canary Scandal Trading Reforms ).
As recently as last week, Assistant Labor Secretary Ann Combs reminded fiduciaries that the fact that "improper practices are being investigated needs to be factored in" to a plan sponsor's thinking (see Combs: Fiduciaries Must Consider Fund Trading Practices ). Schulman, whose firm has taken a lead role in pursuing institutional investor litigation against Enron, AOL TimeWarner, and Lucent, cautions, " Their (plan sponsors) fiduciary role all but requires that they take steps."
As for timing, the window for participating as a lead plaintiff in the actions brought by Milberg Weiss to date is finite. Only about three weeks remain in actions brought against OneGroup, NationsFunds, Strong, and Janus, while about six weeks remain in the action brought against Alliance. You can check out the days remaining to request lead plaintiff status at http://www.milberg.com/mil-cgi-bin/mil?templ=current-cases.html .
Plan sponsors interested in pursuing their options can find out more at a special Milberg Weiss website ( http://www.mutualfundslitigation.com ), or by calling 800) 320-5081.