Lawsuits Against Fund Firms Concern Prospectus Inaccuracy

Two extremely large lawsuits were filed in late 2008 against well-known fund firms. Both damage estimates exceed $400 million. The basic claim is that loaded A-share trades below $50,000 make no economic sense. Such trades should be discouraged since either B- or C-share account values always are higher. With respect to this issue, and related conflicts of interest, it is claimed that prospectuses are silent, misleading, or in error. 

We are asked constantly for our "take" on the cases by clients, the press, and the regulators. We have no opinion on the legal merits of either case. But, after careful analysis of the math issues - and only the math issues - we agree that, in general, problems exist. In fact, several firms may be similarly at risk. 

For equity trades below $50,000 from the two firms, account values for higher-cost B- or C-shares always are greater than for lower-cost A-shares. This finding is in complete conflict with conventional wisdom. Odd as it seems, a high-cost share can perform best. Cost is simply no proxy for account value.

Some people claim that 80 to 90% of A-share sales are load-waived ("at NAV") due to 401(k) and wrap programs. So, firm risk is low. It sounds good, but isn't true. 401(k) and wrap flows are too low. Yes, 80 to 90% of trades are at NAV, but 1/3 to 1/2 of sales - by dollar volume - are loaded. Investor 1 makes 26 NAV trades of $100. Investor 2 makes one loaded $2,600 trade. 96% of trades are at NAV (26/27) yet 50% of dollars are loaded (2600/5200).  

We reviewed 20 firms' prospectuses. Errors abound in sales limits, numeric tables, and textual rationales. Most firms limit B-shares to $99,999, yet the right limit is $249,999 for at least one fund. By miscalculating CDSCs, many over-state costs. Some forgot B-A flips in their tables. Problems can go undetected for years. They are buried deep in the math and are very hard to see. So, fund auditors often tell fund boards - erroneously - that no issues exist.

Does your auditor say there is no problem? Take our quick quiz and see for yourself.

Some issues are widely known. (See below.) Many other issues still are under the radar. With our help, all issues can be fixed quickly, easily, and affordably. We are the leading firm in the area of share class analytics. We've helped fund firms, B/Ds, and regulators with these issues for years.

We work with an independent CPA firm and a securities lawyer. We can review documents for accuracy and math-to-text consistency. We will evaluate risk, quantify it, and suggest "fixes" to disclosure and/or fund pricing.

First Lawsuit (MFS, $450 million): Reuters, July 28, 2008
Second Lawsuit (Lord Abbett, $425 million): Yahoo Business, September 18, 2008
Unscrambling the Alphabet of Fund Fees: NY Times, January 20, 2008
It's Called Class A, But is it Best for You?: NY Times, April 6, 2008
That Prospectus May Need a Fine Tooth Comb: NY Times, July 13, 2008
Lawsuit Sheds Light on Share Class Suitability: Financial Times, November 3, 2008
Share Class Suits Raise Questions About Prospectus Accuracy: BoardIQ, December 2, 2008
Executives Personally Liable for Inaccuracy (SEC vs. Tambone): SEC Website, December 5, 2008
Prospectus Errors Can Tarnish Funds:, February 26, 2009


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