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
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.
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
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 -
that no issues exist.
Does your auditor say there is no problem? Take our
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,
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
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
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: Ignites.com, February 26, 2009
Contact Broker Village at: