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Judge Panel Reluctant to Combine Lawsuits
Lawyers for mutual funds companies argue that lawsuits should be consolidated to lower costs.
Bloomberg News Service
SACRAMENTO - Canary Capital Partners LLC, Janus Capital Group and other mutual fund companies may have to face multiple judges presiding over shareholder suits alleging improper trading, after a judicial panel voiced concerns about combining 275 suits into a single case.
Lawyers for Canary Capital, the hedge fund whose trading spurred the investigations into the $7.2 trillion mutual fund industry, and Janus Capital, told judges that one lawsuit in New York dealing with investors' claims of improper trading would be cost-effective. Panel members said finding one judge who doesn't own shares in the funds being sued would be difficult.
Canary, Janus, Bank of America Corp., Strong Capital Management, Banc One Corp., and other funds are being sued by hundreds of shareholders who say they lost money when mutual and hedge funds made after-hours and short term trades that siphoned profits from long-term investors. Multiple cases may increase costs and complicate possible efforts to forge a settlement.
"I don't think any single judge can handle all the class actions," said U.S. District Court Judge John F. Keenan, a member of the federal Judicial Panel for Multidistrict Litigation and a New York federal court judge, at a hearing in Sacramento, Calif.
Keenan and other judges on the panel suggested grouping the cases by mutual fund families and assigning them to different judges in the same federal circuit, similar to a plan proposed by lawyers for shareholders. Investors oppose a single judge approach, saying the lawsuits are too different.
'Nightmare'
Robert Jossen, an attorney for Canary, asked the panel to conduct an investigation into whether there's a single judge who could hear the cases before making a decision. He told the panel that Canary is a defendant in 110 of the 275 cases filed in eight different cities.
"You can imagine what kind of nightmare it would be" if the suits aren't combined into one, he told the panel. He declined to comment after the hearing was over.
Canary and mutual funds companies are accused in lawsuits filed in California, Colorado, Illinois, New Jersey, New York, Pennsylvania, Wisconsin and Ohio of making trades after 4 p.m. at that day's price to take advantage of late breaking news. The practice is improper, the lawsuits say, because the law calls for such trades to be priced at the next day's 4 p.m. value to keep investors on a level playing field.
Bank of America, Janus and Strong had agreements with Canary that allowed it to make late trades, the lawsuits said.
Steven Schulman, partner at Milberg, Weiss, Bershad, Hynes & Lerach LLP in New York, is representing many of the investors. At stake, potentially, are millions of dollars in shareholder claims. Lead counsel in class action cases typically receive one-fifth of an award, according to a study published last year in the Journal of Empirical Legal Studies.
Other investigations
The Canary trades led to an investigation by state and federal authorities into trading practices at dozens of mutual fund companies.
Canary and Edward Stern, the firm's managing principal, paid $40 million in restitution and fines to settle civil complaints against them filed by New York Attorney General Eliot Spitzer. Together, Bank of America, Janus and Alliance Capital Management Holding LP have set aside almost $500 million for restitution and legal bills.
Led by U.S. District Court Judge William Terrell Hodges of Florida, the seven-judge panel in Sacramento has organized cases in recent years involving claims against Enron Corp., WorldCom Inc. and Holocaust-era German companies. The panel is expected to rule within 30 to 60 days.
In the past, the panel's tendency is "toward inclusivity," said Larry Soderquist, director of Vanderbilt University's Corporate and Securities Law Institute. "It will consolidate unless there are reasons not to."
A model for the fund cases may be the lawsuits that focused on how shares of initial public offerings of Internet companies were allocated, said James Cox, a professor of corporate and securities law at Duke University. Though suits named more than 300 companies as defendants, they were organized as a single case. It resulted in a $1 billion settlement in June.
"I think that was for the better," Cox said.
The newest case is MDL-1586 In Re Mutual Funds Investment Litigation.
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