Sue Your Mutual Fund For Failing to Participate in Securities Class Action Settlements?

So you mull over your latest mutual fund statement, fully disheartened by the S&P 500’s meager 0.42% total gain this year, and wonder to yourself, “Why doesn’t my mutual fund submit the short paperwork necessary to collect the securities class action settlement money to which it is legally entitled?” Free money for me, right? It sure seems easy enough. Let’s see, fill out a form, attach the trades, slap a stamp on it, and head outside to look for one of those ubiquitous blue boxes on the corner. Now just wait for the check, and when it comes, add it to the pot. Presto – no pesky breach of fiduciary lawsuits and the funds’ rate of return just ticked upward a notch or two.

As it turns out, investors with their hard-earned money in the Allianz Funds were thinking just like you. Of course, they jumped in with both feet, serving the financial services giant with a class action lawsuit for failing to pick up its share of these settlements. Even George Tenet might agree this one is slated to be a slam dunk.

But you didn’t think this was going to be that easy, did you? Judge James V. Selna (C.D. Cal.) sure didn’t. He took a look at plaintiffs’ claims that Allianz violated the Investment Company Act of 1940, breached its fiduciary duty, and committed plain old negligence, and well, let’s just say you had better start sharpening your pencil and get that demand letter drafted if you are going to be litigating this one anywhere near his courtroom.

In evaluating the state law claims and the 1940 Act claims under § 36(b) (for breach of fiduciary duty), Judge Selna held these must be brought on a derivative basis because “[t]he fact that Defendants allegedly failed to ensure the participation [in the settlements] injured the funds,” not the shareholders directly. Since the funds “owned the securities,” plaintiffs would have to bring the claims in a derivative lawsuit, following the procedures of Massachusetts law, under which the fund was established. He also ruled that Plaintiffs’ 1940 Act claims under § 36(a) (alleging “personal misconduct”) could only be brought by the SEC, not private plaintiffs.

So where does it go from here? One thing that seems fairly certain is that these investors won’t get to re-file the case as a derivative action, at least not in federal court. Since the federal claims were ruled fatally defective, the court held it no longer had jurisdiction, and bounced the entire action with prejudice. Remains to be seen if we’ll see these investors next in San Francisco or Boston. Stay tuned. You can read the decision, filed on June 8, 2005, at 2005 U.S. Dist. LEXIS 11388.

Nugget: “The [Plaintiffs] injury is identical to every other investor’s in that their pro rata share of the fund allegedly would have been more valuable had Defendants participated in the settlements.”