Plaintiffs’ Lawyer Warns That Class Action Litigation is Just Beginning
The class action settlement litigation against investment advisers is "still in its infancy," according to Randall Pulliam of Dallas-based Baron & Budd PC. Pulliam, you may recall, is that enterprising plaintiffs’ lawyer who filed a slew of lawsuits against advisers and boards of directors at 44 mutual fund complexes earlier this year. The suits alleged that the advisers and boards failed to file proof of claim forms necessary to recover proceeds in class action settlements on behalf of fund shareholders.
"There is still a great deal of litigation to be brought," said Pulliam, speaking at ISS’s annual conference last week. "We are going to bring it. I know other firms are going to bring it." He warned the audience of institutional investors: "Depending on the process that you had in the past, you very well may have liability on this."
Pulliam acknowledged that "over half" of the original cases have been voluntarily dismissed. "We’ve said, ‘Okay, we alleged this set of facts, but it looks like maybe we got it wrong’."
Why were so many of the allegations factually inaccurate? Mutual funds, according to Pulliam, "operate almost as a black box." As a result, his firm was not always able to sufficiently recreate the fund’s portfolio to identify what the fund was holding, when. That, in turn, "prevented us from being able to fully ascertain what claims should be brought," he said.
However, he added, some of the cases that have been voluntarily dismissed actually were settled. In a "handful" of the suits, the defendants settled, agreeing to return "money back to the fund itself." Because of confidentiality agreements, Pulliam cannot disclose which fund groups settled and the amounts of those settlements.
Other cases have been dismissed by the courts. But Pulliam emphasized that "every single one of them" was dismissed on procedural grounds. "The courts have said ‘You’ve not properly alleged your federal claims’," said Pulliam. "They’ve not ruled on the merits." As a result, the substantive question of whether an adviser has a fiduciary duty to file securities claims has not been specifically addressed by a court. "No court has said ‘Yes, these investment advisers owe a fiduciary duty or no they don’t’," he said. "That issue is still open."
Pulliam is planning to try again. "We are doing a little more research and we are prepared to re-file in state court," he said.
If a state court rules on the merits and states that an adviser’s fiduciary duty to advisory clients encompasses the duty to file class action settlement proof of claims, Pulliam will be ready.
"One issue, frankly, that we are waiting on is using our mutual fund litigation to resolve this fiduciary duty question," he said. "Depending on how it is resolved, it could just be a springboard to much more litigation . . . in the future." He said that his firm is "currently investigating" whether "private asset advisers" have a duty to file class action settlement claims. That, he added, involves a "different analysis" than in the mutual fund context.
Fueling that analysis: OCIE’s recent sweep in this area. "Why," asked Pulliam, "is the SEC conducting this fact finding" and sending out letters urging firms to take corrective action "if they are not implying that there is not this obligation?"
OCIE, as you probably know, conducted a recent sweep of advisers’ filing class action claims. A round of deficiency comments followed, along these lines: "As discussed in the adopting release for Rule 206(4)-7, advisers have an obligation to adopt policies and procedures that take into account the nature of a firm’s operations. In designing these policies and procedures, a firm should consider the risk exposure for the firm and its clients relating to a particular activity. Registrant’s clients may be eligible to participate in class action lawsuits, possibly resulting in the receipt of funds or securities. Therefore, Registrant should consider whether it is appropriate to implement written policies and procedures relating to clients’ participation in class action lawsuits." Added the comment, "We are bringing the issue described above to your attention for immediate corrective action."
In any event, all of Pulliam’s suits to date have been brought against mutual fund advisers and boards. "I believe that it is beyond dispute that with respect to mutual fund shareholders, someone owes them a fiduciary duty to file these proof of claims," said Pulliam. "Of all the parties in the equation" — the shareholders, board of directors, adviser — "it’s the individuals who have the least amount of ability to ensure their own interests are protected in these types of filings." He noted that individual shareholders do not have access to the actual portfolio records, so they have no way of knowing when they have a portfolio holding subject to a class action settlement.
As an aside, Pulliam recalled how he viewed the issue of class action settlement claims as a "sleepy little area" when he first filed the suits. "I didn’t realize what a hornet’s nest it was going to necessarily stir up," he said. In retrospect, he added, suing 44 of the 60 largest mutual fund complexes should have been expected to cause a stir.
When he started, Pulliam received the following advice from a friend (who happened to be one of the first plaintiffs’ lawyers filing a tobacco litigation suit): "If you are going to hit a bear, make sure you have a long stick."
At the time, "I didn’t fully understand what he meant," said Pulliam. "But what I have to tell you now is, we hit the bear, and now we are going back and getting a longer stick."
More in next week’s issue.