| Tue 2 Dec 2003, 15:31 | | Old Mutual in direct line of fire |
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By: Barry Sergeant
The floodgates are opening with class action lawsuits against Old Mutual’s US subsidiary Pilgrim Baxter (PBHG) and, for the first time, Old Mutual Asset Management.
Specifically, Old Mutual Asset Management (OMAM), a unit of London-Johannesburg dual-listed Old Mutual, is named as a defendant in a class action suit filed in the East District of Pennsylvania.
In a corner of its labrynthine website, PBHG says that it expects that additional lawsuits similar to this [class] lawsuit have been or will be filed . . .
Class actions constitute one of the biggest sub-sectors of litigation in the US, itself a litigious society. The latest class action against PBHG and others, filed on November 24, names as defendants the numerous entities within the PBHG family, along with individuals such as founders Gary Pilgrim and Howard Baxter, and OMAM. The latest class action (the first was filed on November 17) follows civil fraud charges laid against the PBHG family on November 20 by New York Attorney-General Eliot Spitzer.
Spitzer is looking for damages, penalties, and so on, of at least $250m, from the PBHG family. Also on November 20, the Securities and Exchange Commission (SEC), a federal agency, laid civil fraud and related charges against PBHG. The court papers in the class actions have been professionally prepared by attorneys specialising in the area, and include Shiffrin & Barroway LLP, which has a particularly high rate of successes.
Given the success rate of Spitzer, the class actions against PBHG and related defendants would appear to be off on a sound footing.
In a worst-case scenario, the PBHG debacle could cost Old Mutual dearly. Old Mutual executives have variously estimated the price of acquiring PBHG as in the region of $500-m in September 2000. If this ends up being written off, and Spitzer wins his $250-m, the overall cost could top $1-bn, depending on the success of the class action suits.
In the latest court papers, the complainants note that hundreds, or even thousands, of investors, could join the class action against PBHG and others. Class actions have traditionally been favoured as a fair and equitable way of achieving justice when one individual would have substantially an identical case as many others against specified defendants. Class actions are thus particularly apposite in the case of mutual funds, where many thousands of investors hold technically identical rights in the same investment entity.
In the latest class action filed, complainants Lilia Binder, William Edmonson, Henry Morrow, Delia Orlando, and L. D. Johnson argue that the defendants “were engaging in an unlawful and deceitful course of conduct designed to improperly financially advantage defendants to the detriment of complainants.
“As part and parcel of defendants’ unlawful conduct, the disclosure obligations failed to properly disclose that select favoured customers were improperly allowed to “time” their mutual fund trades.”
While PBHG has insisted that it completely halted the kind of behaviour complained of (market timing and late trades) in December 2001, the latest class action claims, on the contrary, that the “class time” covers a period from November 24, 1998, until November 12, 2003.
The complainants allege that PBHG and other defendants engaged in “fraudulent and wrongful schemes that enabled certain favoured investors . . . to reap millions of dollars in profit, at the expense of complainants and members of the class, through secret and illegal timed trading.”
OMAM has been named as the [legal] “control” person of PBHG, and related entities, in the latest class action.
The first class action against the Old Mutual subsidiary was filed by Stephen Carey, also in the Eastern District Court of Pennsylvania, on November 17, 2003. Both class actions charge the defendants with violations of various provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and common law breach of fiduciary duties. The complainants seek to recover unspecified damages on behalf of the class members.
The Carey class action specifically alleges that during the relevant time, PBHG funds and other named defendants engaged in “illegal and improper trading practices, in concert with certain institutional traders,” causing financial injury to the shareholders of the PBHG funds.
Carey alleges that the defendants “surreptitiously permitted certain favored investors, including defendant [Gary] Pilgrim's private investment limited partnership, to illegally engage in 'timing' of the PBHG Mutual Funds whereby these favored investors were permitted to conduct short-term, 'in and out' trading of mutual fund shares, despite explicit restrictions on such activity in the PBHG Mutual Funds' prospectuses. “
