Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, March 26, 2013

Court Grants Class Certification to Mutual Fund Investors Based on Affiliated Ute Presumption

A recent opinion from the S.D.N.Y. granted class certification to a class of investors in several mutual funds in the Smith Barney Family of Funds because the plaintiffs successfully invoked the Affiliated Ute presumption of reliance.  The allegations stemmed from a previous SEC settlement alleging that the Funds failed to disclose that they did not pass along cost savings achieved by reducing transfer agent fees to the Funds, but instead allowed an affiliated firm to pocket the difference.  In re Smith Barney Transfer Agent Litigation (05 Civ. 7583 (WHP) dec. Mar. 21, 2013) (Download SmithBarney.032113[1])  

Defendant argued that class certification was unwarranted because there was no class-wide reliance presumption available.  Plaintiffs conceded that the fraud-on-the market presumption was not available because the securities did not trade in an efficient market and instead relied on the less commonly invoked Affiliated Ute presumption,  which is available only in claims "involving primarily a failure to disclose." As the court observed, the distinction between misstatements and omissions is often illusory.  Noting that the Affiliated Ute presumption is a "pragmatic one," the court found that the heart of plaintiffs' claim is the failure to disclose the transfer agent scheme that generated profits for the affiliate at the Funds' expense.  Moreover, class representatives had testified that disclosure of the transfer agent scheme would have affected their investment decisions.

As part of the earlier settlement,  the SEC had established a Fair Fund and distributed more than $100 million to the Funds.  Defendant argued that the claims of named plaintiffs who participated in the Fair Fund distribution were atypical.  The court, however, rejected this argument; typicality focuses on the nature of plaintiffs' claims, not on possible defenses to the claims.  In addition, while the securities law prohibits double recovery, there is no evidence that the named plaintiffs had been fully compensated.

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