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Plaintiffs Win Round in Nuveen Case


A recent federal court ruling gives plaintiffs' attorneys additional encouragement to bring suits against mutual fund companies.

A U.S. District Court judge in Chicago has refused to dismiss a lawsuit against Nuveen Advisory Corp. of Chicago which alleges that Nuveen breached the duty it owed to shareholders of six closed-end funds. Judge Elaine Bucklo held in a decision dated March 30 that shareholders can sue Nuveen for allegedly violating the fiduciary duty it owed shareholders without proving that the fees Nuveen charged the funds were excessive.

Shareholders can bring a suit under the federal law which governs mutual funds - the Investment Company Act - based on allegations that the fee agreement between the funds and Nuveen, coupled with the way in which Nuveen managed the fund, created a conflict of interest, the court ruled.

The decision came on Nuveen's motion to dismiss the case well in advance of trial. Bucklo dismissed four alleged violations in the case, but allowed the suit to continue with respect to the breach of fiduciary duty allegation under section 36(b) of the Investment Company Act. That provision permits a shareholder to sue a fund company when the company violates the fiduciary duty it owes shareholders.

Nuveen denies the allegations in the case and is defending the suit vigorously, said Angela Thomas, a spokesperson for Nuveen, last week. She declined further comment.

The lead attorney for the shareholders in the case, Marvin Ian Miller of Chicago, did not return calls seeking comment.

The Nuveen case is the second in the past year in which courts have permitted shareholders to pursue lawsuits against fund advisers without being required to prove fees were excessive. A New Jersey federal court judge issued a ruling similar to that in the Nuveen case on Feb. 23, 1998 in a case involving Fund Asset Management of Princeton, N.J. Both rulings run against the view of a majority of courts which hold that a plaintiff must show that fees are excessive to win a section 36(b) case, according to mutual fund industry lawyers.

The Nuveen and Fund Asset decisions represent a broad reading of section 36(b), said Jeffrey B. Maletta, a lawyer with Kirkpatrick & Lockhart in Washington. Those rulings "give the plaintiffs' bar encouragement," Maletta said.

"The plaintiffs' bar wants to develop 36(b) as broadly as possible," Maletta said. Broad interpretations of section 36(b) make it easier for plaintiffs to bring cases against fund companies for alleged breaches of fiduciary duty, Maletta said.

In the Nuveen case, shareholders claim that Nuveen used borrowing to increase fund assets, thereby increasing the amount of fees which Nuveen received. The shareholders alleged that the arrangement created a conflict in which Nuveen had an incentive to keep the funds leveraged even when such a move was not in investors' best interests.

Nuveen argued that the case should be dismissed because the law requires shareholders to prove that the fees are excessive. Bucklo ruled that the shareholders' contention that the borrowing arrangement violated Nuveen's fiduciary duty was sufficient to allow the case to go forward.

An official in the federal court clerk's office in Chicago said it was unclear if a trial date had been set in the case.