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Fund Firms May Not By Liable for Prospecti


Is a mutual fund company responsible for the statements made in a prospectus for one of its funds? Is the manager of the fund? Possibly not, in either case.

The U.S. Supreme Court has ruled that mutual fund shareholders have a limited right to sue mutual fund companies or fund managers for fraud. In Janus Capital Group vs. First Derivative Traders, the court ruled 5-4 that mutual fund shareholders could not sue Janus for misleading information found in a prospectus.

The ruling also appeared to indicate that shareholders could not necessarily sue a subsidiary involved. That could occur if neither Janus nor its subsidiary actually produced the prospectus in question.

The case arose from accusations that Janus gave some clients hints regarding when it expected markets to change direction. That could encourage those clients to make moves at the expense of other clients.

In 2003, regulators uncovered the rapid-trading deals at Janus and a number of other fund firms. Ultimately, in 2004, Janus paid $225 million to settle claims that it had failed to disclose the trading arrangements to long-term investors.

But that settlement was for investors in the fund, not in shares of Janus stock. The question in the case was whether the parent company-whose stock price cratered when news of the scandals broke-could be held responsible for making misleading statements in the documents.

Ultimately, the high court's decision boiled down to defining the word "make." Since the prospectus is produced by the fund, it was the fund-and not the parent company-that "made" the misleading statements.

"To suggest that the sponsor is not responsible for what happens at the fund is illogical," according to Geoff Bobroff, an industry consultant from East Greenwich, R.I. "If they're not responsible-if they can't be held liable-there's no telling what they might think they can get away with someday."

 

PNC to Buy RBC's U.S. Operations for $3.45B

PNC Financial Services Group Inc. has struck a deal to buy Royal Bank of Canada's U.S. retail banking operations for $3.45 billion.

The deal will allow PNC to beef up its footprint in southeastern markets, where the $25 billion-asset RBC Bank has 424 branches in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina. As a result of the acquisition, which is expected to close in March, 2012, PNC will have 2,870 branches and add about $19 billion of deposits and $16 billion of loans, PNC said.

PNC plans to convert RBC Bank's customers to its platform and rebrand RBC branches under the PNC name. PNC also plans to keep most of RBC's "customer-facing employees" and "sees opportunities to add new positions as it extends its full breadth of retail, corporate, mortgage and wealth management products and services into the acquired markets."

 

 

Quote of the Week

“The central irony of financial crisis is that while it is caused by too much confidence, borrowing, lending and spending, it is resolved only by increases in confidence, borrowing, lending and spending.”

- Lawrence H. Summers

Director Emeritus

National Economic Council