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Navellier Battle with Independent Directors Enters Final Round

After six years and millions of dollars in legal fees, the final round of the much-publicized corporate governance battle between Navellier Management of Reno, Nev., and the independent trustees of Navellier's mutual funds may soon be over.

This past July, the last of the independent trustees, Ken Sletten, won court approval to have his running legal tab paid by Louis G. Navellier, the well-known investment manager of several mutual funds and separately managed accounts. Sletten's legal tab currently stands at $2.3 million but could reach as high as $2.5 million, noted Ralph Alldredge, an attorney with Legal Strategies Group of Emoryville, Calif., who represents Sletten.

Last month, Sletten and his attorney accepted a bond guaranteeing payment of the final tab, but petitioned the court to be sure that the Navellier mutual fund that has been the subject of the legal wrangling isn't raided to cover the legal fees. The court allowed for the legal bill to be footed by the Navellier Aggressive Small Cap Fund, which has shrunk to $3 million from $40 million in 1997, when the legal tab started running.

"While my client is glad to finally be reimbursed for all legal expenses which he has paid out of pocket, fund shareholders shouldn't bear the brunt," Alldredge said.

In 1997, Navellier sued the independent fund trustees, charging they had breached their fiduciary duty and harmed investors by purposefully allowing the management contract between the firm and the fund to lapse. The trustees claimed that they were exercising appropriate fiduciary care by terminating the contract when Navellier refused to provide specific information that the trustees had requested.

The trustees temporarily handed off the small-cap fund to MFS of Boston to manage. But Navellier fund investors voted against the new management contract and the fund was returned to Navellier to manage.

Although Navellier's lawsuit against the trustees was determined in favor of the trustees in July 1999, a loophole in the directors and officer's insurance, which covered both Navellier and the trustees, left the trustees to foot their own legal bills. That industry-wide insurance loophole was later closed at the SEC's urging, and the trustees sent Navellier a demand for payment of their legal fees.

According to a source close to the deal, Navellier has promised to appeal the Sletten decision. Earlier this summer the court ordered an asset freeze on the $3 million fund as a guarantee of final payment to Sletten. The judge agreed to remove the freeze once a bond was posted.

Of particular note, in an Oct. 23 filing with the SEC, Navellier announced that the current board of trustees had approved the termination of the fund and that all shares would be redeemed and the fund would cease operations on Oct. 31. No further explanation was given.

This past May, Navellier's current board also voted to terminate the Navellier All Cap Fund and the group's money market fund, without providing details.

Neither an executive at Navellier, nor Samuel Kornhauser, the San Francisco attorney representing both Navellier and the fund group, returned calls seeking comment.

It is unclear as to how Navellier will pay this court-ordered obligation, although in a 1999 interview, an executive at Navellier noted that the firm would look to its insurer, Chubb Group of Insurance Cos. of Warren, N.J., to cover the tab.

Speculation is that Navellier may have looked to sell off some assets to raise at least part of the necessary cash.

On June 23, Navellier announced it had sold the right to manage two of its large-cap growth funds with a combined $21 million to Touchstone Investments of Cincinnati. Touchstone, which manages $2 billion in assets including a proprietary mutual fund group, is part of the Western & Southern Financial Group, also of Cincinnati. Last month, the Navellier assets were merged into the Touchstone Large Cap Growth Fund. Total fund assets now total $61 million.

While terms of the sale were not disclosed, in another recent sale, of the Lindner Funds of Deerfield, Ill., to Hennessy Advisors of Novato, Calif., (see 10/27/03 MME), Hennessy agreed to pay 2.625% of the Lindner fund group's assets. Using a similar formula to calculate the Navellier sale price, Touchstone may have paid more than $550,000. Any way you slice it, the deal with Touchstone is likely to be lucrative to Navellier since his firm has been hired as the sole sub-adviser to the beefier Touchstone large-cap fund.

Copyright 2003 Thomson Media Inc. All Rights Reserved.