November 07, 2011

A recent federal court ruling dismissing a lawsuit that alleged improper disclosure of fees and breach of fiduciary duties by advisors and broker-dealers of mutual funds bodes well for directors across the industry who are often named as defendants in such lawsuits, according to Jenner & Block Partner Howard S. Suskin in a recent Board IQ article.

In that case, a class of plaintiffs alleged that mutual fund advisors and directors had paid excessive commissions to brokers to persuade them to steer certain funds to new investors, according to the article.  The plaintiffs also sued the directors for allegedly failing to monitor and supervise the fund’s advisor, and for allegedly allowing the advisor to take millions of dollars from investors.

According to Mr. Suskin, Co-Chair of the Firm’s Securities Litigation and Class Action Litigation Practices, it would be “illogical” for plaintiffs to name only an advisor in a suit because settlement money would most likely come out of the plaintiff-owned mutual fund. “With directors included as defendants, a settlement could also come from [a] third-party source, such as insurance…[directors] are a huge source of potential money,” Mr. Suskin said.

In ruling for the mutual fund company, the court said that the plaintiffs should have demanded that the directors sue the advisor on behalf of the fund, rather than sue the advisor and directors themselves. 

Mr. Suskin called the court’s decision for the mutual fund company “pro-director,” but noted that the outcome of each case depends on the specific facts.