WealthManagement Magazine

Rep and Clients Sue Templeton Over Closed-End Vietnam Fund

The Templeton Vietnam Opportunities Fund and its directors are being sued by a group of its investors for negligence in managing the portfolio.The class-action lawsuit was filed last February in federal court in Florida. Investor Michael Wetta is the lead plaintiff. James Roumell, a rep with Robert Thomas Securities in Chevy Chase, Md., is also a claimant along with several of his investors. The claimants

The Templeton Vietnam Opportunities Fund and its directors are being sued by a group of its investors for negligence in managing the portfolio.

The class-action lawsuit was filed last February in federal court in Florida. Investor Michael Wetta is the lead plaintiff. James Roumell, a rep with Robert Thomas Securities in Chevy Chase, Md., is also a claimant along with several of his investors. The claimants allege that the fund hastily invested in Thailand and other Asian countries just before a possible shareholders vote that could have liquidated the fund at NAV. As a result, the suit claims, investors sustained more than $40 million worth of losses.

Robert Thomas Securities is not involved in the litigation.

Under its charter, the fund had until Oct. 1, 1997, to invest at least 65% of its assets in Vietnamese companies. If that wasnt accomplished, shareholders were to vote on either liquidating the fund or amending its charter.

The suit claims that the fund and its officers violated provisions of the Investment Company Act and the Investment Advisors Act, and breached its contract with investors by making the investments in Thailand.

Due to the slow pace of market-opening reforms in Vietnam, the fund never got close to its 65% threshold. But rather than hold cash, which the claimants say would have been the proper course of action prior to a shareholder vote, the fund invested elsewhere.

According to the funds quarterly report, Thai holdings went from 2.8% of the portfolio to 29.7% during the three months ended Sept. 31, 1997. The Asian currency crisis began in early July 1997.

At the time it made the investments, the fund defended its purchases to shareholders by saying Thai shares were selling at bargain prices.

But rather than put the funds future to a shareholder vote, on Oct. 21 the board authorized a tender offer at NAV with the provision that if less than 50% of shares were tendered, the fund would continue as an Asian fund with an emphasis on Vietnam; if not, shareholders would vote on whether to liquidate.

Forty-two percent of the shares were tendered and received $7.77 a share--the Jan. 20, 1998, closing price. The lawsuit claims the final price was 40% less than what shareholders could have received in October (see chart, Page 28 in RR).

TVFs share price and net asset value plummeted during this improper delay from October 1997 through January 1998, the suit states. The hope was that the tender offer would weed [out] enough of the shareholders critical of the Funds management that the vote would go Templetons way and keep the Fund (and hence their management fees) alive.

The suit argues that converting to an Asian fund had no benefits for investors since other such funds were not unique and traded at discounts.

Like any investor, I have taken my licks and moved on. But never have I felt that the loss was so directly attributable to negligence, says Roumell, who was an investor in the Templeton fund along with his clients.

Roumell and his attorney, Karl Barth at Hagens & Berman in Seattle, say the funds directors sit on so many other Templeton fund boards that they are essentially employees of the management company and, therefore, couldnt be counted on to render independent judgment.

The suit alleges, and Franklin Templeton Fund filings show, that as of year-end 1997 several of the independent directors on the Vietnam Opportunities Fund board--Harris Ashton, S. Joseph Fortunato and Gordon Macklin--each sat on more than 50 Franklin Templeton Fund boards and each collected from the fund group total fees last year of $331,000 to $361,000. Macklin is former president of the NASD.

A Templeton spokesperson says, With any pending legal case, we cannot comment except to say that we dont feel this case has any legal or factual merit, and we intend to fight it vigorously. Templeton has filed a motion to dismiss the case.

Meanwhile, in a curious bit of timing, the state of Maryland recently enacted a law, retroactive to two weeks before the case was filed, that says any closed-end fund director who is not an interested party (employee) is deemed to be independent.

Barth says he will proceed with the case anyway.

Thomas Herzfeld, a closed-end fund manager in Miami who is not connected to the suit, says there were a handful of Vietnam funds launched over the last two years but have either been folded or turned into regional funds.

They couldnt find enough to invest in, says Herzfeld. If a fund doesnt invest a majority of its assets in the country for which it is named, it cannot use the countrys name, according to Herzfeld. The SEC doesnt want people using the country to attract investors, he says.

Henry Fahman, chairman and chief executive of Providential Securities in Huntington Beach, Calif., and a Vietnamese native, has toured the country with investors on due diligence trips. I havent invested [in Vietnam] because of the lack of liquidity, Fahman says. Since there is no trading of shares yet, any investment in Vietnamese companies are direct investments that will likely take a long time to produce a return, he adds. Fahman also is not involved in the suit.

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