After stepping into the ring last spring with California Attorney General Bill Lockyer over fund disclosure practices, American Funds recently knocked the AG on the canvas; Edward Jones, another Lockyer target, hasn't been so lucky.
In November, Los Angeles Superior Court Judge Carl West ruled in favor of American Funds. Lockyer sued the firm in March under a new state law that gives him more power to pursue securities fraud cases. The suit claimed American Funds failed to properly disclose $426 million in “shelf-space” arrangements — marketing deals — it had with brokerage firms in its fund prospectuses.
But Judge West agreed with American Funds' argument that a 1996 federal law bars states from creating securities-offering disclosure rules that differ from those of the SEC and issued a tentative decision that California's case is pre-empted by federal law. A final decision is pending but is unlikely to alter the outcome, securities lawyers say. Lockyer plans to appeal the ruling.
It's a setback for Lockyer, who has some big settlements under his belt. Just last year he settled cases with Franklin Resources, the distributor of Franklin Templeton Funds, and Pacific Investment Management (PIMCO) for $20 million and $9 million, respectively. Both cases also involved shelf-space arrangements.
In the explanation of his ruling, West suggested that if the state had a legitimate gripe about inadequate disclosure, it should be aimed at the brokerage firms that deal directly with the investors buying the funds.
Other judges may agree. Two days after the West decision, an appellate court judge in Sacramento ruled in favor of Lockyer, rejecting the pre-emption defense offered by St. Louis brokerage firm Edward Jones. Lockyer sued Edward Jones in December 2004 for nondisclosure of its shelf-space arrangements with certain funds, including American Funds. The suit seeks restitution and damages for clients, as well as the return of $300 million in alleged illegal shelf-space payments made by funds to Edward Jones brokers. The firm also faces up to $25,000 in fines for each alleged violation of the state's securities laws. Jones now faces trial but no date has been set.