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Friday, April 12, 2024 | Back issues
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Court Revives Fraud Case Against Smith Barney

(CN) - The 2nd Circuit reinstated a securities fraud lawsuit accusing Smith Barney Asset Management of hiding excessive "transfer agent" fees from investors, and then kicking back a portion of those fees to a Smith Barney affiliate.

A class of investors who bought shares in Smith Barney mutual funds accused the investment adviser of negotiating a contract for transfer agent services that "saddled the funds with excessive, misleadingly disclosed fees," the ruling states. The fees were then steered to a Smith Barney affiliate, according to investors.

The mutual funds were sponsored and managed by Citigroup Asset Management, which contracted with First Data Investor Services Group to perform transfer agent services for the funds. Transfer agents process transactions, calculate daily net asset values, distribute proxy materials and operate customer service centers, among other things.

Citigroup publicly disclosed this arrangement, but then created a subsidiary called Citicorp Trust Banks and started farming out some of the transfer agent services to the new subsidiary. Citigroup paid Citicorp a portion of the fees collected from investors without telling the funds' board, investors claimed.

They said Citigroup began paying First Data less for its services and then pocketed the difference between what it charged the funds and what it paid First Data.

The district court dismissed the class action, ruling that the failure to disclose that some transfer agent fees were going to a Citigroup subsidiary was not a material false representation. Smith Barney disclosed the gross amount of fees, the district court said, even if it did not break down the allocation or profit margin, so investors had all the material information they needed about the value of the funds.

However, the 2nd Circuit ruled that Smith Barney's disclosures concerning the transfer agent fees were "inadequate."

Smith Barney may have disclosed fund details, the Manhattan court ruled, but it still misled investors. Investors did not know that they were "at the mercy of a faithless fiduciary," Judge Barrington Parker wrote.

The appeals court vacated and remanded, ruling that Citigroup Asset Management, through Smith Barney, had breached its fiduciary duties to investors.

"Any rational mutual fund investor would be highly leery of dealing with a fiduciary such as Citigroup Asset Management and its affiliates who, in violation of the law, lined their pockets at the expense of investors whose interests they were obligated to protect," Parker wrote.

Citigroup Global Markets Inc., another Citigroup Asset Management investment adviser, was also named in the suit, along with Thomas Jones and Lewis Daidone, Citigroup Asset Management officials during the class period.

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