Great Western Financial Corp. has been slapped with two lawsuits charging that it misled customers about mutual funds by implying the products were as safe as savings accounts.
The suits, filed in state superior court and federal district court in California, assert that the Chatsworth, Calif., thrift and its brokerage preyed on unsophisticated consumers to boost fee income, especially the profits on its proprietary Sierra Trust funds.
Great Western "schemed to confuse customers by blurring the distinction" between mutual funds and savings products that have federal deposit insurance, the suits allege.
A spokesman for the banking company said the suits lack merit. "They do not offer anything close to proof positive there were any problems," the spokesman said.
With the lawsuits, Great Western joins a list of banks that have come under fire for questionable sales practices. Barnett Banks Inc. and NationsBank Corp. are also fending off legal complaints by customers who claim they were misled when making investment product purchases.
Executives at those banking companies have also denied the assertions, saying all appropriate written and oral disclosures were made. But industry observers say the allegations are shaking customers' confidence in commercial banks.
"There could be some sort of problem out there," said Charles Horn, a partner at the law firm of Mayer Brown & Platt, Washington. "Customers have traditionally expected their banks to be forthcoming in their explanations" of products and services.
Whatever their outcome, the very existence of the lawsuits could be a blow to Great Western. The company, whose own Sierra Funds had $2.6 billion of assets at yearend, has long prided itself on being able to expand its investment program without skimping on disclosures and other customer protection measures that bank regulators want.
The Great Western spokesman said the bank displays its vigilance in a number of ways, including through a two-page "Explanation of Your Investment" that all fund customers must sign before making a purchase.
But Norma Resnick, 64, said she was never told about an investment products' lack of federal deposit insurance while spending $160,000 on mutual funds. Sales representatives indicated "these were very safe and very secure," Ms. Resnick said of the funds she bought for her 87-year-old mother.
Now, Ms. Resnick said she is "shocked" that the investment has lost 25% of its value.
She is among 30 plaintiffs represented in the two claims. Attorneys filed one suit in California superior court in hopes of capitalizing on a state law that increases award amounts for senior citizens. This suit, on behalf of 24 elderly customers, successfully blocked Great Western's motion to have the action considered by an arbitration panel. The panel would be made up of securities industry representatives, as opposed to a court procedure, where a jury of area residents would decide the outcome.
A second suit, filed on April 13 in U.S. District Court for the Central District of California, currently represents five customers and seeks to receive class action status by proving Great Western's actions affected a large number of customers.
Attorneys are seeking damages and injunctive relief in both claims. Although neither suit discloses a dollar amount, Michael Linfield, a lawyer representing plaintiffs in both suits, said the damages could top $120 million.
The allegations facing Great Western are typical of complaints that the Senate Special Committee on Aging has been hearing, said a committee spokesman.
In fact, the committee plans to contribute language to a bill that the Senate Banking Committee is preparing that would address the issue of selling investments to the elderly, he said.
Industry observers agree that banks are in for more heat. Like mainstream brokerages, banks will have to deal with customers who will look for someone with deep pockets when their investments don't fare well.
"If banks want to be in the brokerage business, they'd better get used to this," Mr. Horn said.
