Amsouth Bancorp. has been socked with a lawsuit alleging that its brokerage employees systematically induced customers to buy mutual funds by misleading them about investment risk.
The lawsuit, which may be granted class-action status, is the latest in a string of cases brought against banks since the industry began a massive push into mutual fund sales in the early 1990s.
It was filed last Tuesday in a state court in Birmingham, Ala. An attorney for the plaintiff said as many as 10,000 customers could ultimately be included in the suit.
Birmingham-based Amsouth denied the allegations and promised to fight them in court.
Other banks battling similar litigation include NationsBank Corp., Great Western Financial Corp., and Boatmen's Bancshares.
In the past three years, regulators have ratcheted up the disclosure standards for banks that sell uninsured investment products, and bankers say they have made great strides in helping customers understand the difference between deposits and mutual funds.
But the wave of lawsuits continues unabated, and increasingly banks are having to balance the benefits of running a brokerage against the rising legal risks.
"Banks have to be looking at these suits and engaging in a risk-reward analysis," said F. Ronald O'Keefe, law partner at Hahn Loeser & Parks, Cleveland. "If they stay in this business, what are the costs of compliance and the risks of litigation?"
The complaint against Amsouth was filed on behalf of James W. Kerr and other unnamed Alabama depositors "who purchased securities or other non- FDIC insured products" through Amsouth Investment Services between January 1992 and February of this year.
Plaintiffs' attorneys allege that bank brokerage employees targeted customers with maturing certificates of deposit, checking accounts, or savings accounts. The employees pitched investments, including Amsouth's proprietary mutual funds, as an alternative.
"The issues are whether the bank and its brokerage subsidiary engaged in deceptive practices to induce customers to move their funds from depository accounts to risky noninsured investments," said Alan Schulman, lead counsel in the case and a law partner at Milberg Weiss, San Diego.
"The investment subsidiary would call and say, 'I'm from Amsouth,' implying they were from Amsouth bank," said Stephen E. Cauley, a Little Rock lawyer also representing the plaintiffs. "People thought they were dealing with the bank when, in fact, they were dealing with a separate corporation."
An Amsouth spokesman disputed the charges. "We comply with every law and regulation concerning the sale of nondeposit investment products by a banking institution," said Stephen A. Yoder, Amsouth's general counsel.
"We will contest with a great deal of vigor all aspects of this case, including the class-action certification and the substance of the charges," Mr. Yoder added.