Two lawsuits filed recently, against Bank of America Corp. and Wachovia Corp., alleging breach of fiduciary duty in their conversions of trust accounts into investments in proprietary mutual funds, are seen by a plaintiffs' attorney as having the potential to disrupt the bank-fund business.
Similar lawsuits against other banks with proprietary mutual funds that jump-started their fund groups through trust account conversions are on their way to court, the attorney said. But a second lawyer, citing the prospect for out-of-court settlements, said the suits' effect may not be earth-shaking.
A potential class action was refiled last month against Bank of America in U.S. District Court for the Eastern District of Missouri by six plaintiffs. They allege several counts of violating securities laws, breach of fiduciary duty, and self-dealing. Each plaintiff was a co-trustee or beneficiary of a trust account for which B of A, or predecessor banks including Boatmen's Bancshares, the parent of Boatmen's Trust Co., was fiduciary.
The suit is an old claim that has been dismissed several times, said Shirley Norton, a spokeswoman for Bank of America. She accused an attorney in the case of refiling the complaint with various charges in an effort to find a judge willing to hear it. "We believe this suit is without merit and our position will be vindicated," she said.
The B of A lawsuit has been bouncing around various courts since February 2004.
It centers on two key issues: the level of disclosure given trust clients about the conversion and subsequent fees, and whether clients fully understood the benefits of the conversion and what was occurring, said Jim Moorhead, a partner in the Washington office of the Steptoe & Johnson law firm. The suit seeks to prove that the bank breached both the duty of loyalty and duty of care, as well as losing its personal touch with clients, he added.
"While we tend to look for an overarching rule from a particular case, a vast majority of these class-action cases settle," he said. Even if the plaintiffs win, the impact on the bank proprietary fund industry may not be huge, he added. "I don't think this would be an earthquake for the industry."
Last month's refiling was by Richard D. Greenfield of the Royal Oak, Mich., law firm Greenfield & Goodman. Steven Hamburg of the St. Louis law firm Summers, Compton, Wells & Hamburg is co-counsel on the case. Mr. Greenfield is also representing plaintiffs in the suit filed last month against Wachovia and its Evergreen Funds unit.
The Wachovia suit alleges that it acted in its own self-interest without regard to its responsibilities to the sole beneficiary of two discretionary trust accounts created in 1990 for a boy who had been shot and crippled. The trust accounts, originally funded with $81,700, were invested with Evergreen Funds for years, accruing high fees, the plaintiff alleges, despite the availability of lower-cost, better performing nonproprietary funds.
"The B of A and Wachovia lawsuits are similar inasmuch as both banks improperly force their fiduciary accounts' assets to be invested in their proprietary mutual funds instead of investing accounts in the best managed funds with the lowest expense ratios," Mr. Greenfield said. "I am working with several prominent lawyers nationwide on similar suits against other major banks that do the same thing ...."
Bank of America's integrations of trust accounts acquired in its numerous bank purchases during the past 15 years were the occasion for the alleged breaches of fiduciary duty, the lawsuit said. In pursuit of cost reductions, it alleged, B of A consolidated acquired trust departments into a single private-client wealth management division, which systematically converted trust clients' common trust funds into the bank's proprietary mutual funds.
Instead of assessing whether less expensive nonproprietary funds, such as those of Vanguard Group or Fidelity Investments, were more appropriate for trust customers, the suit alleged, B of A systematically pumped trust assets into proprietary portfolios, a clear breach of fiduciary duty.
The complaint cites an October 1999 letter from the president of the private-client division to two of the plaintiffs, stating that "the use of outside mutual funds in fiduciary accounts is in violation of corporate policy."
Though B of A sought clients' formal approval to make the conversions, it failed to give proper notice to its trust clients that they had the right to object and could seek a replacement trustee, the suit alleged.
The Federal Reserve's Board of Governors had warned against the potential conflict of interest in trust account conversions in a Feb. 26, 1997, cautionary letter to banking organizations. The Fed advised banks to make sure trust fund conversions were in fiduciary customers' best interests. It also raised the issue of the potential conflict in a bank's use of proprietary mutual funds to invest trust money when nonproprietary funds could be equally appropriate for clients.
The Bank of America complaint also alleges that trust department integration planning aimed to serve trust clients with fewer employees and to increase standardization of investments. Though trust clients of acquired banks may have dealt with a single bank officer, the suit alleged, after the conversions, personalized service was replaced with generic customer service from unsophisticated call center employees.
As Bank of America swallowed up bank after bank, the suit said, all but the highest-net-worth accounts were served by call centers in Dallas, Atlanta, and other sites staffed by "lower-level bank personnel with little or no investment expertise" who relied on computerized asset allocations programs that were "designed to maximize the use of the bank's Nations Funds."
Also at issue are the higher fees trust clients were charged; the suit said direct and indirect charges to fiduciary accounts were 20 to 30 basis points higher than before. A letter to clients explaining the new mutual fund fee structure and promising credits to fiduciary accounts was written in indecipherable legalese, the suit alleged. Further, the impression was given that such trust account credits would offset all fees, which was not the case, the suit said.
