Concord Holding Corp. has been slapped with a lawsuit by investors who claim the distributor of bank-managed mutual funds overstated its financial prospects when it recently went public.
The lawsuit also names Concord's largest client, Bank of America, as a defendant. The San Francisco bank, which uses Concord to distribute and administer its proprietary mutual funds, has long owned options to purchase a minority stake in the company.
The suit, filed late last month in U.S. District Court in Northern California, alleges that Concord deceived. investors about demand for Concord's products and services, the success of its marketing efforts, the way it charges clients, and its profits.
The 59-page civil suit alleges violations of five sections of federal securities lawS. The shareholders are seeking compensatory damages, but did not specify the amount.
Richard E. Stierwalt, chairman of New York-based Concord said the lawsuit was groundless, and appeared to have been triggered by consternation over a drop in Condord's stock price.
Concord shares hit the market at $12:50 in February, but were trading in the $6 range last week.
"We believe this lawsuit is without merit and intend vigorously to defend against it," Mr. Stierwalt said.
A Bank of America spokeswoman said the charges are "totally without merit."
Concord is the largest distributor and administrator of bankmanaged mutual funds, with $31 billion in assets under administration and a sterling list of clients, including Barnett Banks Inc. and Chase Manhattan Corp.
Its decision earlier this year to go public was widely seen as setting the stage for a major expansion. But instead, troubles have piled up at Concord's doorstep.
The company posted a loss of $232,000 for the three-month period that ended June 30. That is a sharp reversal from the year-earlier quarter, when Concord's net income totaled $1.2 million.
And Bank of America's mutual fund family took big losses on derivative investments, cutting into the fees Concord gets for administering the funds. As a show of Support for Bank of America, Concord recently agreed to waive several million dollars of fees.
Mark D'Aunolfo, an analyst who follows Concord for Adams' Harkness & Hill, Boston, said shareholder suits like the one brought against Concord are quite COnLnOn.
When a nigh-flying stock suddenly stumbles after its initial public offering, investors often demand compensation for their paper losses, he said.
Mr. D'Annolfo said a lot of Concord's price volatility could be the result of the general markets' quirkiness during the past few months.
The suit disputes this assertion, however, saying the stock fell in response to announcements and other disclosures that began filtering out of Concord soon after the offering.
Concord "presented itself as very successful" in the months before its initial public offering, according to the lawsuit filed by a shareholder, Seymour Lazar, on behalf of himself and other investors.
But within months, the suit maintains, "Concord, its controlling shareholders and insiders realized that Concord's competitive position was being impaired."
The company "was having increased difficulty in retaining existing clients and obtaining new clients and in continuing to increase the total amount of assets under administration," according to the plaintiff.
One of the "insiders" who knew Concord's business was stagnating was Bank of America, the lawsuit claims. The bank reduced its holdings of Concord stock options through the offering.
The suit charges that the bank was using the offering as a way to "'bail out' of its position in Concord before knowledge of adverse trends and conditions became public." '
Concord, Bank of America, and other defendants are expected to file their responses within 60 days, after which the case would be assigned to a district court judge. While the litigants do battle, Concord will likely continue business as usual, said Mr. D'Annolfo, the analyst.
The suit "should not in any way affect their relationship with customers or their ability to win new business," he said.