NationsBank Corp.'s decision to settle a lawsuit involving the sale of two exotic investment funds could open the way for a wave of new litigation against banks that sell investments, legal experts said.
On Friday, the North Carolina-based banking company announced that it will pay $30 million to settle the case, which was filed in Texas state court last January.
The plaintiffs - an Austin couple - alleged that they had not been advised of the risks of investing in two closed-end funds managed by NationsBank.
The settlement is large, lawyers contend, and is the first to arise from a case alleging improper mutual fund sales practices at a bank.
"If attorneys perceive that there is a settlement pot of gold ... for litigants, then it might embolden people to file suit not only against NationsBank but other banks as well," said F. Ronald O'Keefe, an attorney with the Cleveland law firm Hahn Loeser Parks.
The NationsBank settlement could also force some banks to boost their compliance training for brokers, said John S. McCune, president of Norwest Investment Services, Minneapolis.
He added it might also dissuade other banks from selling exotic investments such as closed-end mutual funds, which Norwest does not manage and generally shies away from selling.
"Properly used, they can add value to a customer's portfolio," Mr. McCune said. "We don't sell much of them, because we're not happy with their performance. I just don't see where it's a great investment."
Edward E. Furash, a Washington-based banking and investment consultant, said the NationsBank case sends a signal that banks have to be more vigilant about their brokers.
He added that the old warning "buyer beware" has turned to "seller beware."
"There needs to be more attention paid to compliance, to the monitoring of employees, and understanding not just what the employee said but what the customer heard during a sale."
Under the terms of the settlement, NationsBank will inject $25 million into the funds - Nations Government Income Term trusts 2003 and 2004.
The two closed-end funds - which, like stocks, trade on a stock exchange at a discount or a premium to their net asset value - have lost more than four-fifths of their value since being launched in 1993 and 1994.
The banking company will also set aside a $5 million pool for customers who lost money after trading their shares in the two funds.
In a prepared statement, G. Patrick Phillips, president of financial products for the bank, said: "This is the right course for NationsBank. While we vigorously deny the allegations against us, we wanted to end this matter in a way that would benefit our customers.
"This is our response to a unique market situation and we believe it will put the matter behind us," Mr. Phillips said.
Still, the Texas settlement may not be the last for the banking company, which has been named in several lawsuits with disgruntled investors in Florida and Washington, D.C., attorneys said.
Ellison Clary, a spokesman for NationsBank, said the company has no plans to make other settlements, and that its brokers do disclose the risks of investing in uninsured products.
