Mistrust of Madison County muffs mutual funds cases

Steve Korris Dec. 21, 2006, 3:54am

Mutual funds picked up a boost from the U.S. Supreme Court this year but they squandered it through mistrust of Madison County.

Defendants in a batch of class actions removed the cases to U.S. District Court in East St. Louis, even though the Justices guaranteed they would win in Madison County.

The Justices held in Kircher v. Putnam Funds that federal law precludes class actions in state courts over securities, but they left it to Madison County to throw out the suits.

Justice David Souter wrote that a state court must follow a new Supreme Court decision, Dabit v. Merrill, Lynch, Pierce, Fenner & Smith.

In Dabit, class action attorneys argued that federal securities law applied to holders. They argued that members of the class did not fit the definition of holder.

The Justices rejected the argument.

Their decision in Kircher, weeks later, sharpened the point.

Souter wrote, "…the funds can presently argue the significance of Dabit and ask for dismissal on grounds of preclusion when they return to the state court."

He wrote, "…we have no reason to doubt that the state court will duly apply Dabit's holding that holder claims are embraced…"

He even promised reversal if Madison County did not act right, writing that "…any claim of error on that point can be considered on review by this Court."

After Souter handed the funds their apparent victory, he explained why the Justices wanted state court to wrap up the cases.

He wrote that when Congress precluded certain state law class actions it did not intend to add other state law cases to federal dockets.

He wrote, "…there is no apparent federal interest in spending time on such cases…"

After the Supreme Court acted, Madison County reopened the cases.

In rapid sequence the funds removed the suits to federal court, federal court remanded them to Madison County, and the funds removed them again.

Pacific Life Insurance attorney Jason Rankin of Edwardsville explained the second removal notice as "a precaution given the unique procedural posture of this case."

Attorney Stephen Tillery filed the suits, claiming mutual funds favored some investors at the expense of others by rigging the timing of global trades.

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