Attorney Stephen Tillery of St. Louis, down to his last argument in Madison County class action claims against mutual funds, accuses them of doing a good and honest job.
Retreating from apparent claims of fraud and misrepresentation under an order of U.S. District Judge David Herndon, Tillery seeks to pursue his suits as negligence claims.
"Plaintiffs make no claim that the Funds are bad investments," Tillery gushed in an Oct. 9 brief for Circuit Judge Barbara Crowder, who has three mutual fund suits in her court.
"Plaintiffs agree with defendants' representations that the Funds are good investments," Tillery wrote, emphasizing 'agree' with bold italics.
"Plaintiffs' claim in this case is that the Funds could have been even better investments but for the negligent practices of defendants…," Tillery wrote.
He argues that mutual funds adjusted share values daily instead of round the clock, allowing traders to make money shareholders should have made.
In Crowder's court on Oct. 23, Tillery associate Robert King insisted that plaintiffs have pursued negligence claims all along.
"We have never alleged in this case that there is something wrong with the mutual funds, that they are not good long term investments. We have never alleged that," King said.
"We have never said that their statements that they are good long term investments are false. We have never intimated that.
"What we said is we didn't make as much money on them as we could have."
For Putnam Investment Management, Peter Simshauser told Crowder the plaintiffs allege that Putnam convinced and urged investors to hold shares.
King answered, "We never say that they convinced them falsely."
"To focus on that language – in convincing, by urging – yes, that is communication but it's not communication of anything false," King said. "We aren't alleging that these are misrepresentations.
"Their argument is somewhat insulting because if we really did intend to plead fraud, we have done a really bad job of it here."
Simshauser asked Crowder to rule the way Herndon ruled in federal court.
Herndon declared in April that federal securities law precluded class action claims of fraud and misrepresentation in state courts.
He declined jurisdiction to dismiss Tillery's suits, leaving it up to Madison County judges to make that call.
Circuit Judge David Hylla held a hearing on a motion to dismiss in August, and Associate Judge Ralph Mendelsohn held one in September.
They took the motions under advisement.
At Crowder's hearing, King lamented Herndon's logic.
He said plaintiff's counsel had no problem with Herndon, who he called a fine judge.
"But," King said, "in this particular case on this particular issue he got it wrong."
He said that according to Herndon, when plaintiffs alleged that defendants valued shares once a day they alleged an omission.
"People who understand how mutual funds work understand that mutual fund shares are valued only once a day," King said. "We haven't alleged anywhere in our complaint that this was an omission or misrepresentation of any sort at all."
He said that according to Herndon, when plaintiffs alleged that daily valuation created opportunities for market timing arbitrage, they alleged misrepresentation.
"Again, we have never alleged that they misrepresented this nor have we alleged that they should have told us but didn't," King said. "There is no allegation of omission."
He wondered if Herndon bothered to read his complaint.
He grumbled, "I don't know if it's a law clerk issue or what, but this suggests to me a lack of familiarity with our complaint because we allege nothing like this anywhere in our complaint."
He said negligently calculated share prices are not misrepresentations because they aren't even representations.
"They are not a misstatement because they're not even a statement," King said. "You can't buy a mutual fund share at a misrepresented price.
"The investor who is injured by market timing was injured hours before that ever happened, before there was any representation or statement of a price to anybody.
"We don't seek fraud damages in this case. What would a recovery for fraud look like?"
Simshauser said, "I don't mean to be sarcastic but if Mr. King has to spend so much time explaining why everyone else got it wrong, with all due respect, maybe it's the plaintiffs who have gotten it wrong, your honor."
Crowder said, "I'm learning a lot. It's very interesting."
"I feel like I understand it, maybe not with the same confidence that you now wish I would have, but I appreciate the way you have all presented it," Crowder said.
If she dismisses Tillery's plaintiffs, they might still qualify for inclusion in any class action springing from litigation in federal courts.
The U.S. Judicial Council on Multidistrict Litigation has consolidated a mass of mutual fund suits, including some of Tillery's, in federal court at Baltimore.