Madison County Circuit Judge Nicholas Byron doesn't know how long he will wear his robe, but he might have time to earn distinction as the first American judge to rule that investors in a mutual fund own the assets of the fund.

Byron reasoned at a March 25 hearing that if an investor pays capital gains taxes on the earnings of a mutual fund, the investor may indeed own the assets.

He ordered Van Kampen mutual fund to show income tax returns to attorney Stephen Tillery of St. Louis so Tillery can determine whether the fund pays capital gains taxes.

"I don't know how long I will be here in this office," Byron said. "How much time will that take?"

Tillery associate Robert King said it shouldn't take long.

Van Kampen attorney David Koropp said, "Who pays the taxes is not something that is ever going to be in dispute."

Koropp said, "Mutual funds release their financial statements. You get their prospectus every year."

Byron said, "I don't bother to read it."

Koropp, who had called the hearing on a motion to dismiss, thus came out of the hearing in worse shape than when he went in.

Tillery plaintiff Avery Jackson alleges that Van Kampen calculated asset values in a way that allowed "market timers" to profit at the expense of other shareholders.

Byron had denied a motion to dismiss in 2004, but Van Kampen tried again because the Illinois Supreme Court and federal courts have changed the rules of class actions.

"The legal landscape has changed completely," Koropp said as the hearing began.

He said Maryland law would apply because Van Kampen is a Maryland corporation.

Under Maryland law, he said, "an action at law to recover damages for an injury to a corporation can be brought only in the name of the corporation itself acting through its directors and not by an individual stockholder like Mr. Jackson."

"Injury to the corporation's business or property occurs when officers and directors waste funds or make imprudent investments," he said.

"That's not an injury to the shareholders directly."

He said the price of a mutual fund is based on net asset value, or NAV. He said plaintiffs allege that on certain days, Van Kampen incorrectly calculated NAV.

"The next day they will calculate the NAV correctly and then they would buy these shares back from those same shareholders but this time at the correct price and so the market timer would get a profit," Koropp said.

He said plaintiffs claim this trading doesn't injure the fund. "It absolutely injures the fund," he said.

Byron said, "You are saying this should be a shareholder derivative action instead of against the corporation?"

Koropp said, "Exactly."

"Something can happen here in the United States that you know when the markets reopen in Japan, that stock is going to shoot
up," Koropp said.

"Some people trade that way. It's not illegal.

"In the stock market some people market time, often to their detriment.

"When you own shares of a mutual fund, just like with a corporation, what you own is a claim on those assets.

"No case has ever held that the shareholders of a mutual fund own underlying assets of the fund."

King responded that market timing causes dilution of share values.

"It's a low risk trading strategy and the market timing profit comes not out of the fund," he said. "It comes dollar for dollar out of the pockets of long term investors."

The key, he said, is the ownership interest.

"Who owns that stuff," he asked. "Who do the assets in the fund belong to?"

He said, "They belong to the investors."

He said the fund nominally holds assets in its name for the benefit of investors.

"The real true beneficial owners of these assets are the investors," he said.

Byron said, "It just hit me between the eyes, though, on this point. But you see, the effect of these gains is something I as an investor in the fund have to pay for."

Koropp said, "Absolutely, but derivative cases get brought against mutual funds all the time. It's common. They treat mutual funds like corporations."

King told Byron, "If you don't dismiss on this ground and you let us have discovery, we will show you."

"We can put our own 1099's into the record and show that
Avery Jackson paid the capital gains tax on the investment return," King said.

"If we get the defendant's tax records, you will see that they never paid a capital gains tax on their sales of shares to the public.

"That's because it's not really theirs."

Byron said, "Do you have any case on this point regarding mutual funds?"

King said, "I am not aware, just as they are not aware, of any cases.

"Let's find out who pays the taxes and resolve that mixed question of law and fact, not on a motion to dismiss but on a properly developed record."

Koropp said, "No court has ever suggested that because you pay the capital gains tax, somehow the derivative claim rule doesn't work any more in regard to mutual funds."

He told Byron, "I would urge you to not create a new issue of law here on who owns the assets of a mutual fund. No court has ever addressed it anywhere in the country."

"This court would be the first to ever hold differently on that," Koropp said.

"I pay capital gains on mutual funds, that's true. It just doesn't have anything to do with -"

Byron said, "It just hit me. I didn't realize he was going to bring it up. It just hit me."

Koropp said, "It hit me too, but it's not relevant."

"The fact that the capital gains get passed is by virtue of federal law that created mutual funds in the first place, but it has nothing to do with the direct versus the derivative claim," Koropp said.

Byron said, "If discovery is going to be extensive then I need to decide the case."

King said, "There is an issue on which you should allow limited discovery and that is the ownership issue."

Byron said, "What would that entail, discovery on the ownership?"

King said, "I want to see their tax returns."

Byron said, "Whose tax returns?"

King said, "The fund's tax returns."

Byron said he would defer a decision and let them pursue the question.

King said, "May we get their tax returns?"

Byron said, "One year. We'll make it a couple of years. Pick two years. Then you comply with two years. That's my ruling."

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