PITTSBURGH (AP) – Mellon Financial Corp. and its Dreyfus Corp. subsidiary wrongly spent mutual fund assets on marketing expenses, including payments that induced brokers to push Dreyfus funds totheir customers over other investments, a federal lawsuit charges.
The U.S. District Court lawsuit was filed in Pittsburgh earlier this week by Noah Wortman, a Dreyfus investor from New Castle, Del., who owns shares of a Dreyfus stock-index fund.
It alleges that those who guide the Dreyfus investment funds violated federal securities laws surrounding what are known in the industry as “12b-1 fees” which are named for a section of mutual fund laws.
The fees, devised in 1980, are generated by liquidating a small percentage of a fund’s assets to pay for marketing fees which, in theory, help the fund to grow even more.
“But in practice, while funds have grown, there’s been little reduction of fees along with those economies of scale,” said Kerry O’Boyle, a mutual fund analyst at Chicago-based Morningstar.
Wortman’s lawsuit claims that “hundreds of thousands” of investors have been harmed because the marketing fees are paid to brokers. The practice “created an undisclosed conflict of interest and caused brokers to push clients to Dreyfus funds, regardless of the funds’ investment quality relative to other investment alternatives.”
The marketing fees were used to pay for sales contests and other incentives for brokers to sell the Dreyfus brand funds, the lawsuit states.
A spokeswoman for New York-based Dreyfus declined comment Thursday, saying the fund company hasn’t seen the lawsuit.
Wortman is seeking unspecified damages, saying his investment prospectus didn’t disclose that Dreyfus would “improperly siphon assets” from his fund to cover Dreyfus’ marketing expenses. The lawsuit, which was filed Wednesday, also says that 22 Dreyfus funds were closed to new investors so a marketing fee “could not possibly have been used to market and distribute them” to new investors.
Wortman’s attorney, Alfred Yates of Pittsburgh, is hoping to get the lawsuit classified as a class action.
The lawsuit highlights a growing area of controversy in the mutual fund markets, O’Boyle said.
Lawmakers have even talked about abolishing 12b-1 fees, though no formal action has been taken.
“This is a serious matter that’s getting widespread attention because it gets to the heart of how funds are sold and how fees are charged,” O’Boyle said.
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Information from: Tribune-Review, http://www.triblive.com
