Fund Company Not Liable for Market Timing Thanks to Good Faith Efforts

The U.S. District Court for the District of Maryland granted summary judgment to a mutual fund company accused by plaintiffs of making misrepresentations about preventing market timing. The Court ruled that the fund company made a good faith effort to stop non-arranged market timing consistent with prospectus statements. Therefore, the Court opined, no finder of fact could infer that the mutual fund company acted with the requisite intent under Rule 10b-5 even though the fund company did not completely stop market timing activities. The Court explained that the fund company took numerous steps to combat market timing including making changes to its prospectus, imposing redemption fees, monitoring trading, eliminating brokerage commissions, and terminating dealer agreements. The Court flatly rejected plaintiffs claim that the fund company should have acted quicker.

OUR TAKE: This case shows that diligent compliance efforts, even though they may not completely stop wrongdoing, can protect a firm from liability. Also, this case is another example that class action plaintiffs usually lose in federal cases against mutual fund firms.