Fidelity sued for Ultra-Short Bond Fund

A lawsuit claims the firm failed to inform investors adequately about the risk being taken with its Ultra-Short Bond Fund.

A lawsuit filed in the U.S. District Court of Massachusetts on June 5 against Fidelity Investments claims that the company failed to inform investors adequately about the risk being taken with the firm’s Ultra-Short Bond Fund (FUSFX).
The suit, filed by investor Alan Zametkin, alleges that the Boston-based fund company didn’t fully disclose information about the fund, which suffered losses last year due to the subprime-mortgage crisis.
The lawsuit is without merit, and “we intend to defend the case vigorously,” said Fidelity spokesman Vin Loporchio.
Fidelity began selling shares of the fund in 2002.
In its registration filing with the Securities and Exchange Commission, Fidelity identified the fund’s objective as seeking “a high level of current income consistent with the preservation of capital.”
The plaintiffs also said that the materials indicated that the fund would be managed “to have similar overall interest rate risk to the Lehman Brothers 6 Month Swap Index,” offered by Lehman Brothers Holdings Inc. in New York.
The complaint alleges that “the so-called risk and volatility measure disclosed by the defendants was not sufficient or meaningful to advise investors of the actual risks associated with investing in the Ultra-Short Bond Fund.”
The complaint also noted that as of July 31 and Jan. 31, 2007, Fidelity had invested nearly two-thirds of the fund’s assets in mortgage-related or mortgage-backed securities and that the “risk and volatility measure did not warn that he fund was so heavily invested in high-risk mortgage-backed securities.”
“Like other fixed-income funds, the Ultra Short Bond Fund has faced an unusually challenging market environment during the last 12 to 18 months,” Mr. Loporchio said.
“The volatility and lack of liquidity that gripped the credit markets has impacted most non-Treasury sectors,” he said. “The majority of the subprime-mortgage instruments were in the highest-rated AAA and AA securities.”
As of June 10, the $340 million fund had trailing returns of -13.19% for the one- year period, -1.86% for three-year period and -0.46% for the five-year period.
Similar lawsuits have been filed against State Street Global Advisors of Boston for losses in bond funds.