Calif. court: State can sue American Funds

PHILADELPHIA — A California court ruling late last month may make it easier for states to sue financial firms, according to legal experts. A California Court of Appeal panel in Los Angeles affirmed that Attorney General Edmund G. “Jerry” Brown Jr. may sue American Funds Distributors Inc. of Los Angeles, the distribution arm of Capital Research and Management Co., adviser to the American Funds. It is a “major” ruling “that’s being very closely tracked by other states,” said Neal Sullivan, a partner in the Washington office of Bingham McCutchen LLP, a Boston-based law firm. The suit, originally brought by Mr. Brown’s immediate predecessor, Bill Lockyer, alleged that American Funds had perpetrated fraud under California law by not disclosing all material information that investors needed to make informed decisions. Specifically, according to the suit, American Funds failed to disclose adequately “shelf space” payments the fund company made to brokers that sell its funds. American Funds had hoped to get the case dismissed on the grounds that federal regulators, not the state, have jurisdiction over the securities industry. But the three-judge panel disagreed, writing that Congress “intended to preserve the states’ anti-fraud authority to control the conduct of brokers and dealers.” The ruling overturned a ruling by a state Superior Court judge in November 2005 and sends the case back to that court. American Funds was mum about what it plans to do next. “We are continuing to evaluate our options,” said company spokesman Chuck Freadhoff.