New York law firm Milberg Weiss
filed a complaint
, Smith Barney
and related companies alleging revenue sharing practices and fraud.
The law firm, which specializes in securities class action, described the Smith Barney revenue sharing set up in the complaint as a "two-pronged scheme." The wirehouse initially defrauded investors by steering them towards in-house funds, and then defrauded them again by collecting "undisclosed excessive fees from them" stated Milberg Weiss in the complaint. Smith Barney then funneled those fees back into acquiring more "unwitting" clients, the complaint alleged.
Key to the complaint is that the contention that plaintiffs believed they received unbiased advice, and that Smith Barney brokers therefore did not uphold their fiduciary duties.
The complaint alleges that the practices took place between March 1999 and March 2004.
The fee structures were along the lines of 4.5 percent sales commissions for shares of B class in-house funds, as opposed to 4 percent on non-proprietary funds; and two to three percent for in-house C class shares, instead of one percent for non-proprietary shares.
Smith Barney also allegedly implemented a shelf space program, where strategic partners paid for higher priority. In house funds received top priority, followed by strategic partners, which included funds from AIM, Alliance, American, Fidelity, Franklin Templeton, Lord Abbett, MFS, Oppenheimer and Van Kampen.
The red herring appeared on March 22, when Smith Barney revised their fund prospectuses informing investors that "revenue sharing [payments]...may create an incentive for an intermediary or its employees...to recommend or sell shares of a fund to you."
Other disclosures included: "the distributors may make payments for distribution...out of their past profits and other available sources...[t]he payments described above are often referred to as 'revenue sharing payments.'"
Milberg Weiss filed a similar complaint
against Merrill Lynch
in March. The firm has been prominent in other fund company suits and has set up a website
called MutualFundFraud.net for investors.
is the lead attorney from Milberg Weiss on both cases; he recently spoke
with the Wall Street Journal
about the status of fund cases.
Schulman was made name partner of the firm, changing the name to Milberg Weiss Bershad & Schulman, on May 3.
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