Trust Updates Archive

20050808BSA LaSalle Conversion Lawsuit Dismissed

(June 2, 2006--Chicago, IL)--Trust beneficiaries waited too long to file their objections to LaSalle  Bank’s conversion of its common trust funds to proprietary mutual funds, according to a federal court, which has dismissed the lawsuit. The dismissal, which should have been good news for banks that converted their common trust funds to proprietary mutual funds prior to 1996, may not in fact be so, according to legal experts, who say the ruling will most likely be reversed on appeal.
        The ruling, by Judge Michael Mukasey of the Southern District of New York, is currently under reconsideration. Plaintiffs say they will appeal if, upon reconsideration, the ruling is upheld.
        LaSalle converted its common trust funds in 1993, three years prior to the passage of congressional legislation that made such transactions tax-free. It is estimated that fewer than 15 banks had taxable conversions. Of those, cases have been litigated only against LaSalle and Bank One, successor to the First National Bank of Chicago. Bank One, which was sued in 1997, settled in 2003 for some $9 million.
        Conversion litigation risk, it was generally assumed, would be significantly reduced after 1999, because the statute of limitations for breach of fiduciary duty claims would have expired in most states. That assumption was thrown out in 2000 when trust beneficiaries sued First Union, now Wachovia, alleging capital gains damages incurred in a “tax-free” conversion (Parsky v. Wachovia). That lawsuit was settled in 2003 for more than $23 million.
        Conversion litigation risk was further heightened when, in 2002, nearly 10 years after it converted, LaSalle was sued. In their complaint, plaintiffs argued that the bank’s ongoing investment of trust assets into its proprietary mutual fund equaled an ongoing breach. The argument was rejected by Mukasey, who found that New York courts had “consistently rejected” it. The federal court is also required to look to state law to determine statutes of limitations, according to Mukasey.
        A spokesman for the bank declined to comment on the decision, saying “the 31-page ruling speaks for itself.”

For more information, see the current issue of Trust Regulatory News.  Other topics in the current issue include:

Wachovia—Déjà Vu All Over Again

The latest conversion lawsuit against Wachovia, the bank’s fourth, seems to be a thinly veiled attempt to resurrect sweep-fee class actions. It also seeks to raise the stakes by alleging collusion, which would open the door to R.I.C.O. charges and triple damages.
    Core allegations in Brooks v. Wachovia are basically similar to those in Parsky v. Wachovia: breach of fiduciary duty, breach of contract, and unjust enrichment.
    Brooks differs from Parsky on two key points. One, plaintiff alleges that senior mutual fund officers were puppets of the bank and worked with them to “engineer a scheme to benefit themselves” at the expense of bene-ficiaries. Two, plaintiffs say that the bank’s sweep fee is another indicator of its “arrogance and utter insensitivity” to the best interests of the beneficiaries. Fighting words that the bank responds to in kind.

Winning Strategy—Fourth Consecutive Year of Growth

 Strong asset growth combined with stable returns translated into the fourth consecutive year of healthy earnings for fiduciary institutions, according to Trust Performance Report’s analysis of 2005 data. Fiduciary institutions in all peer groups saw asset growth. The data suggest that 2006 will be another banner growth year for fiduciary institutions, both small and large.
    TPR is a sister publication of TRN. To order or view sample pages, go to sample.pdf

BONY—Failure to Exercise Reasonable Care

Two weeks after Bank of New York acquired J.P. Morgan Chase’s corporate trust business, the U.S. Securities and Exchange Commission announced a civil fine and a cease-and-desist order against the bank for weaknesses in its transfer agency procedures.

Opening the Door to More Trust Challenges in Federal Court

By reining in the Ninth Circuit’s overly “broad” interpretation of the probate exception in Marshall v. Marshall, the U.S. Supreme Court is opening the door to more federal court challenges in disputes involving trusts and estates. (see also TrustUpdates, May 1, 2006).

Class-Action Law Firm Indicted for Alleged Kickbacks

Millions of dollars in kickbacks were paid in more than 150 class-action and shareholder derivative lawsuits, according the U.S. Attorney’s Office in Los Angeles.
    A federal grand jury on May 18 indicted the New York-based law firm of Milberg Weiss Bershad & Schulman and two of its partners, David Bershad and Steven Schulman, for allegedly participating in a multi-million-dollar scheme.
No statement in this issue is offered as or should be
construed as legal opinion or advice

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