Securities Regulation Daily Interlocutory appeal denied regarding mutual fund loss causation pleadings
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Monday, January 9, 2017

Interlocutory appeal denied regarding mutual fund loss causation pleadings

A motion by mutual fund companies for an interlocutory appeal on whether mutual fund document misrepresentations affected the funds’ net asset value was denied by a federal court in New York. Although the court acknowledged that in the mutual fund context this was a case of first impression for the Second Circuit and there was conflict among district courts, the statutory elements required for an interlocutory appeal were not satisfied in this case (Youngers v. Virtus Investment Partners Inc., January 6, 2017, Pauley, W.).

Controlling question. The investors alleged that the NAVs of their mutual funds declined as a direct result of misrepresentations of performance history in fund documents. But NAVs are based on the underlying asset values according to a formula prescribed by the Investment Company Act, so misstatements could not affect NAV. Therefore, as a matter of law, the plaintiffs failed to plead this theory. However, their alternate theory of NAV loss causation, that investors paid higher fees directly because of the misstatements, prevented it from being a pure question of law and required consideration of facts to determine whether the fees in this case would have been lower had the disclosures complied with statutory requirements.

Substantial ground for difference of opinion. The Second Circuit has not yet defined "value" where, as for mutual funds, shares are not publicly traded on the open market. Because this question would be an issue of first impression for the Second Circuit and represented diverging opinions within the Second Circuit, the court found that this was "the type of conflict that may be ripe for interlocutory appeal."

The risk concealed by the alleged misstatements directly related to decline in NAV. The risk was that future performance was important to investors and factored into their valuation. Because loss in value would not be immediately apparent, value of the mutual fund could decline without a corresponding decline in price. The investors adequately alleged such a diminution in NAV, and it was up to them to have an opportunity to prove it at the summary judgment stage.

Termination of litigation. Certification would not advance termination of the litigation in this case because the investors’ alterative theory was viable and dismissal of the case would simply allow re-pleading and delay consideration on the merits. This element was lacking, preventing the interlocutory order from certification. The court noted that the issue would best be addressed on a "more fulsome record after discovery is complete" and not as an interlocutory appeal.

The case is No. 15-cv-8262-WHP.

Attorneys: Laurence M. Rosen (The Rosen Law Firm, P.A.) for Mark Youngers. George S. Wang (Simpson Thacher & Bartlett LLP) for Virtus Investment Partners Inc., Virtus Investment Advisers, Inc. and Virtus Opportunities Trust.

Companies: Virtus Investment Partners Inc.; Virtus Investment Advisers, Inc.; Virtus Opportunities Trust

MainStory: TopStory FraudManipulation InvestmentCompanies NewYorkNews

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