Fraud Class Action Against Investment Company For Excessive Fees Partially Sustained; Siemers v. Wells Fargo & Co., No. 05-04518 (N.D. Cal. Oct. 24, 2006)
Securities Class Action Reporter2006-11-30
The U.S. District Court for the Northern District of California denied in part and granted in part defendant investment companies' motions to dismiss securities fraud claims against them. The district court ruled that the plaintiff did not have standing to bring suit against the investment companies for mutual funds that he did not own. However, the district court allowed claims based upon mutual funds that the plaintiff owned to proceed.
Ronald Siemers invested in mutual funds sold by Wells Fargo & Co. Siemers alleged that Wells Fargo engaged in a scheme to pay brokers to sell its mutual funds to investors. Siemers claimed that the brokers held themselves out as unbiased, but received kickbacks from Wells Fargo to recommend Wells Fargo mutual funds.
Siemers claimed that, in order to finance the kickbacks, Wells Fargo charged excessive fees to Siemers and other investors. In a proposed class action, Siemers sued Wells Fargo, its affiliated companies and two brokers for securities fraud pursuant to §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and §§12(a)(2) and 15 of the Securities Act of 1933.
The district court denied the defendants' motion to dismiss as to all counts (see 4 S.Cl.Act.Rep. 176, Sept. 15, 2006), except for Siemers' §§ 36(b) and 48(a) of the Investment Company Act of 1940 claims. Siemers filed a second amended complaint, and the defendants moved to dismiss.
Lead plaintiff's standing determined prior to certification.
In order to represent a proposed class in a securities fraud class action, the lead plaintiff must have standing to sue. Standing must be proved prior to class certification, and standing cannot be established through certification.
The district court ruled that Siemers did not have standing to sue H.D. Vest Investment Services. L.L.C. because he never had an account with H.D. The district court also held that Siemers did not have standing to bring suit based on mutual funds that he did not own.
To state securities fraud claims pursuant to §10(b), a plaintiff must allege that the defendants had knowledge or sci-enter of their false and misleading statements. The district court held that Siemers failed to allege scienter as to the Wells Fargo-affiliated companies and the brokers.
The district court denied Wells Fargo's motion to dismiss, but granted the affiliated companies and brokers' motions to dismiss. The district court also dismissed Siemers' claims that were based on mutual funds that he did not own, suggesting that Siemers could expand the actionable mutual funds by adding plaintiffs who owned them.