Wells Fargo Investments is in the sites of Milberg Weiss, perhaps the nation's best-known class action lawyers. The New York law firm recently filed a class action lawsuit against the San Francisco-based fund firm in which it alleges that the funds participated in non-disclosed revenue sharing that harmed shareholders. The NASD's recent settlements with 14 broker-dealers for revenue sharing related issues seem to have sparked the suit.

Wells Fargo and its H.D. Vest affiliate were among the 14 firms named by the NASD. Wells Fargo paid a $2.97 million fine to the NASD over allegations that it had improperly used revenue sharing in its brokerage program while H.D. Vest paid more than $4 million in fines.

The plaintiffs in the suit include those shareholders who relied on the Wells Fargo and H.D. Vest Preferred Funds program as well as all shareholders in the Wells Fargo Mutual Funds. The suit also names Stephens Inc and SEI Investments Distributors as defendants for their role as fund distributors.

The suit was filed in the United States District Court for the Northern District of California (case C-05-4518WHA).

In its complaint (view pdf), Milberg Weiss Bershad & Schulman characterizes the revenue sharing as an "insidious kickback scheme" in which Wells Fargo benefited by selling shelf-space to fund firms and then told shareholders that it was "unbiased, objective financial planning."

If the law firm wins the case it come open the floodgates on copy cat suits as many brokerage firms have maintained similar preferred fund lists that included the fund firms paying revenue sharing.

The Wells Fargo and H.D. Vest Preferred Funds program included mutual funds from a number of complexes. Those funds paid revenue sharing payments to Wells Fargo and H.D. Vest in order to be included in the program, alleges Milberg Weiss.

The complaint adds that he financial advisors held the preferred lists out as objective and failed to properly disclose that were part of a "scheme" to "steer clients into purchasing" the funds. The program also created an "insurmountable conflict of interest by providing substantial monetary incentives to sell shelf-space funds to their clients, even though such investments were not in the clients' best interest," Milberg Weiss also alleges.

The case also seeks to cover shareholders of Wells Fargo Mutual Funds on the theory that the funds paid under revenue sharing agreements with brokers at Wells Fargo Investments and H.D. Vest to push investors into Wells Fargo Funds came from "illegal" excessive fees that should have been invested in the underlying portfolio.

Those fees could be substantial if the complaint is to be believed. In the Wells Fargo program, each fund family paid a base fee of $50,000 to be included on the list. Funds then paid another 35 basis points on new sales. The funds also reimbursed Wells Fargo for some fund marketing and administrative expenses.

The New York City-based law firm said Friday that it is still seeking a lead plaintiff for its case. The suit seeks to cover shareholders in the funds from June 30, 2000 through June 8, 2005 and is claiming violations of the Securities Act of 1993, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and state law.

Wells Fargo Preferred Funds

AIM Distributors.

Alliance Bernstein

Allianz Global Inv

Dreyfus

Delaware Inv

Eaton Vance

Evergreen Inv

Federated

Fidelity Inv

Franklin Templeton

Hartford

ING Funds

MFS Inv Mgmt

Oppenheimer Funds

Pioneer Inv Mgmt

Putnam Inv

Scudder Inv

Van Kampen Inv

Wells Fargo

H.D. Vest Preferred Funds

AIM Investments

American Funds

Franklin Templeton

John Hancock Funds

Lincoln Financial

MFS Inv Mgmt

Oppenheimer Funds

Phoenix Inv Partners

Putnam Inv

Scudder Inv

Van Kampen Inv

Wells Fargo Funds  

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