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Pretty Please, Can We Sue You? TheStreet.com (Mar. 7, 2001)

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Abstract: As if the likelihood of winning a lawsuit against the manager of a mutual fund weren't slim enough already, Maryland is trying to make it virtually impossible.

In many cases, shareholders can sue their mutual fund manager only if they first ask the fund's directors to do so on their behalf. If shareholders want to sue the manager directly, they must show that the directors are not truly independent of the manager. The Maryland Legislature is considering a bill that would make it impossible to make this showing.

The Maryland bill would require that courts treat any director who is independent under federal law as independent under state law as well.

Unfortunately, federal law requires independent directors to show very little independence. Under the law, a director can be independent even if he engages in transactions with the fund, used to work for the fund's manager, or owns stock in companies in which the fund invests.

Imagine a wayward money market fund manager who lost all of his fund's money investing in technology stocks, and then quit his job to join the fund's board. He would be an independent director under federal law, which means he could then refuse to sue his former employer on behalf of the fund. And the Maryland Legislature would consider his vote to be independent.

The Committee overseeing the bill in the Maryland House of Delegates had scheduled hearings the day this article was published, at which I was scheduled to testify. The bill was withdrawn that morning, however, and the hearing was cancelled. It is my understanding that, under Maryland parliamentary rules, this maneuver will allow the Committee to hold hearings at which only supporters of the bill will be allowed to testify.

If you would like to let the Maryland legislature know you oppose the bill, the time to act is now.

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