Securities Class Action Regarding Mutual Fund Performance


Cornerstone Research worked with a finance expert to analyze investments in mortgage-backed securities during the financial crisis.

Retained by Morrison & Foerster and by Quinn Emanuel Urquhart & Sullivan

Defense counsel for a major nationwide broker-dealer retained Cornerstone Research and Professor Christopher James of the University of Florida to analyze factors that led to the decline in the net asset value (NAV) of a proprietary ultrashort bond mutual fund during the financial crisis. Shareholders of the fund filed a securities class action under Sections 11 and 12 of the Securities Act of 1933, alleging that the defendants falsely portrayed the fund as a conservative investment with minimal risks.

Professor James opined that the alleged overconcentration in mortgage-backed securities did not cause the fund’s decline.

Among other allegations, shareholders claimed that the fund invested more than 25 percent of its assets in non-agency mortgage-backed securities (MBS), allegedly exceeding a policy limit on the concentration of assets in any one industry. The plaintiffs claimed that this overconcentration led to the NAV decline when credit and liquidity risks materialized during the financial crisis.

Professor James submitted multiple reports, in which he analyzed the daily composition and performance of individual assets in the fund’s portfolio. To determine the effect of the alleged overconcentration on NAV, he also constructed a hypothetical portfolio that kept investments in non-agency MBS within the 25 percent limit by reweighing the components of the actual portfolio. Professor James found that the hypothetical portfolio NAV tracked the actual NAV very closely, showing that the alleged overconcentration in non-agency MBS did not cause the fund’s NAV decline.

The case settled shortly before trial.

For additional information about this case, please contact Katie GalleySasha Aganin, or Eric Tam.

Case Expert

Christopher M. James

William H. Dial/SunBank Eminent Scholar in Finance and Economics,
Warrington College of Business Administration,
University of Florida