Stock purchase prompts bitter dispute with two U.S. fund managers

A secretive multinational bank that counts Federal Reserve Board Chairman Alan Greenspan among its directors is locked in an unusually nasty court dispute that involves charges of stonewalling, stock manipulation and an “arrogance of political power.”

In an unusual twist, the case is being pressed by two prominent figures in the U.S. mutual fund business, and could spill into Congress and a tribunal in The Hague before it’s over.

The First Eagle SoGen Funds in New York filed suit last January and has since been joined in the case by Leon Levy, chairman and co-founder of OppenheimerFunds Inc., also in New York.

“We’re talking about the extraordinary arrogance of political power,” says Jean-Marie Eveillard of the First Eagle SoGen Funds.

“We’re talking about bureaucrats in Basel who work for a multinational organization. These guys don’t even pay taxes,” he says.

Fund experts say the case holds implications for the entire financial community.

“If people who are inclined to invest in multigovernmental agencies come to believe that they will try to do to them what this agency is trying to do to this fund, they will be much more cautious,” says Pamela Wilson, a lawyer at Hale & Dorr LLP in Boston.

Defrauding investors?

At the center of the dispute is the Bank for International Settlements, an obscure, quasi-public institution based in Switzerland that is supposed to promote cooperation among the world’s central banks.

Its board of directors, which includes Mr. Greenspan and William McDonough, president of the Federal Reserve Bank of New York, voted in January to pay 16,000 Swiss francs, or $9,280 a share, to buy back 72,648 privately held shares of the bank’s stock.

At that meeting, Fed Vice Chairman Roger Ferguson Jr. attended in place of Mr. Greenspan.

But First Eagle SoGen Funds claims the stock is worth twice as much, according to federal court suit, filed Jan. 5 in Manhattan. Its managers say that they will not tender their BIS stock until a court verdict is reached.

First Eagle says it is owed $19,000 per share, because that is the true intrinsic value of the stocks, according to the bank’s own experts.

“I think we have a very strong political case,” Mr. Eveillard says. “On one side you have a secretive Swiss bank, a multinational organization. Mr. Greenspan and Mr. McDonough sit on the board of the bank.

“The bank’s board unanimously approved the atrocious price of 16,000 Swiss francs, thereby, we believe, defrauding 100,000 American individuals who have their savings invested in our funds.”

“It certainly suggests that the bank is not being guided in the least bit by what we Americans look on as equity of the law in the United States, and that strikes me as very unfair,” Mr. Levy adds.

The bank calculated the price of the stock with help from the French unit of J.P. Morgan, which says that low liquidity and lack of voting rights means that the shares are worth just 45% of the bank’s intrinsic value.

Plea to Congress

Besides filing the lawsuit, First Eagle sent copies of a form letter to financial advisers and brokers as part of an effort to spark a lobbying campaign in Washington.

The letter claims that the bank is “violating the basic rules of corporate governance, contract law and respect for property rights,” and accuses the Federal Reserve of dragging its feet on a request under the Freedom of Information Act for more information about the buyback.

Fund experts say the move to lobby Congress is very unusual, if not groundbreaking. At least one mutual fund consultant says First Eagle runs the risk of a backlash from investors if they determine they haven’t been given all the information about the case.

But Mr. Eveillard says the decision to send the letters out with the fund group’s monthly newsletter was fairly easy to make.

“We believe we have a fiduciary duty to the shareholders in our funds to do the best and the most we can in order for them not to be unduly deprived of what is rightfully theirs,” he says.

Barry Barbash, a former top investment regulator at the Securities and Exchange Commission and now a mutual fund lawyer with Shearman & Sterling in Washington, says that while he’s not certain such a tactic will cause anyone in Congress to act, that may not be First Eagle’s primary motive.

Mr. Barbash says the letters may help convince the bank that real people are affected by its actions, and that the dispute is best handled privately. If that’s what First Eagle is trying to do, the letters may have value, Mr. Barbash says.

Investors mistreated

Mr. Levy says he joined First Eagle’s case last month in part because he’s never seen minority investors so mistreated. He says he is refusing to tender his 100 personal shares in the bank until First Eagle’s lawsuit comes to an end.

Mr. Levy says he purchased his shares through a broker in 1995 because it seemed like a logical way to play the gold market. The bank has large holdings in bullion.

“I thought that a huge and powerful organization like the Bank for International Settlements would behave very properly,” Mr. Levy says. “I never thought that we would find a situation where they would take advantage of minority stockholders.”

For its part, the bank claims it is not trying to take advantage of minority shareholders and has requested that the case be dismissed, according to court papers.

The documents indicate that the bank is merely trying to play by the rules it set up when the stock was issued. Under those rules, that stock does not carry with it the usual rights of shareholders. Investors should have known that when they bought it, the bank asserts.

In any event, Cleary Gottlieb Steen & Hamilton, the New York law firm representing the bank, says in court papers that any shareholder disputes must be resolved by a tribunal in The Hague.

Unfortunately for First Eagle, it seems more and more likely that that could happen.

First Eagle asked for a temporary restraining order in U.S. District Court for the Southern District of New York soon after the bank announced Jan. 8 that it was buying back all of the outstanding shares. The judge denied the request partly on grounds that he believed the dispute belongs in The Hague.

The fund group appealed and is waiting for that verdict, which is expected soon.

If the verdict should go against it, Mr. Eveillard says, First Eagle will sell its shares back to BIS for the stated price, but will continue to fight.

Last Wednesday, Sullivan & Cromwell, the New York law firm representing First Eagle, filed a class-action complaint on behalf of all American mutual fund shareholders as an amendment to its case.