Wednesday, May 17, 2017

Class certified in action over how funds were marketed

By Rodney F. Tonkovic, J.D.

A class has been certified in a fraud action brought against an investment adviser that allegedly advertised back-tested, hypothetical results as actual performance. The court found that the proposed class satisfied the typicality and adequacy requirements of Rule 23(a) and was entitled to a presumption of reliance, thus satisfying the predominance requirement (In re Virtus Investment Partners, Inc. Securities Litigation, May 15, 2017, Pauley, W.).

Virtus Investment Partners began marketing a family of funds called "AlphaSector" in 2009. In its marketing materials, the adviser represented that the funds' outsized performance was the result of live trading with real client assets since 2001. AlphaSector, however, did not exist before 2008. In a January 2013 conference call, Virtus's CEO touted the firm's strong performance and noted that this performance was a key driver of its "high level sales and net flows." These remarks, the complaint said, failed to mention that at least part of this performance was attributable to misleading statements about AlphaSector.

Earlier proceedings. The court had previously granted in part and denied in part the defendants' motion to dismiss two class action complaints brought by purchasers of Virtus securities and mutual funds, respectively. Both actions concerned representations by a Virtus subadviser, F-Squared and AlphaSector's track record. Also, the SEC obtained a $35 million settlement and admission of wrongdoing from F-Squared and, later, a $16.5 million settlement from Virtus. "If an investment adviser chooses to advertise, it is responsible for the content and accuracy of its ads," Enforcement Director Andrew Ceresney said at the time.

Class certified. The court certified a class consisting of purchasers of Virtus common stock between January 25, 2013 and May 11, 2015. The Arkansas Teacher Retirement System was appointed class representative and Labaton Sucharow LLP and Bernstein Litowitz Berger & Grossmann LLP is class counsel.

The court first found that the proposed class satisfied the typicality and adequacy requirements. Virtus argued that the lead plaintiff was subject to unique defenses because it was an "in-and-out" trader and sold all of its shares prior to the end of the class period. The court disagreed, noting that the lead plaintiff held a large number of shares through the first corrective disclosure, which subjected it to the same wrongful acts as the rest of the class. Virtus argued further that the lead plaintiff purchased Virtus shares after the truth was revealed, but the court said that these purchases were still before the truth was fully revealed to the market.

Turning to the Rule 23(b) requirements, the court found that the class was able to show reliance under both the Basic and Affiliated Ute presumptions. The class qualified for the Basic presumption because the alleged misstatements were contained in publicly-filed prospectuses and statements; the relevant transactions took place before the truth was revealed; and Virtus's common stock traded on an efficient market. The defendants offered a "truth-on-the-market" defense, which was inappropriate on a motion for class certification and were also unable to offer alternative explanations for the drops in share price.

The lead plaintiff was also entitled to a presumption of reliance under Affiliated Ute for the CEO's statements in the 2013 conference call. Here, the CEO omitted the AlphaSector's misleading performance history, stating a half-truth at best. Other statements were characterized as false and misleading statements, not omissions, and were not subject to the Affiliate Ute presumption.

The case is No. 15cv1249.