Seligman Lawsuit Could Become Spitzer’s Waterloo
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As Napoleon discovered in the 1700s, not every battle is a sure thing. Waterloo was clear proof of that.
Some Wall Streeters suggest a similar political Waterloo could befall the gung-ho New York State attorney general, Eliot Spitzer, the state’s next would-be governor, if he should lose his court battle with J. & W. Seligman, a 146-year-old advisory that surprisingly slapped him with a lawsuit last Wednesday.
If Mr. Spitzer loses, it could mean a setback in his bid to become governor, one former commissioner of the Securities and Exchange Commission said. His reasoning: The attorney general, despite his good work, would be widely branded as a shoot-from-the-hip regulator, a loose cannon who is willing to ignore the rules of law to get his way.
Seligman, which manages about $8 billion of assets and is owned by a small group of private investors, is challenging an investigation launched by Mr. Spitzer’s office into whether the fees it charges its mutual fund investors are excessive. It contends, too, Mr. Spitzer is using pressure tactics to get it to agree to management fee reductions and argues regulation of such fees is the sole province of the SEC.
Most of Mr. Spitzer’s adversaries usually buckle under and settle his complaints rather than subject themselves to a steady flow of negative publicity. But Seligman is an isolated case of one firm that’s willing to don boxing gloves and slug it out. Its reasoning for not settling is contained in its complaint: “The Attorney General has exceeded his authority and intruded himself into an area assigned by Congress to the SEC.”
In its lawsuit, filed in federal court in Manhattan, Seligman is seeking to halt Mr. Spitzer’s investigation, which, it notes, kicked off August 26 with a bunch of subpoenas being issued for documents describing fee negotiations between the firm and the independent directors of the Seligman funds dating back to January 1, 1998.
The fee investigation of Seligman is an outgrowth of a probe by Mr. Spitzer and the SEC that began in early 2004 after the advisory disclosed it had an arrangement in 2002 with a Chicago brokerage firm that permitted the firm a limited amount of frequent trading in certain mutual funds it managed. The arrangement ended in 2003, and Seligman made restitution to the involved funds.
Seligman began settlement negotiations with Mr. Spitzer and the SEC last March, and a tentative agreement in financial terms was reached in August.
After that, though, according to Seligman’s suit, Mr. Spitzer’s office then sought to impose certain “unacceptable” operating conditions that would have effectively involved turning over control of the negotiation of advisory fees to an outsider and subjecting the negotiation process at Seligman to oversight and control by Mr. Spitzer’s office.
The attorney general doesn’t have the authority to challenge Seligman over its fees, the advisory’s attorney, Daniel Pollack, said. Otherwise, he added, “You would have attorney generals from all 50 states, each having his or her own idea as to what management fees should be imposed, and it would certainly lead to chaos.”
Mr. Pollack is quick to point out that neither the SEC, nor, for that matter, any investor has ever complained about or challenged Seligman’s fee structure. In fact, he noted that in previous conversations with the SEC, he was specifically told by the commission that “we’re not complaining about Seligman’s fees,” which Mr. Pollack described to me as well within the industry norm.
Actually, that’s not entirely true. Seligman’s fund fees are about 13% higher than the industry average, 1.77% of assets, versus the industry norm of 1.46%, said Russ Kinnel, director of mutual fund research at Morningstar, the nation’s leading mutual fund tracker. Seligman’s largest fund, its $3 billion Seligman Communications & Information Fund, has an expense ratio of 1.51%. “The Seligman funds, by and large, are at the high end, but not off the chart,” Mr. Kinnel said.
Overall, Seligman operates 40 mutual funds and over the past five years, after fees, sports a below-average performance. In this period, 23 of its funds have turned in a mediocre showing, while 15 have performed above average. Two of the funds do not have five-year records.
Mr. Kinnel went out of his way to praise Mr. Spitzer, who, he observed, is helping to clean up the industry by shedding light on a lot of shady practices and filling a void that the SEC and mutual fund boards have ignored.
Oddly, Seligman is seemingly so nervous about the entire matter that it refused to disclose the names of the investors who own the firm. The firm’s internal public relations personnel did not return calls seeking comment on the question, and its outside public relations counsel, Hank Green, was equally evasive. He claimed he was unable to locate anyone at Seligman who had access to such information and would not respond to additional calls on the matter.
As it turns out, the names are no state secret. They’re on the Internet. Forms filed with the SEC show that the chairman of Seligman, William Morris, is the largest holder with more than a 50% stake, followed by the advisory’s president, Brian Zino, with an excess of 10%.
So how will Seligman’s suit play out? As a general rule, the SEC and the courts do not upset the business judgment of fund directors, except for very unusual circumstances. That’s obviously a plus for Seligman. However, some securities attorneys, as well as a couple of SEC staff members, believe Mr. Spitzer is likely on sound legal ground and has assuredly looked hard at any jurisdictional problems.
“It’s a close call, but it will be difficult to restrain the attorney general from enforcing New York law,” notes Jay Baris, a partner in the law firm of Kramer Levin Naftalis & Frankel. “I think Seligman has made a good case, but the odds are slightly tipped in Mr. Spitzer’s favor, and there’s a 55% chance he’ll prevail.”
Mr. Spitzer’s reaction: alas, no reaction. “We won’t comment on the case; let it take its course,” a spokesperson said.