Mutual fund sued by online gambling investors

Casualties of US gambling bans try to recover investment monies

Shareholders of two Vanguard Group Inc funds have launched litigation in a Delaware court against the company and fund executives for allegedly investing their money in four illegal offshore Internet gambling businesses, reports the news agency Reuters.

The case again raises the question of whether mutual funds can be held liable for their investments in foreign firms that later face prosecution.

The same plaintiffs were unsuccessful in a similar Manhattan court case in 2008, where the judge ruled that the shareholders were injured by a U.S. government crackdown on Internet gambling [the UIGEA] which damaged the businesses of online gambling companies, and not by Vanguard's investment in the gambling firms.

Plaintiffs represented by New York attorney Thomas Sheridan seek to hold mutual fund companies liable for their investments in online gambling companies, and similar actions have been filed in Missouri and New York against Kansas City-based American Century Investments and in California against Los Angeles-based Causeway Capital Management LLC. All have so far proved unsuccessful.

The suits claim that the funds' investments in online gambling companies were wiped out when the U.S. government began cracking down on illegal offshore gambling businesses in 2006. The act and subsequent enforcement actions led to withdrawal from the US market and serious commercial damage to a number of major online gambling companies, impacting the investors in those companies.

The Delaware lawsuit alleges that Vanguard International Equity Index Funds and Vanguard Horizon Funds unlawfully invested money in illegal gambling businesses. The plaintiffs are listed as Marylynn Hartsel of Florida and South Carolina resident Deanna Parker, who seek class-action status on behalf of investors who bought shares in the funds before July 17, 2006.

Reuters reports that among other things, plaintiffs claim that even before the 2006 law was passed, investors should have heeded many warning signs, including a notice in PartyGaming's 2005 prospectus that its activities were seen as illegal by authorities. Neteller made similar comments in its 2004 prospectus, the suit states.

The lawsuit alleges that Vanguard and Vanguard fund managers and trustees knew they were violating U.S. criminal laws by investing in Sportingbet, PartyGaming, Bwin Interactive Entertainment AG and Neteller.

John Woerth, a spokesman for Vanguard, told the news agency: "We feel it is important to emphasize that Vanguard adheres to the highest ethical standards in every aspect of our business. We believe that the plaintiffs' case is without merit, and we intend to defend the matter vigorously."

Source: Delaware Chancery Court, Case No. 5394

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