Investors in Pennsylvania-based Vanguard Group Inc., the second-biggest U.S. manager of stock and bond mutual funds, resorted to litigation this week in a claim against group management's illegal investment in companies running Internet gambling businesses banned in the U.S., reports Bloomberg business news.

Chief Investment Officer George Sauter, portfolio manager Duane Kelly and eight trustees are alleged to have transgressed against U.S. racketeering laws and failed in their fiduciary duties to investors by acquiring stock in as yet unidentified Internet gambling businesses.

The complaint was filed by two investors, Deanna McBrearty and Marylynn Hartsel, in the US District Court of New York - a district known for taking a hard line on Internet sports betting.

The plaintiffs claim that: "Defendants caused the funds to become owners of illegal gambling businesses,'' and seek class-action status on behalf of all similarly aggrieved investors, together with as yet unspecified compensatory and punitive damages.

Vanguard is a tempting target; the company has more than $1.25 trillion in assets. A company spokesman said that the company hasn't been served with the complaint yet and declined to comment further. Vanguard International Equity Index Funds, which does business as the Vanguard European Stock Index Fund, and the Vanguard Horizon Funds, are named in the complaint.

Although the contentious investments by Vanguard have yet to be identified, there is speculation that the now liquidated Betonsports Plc may be one of these. Following US federal enforcement actions in 2006 the company declared bankruptcy and is currently in the hands of liquidators, with two former management executives, David Carruthers and Gary Kaplan in detention. The company, and four individual defendants have pleaded guilty and await sentence.

Gibraltar-based Party Gaming Plc, may be another; the plaintiff's legal representative, Thomas Sheridan, told Bloombergs that the company was one of several Internet businesses in which Vanguard invested client assets; he declined to identify any others.

"We don't have detailed information at the moment about what they actually paid and what they actually sold these investments for,'' Sheridan said, adding that those responsible could be liable for tens of millions of dollars in damages.

The plaintiffs allege that the investments suffered 'significant losses' after the federal government prosecutions began in 2006.

The case is McBrearty v. The Vanguard Group, 08cv7650, U.S. District Court, Southern District of New York (Manhattan).

“The company, and four individual defendants have pleaded guilty and await sentence”

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