Breach of Fiduciary Duty

Without Written Confidentiality Agreement, Competing Does Not Breach Fiduciary Duty, Court Rules

July 11, 2008 | Peter S. Lubin and James V. DiTommaso

A former shareholder, officer and director did not breach his fiduciary duty to a corporation when he started a competing company, and a former employee did not breach his duty of loyalty by joining, the First District Court of Appeal has ruled. Cooper Linse Hallman v. Hallman, No. 1-05-0597 (2006).

Plaintiff Cooper Linse Capital Management, a closely held financial services company, brought on Thomas Hallman in 1994 as a shareholder with 20% of stock shares. The remainder were divided evenly between Lori Cooper and Don Linse. Hallman served as vice president and CFO as well as an employee. Two years later, the company hired James McQuinn as an employee only. Neither man signed a written confidentiality agreement, and both disputed Cooper Linse’s contention that they entered into an oral confidentiality agreement. All parties agreed that Linse and Cooper made all of the business decisions.

In 2000, the company that held Cooper Linse’s clients’ accounts in trust got into financial trouble and had its assets frozen, leaving clients unable to access their accounts and Cooper Linse unable to pay its employees. Linse began negotiations to take over that company’s trust business; McQuinn and Hallman quietly began planning to start a business competing with Cooper Linse.

Our Chicago Consumer Attorneys Can Assist in Recovering Money Damages for Consumer Frauds– Federal Reserve Website Assists in Reporting Consumer Fraud to the Right Agency

May 31, 2008 | Peter S. Lubin and James V. DiTommaso

Are you a consumer with questions or concerns related to potential fraud and do not know what government agency to contact? The Chicago Federal Reserve Bank provides a web page that allows you to link to government agencies that may help you. The web page has links to federal and state banking agencies, federal and state securities agencies, and state insurance agencies located in Illinois, Indiana, Iowa, Michigan, and Wisconsin. You can also link to various useful financial , insurance, and banking tools, and to lists of financial services regulators, and consumer complaint filing information. Click here to link to the Chicago Federal Reserve Fraud web page.

If you need legal assistance in pursuing a civil lawsuit because government regulators cannot help you in recovering money lost due to fraud, our private sector lawyers can assist you by clicking here to contact us.

Mutual Fund Owners May Not Sue Over Excessive Fees, Seventh Circuit Rules

May 28, 2008 | Peter S. Lubin and James V. DiTommaso

In a mutual fund’s shareholder dispute, the Seventh U.S. Circuit Court of Appeals ruled on May 19 that an investment advisor’s fiduciary duty to shareholders does not require that the advisor’s fees be “reasonable” by any legal definition. In Jones v. Harris Associates L.P., 07-1624 (7th Cir. 2008), the circuit affirmed a summary-judgment ruling in favor of the mutual fund manager by the U.S. District Court for the Northern District of Illinois.

Three shareholders in the Oakmark complex of mutual funds sued the fund’s advisor, Harris Associates, contending that the fees they paid toward Harris’s compensation were too high. The bulk of the opinion (which the majority called “the main event”) concerned section 36(b) of the Investment Company Act, an amendment to the 1940 act added in 1970. That law gives investment advisors at registered investment companies a fiduciary duty to shareholders with regard to any compensation they or their affiliates receive. However, said the Seventh Circuit, “a fiduciary duty differs from rate regulation…. Section 36(b) does not say that fees must be ‘reasonable’ in relation to a judicially created standard. It says instead that the adviser has a fiduciary duty.” The court goes on to note that fiduciary duty is well-defined in trust law and does not foreclose an advisor’s ability to negotiate for compensation.

In doing so, the court disapproved caselaw from Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982). That case requires that “[t]o be guilty of a violation of §36(b) . . . the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.”

Bond Filing Absolutely Must Precede Attachment Order Under Illinois Attachment Act, Appeals Court Rules

May 24, 2008 | Peter S. Lubin and James V. DiTommaso

In a business fraud lawsuit pitting a bank against its security vendor, the Illinois Appellate Court for the 1st District ruled May 1 that an attachment order must be voided under the Illinois Attachment Act if plaintiffs fail to file an attachment bond beforehand. In ABN Amro Services Company, Inc. v. Navarrete Industries, Inc., No. 1-07-0089 (Ill. App. 2008), the appeals court voided such an order and remanded it to the trial court.

The case arose from alleged fraud by INS, which provided security for multiple Chicago-area La Salle Bank branches. A fraud investigator discovered that Armando Navarrete of INS was fraudulently overbilling the banks by an alleged $15.9 million, then paying kickbacks to the banks’ vice president for security, George Konjuch. The bank filed a lawsuit in September of 2006 against INS, Konjuch, Navarrete and another INS employee, alleging fraud, civil conspiracy and constructive trust, plus breach of fiduciary duty against Konjuch. (Konjuch and Navarrete have since been indicted by a federal grand jury for the scheme.)

At the same time, plaintiffs asked for a temporary restraining order, a preliminary injunction and an order of statutory prejudgment attachment, all of which were attempts to keep the alleged conspirators from absconding with the money. Upon receiving notice of these filings, defendants immediately filed motions to void the restraining order and the prejudgment attachment. After hearings, the trial court dissolved the restraining order and denied the preliminary injunction, but declined to vacate the attachment order. Both sides appealed.