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Thursday, August 25, 2005

A "Private" SEC Letter Finds its Way into Litigation

by: Sean Hanna, Editor in Chief

Bjurman, Barry & Associates is facing more fallout from an SEC review that led to claims it overcharged its funds for marketing and distribution costs. Not only did the SEC request the Los Angeles fund manager reimburse its funds, but the SEC letter is now being used as evidence in a private lawsuit.

The Wall Street Journal reported on the suit and the role of the SEC letter in an article Thursday morning.

The SEC sent the deficiency letter to Bjurman's trustees and management following an inspection of the fund complex in 2003. That August 19 letter summarized the inspection and alleged that Bjurman overcharged by as much as $460,000 for certain services and that the trustees "did not conduct meaningful reviews" of the fees, raising "serious questions" of oversight.

"It appears that [Bjurman] placed its interests ahead of those of the [funds] and, therefore, breached its fiduciary duty," the letter read, according to the paper.

During the investigation the SEC discovered that during 2001 and 2002 Bjurman regularly collected more than the funds 25 basis point 12b-1 fee to cover marketing and distribution expenses. Bjurman then reimbursed the fund for the excess fee at the end of the year. In effect, it was taking an interest free loan from the fund to pay for marketing costs.

Those "loans" came to $143,161, and the following year $316,670, the SEC said in the letter. The SEC also noted that the fund trustees approved the practice.

Bjurman stopped the practice before the SEC inspection but failed to implement a new method for paying the fees, the paper also claimed.

At the SEC's request, Bjurman reimbursed the fund and paid interest on the amount. It also ceased charging the fund for the services and denies that it violated its fiduciary duties to shareholders.

Those actions may not save Bjurman from all liability, however.

The letter became public when it was entered as evidence in a suit brought by in Delaware in May by a shareholder of the Bjurman Micro-Cap Growth fund. The shareholder had already brought a similar suit in December of 2003 in New York.

Eduard Korsinsky, the suing shareholder's lawyer, told the paper that the letter came to light through related litigation.

The letter "is an indication that the board had not been functioning independently and instead is beholden to Mr. Bjurman and Mr. [Thomas] Barry," Korsinsky told the paper.

However, the SEC letter and inspection covered a two year period during which the fund was still open to new investors. Bjurman closed the fund in May of 2003.

Bjurman claims that collecting the 12b-1 fees is reasonable since they are used to pay shareholder services charges levied by fund supermarkets such as Charles Schwab and Fidelity Investments. 

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