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Consumers Union Backs Suit Over Investment : Banking: Group hopes action against Great Western will improve disclosure on fund risks.

October 20, 1994|DAVID W. MYERS | TIMES STAFF WRITER

The nation's largest consumer advocacy group Wednesday threw its weight behind a lawsuit filed by an elderly Santa Monica widow, who claims she lost $8,000 after a mutual fund salesman at her bank wrongfully led her to believe that the value of her shares was insured by the federal government.

Appearing at a press conference announcing the lawsuit, Consumers Union attorney Gail Hillebrand said she hopes that 94-year-old Ruby Rosenthal's action against Great Western Bank will force lenders to do a better job of evaluating their customers' financial situation before "selling them a mutual fund that they shouldn't be in."

"Financial institutions are aggressively marketing mutual funds to their customers, but they're not doing a good job of explaining all the risks," Hillebrand said. "Maybe this (lawsuit) will encourage them to do better."

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About 3,500 U.S. banks now sell mutual funds, and the amount of money flowing into those funds has been growing at a 40% annual rate--nearly twice as fast as the fund industry in general. Regulators are now studying whether those financial institutions are fully disclosing the risks to their customers.

Regulators and consumer groups are particularly concerned that longtime bank customers--many of whom, like Rosenthal, have never invested in a mutual fund before--mistakenly believe that the value of the funds cannot drop, or that any losses would be covered by the federal government.

Although deposits at most banks and thrifts are insured for up to $100,000, mutual fund investments that are offered by those same institutions have no such a guarantee.

Rosenthal's suit, filed by Pasadena attorney Michael Linfield, claims the widow invested $60,000 after visiting a broker in the Great Western branch where she had banked for the past 30 years.

The suit claims the broker told Rosenthal that she could double the return she was earning on her $60,000 certificate of deposit by investing the money in "U.S. Government securities."

Although Rosenthal's mutual fund invested in government-backed securities, the value of her shares in the fund dropped by about $8,000 when interest rates rose. Only then did she realize that the investment was not risk-free, her suit claims.

She soon closed the account, she said, "because I lived through the Depression . . . and I was afraid I was going to go to the poor house" if the value of her investment fell further.

Attorney Linfield said he'll ask a judge for an injunction to stop Great Western "from misleading investors," and to award Rosenthal "millions and millions" of dollars in punitive damages. He might also ask the court to give the suit "class status," which would allow him to represent other consumers who have lost money after purchasing mutual funds through the bank.

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William C. Tak, the Great Western broker who sold Rosenthal the mutual fund investment, was unavailable for comment. But Brian Cerini, who heads Great Western's brokerage unit, said he had discussed Rosenthal's complaint with Tak, and that Tak had said the risks of investing in the fund were completely explained to both Rosenthal and a nephew of hers who had accompanied her on visits to the branch.

"Mrs. Rosenthal was well informed about the investment that was presented to her," Cerini said, adding that she had also signed a statement acknowledging that the investment was not insured.

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