“When Thomas P. Gallagher sold his shares in a sinking investment fund in January 2002, he thought that he was just cutting his losses in a fund punished by a broadly declining market. But when he saw a notice describing a class-action lawsuit against the fund’s manager, he decided that something sinister might have taken place,” writes Jonathan Glater in today’s New York Times.

“Mr. Gallagher, 72, is now one of the lead plaintiffs in a suit against a closed-end fund — whose shares can be sold only to the investment company at certain times, according to court documents — and administered by Van Kampen Funds, an Illinois company.”

“The suit contends that the company did not use available market prices to determine the value of fund assets. By using its own estimates of the assets’ worth, according to the suit, the company inflated the fund’s value. This caused new customers to overpay for shares and inflicted losses on existing investors when the fund’s managers eventually adjusted the value of investments downward, according to the suit.”

” ‘Possibly, some investments just go sour,’ Mr. Gallagher said, recalling his thoughts when he sold his shares. From the lawyers filing the suit, though, he said, ‘I learned about the problems that Van Kampen was not making its customers aware of.’ “

“Lawsuits against investment funds, including mutual funds, have become more frequent, in part because so many people bought shares, and the decline in the stock market has as a result hurt many people, lawyers say. And of course, the quest by plaintiffs’ lawyers for deep pockets continues.”

“In 2002, investors sued 13 funds, up from 5 in 2001 and 2 the year before, according to NERA Economic Consulting. But those figures understate the total number of lawsuits, because some companies, like Merrill Lynch, have been the target of several complaints.”

” ‘There’s a most unusual if not unique convergence of many, many more people in the market, seeing the market blow up in their faces,’ said Marianne K. Smythe, a partner at Wilmer, Cutler & Pickering in Washington and a former government regulator of the fund industry. ‘You’re likely to get more lawsuits.’ “

“A spokeswoman for Van Kampen declined to comment on the suit against the company, which is based in Oakbrook Terrace, Ill., outside Chicago. But in its court filings, Van Kampen argued that its valuation methods were fully disclosed to investors and that the market quotes for the senior bank loans its fund invested in were not readily available or reliable. The decline in the value of the fund was a result of the deterioration of the market over all, the company maintained.”

“Lawsuits against fund administrators like Van Kampen are moving through the courts even as Congress is considering changes to how funds are regulated. Critics of the fund industry worry that sellers of funds do not disclose enough information to potential investors to ensure that the purchasers do not buy funds with undesired — and misunderstood — characteristics.”