California’s attorney general Bill Lockyer today filed a securities fraud lawsuit against Edward D. Jones & Co., alleging the St. Louis-based broker dealer failed to tell investors about “shelf space” payments it received from seven mutual funds to recommend and sell those funds.

The lawsuit filed in Sacramento County Superior Court alleges the seven mutual funds (called “preferred funds” by Jones) that maintained shelf space arrangements with Jones include: American Funds, Federated Investors, Goldman Sachs, Hartford, Lord Abbett, Putnam Funds, and Van Kampen Investments. It alleges that under the “shelf-space” agreements at issue in the case, seven mutual funds paid Jones either cash or “directed brokerage” commissions (on portfolio transactions) to sell those funds, place them on lists of recommended buys or obtain other preferential treatment. From January 2000 through the present, Jones extracted approximately US$300 million in shelf space payments, according to the complaint, most of it in cash.

Jones violated the anti-fraud laws, the complaint alleges, by failing to tell investors about the existence of the shelf space arrangements, and failing to disclose the potential conflict of interest created by the arrangements. None of the allegations have been proven.

The sale of these preferred funds comprised about 98% of all Jones’ mutual fund sales from January 2000 through the present, according to the complaint. Sales of just one preferred fund — American Funds — accounted for 50% of all Jones’ sales during the same period, the complaint alleges. In California, Jones’ sale of the preferred funds totaled an estimated US$5.8 billion from January 2000 through October 2004, said Lockyer.

The suit seeks disgorgement of all profits, restitution and damages for investors who bought mutual funds from Jones. Additionally, the complaint asks the court to impose civil penalties for each violation of the securities law. The maximum civil penalty for each violation is US$25,000.

Lockyer also seeks “injunctive relief” requiring Jones to fully disclose to investors, at the point of sale, the incentive payments it receives from mutual funds. Stressing the disclosure requirements will be stringent, Lockyer said, “California will demand full honesty from Edward Jones in its dealings with this state’s investors.”

The Jones lawsuit is the third enforcement action taken by Lockyer under a law he sponsored which took effect Jan. 1, 2004 and which gave his office authority to file civil enforcement actions for violations of the Corporate Securities Law. In two previous actions, Lockyer settled shelf space complaints against the distributor of PIMCO mutual funds, PA Distributors (on Sept. 15, 2004) and Franklin Templeton Distributors, Inc. (on Nov. 17, 2004). Investigations remain ongoing of California-based American Funds, as well as several other broker-dealers.

Also today, the Wall Street Journal said that Edward Jones has agreed to pay US$75 million to settle charges with U.S. federal securities regulators that it steered investors to certain mutual funds without disclosing that the firm received compensation from those funds. A final agreement could be approved by the Securities and Exchange Commission as early as this week.