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S&P sues Vanguard
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June 8, 2000: 5:21 p.m. ET
Alleges fund firm didn't get S&P's permission to use its indexes in VIPERs
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NEW YORK (CNNfn) - Standard & Poor's parent McGraw-Hill said Thursday it is suing The Vanguard Group and Vanguard Index Trust for breach of contract, trademark infringement and unfair competition in connection with the fund company's planned exchange-traded shares known as VIPERs.
McGraw-Hill's lawsuit, filed in the U.S. District Court in Manhattan, alleges that the king of index funds violated its 1988 licensing agreement with S&P, and charges that the fund family is using the S&P indexes and trademarks in its VIPERs without having expanded its license.
"Vanguard ... has attempted to shoehorn its new offering within the scope of the existing license by purporting to structure the new exchange-traded securities products as shares of open-end mutual funds covered by the 1988 agreement," S&P said in a statement.
Exchange-traded funds, unlike shares of traditional mutual funds, trade like stocks, pricing continuously throughout the day instead of just once at the end of trade.
 In May, Vanguard said it had applied to the Securities and Exchange Commission to launch VIPERs for five of its nine index funds - the Vanguard 500 Index, Vanguard Growth Index, Vanguard Total Stock Market Index, Vanguard Value Index and Vanguard Small-Cap Index.
The bottom line from S&P's perspective is that "Vanguard is attempting to use our intellectual property without our permission," said S&P spokeswoman Christina Pretto. The 1988 licensing agreement, she added, "does not include exchange-traded funds."
In a statement issued late Thursday afternoon, Vanguard called S&P's complaint "baseless and without merit, and a surprising tactic." It further argued that unlike exchange-traded products put out by other firms, its VIPERs were new classes of shares that "represent interests in the same funds already covered by S&P licenses." They "would not represent new funds or portfolios of investments."
"This is fully consistent with actions that Vanguard has taken nine times in the last few years alone, when Vanguard began adding separate classes of shares to its index funds without objection from S&P or McGraw-Hill," said Vanguard general counsel Greg Barton in the statement.
Barclays says it's in clear with S&P
Another fund provider, Barclays Global Investors, recently launched a series of ETFs, some of which track S&P indexes. Although Pretto would not speak specifically about Barclays, S&P said in its statement that it has over 400 licensing agreements "covering clearly specified uses of S&P indices and marks, including agreements related to exchange-traded funds."
Barclays spokesman Tom Taggart, meanwhile, told CNNfn.com, "We have a partnership agreement with S&P for exchange-traded funds."
Dan Wiener, editor of the Independent Adviser for Vanguard Investors, suspects Vanguard may have gotten bad legal advice suggesting it did not need to pay S&P any additional fees for the use of S&P indexes in its VIPERs. "I think this is all going to be settled with a little money," Wiener said.
S&P said it is seeking injunctive relief preventing Vanguard from using any S&P indexes or trademarks in conjunction with VIPERs, an order requiring Vanguard to withdraw its VIPERs application from the SEC and an order declaring Vanguard in material breach of the 1988 licensing agreement and hence liable for damages and attorneys' fees. 
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