NEW YORK (CNNfn) - Investors in two Heartland municipal bond funds have launched a class-action lawsuit against the fund company seeking damages for steep drops in the funds' net asset values in October -- declines that Heartland has said are the result of a difficult market and a subsequent change in its pricing methods.|
The lawsuit, filed in the U.S. District Court for the Eastern District of Wisconsin last Friday, is in response to "devastating losses from the sudden and shocking revaluation" of the Heartland High-Yield Municipal Bond Fund and the Heartland Short Duration High-Yield Municipal Fund, the plaintiffs' counsel said in a statement on Sunday.
The lawsuit charges that Heartland and some of its directors and officers issued false and misleading statements regarding its business and financial condition between May 1, 1999 and October 16, 2000.
Heartland did not immediately return calls for comment.
In October, Heartland adopted a "fair value pricing procedure" for the funds and said the firm would consider information other than that which it receives from an independent pricing service to value the securities it invests in.
The change in procedure resulted in an immediate 69 percent loss in net asset value for the Heartland High-Yield Municipal Bond Fund and a 44 percent plunge in NAV for the Heartland Short Duration High-Yield Municipal Fund.
In a letter to investors on Oct. 16, William Nasgovitz, president of the equity and bond fund company, blamed the "general market environment" of high-yield securities for the massive re-pricing. And in a footnote to the funds' performances on its Web site, Heartland noted that its decision to consider factors other than the pricing service's valuations was due to "a current lack of liquidity in the high-yield municipal bond markets generally," "credit quality concerns," "a lack of market makers, market bids and representative market transactions in the specific types of securities held by these funds."
There is no doubt that the market for high-yield municipal bonds has been bad this year, and since both Heartland funds in question invest in low-credit or unrated debt, the liquidity for those types of securities can be low even in a good market and the securities can be difficult to value, said Eric Jacobson, the associate director of fund analysis at Morningstar.
But, he added, tough market conditions did not occur overnight between Oct. 12 and Oct. 13, when Heartland re-priced its funds. "It's almost defacto that someone wasn't pricing something correctly," he said.
Year to date, the Heartland High-Yield Municipal Bond Fund is down 68 percent and its Short-Duration High-Yield Municipal is down nearly 44 percent, according to Morningstar data.
-- From staff and wire reports