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A Philadelphia Common Pleas Court judge has approved a $23 million settlement in a class action suit against First Union Bank brought by the trust fund customers of two banks who claimed they were hit with hefty taxes despite promises the conversions would be tax free. The lawsuit stemmed from the conversion of nine common trust funds formerly managed by CoreStates Bank and Signet Bank into First Union’s Evergreen mutual funds. First Union is now known as Wachovia Bank. Plaintiffs attorneys Allen D. Black, Jeffrey S. Istvan, Jennifer L. Maas and Gerard A. Dever of Fine Kaplan & Black argued that First Union structured the conversion in such a way that the common trust funds unnecessarily realized millions of dollars in taxable capital gains. The suit also alleged that First Union mistakenly over-reported capital gains income in one of the common trust funds by more than $10 million and had, therefore, caused investors to pay unnecessary taxes on “phantom” capital gains. Under the settlement, approved Friday by Common Pleas Judge Albert W. Sheppard Jr., First Union will pay $20.5 million in cash to the class. Payments to class members will top $23 million because nearly $2.8 million in tax refunds were also paid directly to some class members. Plaintiffs lawyers said that under the proposed plan for distributing the settlement funds, the average payment to class members will be about $3,600, while some class members will receive as much as $100,000. In court papers, plaintiffs lawyers hailed the settlement as an “excellent result” for the class, noting that it was approximately three times the maximum damages forecast by First Union’s expert and about 55 percent of the maximum damages calculated by the class’s expert. Plaintiffs lawyers said the alleged damages in the case are not the “excess” capital gains themselves, but rather the taxes paid on them. The plaintiffs expert, Professor Michael J. Barclay of the University of Rochester’s William E. Simon Graduate School of Business Administration, concluded in his report that the taxes paid on the “excess” gains totaled more than $39 million. By contrast, First Union’s expert, Anthony B. Creamer III of Navigant Consulting, found the damages to be $7 million after concluding that most of the “excess” taxes would have been paid eventually anyway. The allegations in the suit stemmed from actions that First Union took soon after it acquired Signet Banking Corp. in December 1997, and CoreStates Financial Corp. in April 1998. In doing so, First Union became the trustee of 33 common trust funds, as well as the underlying trusts whose assets were invested in the common trust funds. Plaintiffs lawyers alleged that “even before the ink had dried on the CoreStates merger documents, top executives at First Union had decided to terminate as many of the 33 common trust funds as possible and put the money in them into shares of First Union’s Evergreen mutual funds.” The suit, Parsky v. First Union Corp., alleged that First Union, as trustee, owed fiduciary duties of loyalty, prudence and candor to the beneficiaries of the common trust funds. In a breach of that duty, the suit alleged, First Union “promised the beneficiaries a tax-free conversion, but nevertheless proceeded with the conversion in such a way that the beneficiaries of the nine equity common trust funds suffered horrendous and unnecessary tax consequences in the tens of millions of dollars.” The suit was certified as a class action on behalf of “all persons who paid taxes on capital gains realized in the nine converted equity common trust funds during the conversion period.” Plaintiffs lawyers alleged two claims on behalf of the class. In the first claim, they alleged that First Union had breached its fiduciary duties to the class “by secretly handling the common trust funds and conversion in a way that caused enormous and unnecessary tax consequences to the beneficiaries.” And in a breach of contract claim, they alleged that First Union broke its written promise to “carry out the conversion in such a way as to avoid federal income tax liability.” Under the terms of the settlement, the plaintiffs’ have the right to petition for fees equal to 25 percent of the settlement. Wachovia, the successor to First Union, was represented by attorneys C. Clark Hodgson Jr. and Daniel T. Fitch of Stradley Ronon Stevens & Young.

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