Texas Class Action Securities Fraud Claim Against Cushing MLP Total Return Fund CEO and CFO Can Go Forward, Says District Court Judge

In Texas, a US district court judge has refused to dismiss a class action securities fraud claim against Cushing MLP Total Return Fund CEO Jerry V. Swank and CFO Mark Fordyce. The Texas securities fraud claim accuses the defendants of misrepresentations and omissions related to the fund’s deferred tax asset. Other claims, including a 1940 Investment Company Act Section 36(b) claim over tax advisory fees, were dismissed.

The defendants named in the Texas securities fraud claim are investment adviser Swank Energy Income Advisers LP, Swank Capital LLC, fund board chairman, trustee, president and CEO Jerry V. Swank, fund CFO and trustee Mark Fordyce, fund audit committee member and lead independent trustee Edward N. McMillan, fund trustee and audit committee chair Brian R Bruce, and fund trustee and committee head Ronald P. Trout.

Lead plaintiff Terri Morse Bachow says that between September 1 and December 19, 2008, individual investors bought Cushing MLP Total Return Fund stock. She says that most of the reported net assets in the fund (which were invested in the energy infrastructure sector) was an accounting accrual owing to time differences in tax payments.

Throughout the class period, the deferred tax asset increased and the possibility that the fund would make money that the deferred tax asset could be used against became practically nonexistent. When the class period was over, the accounting accrual was made up of over 50% of the fund’s stated net assets and the chance the accrual would lead to any benefit was all but nonexistent.

The plaintiff claims that fund shareholders lost tens of millions of dollars when this data was disclosed on December 19, 2008 and the fund’s shares market price went down from $7.40 to $3.81. Bachow then filed a Texas securities class action claim.

In the claim, Swank and Fordyce are accused of making statements that were materially misleading, making it sound as if the fund was likely going to use deferred tax in “fact sheets” distributed to shareholders and in two SEC filings. The fund CFO and CEO are accused of failing to correct these statements even after discovering that they were misleading or untrue.

The court refused to drop the 1934 Securities Exchange Act Section 10(b) claim against the two men, noting that the plaintiff demonstrated that this information was important to any reasonable investor who was deciding on what to invest in. The court, however, did drop the Section 20(a) control person claims since the securities fraud claim name the two men (and not Swank Advisers and the fund), which makes it impossible for the two defendants to be their own “control persons.” The claim as to Trout, Swank Capital, Bruce, and McMillan failed because there was no allegation that the “controlled person” committed securities fraud.

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