In Re: Salmon Smith Barney Mutual Fund Fees Litigation 04...
Transcript of In Re: Salmon Smith Barney Mutual Fund Fees Litigation 04...
UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK
In re SALOMON SMITH BARNEY MUTUAL Civil Action No . 04-CV-4055 (NRB)FUND FEES LITIGATION
CONSOLIDATED AMENDED CLASSACTION COMPLAIN T
JURY TRIAL DEMANDE D
Lead Plaintiff' R .W . Grand Lodge of F . & A . Masons of Pennsylvania ("Masons"),
individually and on behalf of all others (collectively, the "Class"), that purchased or held one or
more shares or other ownership units of proprietary mutual funds organized and offered by
Salomon Smith Barney, Inc . ("SSB") n/k/a Citigroup Global Markets, Inc .., and its affiliates,
from March 22, 1999 to March 22, 2004 (the "Class Period"), alleges the following upon
information and belief, except as to those allegations concerning the named Plaintiffs (as define d
below), which are alleged based upon personal knowledge . Plaintiffs' information and belief ar e
based upon, among other things, the investigation conducted by and through Plaintiffs' attorneys,
which included : (a) a review and analysis of Defendants' (including mutual funds offered by
Defendants) filings with the United States Securities and Exchange Commission (the "SEC") and
other regulatory filings ; (b) review and analysis of press releases, public statements, advisories,
news articles and other publications disseminated by or concerning the Proprietary Funds or the
other defendants ; (c) review of documents relating to recent inquiries and regulatory actions
against certain mutual funds by the National Association of Securities Dealers (the "NASD") and
the SEC; and (d) interviews with former employees of SSB and its affiliates who have
knowledge of the conduct complained of herein
Plaintiffs believe that further substantial evidence exists to support the allegations in this
Consolidated Class Action Complaint that will become available after a reasonable opportunit y
for discovery.. Most of the specific facts supporting the allegations herein are known only t o
Defendants or are exclusively within their custody or contro l
NATURE OF THE ACTION
1 This is a federal securities class action arising out of an unlawful and deceitful
scheme and course of conduct engaged in by SSB and a number of its affiliates, subsidiaries and
parent companies, including Smith Barney Fund Management LLC, Salomon Brothers Asse t
Management Inc (the "Fund Advisers"), the proprietary mutual funds they manage (th e
"Proprietary Funds"),' and the directors, trustees, and registrants of the Proprietary Funds . SSB
and the other defendants engaged in a scheme to use SSB's brokerage arm and its investmen t
clients to line the coffers of SSB through a number of illegal and improper activities, to th e
detriment of those SSB clients, the Plaintiffs herein SSB's scheme had three primar y
components .
2 . The first part of the scheme involved SSB 's use of its nationwide network of
affiliated broker-dealers to steer Plaintiffs to invest billions of' dollars of' their hard-earned
savings in Proprietary Funds that were managed and administered by officers and employees of
SSB, as well as in a select number of other mutual funds with which SSB had undisclosed kick-
back arrangements (the "Strategic Partners")
3 SSB steered clients into its own proprietary mutual funds by offering abnormal ,
undisclosed incentives to its brokers to sell its Proprietary Funds .. Plaintiffs set forth in detai l
below SSB's and its affiliates' improper and undisclosed payments to brokers and financia l
The Proprietary Funds are listed in Exhibit A hereto .
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advisors to induce them to recommend and sell the Proprietary Funds, instead of better
performing mutual funds that were more suitable for Plaintiffs' expressed investment needs and
objectives .. By offering incentive programs and higher commissions known as "selling
concessions" to the SSB-affiliated brokers and financial advisors, SSB and its affiliates
artificially increased the sale of shares of the Proprietary Funds . None of the incentives and/or
pressure to sell such Proprietary Funds was ever disclosed to the brokerage clients and, in fact,
many brokers would fail to propose anything but SSB's Proprietary Funds to clients, despite
their poor performance when compared to the performance of'otherr funds ..
4 . SSB and its affiliates had a huge financial incentive to embark on this fraud
because the lucrative fees they reaped for managing and advising the Proprietary Funds were
calculated as a percentage of assets under management by the funds As the amount of investors
and the size of their collective investments in the Proprietary Funds grew, so did the amount of
fees SSB and its affiliates extracted from the funds to line their pocket s
5 In addition to pushing its own Proprietary Funds, SSB had an undisclose d
arrangement with other mutual fund companies (as well as certain of the Proprietary Funds) that
was referred to as the "Strategic Partners Program .," Through this program, SSB received
improper and undisclosed payments from participating mutual funds, and in exchange, SSB and
its affiliated brokers agreed to and did steer Plaintiffs to invest in the funds of SSB's Strategic
Partners The Strategic Partners paid SSB's affiliated broker-dealers $1 million or more in fees
to be "warehoused" at the brokerage houses, and also required the Strategic Partners to make
directed brokerage payments, which were lucrative commissions from trades in the mutual
:funds' investment portfolios that were improperly allotted to brokers as rewards for steering
clients to certain pre-determined funds .
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6 Not only did SSB provide visibility only to Proprietary or Strategic Partners'
funds, but their technology was specifically programmed to steer Plaintiffs into these funds
SSB's computer system was promoted as being able to conduct in-depth analysis (investment
risk, analysis of money manager, historical performance, etc) so as to provide investment
products tailored to each client's investment objectives . . However, SSB's sophisticated computer
system was yet another mechanism to support its improper schemes In actuality, SSB's internal
computer systems were programmed to consistently suggest SSB's Proprietary Funds, or the
funds of its Strategic Partners, rather than the funds best suited to meet investors' objectives
7. . SSB and its affiliates failed to disclose these material conflicts of interest and
created undisclosed pecuniary and other incentives (such as higher commissions for its affiliated
brokers) to direct unsuspecting Plaintiffs to purchase pre-selected mutual funds with whom SSB
had struck secret deals ..
8 The second part of the Defendants' scheme involved extracting the maximum fees
from the investors who had been improperly steered by SSB into its Proprietary Funds . During
the Class Period, Defendants engaged in a number of improper and undisclosed activities in
order to extract the maximum possible fees from the Plaintiffs herein These fees amounted to
hundreds of millions of dollars and were improperly used to fund various kickbacks to SSB and
its affiliates Defendants misrepresented the true purpose behind the fees and commissions and
the purported value and benefits Plaintiffs were to derive from these fees and commissions ..
9. . Defendants extracted excess fees in several ways, Defendants failed to inform
:Plaintiffs of "breakpoints," i .e , levels of investment at which the fees being charged declined in
percentage terms . They also manipulated clients' investments by dividing the investment
between multiple purchases and/or multiple funds to fall just below the "breakpoints" and thus
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deny Plaintiffs the advantage of lower percentage fees . Defendants also improperly directed
.Plaintiffs to purchase Class "B" shares in Proprietary Funds, when, given the size of the
investment, purchase of Class "A" shares would have been far more economically
advantageous 2 Defendants also imposed annual payments, known as "12b-1 trails," to pay for
distribution costs, including payments to broker-dealers . These 12b-1 fees were set at
abnormally high levels in order to pay for the unjustified and undisclosed payments to SSB
brokers to cause them to push SSB's Proprietary Funds to the exclusion of other products .
Finally, while SSB is permitted to charge commissions for transactions at levels above what
might be obtained from other sources, so long as the client was obtaining a "benefit" from the
additional payment (these excess commissions are known as "soft dollars"), Defendants charged
Plaintiffs commissions above the going rate that provided no benefit whatsoever to Plaintiffs
'On the contrary, the only use of the soft dollars was to provide undisclosed incentives to brokers
to channel Plaintiffs into the Proprietary Funds .
M. The third undisclosed part of the fraudulent scheme involved SSB's use of the
.Proprietary Funds to support its investment banking clients . SSB and the other defendants
caused the Funds to purchase shares in certain of SSB's investment banking clients . This caused
the Funds to invest in under-performing or non-performing assets to the detriment of Plaintiffs
and the benefit of'SSB
I1 The materials provided by SSB through its brokerage arm to clients and the
.Prospectuses, Statements of Additional Information ("SAIs"), Semi-Annual Reports and Annual
Reports for the Proprietary Funds failed to disclose any of this improper conduct to Plaintiff s
Class A shares generally have an up-front fee, but lower continuing fees, while Class B shares have no up-fiontBee, but higher continuing payments based upon the amount invested In general, at investments above $50,000,
Class B shares impose much higher fees upon the investo r
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By concealing their improper conduct, undisclosed concessions, secret revenue-sharing and
Strategic Partners agreements and excessive fees and commissions, SSB and its affiliates failed
to disclose information that would be significant to any reasonable investor and directly
diminished the net return on Plaintiffs' investments in the Proprietary Funds . As a further resul t
of Defendants' fraudulent scheme and material misrepresentations throughout the Class Period,
Plaintiffs were denied lucrative investment opportunities and have lost hundreds of millions o f
dollars
12 . SSB 's mutual fund practices were exposed beginning on March 22, 2004, when
SSB and its affiliates revised the Proprietary Funds' prospectuses to include language advising
investors that previously-undisclosed "revenue sharing" payments that had been made to
financial intermediaries "may create an incentive for an intermediary or its employees or
associated persons to recommend or sell shares of 'a fund to you "
13 . In recent actions against Morgan Stanley DW, Inc, ("Morgan Stanley") and
Massachusetts Financial Services Co ., the SEC has condemned similar fraudulent practices by
mutual funds, finding that the purposeful omissions of compensation programs and excessive
fees and commissions create insurmountable, undisclosed conflicts of interest that violate the
federal securities laws . The SEC and the NASD recently censured and fined Morgan Stanley for
improperly incentivizing brokers to steer investors into Morgan Stanley proprietary mutual
funds . Morgan Stanley agreed to settle actions filed by the SEC and the NASD by paying $50
million in civil penalties and surrendering profits ..
14 The unlawful actions of SSB and its affiliates described herein are substantiall y
similar to those already condemned by the NASD and the SEC Defendants' own unjust
enrichment, scheme and conduct, as described herein, exploited the misplaced trust of Plaintiff s
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and violated Sections 11, 12(a)(2) and 15 off the Securities Act of 19.33 (the "Securities Act"), 15
U S C §§ 77k, 771(a)(2) and 77o ; Sections 10(b) and 20(a) of the Securities Exchange Act of
19.34 (the "Exchange Act"), 15 U S .C . §§ 78j(b) and 78t(a), and Rules l Ob-5 (17 C .F .R. .
240 1 Ob-5) and I Ob- 10 (17 C F .R § 240 1Ob-10) promulgated thereunder ; and Sections .34(b),
36(b) and 48(a) of the Investment Company Act of 1940 (the "Investment Company Act") The
trustees and members of boards of directors of the Proprietary Funds also breached their
common law fiduciary duties to Plaintiffs .
JURISDICTION AND VENUE
15 This Court has jurisdiction over this action pursuant to Section 22 of the
Securities Act, 15 US C § 77v; Section 27 of the Exchange Act, 15 U S C . § 78aa; Sections
34(b), 36(b) and 48(a) of'the Investment Company Act, 15 US C §§80a-33(b), 80a-35(a) and
(b) and 80a-47(a) ; and 28 U,S .C §§1331, 1337 and 1367(a) .
16 .. Venue is proper- in this District pursuant to Section 27 of the Exchange Act ,
Section 22 of the Securities Act and 28 U S .C .. § 1391 because many of the acts and practices
complained of herein, including the preparation and dissemination of materially Use and
misleading Prospectuses, Annual and Semi-Annual Reports and SAIs for the Proprietary Funds,
occurred in substantial part in this District .. Defendants Citigroup, Inc, Citigroup Asset
Management, SSB, Salomon Brothers Asset Management Inc ., and Smith Barney Fund
Management LLC are and were at all relevant times headquartered in this District in New York
City .
17. . In connection with the acts and omissions alleged in this Consolidated Complaint,
the Defendants, directly or indirectly, used the means and instrumentalities of interstate
commerce, including without limitation, the mails, interstate telephone communications and the
facilities of the national securities markets and exchanges .
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PARTIES
Plaintiffs
18 Lead Plaintiff' the Masons, part of the oldest and largest fraternity of freemason s
in the world, is a large institutional investor with approximately $500 million in assets . As
demonstrated by the certification previously filed with the Court, during the Class Period, the
Masons purchased or held shares of the Salomon Brothers International Equity Fund, the
Salomon Brothers Large Cap Growth Fund, and the Salomon Brothers Emerging Market Debt
Fund, and have been damaged thereby . By order dated August 12, 2004, this Court appointed
the Masons as Lead Plaintiff for the Clas s
19 . Plaintiff Larry D.. Turner ("Turner"), as demonstrated by his certificatio n
previously filed with the Court, purchased during the Class Period and continues to hold share s
of the Smith Barney Mid Cap Core Fund, Class A and the Smith Barney Fundamental Valu e
Fund, Class A, and has been damaged thereby .
20. Plaintiff' Barbara Kopf ("Kopf'), as demonstrated by her certification previously
filed with the Court, purchased and continues to hold shares of the Salomon Brothers Capita l
Fund, Class C, and has been damaged thereb y
21 Plaintiff' Lorraine Steele ("Steele"), as demonstrated by her certi fication
previously filed with the Court, purchased and continues to hold shares of'the Salomon Brother s
High-Yield Bond Fund, Class B, and has been damaged thereby..
22 Plaintiff Linda Rotskoff' ("Rotskoff'), individually and on behalf of Jenlibrilo ,
Inc, as demonstrated by certifications previously filed with the Court, purchased and continue s
to hold shares of'the Salomon Brothers Investors Value Fund, Class 0 and the Salomon Brother s
Small Cap Growth Fund, Class 0, and has been damaged thereby .
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23 Plaintiff' .Julie A .. May ("May"), as demonstrated by her certification previously
filed with the Court , purchased and continues to hold shares of the Smith Barney Aggressiv e
Growth Fund, Class A, and has been damaged thereb y
24 Plaintiff Carol Chiumento ("Chiumento"), as demonstrated by her certification
previously filed with the Court, purchased and continues to hold shares of the Smith Barne y
Large Cap Core Fund, and has been damaged thereby .
25 .. Plaintiff Ruth Kurby ("Kurby"), as demonstrated by her certification previousl y
filed with the Court, purchased and continues to hold shares of the Salomon Brother s
Short/Intermediate U .S . Government Fund, Class B and Salomon Brothers High Yield Bond
Fund, Class B, and has been damaged thereby .
26 . Plaintiff' Kathleen Fitzgerald ("Fitzgerald"), as demonstrated by her certification
previously filed with the Court, purchased and continues to hold shares of the Smith Barne y
Proprietary Funds, and has been damaged thereby .
27 Plaintiff' LuAnn Beyer ("Beyer"), as demonstrated by her certification previously
filed with the Court, purchased and continues to hold shares of the Salomon Brothers Capita l
Fund, Class C, and has been damaged thereby ..
28 . Plaintiff Eric J .. Clark ("Clark"), as demonstrated by his certification previousl y
filed with the Court, purchased and continues to hold shares of the Salomon Brothers Capita l
Fund, Class C, and has been damaged thereb y
29 . Plaintiff' Vera Gould ("Gould"), as demonstrated by her certification previousl y
filed with the Court, purchased and continues to hold shares of the Salomon Brothers Small Cap
Growth Fund, Class A, and has been damaged thereby..
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30 .. Plaintiff R Alan Maurer ("Maurer"), as demonstrated by his certificatio n
previously filed with the Court, purchased and continues to hold shares of'the Salomon Brother s
Small Cap Growth Fund, Class A, and has been damaged thereb y
31 . Plaintiff ' Nickolas I Borders ("Borders"), as demonstrated by his certificatio n
previously filed with the Court, purchased and continues to hold shares of the Salomon Brothers
Small Cap Growth Fund, Class C, and has been damaged thereby ..
32 . Plaintiff' Jerome Caplan ("Caplan"), as demonstrated by his certification
previously filed with the Court, purchased and continues to hold shares of the Smith Barne y
Aggressive Growth Fund, Class A, and has been damaged thereby .
33 . Plaintiff Dale E . Warfreld ("Warfield"), as demonstrated by his certificatio n
previously filed with the Court, purchased and continues to hold shares of the Smith Barne y
Diversified Strategic Income Fund, and the Smith Barney Income Portfolio Fund, and the Smith
Barney Investment Grade Bond Fund, and has been damaged thereb y
34 Plaintiff' Jerome Frizzle ("Jerome Frizzle"), as demonstrated by his certificatio n
previously filed with the Court, purchased and continues to hold shares of the Smith Barney
Small Cap Growth Fund, Class A, and has been damaged thereby .
35 . Plaintiff Magnoria R. Frizzle ("Magnoria R Frizzle"), as demonstrated by he r
certification previously filed with the Court, purchased and continues to hold shares of'the Smit h
Barney Small Cap Growth Fund, Class A, and has been damaged thereby ..
36 .. Plaintiff' Chanda Maxwell ("Chanda Maxwell"), as demonstrated by he r
certification previously filed with the Court, purchased and continues to hold shares of numerou s
Smith Barney Funds, and has been damaged thereby .
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37 .. Plaintiff Ryan Maxwell ("Ryan Maxwell "), as demonstrated by his certificatio n
previously filed with the Court, purchased and continues to hold shares of numerous Smit h
Barney Funds, and has been damaged thereby .
38 .. Plaintiff' Claus Naehrig ("Naehrig"), as demonstrated by his certification
previously filed with the Court, purchased and continues to hold shares of'the Salomon Brother s
Capital Fund, Class A, and has been damaged thereby
39 Plaintiff Philip J Rosewarne ("Rosewarne"), as demonstrated by his certification ,
which is attached hereto as Exhibit "D," purchased shares of Smith Barney Aggressive Growth
Fund during the Class Period and has been damaged thereb y
40 Plaintiff's Masons , Turner, Kopf, Steele , Rotskoff, May, Chiumento, Kurby ,
Fitzgerald, Beyer, Clark, Gould, Maurer, Borders, Caplan, Warfield, Jerome Frizzle, Magnori a
Frizzle, Chanda Maxwell, Ryan Maxwell, Naehrig and Rosewarne are collectively referred to a s
"named Plaintiffs "
DEFENDANTS
'Che Parent s
41 . Defendant Citigroup, Inc. ("Citigroup") is the ultimate parent of all of th e
corporate defendants named herein. Through its subsidiaries , Citigroup markets, sponsors and
provides investment advisory , distribution and administrative services to, among others, the
Proprietary Funds . Citigroup is incorporated in Delaware and its principal executive offices are
located at 399 Park Avenue, New York, New York 1004 3
42 . Defendant Citigroup Global Markets Holdings Inc . ("CGMHI"), f/k/a Salomo n
Smith Barney Holdings Inc , operating through its subsidiaries, engages in full-servic e
investment banking and securities brokerage business CGMHI is a subsidiary of Citigroup an d
the sole parent of SSB . The portion of Citigroup's asset management segment housed within
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CGMHI is comprised primarily of two asset management business "platforms" : Salomon
Brothers Asset Management and Smith Barney Asset Management These platforms offer a
broad range of asset management products and services, including mutual funds . CGMHI is
incorporated in New York and has its principal executive offices at 388 Greenwich Street, New
York, New York 10013 .
The Investment Advisers
43 Defendant Citigroup Asset Management ("CAM") is a group of investmen t
adviser affiliates of Citigroup, The investment services of CAM are provided by Salomon
Brothers Asset Management Inc ., Smith Barney Asset Management, Citibank Global Asset
Management (a unit of Citibank, N.A . and Citibank International PLC), Citigroup Asset
Management Limited and affiliated advisory entities .. CAM is incorporated in Delaware and
located at 399 Park Avenue, 7`h Floor, New York, New York 1004 3
44 .. Defendant SSB, n/k/a Citigroup Global Markets, Inc, and d/b/a Smith Barney
Asset Management, is registered as an investment adviser under the Investment Advisers Act an d
managed and advised the Proprietary Funds during the Class Period .. SSB, together with
defendants Smith Barney Fund Management and Salomon Brothers Asset Management, as
defined herein, had responsibility for overseeing the day-to-day management of the Proprietary
Funds . SSB is located at 399 Park Avenue, New York, New York 10022 . SSB is also a
registered broker-dealer and employs a nationwide network of brokers and financial advisors that
sold the Proprietary Funds to Plaintiffs .. The main office of SSB's broker-dealer operations is
388 Greenwich Street, New York, New York 10013 . As part of its marketing function, SSB also
administered the Proprietary Funds distribution plans and served as a vehicle for financing the
Proprietary Funds sales campaigns . SSB, when acting in its capacity as a distributor of the
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Proprietary Funds, shall be referred to herein as the "Proprietary Fund Distributor," or th e
"Distributor "
45 . Defendant Salomon Brothers Asset Management, Inc ("Salomon Brothers Asse t
Management ") is registered as an investment adviser under the Investment Advisers Act and
managed and advised the Proprietary Funds during the Class Period . . Salomon Brothers Asset
Management, together with defendants SSB and Smith Barney Fund Management, as defined
herein , had responsibility fbi overseeing the day-to-day management of the Proprietary Funds .
Salomon Brothers Asset Management is located at 399 Park Avenue, New York, New Yor k
10022 .
46 Defendant Smith Barney Fund Management LLC ("Smith Barney Fund
Management") is registered as an investment adviser under the Investment Advisers Act an d
managed and advised the Proprietary Funds during the Class Period .. Smith Barney Fun d
Management , together with defendants SSB and Salomon Brothers Asset Management, had
responsibility for overseeing the day-to-day management of the Proprietary Funds Smith
Barney Fund Management is located at 399 Park Avenue, 4 1h Floor , New York, New Yor k
:10022 .
47 . Defendants CAM, SSB, Salomon Brothers Asset Management and Smith Barney
Fund Management are sometimes referred to collectively herein as the "Investment Advise r
Defendants" .
The Proprietary Fund s
48 .. The Defendant Proprietary Funds, as identified in the list attached hereto a s
Exhibit "°A" are open-ended management companies comprised of the capital invested by mutua l
fund shareholders, each having a board of Directors or Trustees charged with representing th e
interests of the shareholders of that fund . The Registration Statements and Prospectuses pursuan t
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to which Plaintiff's purchased their shares or other ownership units in the Proprietary Funds ar e
referred to collectively herein as the "Prospectuses . "
The Registrants
49 . Each of the Defendant Proprietary Fund Registrants, as identified in the lis t
attached hereto as Exhibit "B" was the registrant and issuer, or a successor in interest to a
registrant and issuer of the Proprietary Funds sold to Plaintiffs and other members of'the Clas s
The Directors and Trustees of'the Proprietary Fund s
50. During the Class Period, defendant R Jay Gerken ("Gerken") was a Director o r
Trustee charged with overseeing 227 or more of'the Proprietary Funds During the Class Period ,
Gerken also served as Managing Director of SSB, President and Chief Executive Officer
("CEO") of certain mutual funds associated with Citigroup , Inc and Chairman, President and
CEO of Smith Barney Fund Management, Travelers Investment Advisor-, Inc . and Citifund
Management , Inc . Defendant Gerken was responsible for and signed SSB's false and misleading
SEC filings , including the Proprietary Funds' Prospectuses and Annual and Semi-Annual
Reports while President , CEO and a Board member of the Funds during the Class Period .
51 . During the Class Period, defendant Heath B.. McLendon ("McLendon") was a
]Director or Trustee charged with overseeing 228 or more of'the Proprietary Funds . During the
Class Period, McLendon also served as Chairman, President and CEO of SSB Citi Fund
Management, LLC and more than fifty investment companies sponsored by Salomon Smith
]Barney, Chairman or Co-Chairman of the Board for more than seventy investment companie s
associated with Salomon Smith Barney, Managing Director of'Smith Barney, Chairman of Smit h
:Barney Strategy Advisers, Inc .. and President of SBMFM Defendant McLendon was
responsible for and signed SSB's false and misleading SEC filings, including the Proprietar y
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.Funds' Prospectuses and Annual and Semi-Annual Reports while President, CEO and a Board
member of the Funds during the Class Period .
52 . During the Class Period, defendant Phillip W . Coolidge ("Coolidge") was a
Director or Trustee charged with overseeing forty-seven or more of the Proprietary Funds .
During the Class Period, Coolidge also served as President and CEO of Signature Financial
Group, Inc and CFBDS, Inc, a distributor of Salomon Brothers funds Defendant Coolidge was
responsible for and signed SSB's false and misleading SEC filings, including the Proprietary
Funds' Prospectuses and Annual and Semi-Annual Reports while President, CEO and a Board
member of the Funds during the Class Period ..
53 During the Class Period, defendant Carol L . Colman ("Colman") was a Director
or Trustee charged with overseeing thirty-five or more of the Proprietary Funds . For each of the
Proprietary Funds on which she served as a Board member or Trustee during the Class Period,
Defendant Colman signed the materially false and misleading Prospectuses that were filed wit h
the SEC .
54 . During the Class Period, defendant Daniel P . Cronin ("Cronin") was a Director or
Trustee charged with overseeing seven or more of the Proprietary Funds For each of th e
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Cronin signed the materially false and misleading Prospectuses that were filed with
the SEC ..
55 . During the Class Period, defendant Leslie H Gelb ("'Gelb") was a Director o r
Irustee charged with overseeing thirty-two or more of the Proprietary Funds For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
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Defendant Gelb signed the materially false and misleading Prospectuses that were filed with the
SEC,
56.. During the Class Period, defendant William R . Hutchinson ("Hutchinson") was a
Director or Trustee charged with overseeing forty-two or more of the Proprietary Funds . For
each of the Proprietary Funds on which he served as a Board member or Trustee during the Class
Period, Defendant Hutchinson signed the materially false and misleading Prospectuses that were
filed with the SEC
57 . During the Class Period, defendant Dr .. Riordan Roett ("Roett") was a Director or
Trustee charged with overseeing thirty-two or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Roett signed the materially false and misleading Prospectuses that were filed with the
SEC .
58 During the Class Period, defendant Jeswald W Salacuse ("Salacuse") was a
Director or Trustee charged with overseeing thirty-two or more of the Proprietary Funds For
each of the Proprietary Funds on which he served as a Board member or Trustee during the Class
Period, Defendant Salacuse signed the materially false and misleading Prospectuses that were
filed with the SEC .
59. During the Class Period, defendant Elliot J . Beiv (Berv") was a Director or
Trustee charged with overseeing thirty-seven or more of the Proprietary Funds .. For each of the
Proprietary Funds on which he served as a Board member- or Trustee during the Class Period,
Defendant Berv signed the materially false and misleading Prospectuses that were filed with the
SEC .
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60 . During the Class Period, defendant Mark I . Finn ("Finn") was a Director o r
Trustee charged with overseeing thirty-seven or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member- or Trustee during the Class Period,
Defendant Finn signed the materially false and misleading Prospectuses that were filed with th e
SEC
61 . During the Class Period, defendant Stephen Randolph Gross ("Gross") was a
Director or Trustee charged with overseeing thirty-two or more of the Proprietary Funds . For
each of the Proprietary Funds on which he served as a Board member or Trustee during the Clas s
:Period, Defendant Gross signed the materially false and misleading Prospectuses that were file d
with the SEC
62 .. During the Class Period, defendant Diana Harrington ("Harrington") was a
Director or Trustee charged with overseeing thirty-seven or more of the Proprietary Funds For
each of the Proprietary Funds on which she served as a Board member or Trustee during th e
Class Period, Defendant Harrington signed the materially false and misleading Prospectuses tha t
were filed with the SEC ..
63 During the Class Period, defendant Susan B Kerley ("Kerley") was a Director or ,
Trustee charged with overseeing thirty-seven or more of the Proprietary Funds For each of th e
Proprietary Funds on which she served as a Board member or Trustee during the Class Period ,
Defendant Kerley signed the materially false and misleading Prospectuses that were filed with
the SEC .
64 . During the Class Period, defendant Andrew L . Breech ("Breech") was a Director
or Trustee charged with overseeing four or more of the Proprietary Funds .. For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
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Defendant Breech signed the materially false and misleading Prospectuses that were filed wit h
the SEC .
65 . During the Class Period, defendant William R . Dill ("Dill") was a Director o r
Trustee charged with overseeing four or more of the Proprietary Funds . For each of the
.Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Dill signed the materially false and misleading Prospectuses that were filed with the -
SEC .
66 .. During the Class Period, defendant Clifford M Kirtland , Jr .. ("Kirtland") was a
Director or Trustee charged with overseeing four or more of the Proprietary Funds For each o f
the Proprietary Funds on which he served as a Board member of Trustee during the Class Period ,
Defendant Kirtland signed the materially false and misleading Prospectuses that were filed wit h
the SEC .
67 .. During the Class Period, defendant Louis P .. Mattis ("Mattis") was a Director o r
Trustee charged with overseeing three or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Mattis signed the materially false and misleading Prospectuses that were filed wit h
the SEC .
68 . During the Class Period, defendant Thomas F Schlafly ("Schlafly") was a
.Director or Trustee charged with overseeing three or more of the Proprietary Funds . For each of
the Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Schlafly signed the materially false and misleading Prospectuses that were filed wit h
the SEC .
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69 .. During the Class Period, defendant Lee Abraham ("Abraham") was a Director or
Trustee charged with overseeing twenty-eight or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Abraham signed the materially Use and misleading Prospectuses that were filed with
the SEC
70 . During the Class Period, defendant Allan J . Bloostein ("Bloostein") was a
Director or Trustee charged with overseeing thirty-five or more of the Proprietary Funds For
each of the Proprietary Funds on which he served as a Board member or Trustee during the Class
Period, Defendant Bloostein signed the materially false and misleading Prospectuses that were
filed with the SEC
71 .. During the Class Period, defendant Jane F, Dasher ("Dasher") was a Director or
Trustee charged with overseeing twenty-eight or more of the Proprietary Funds For each of the
Proprietary Funds on which she served as a Board member or Trustee during the Class Period ,
Defendant Dasher signed the materially Use and misleading Prospectuses that were filed with
the SEC .
72 . During the Class Period, defendant Paul Hardin ("Hardin") was a Director or
Trustee charged with overseeing thirty-five or- more of the Proprietary Funds For each of the
.Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Hardin signed the materially false and misleading Prospectuses that were filed with
the SEC .
73 During the Class Period, defendant Roderick Rasmussen ("Rasmussen") was a
Director or Trustee charged with overseeing twenty-eight or more of the Proprietary Funds . For
each of the Proprietary Funds on which he served as a Board member or Trustee during the Clas s
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Period, Defendant Rasmussen signed the materially false and misleading Prospectuses that wer e
filed with the SF C
74 . During the Class Period, defendant John P . Toolan ("Toolan") was a Director or
Trustee charged with overseeing twenty-eight or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Toolan signed the materially false and misleading Prospectuses that were filed wit h
the SEC
75 . During the Class Period, defendant Donald R . Foley ("Foley") was a Director or
Trustee charged with overseeing twenty-eight or more of the Proprietary Funds For each of th e
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Foley signed the materially false and misleading Prospectuses that were filed with th e
SEC .
76 During the Class Period, defendant Richard E . Hanson, Jr ("Hanson") was a
Director or Trustee charged with overseeing twenty-eight or more of the Proprietary Funds . For
each of the Proprietary Funds on which he served as a Board member or Trustee during the Class
Period, Defendant Hanson signed the materially Use and misleading Prospectuses that wer e
filed with the SEC ..
77 During the Class Period, defendant Donald M . Carlton ("Carlton") was a Directo r
or Trustee charged with overseeing thirty-two or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Carlton signed the materially false and misleading Prospectuses that were filed with
the SEC
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78 .. During the Class Period, defendant A . Benton Cocanougher ("Cocanougher") wa s
a Director or Trustee charged with overseeing thirty-two or more of the Proprietary Funds . For
each of the Proprietary Funds on which he served as a Board member or Trustee during the Clas s
.Period, Defendant Cocanougher signed the materially false and misleading Prospectuses that
were filed with the SEC .
79 .. During the Class Period, defendant Alan G . Merten ("Merten") was a Director o r
Trustee charged with overseeing thirty-two or more of the Proprietary Funds For each of' th e
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Merten signed the materially false and misleading Prospectuses that were filed wit h
the SEC .
80 . During the Class Period, defendant R Richardson Pettit ("Pettit") was a Directo r
or Trustee charged with overseeing thirty-two or more of the Proprietary Funds .. For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Pettit signed the materially false and misleading Prospectuses that were filed with th e
SEC
81 During the Class Period, defendant Paul Ades ("Ades") was a Director Or Truste e
charged with overseeing fifteen or more of'the Proprietary Funds . For each of the Proprietar y
Funds on which he served as a Board member or Trustee during the Class Period, Defendant
Ades signed the materially false and misleading Prospectuses that were filed with the SEC .
82 . During the Class Period, defendant Herbert Barg ("Barg") was a Director or
Trustee charged with overseeing forty-two or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
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Defendant Barg signed the materially false and misleading Prospectuses that were filed with th e
SEC
83 . During the Class Peiiod, defendant Dwight B . Crane ("Crane") was a Director or
Trustee charged with overseeing forty-nine or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Crane signed the materially false and misleading Prospectuses that were filed with the
SEC
84., During the Class Period, defendant Frank G Hubbard ("Hubbard") was a Director
or Trustee charged with overseeing fifteen or more of the Proprietary Funds .. For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Hubbard signed the materially false and misleading Prospectuses that were filed with
the SEC .
85 During the Class Period, defendant Jerome H .. Miller ("Jerome H Miller") was a
Director or Trustee charged with overseeing fifteen or more of the Proprietary Funds . For each
of the Proprietary Funds on which he served as a Board member or Trustee during the Clas s
Period, Defendant Jerome H Miller signed the materially Use and misleading Prospectuses tha t
were filed with the SEC .
86 .. During the Class Period, defendant Ken Miller ("Ken Miller") was a Director o r
Trustee charged with overseeing fifteen or more of the Proprietary Funds For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Ken Miller signed the materially Use and misleading Prospectuses that were filed
with the SEC .
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87 During the Class Period, defendant Burt N Dorsett ("Dorsett") was a Director or
Trustee charged with overseeing twenty-seven or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Dorsett signed the materially false and misleading Prospectuses that were filed wit h
the SEC
88 . During the Class Period, defendant Elliot S . Jaffe ("Jaffe") was a Director o r
Trustee charged with overseeing twenty-seven or more of the Proprietary Funds . For each of th e
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Jaffe signed the materially false and misleading Prospectuses that were filed with th e
SEC
89 . During the Class Period, defendant Stephen E . Kaufman ("Kaufman") was a
Director or, Trustee charged with overseeing fifty-six or more of the Proprietary Funds . For each
of the Proprietary Funds on which he served as a Board member or Trustee during the Clas s
Period, Defendant Kaufman signed the materially false and misleading Prospectuses that wer e
filed with the SEC ..
90 . During the Class Period, defendant Joseph .J . McCann ("McCann") was a Director
or Trustee charged with overseeing twenty-seven or more of the Proprietary Funds . For each of
the Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant McCann signed the materially false and misleading Prospectuses that were filed with
the SEC
91 . During the Class Period, defendant Cornelius C Rose, Jr ("Rose") was a Directo r
or Trustee charged with overseeing twenty-seven or more of'the Proprietary Funds . For each of
the Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
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Defendant Rose signed the materially false and misleading Prospectuses that were filed with th e
SEC .
92 .. During the Class Period, defendant H John Ellis ("Ellis") was a Director* o r
Trustee charged with overseeing thirty-four or more of the Proprietary Funds For each of th e
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Ellis signed the materially false and misleading Prospectuses that were filed with th e
SEC ..
93 . During the Class Period, defendant Armon R . Kamesar ("Kamesar") was a
Director or Trustee charged with overseeing thirty-four or more of the Proprietary Funds For
each of the Proprietary Funds on which he served as a Board member or Trustee during the Clas s
.Period, Defendant Kamesar signed the materially false and misleading Prospectuses that wer e
filed with the SEC ..
94 .. During the Class Period, defendant John J . Murphy ("Murphy") was a Director or
Trustee charged with overseeing thirty-four or more of the Proprietary Funds . For each of th e
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Murphy signed the materially false and misleading Prospectuses that were filed with
the SEC .
95 During the Class Period, defendant Robert M . Frayn, Jr . ("Frayn") was a Director
or Trustee charged with overseeing one or more of the Proprietary Funds For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Frayn signed the materially false and misleading Prospectuses that were filed with th e
SEC .
-24-
96, During the Class Period, defendant Leon P . Gardner ("Gardner") was a Directo r
or Trustee charged with overseeing one or more of the Proprietary Funds For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Gardner signed the materially false and misleading Prospectuses that were filed wit h
the SEC .
97 . During the Class Period, defendant Howard 1 Johnson (" .Johnson") was a
Director or Trustee charged with overseeing one or more of the Proprietary Funds . For each of
the Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Johnson signed the materially Use and misleading Prospectuses that were filed wit h
the SEC
98 . During the Class Period, defendant David E . Maryatt ("Maryatt") was a Director
or Trustee charged with overseeing one or more of the Proprietary Funds For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Maryatt signed the materially Use and misleading Prospectuses that were filed wit h
the SEC .
99 . During the Class Period , defendant Jerry A . Viscione ("Viscione") was a Director
or Trustee charged with overseeing one or more of the Proprietary Funds For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Viscione signed the materially false and misleading Prospectuses that were filed wit h
the SEC
100 . During the Class Period, defendant Abraham E . Cohen ("Cohen") was a Director
or Trustee charged with overseeing seventeen or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
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Defendant Cohen signed the materially Use and misleading Prospectuses that were filed wit h
the SEC
101 . During the Class Period, defendant Robert A Frankel ("Frankel") was a Directo r
or Trustee charged with overseeing twenty-four or more of the Proprietary Funds For each o f
the Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Frankel signed the materially false and misleading Prospectuses that were filed with
the SEC
102 . During the Class Period, defendant Michael E . Gellert ("Gellert") was a Director
or Trustee charged with overseeing seventeen or more of the Proprietary Funds, For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Gellert signed the materially false and misleading Prospectuses that were filed wit h
the SEC
103 . During the Class Period, defendant Rainer Greeven ("Greeven") was a Director or
Trustee charged with overseeing seventeen or more of the Proprietary Funds . For each of th e
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Greeven signed the materially false and misleading Prospectuses that were filed wit h
the SEC
104 .. During the Class Period, defendant Susan M . Heilbron ("Heilbron") was a
Director or Trustee charged with overseeing seventeen or more of the Proprietary Funds . For
each of the Proprietary Funds on which she served as a Board member or Trustee during the
Class Period, Defendant Heilbron signed the materially false and misleading Prospectuses that
were filed with the SEC
-26-
105 .. During the Class Period, defendant Paolo Cucchi ("Cucchi") was a Director o r
Trustee charged with overseeing eight or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Cucchi signed the materially false and misleading Prospectuses that were filed wit h
the SEC
106 . During the Class Period, defendant George M Pavia ("Pavia") was a Director or-
Trustee charged with overseeing nine or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
]Defendant Pavia signed the materially false and misleading Prospectuses that were filed with the
SEC ..
107 . During the Class Period, defendant Charles F .. Barber ("Barber") was a Director
or Trustee charged with overseeing sixteen or more of'the Proprietary Funds For each of'the
.Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Barber signed the materially false and misleading Prospectuses that were filed with
the SEC
108 . During the Class Period, defendant C .. Oscar Morong, Jr . ("Morong") was a
Director or Trustee charged with overseeing thirty-seven or more of the Proprietary Funds . Fo r
each of'the Proprietary Funds on which he served as a Board member or Trustee during the Clas s
Period, Defendant Morong signed the materially false and misleading Prospectuses that wer e
filed with the SEC ..
109 .. During the Class Period, defendant Walter E . Robb, III ("Robb") was a Directo r
or Trustee charged with overseeing thirty-eight or more of the Proprietary Funds For each o f
the Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
-27-
Defendant Robb signed the materially false and misleading Prospectuses that were filed with th e
SEC .
110 . During the Class Period , defendant Riley C. Gilley ("Gilley" ) was a Director or
Trustee charged with overseeing thirty-five or more of the Proprietary Funds .. For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Gilley signed the materially false and misleading Prospectuses that were filed with th e
SEC .
111 During the Class Period, defendant Robert Lawless ("Lawless") was a Director o r
Trustee charged with overseeing four or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Lawless signed the materially false and misleading Prospectuses that were filed wit h
the SEC
112 During the Class Period, defendant William Woods, Jr ("Woods") was a Director
or Trustee charged with overseeing thirty-eight or more of the Proprietary Funds . For each of
the Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Woods signed the materially false and misleading Prospectuses that were filed wit h
the SEC .
113 . During the Class Period, defendant Martin Brody ("Brody") was a Director or
Trustee charged with overseeing twenty or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member- or Trustee during the Class Period ,
Defendant Brody signed the materially false and misleading Prospectuses that were filed with th e
SEC .
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114 . During the Class Period , defendant Walter E Auch ("Auch") was a Director or
Trustee charged with overseeing two or, more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Auch signed the materially false and misleading Prospectuses that were filed with th e
SEC
115 During the Class Period, defendant Frederick 0 Paulsell ("Paulsell") was a
Director or Trustee charged with overseeing one or more of the Proprietary Funds For each of
the Proprietary Funds on which he served as a Board member or Trustee during the Class Period,
Defendant Paulsell signed the materially false and misleading Prospectuses that were filed with
the SEC .
116 During the Class Period , defendant Julie W. . Weston ("Weston") was a Director or
Trustee charged with overseeing one or more of the Proprietary Funds For each of th e
Proprietary Funds on which she served as a Board member or Trustee during the Class Period ,
Defendant Weston signed the materially false and misleading Prospectuses that were filed wit h
the SEG .
117 . During the Cl ass Period, defendant Lloyd J Andrews ("Andrews") was a Directo r
or Trustee charged with overseeing one or more of the Proprietary Funds For each of th e
.Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Andrews signed the materially false and misleading Prospectuses that were filed with
the SEC .
118 During the Class Period, defendant Victor Atkins ("Atkins") was a Director o r
Trustee charged with overseeing two or more of the Proprietary Funds . For each of the
Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
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Defendant Atkins signed the materially false and misleading Prospectuses that were filed wit h
the SEC
119, During the Class Period, defendant B Alexander Gaguine ("Gaguine") was a
Director or Trustee charged with overseeing one or more of the Proprietary Funds For each o f
the Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Gaguine signed the materially false and misleading Prospectuses that were filed wit h
the SEC .
120 During the Class Period, defendant Rosalind A . Kochman ("Kochman") was a
Director or Trustee charged with overseeing one or more of the Proprietary Funds . For each of
the Proprietary Funds on which she served as a Board member or Trustee during the Clas s
Period, Defendant Kochman signed the materially false and misleading Prospectuses that wer e
filed with the SEC .
121 .. During the Class Period, defendant Irving Sonnenschein ("Sonnenschein") was a
Director or Trustee charged with overseeing one or more of the Proprietary Funds For each o f
the Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Sonnenschein signed the materially Use and misleading Prospectuses that were file d
with the SEC
122 . During the Class Period, defendant E Kirby Warren ("Warren") was a Director or
Trustee charged with overseeing thirty-five or more of the Proprietary Funds . For each of th e
.Proprietary Funds on which he served as a Board member or Trustee during the Class Period ,
Defendant Warren signed the materially false and misleading Prospectuses that were filed wit h
the SEC
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123, All of the Director Defendants violated their fiduciary duties to the Proprietar y
Funds and Plaintiffs by knowingly or recklessly allowing the conduct complained of'herein
124 Defendants Cocanougher, Cohen, Merten, Bloostein, Breech, Kamesar, Gaguine,
Dorsett, Morong, Colman, Barber, Kirtland, Rose, Cronin, Maiyatt, Harrington, Carlton, Foley ,
Crane, Warren, Beiv, Jaffe, Paulsell, Hubbard, Pavia, Ellis, McLendon, Barg, Johnson,
Sonnenschein, Dasher, Jerome H .. Miller, Viscione, Salacuse, Murphy, Toolan, McCann,
Weston, Ken Miller, Abraham, Gardner, Gelb, Andrews, Mattis, Finn, Brody, Gellert, Cucchi,
Ades, Hardin, Coolidge, Gerken, Pettit, Greeven, Hanson, Gilley, Roett, Frankel, Lawless,
Frayn, Rasmussen, Kochman, Kaufman, Gross, Kerley, Heilbion, Schlafly, Atkins, Auch, Robb,
Dill, Hutchinson, Woods and any additional Directors and Trustees of the Proprietary Funds
whom Plaintiffs will identify after a reasonable opportunity for discovery, are referred to
collectively herein as the "Director Defendants "
125 .. Collectively, all defendants named above shall sometimes be referred to herein a s
"Defendants "
THE STRUCTURE AND OPERATION OF SSB AND ITS MUTUAL FUND S
126 .. SSB is a diversified financial services firm that offers investment banking ,
investment analysis, and brokerage services, among other things, and also has a family of mutual
funds - the Proprietary Funds - for which it solicits business through its affiliate brokers an d
provides advisory services through its advisory subsidiaries .
127 . Each Proprietary Fund Registrant is its own trust or corporation Each of the
Proprietary Funds also is a business trust (or a series of a trust) or corporation that is owned by
the shareholders of the fund At all times during the Class Period, it was the legal responsibilit y
of the Director Defendants to exercise control and supervision over the business affairs of th e
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Proprietary Funds so as to protect the best interests of fund shareholders . The prospectus fbr th e
Salomon Brothers Capital Fund and the Salomon Brothers Small Cap Growth Fund, which i s
typical of the representations made in all other Prospectuses, states :
The business and affairs of each Fund are managed under thedirection of the Board of' Directors The Board of Directorsapproves all significant agreements between the Funds and thepersons or companies that furnish services to the Fund, includingagreements with its distributor, investment manager, administrator,custodian and transfer agent The Funds' day-to-day operations aredelegated to the investment manager and administrator ,
128 Similarly, with respect to the duties of the Directors and Trustees vis-a-vis th e
funds' investment advisers, the SAIs typically stated :
[Smith Barney Fund Management] serves as investment managerto the fund pursuant to an investment management agreement(the "Management Agreement") with the trust , which wasapproved by the board of trustees, including a majority of theindependent trustees on July 17, 2002 . . . . Subject to the
supervision and direction of the trust's board of trustees, themanager manages the fund's portfolio in accordance with thefund's stated investment objective and policies, makes investment
decisions for the fund, places orders to purchase and sell securities,and employs professional portfolio managers and securitiesanalysts who provide research services to the fund .
,(Emphasis added) .. The Directors or Trustees of each fund thus admit responsibility fo r
reviewing and approving the advisory and fee agreements between the Advisers and th e
Proprietary Funds .
129 .. The Investment Company Institute ("ICI"), of which CAM is a member, recently
described the duties of mutual fund boards as follows :3
`; The ICI describes itself"as the national association of the U .S investment company industry Founded in 1940, itsmembership includes approximately 8,601 mutual funds, 604 closed-end funds, 110 exchange-traded funds, and sixsponsors of unit investment trusts . Its mutual fund members have 86 .6 million individual shareholders and manageapproximately $7 .2 trillion in investor assets The quotation above is excerpted from a paper entitled Understandingthe Role of Mutual Fund Directors, available on the ICI's website athttp ://www.ici org/funds/dir/bro_mf directors pdf
-32-
Unlike the directors of other corporations, mutual fund directorsare responsible for protecting consumers, in this case, the funds'investors The unique "watchdog" role, which does not exist inany other type of company in America, provides investors with theconfidence of knowing the directors over-see the advisers whomanage and service their investments .
In particular, under the Investment Company Act of 1940, theboard of directors of a mutual fund is charged with looking afterhow the fund operates and overseeing matters where the interestsof the fund and its shareholders differ from the interests of itsinvestment adviser or management company . .
130, SEC Chairman William H .. Donaldson further articulated the duties of mutua l
fund directors in a January 7, 2004 speech given at the Mutual Fund Diiectois Forum, wherein
he stated :
The board of directors of a mutual fund has significantresponsibility to protect investors By law, directors generally areresponsible for the oversight of all of the operations of a mutualfund .. In addition, under the Investment Company Act, directors are
assigned key responsibilities, such as negotiating and evaluatingthe reasonableness of advisory and other fees , selecting the
fund's independent accountants, valuing certain securities held bythe fund, and managing certain operational conflicts
The role of fund directors is particularly critical in the mutual fundcontext because almost all funds are organized and operated byexternal money-management firms, thereby creating inherentconflicts of interest and potential for abuse .. Money-managementfirms operating mutual funds want to maximize their, profitsthrough fees provided by the funds, but the fees, of course, paid tothese firms, reduce the returns to fund investor s
Independent directors, in particular, should serve as "independentwatchdogs" guarding investors' interests - and helping to protectfund assets from uses that will be of primary benefit tomanagement companies . These interests must be paramount, for itis the investors who own the funds and for whose sole benefitthey must be operated .
The recent revelations about mutual funds have led to greater focusand scrutiny of the role played by independent fund directorsSome have questioned whether mutual fund directors are toopassive, are captives of fund management companies, sit on too
-33-
many boards, lack the knowledge to keep apprised of a fund'sactivities, and are paid too much for any value they bring inprotecting fund investors
[Mutual fund directors are] . . .. investors' first line of defense inensuring that their interests are being served, that conflicts ofinterest are appropriately managed and disclosed, and thatinvestors' money is being managed responsibly . While the SECshares this mission to protect investors, we cannot be in theboardroom when investors' interests may be compromised .Investors are depending on [Mutual fund directors] to stand up forthem .
http ://www.sec.gov/news/speech/spchO 10'704whd .htm
1 3 1 Rather than fulfill the critical role described by Chairman Donaldson, in truth an d
in fact, as described below, the Proprietary Funds Boards of Directors and Trustees, i e the
Director Defendants, were captive to the Investment Adviser Defendants, who induced the
Director Defendants to breach their statutory and fiduciary duties to manage and supervise the
Proprietary Funds, approve all significant agreements and otherwise take reasonable steps to
prevent the Advisers from skimming Proprietary Fund asset s
THE DEFENDANTS ENGAGED IN AN ILLEGAL AND UNDISCLOSED SCHEME TOMAXIMIZE DEFENDANT SSB'S REVENUES AT THE EXPENSE OF INVESTORS
132 .. As explained in more detail below, Defendants used SSB's position as a
diversified financial services firm to exploit Plaintiffs in a number of different and undisclosed
ways. SSB improperly directed Plaintiffs to mutual funds based upon SSB's desire to earn fees
from those customers (the Proprietary Funds) or because the entities operating such funds had
made substantial payments to SSB to tout their funds (the Strategic Partners) In addition,
Defendants manipulated customers' fund purchases to maximize fees and commissions to SSB
and charged exorbitant fees to be used to provide kickbacks to brokers to improperly tout certain
funds .. Finally, Defendants selected investments for purchase by the mutual funds based not
upon the merits of the investment, but on their- overall financial relationship with SS B
-34-
A. SSB Improperly Directed Plaintiffs To Purchase Shares InMutual Funds For Improper And Undisclosed Reasons
1 . Improperly Directing Purchasers To The Proprietary Fund s
1 33 Like all mutual fund managers, the Investment Adviser Defendants are paid a
percentage of'mutual fund assets under management as a management fee . In order to increas e
their management fees, Defendants directed Class members into the Proprietary Funds .
134 . By steering investors into Proprietary Funds, SSB increased the amount of money
under its management, which in turn increased fund management fees and boosted SSB's overall
profitability . In support of this tactic, SSB pressured its brokers through undisclosed incentive
programs to steer Plaintiffs into SSB's Proprietary Funds .. Rather than offer clients funds that
best suited their investment objectives, SSB provided brokers, regional managers and branch
managers, various cash and non-cash incentives so that these employees would personally
benefit by steering investors into SSB's Proprietary Funds, regardless of the clients' best
interests These incentives created undisclosed conflicts of interest for the broker-dealers an d
brokers in violation of Rule lOb-10, which requires broker-dealers to disclose to investors an y
remuneration it receives from third parties so that customers are aware of any conflicts of interes t
that the broker- dealer has .
1 3 5 . According to a former SSB Senior VP who was employed by SSB between 199 6
and 2000, and who was familiar with SSB's sales and compensation practices ("SSB's former
Senior VP"), SSB based employee compensation on a "payout grid ." The factors used in the
grid's matrix included an employee's production to date and the types of products sold by the
employee (proprietary v non-proprietary products) SSB's former Senior VP reported that SSB
paid employees higher commissions on Proprietary Funds than non-Proprietary Funds .
According to SSB's fbrmer Senior VP, SSB's incentives for pushing Proprietary Funds were
-35-
never communicated to clients Thus, SSB created an undisclosed compensation program tha t
pitted brokers' interests against the interests of the client s
136 . Additionally, SSB management strongly encouraged brokers to push the
Proprietary Funds on investors by offering brokers incentives such as gift certificates, dinners ,
KB A . tickets , vacations or lucrative Initial Public Offering ("IPO") allocations ..
137 According to SSB's former Senior VP, Proprietary Fund representative s
customarily visited brokers' offices to pitch newly-issued Proprietary Funds (so-called "roa d
shows") At these road shows, the representatives continued SSB's steering program by
stressing the enhanced payouts brokers received if they sold such funds SSB's former Senio r
VP also reported that, in addition to promoting SSB's Proprietary Funds, the representative s
often downplayed the funds' shortcoming s
138 . The former Senior VP personally attended road shows where SSB-affiliated
wholesalers marketed the Proprietary Funds According to SSB's former Senior VP, during such
road shows, Proprietary Fund coordinators compared the Proprietary Funds' performance t o
certain external funds' performance and provided brokers with the information necessary to steer
clients seeking external funds into the Proprietary Funds One such tactic was a presentation of
skewed performance figures that made it appear as if the Proprietary Funds were performing
much better than their actual performance . In addition to presenting skewed performance
figures, SSB's former Senior VP stated that SSB's brokerage support infrastructure was designe d
to assist brokers in their steering efforts .. Specifically, the mutual fund group at SSB had a
support desk that brokers called to determine which Proprietary Fund they could sell to ais
customer who was requesting a similar non-proprietary fund .
-36-
139 .. Another former SSB broker who worked for SSB and with SSB's former Senior
VP between 1998 and 2001("SSB Broker 2"), reported that investors who sought investment
advice from SSB brokers were steered into funds based on the inducements provided to the
broker by the particular Proprietary Fund.. SSB Broker 2 was privy to SSB's steering tactics
because, on several occasions, he dined with SSB sales managers who told him about the various
incentives and benefits available to brokers that sold a certain level of Proprietary Funds .
Moreover, SSB Broker 2 confirms that investors seeking non-Proprietary Funds were directed
into Proprietary Funds based on "ammunition" provided by SSB managers and fund wholesalers,
which consisted of documents and marketing materials that painted an overly-optimistic and
misleading picture of the fund's financial highlights, while downplaying the funds' risks and/or
poor performance . SSB Broker 2 stated that he would use these misleading materials with
clients and would "always" attempt to convert a customer seeking an external fund into
purchasing a Proprietary Fund because of the benefits he would receive from SSB management
for- doing so .
140, SSB Broker 2 also stated that he knew of 'a 75-year-old investor- who was steered
by an SSB broker into a Proprietary Fund that held high-risk telecom securities . Subsequent to
the investment, the fund declined 20% over a three- to four-month period, and the broker had
been discouraged by management from sending the investor the fund's prospectus - so that the
investor would and did continue in the erroneous belief that the fund was a safe and suitable
investment
141 . Internal SSB documentation confirms that SSB presented skewed data In the
January 5, 2001 issue of The Financial Consultant, an internal SSB publication, which is marked
"[For] Internal Use Only," in a section titled "Why Keep Up with the Joneses, When you Ca n
- 37 -
Beat Them," SSB presents brokers with the financial performance of its mutual funds
benchmarked against well-known funds as reflected by Lipper rankings .4 Not surprisingly ,
SSB's Proprietary Funds outperformed the other funds listed in Lipper in each category ove r
every time period However, SSB failed to present brokers with comparisons of the Proprietar y
)Funds' performance to that of funds which performed better than SSB's funds . Over the same
period SSB stated that its Mid Cap Core Fund returned 17 3% ;5 however, rather than compare
those returns to Meridian Growth (described as a mid-cap growth fund), which returned 30 65% ,
SSB compared its fund to Lipper' s average of Multi-Cap Core Funds, which purportedly
returned -3 .0% Thus, rather than "keeping up with the Joneses " SSB was pushing finds that
underperformed comparable funds ..
142 . SSB's unwavering scheme to sell Proprietary Funds was implemented not onl y
with carrots and constant bombardment with skewed marketing, but also with sticks .. According
to a former SSB broker that worked in SSB's Billings Montana office between 1997 and 2002
("SSB Broker 3"), SSB rewarded brokers that sold Proprietary Funds with higher commissions
and punished brokers that failed to sell a minimum threshold of funds SSB Broker, 3 stated that
brokers had fee-based proprietary business targets to hit He said that if they did not do
proprietary business, there were penalties SSB Broker 3 also stated that SSB encouraged
brokers to sell Proprietary Funds even where the funds were not in the client's best interests .
143 SSB Broker 3 reported that there were perks for being a leader in the mutual fund
products and that the easiest way to become a leader was to participate in selling the Proprietar y
Funds . In addition to incentivizing brokers with perks, SSB compounded the push to sel l
4 Lipper is a Reuters company that provides benchmarking information used to evaluate mutual funds managers'performance and portfolio performance .
5 Percentages based on reported adjusted close
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Proprietary Funds by pressuring brokers Specifically, SSB Broker 3 also stated that there wer e
constant e-mails, manager meetings and wholesaler visits from Proprietary Fund representative s
who touted the benefits of selling Proprietary Funds SSB Broker 3 stated broker participation in
wholesaler visits was mandatory when the Proprietary Funds were involved SSB Broker 3
reported that SSB managers pushed broker's to be "company guy[s]" and sell Proprietary Funds .
144 Initially, SSB Broker 3 sold Proprietary Funds "just to shut them [the branc h
mangers] up [and] to get them off his back ." However, after initially succumbing to SSB's
demands, SSB Broker' 3 made an about face and refused to sell Proprietary Funds to his clients .
In retaliation, SSB Broker 3's branch manager heavily criticized him for breaking protocol, not
selling the Proprietary Funds, and holding too much client funds in cash, instead of encouraging
them to invest in the market, although he said that at the time that the market was crashing .
145 . Moreover, when SSB Broker 3 scaled back selling Proprietary Funds, he state d
that his branch manager began to "make things difficult ." Specifically, SSB Broker 3 reported
that his branch manager constantly "rode" him for failing to push Proprietary Funds an d
eventually threatened his U-4 with a manufactured customer complaint SSB Broker 3 stated
that the threatened complaint was "put to bed" after his client discussed the matter with his
manager
2 . Imps-o verly Directing Purchasers to Strategic Partner s
146, In addition to steering investors into SSB's Proprietary Funds, SSB also steere d
investors into the funds of certain outside wholesalers that were willing to pay SSB and its
employees for access to SSB's clients through a marketing plan referred to within SSB as the
"Strategic Partners Program .." Some or all of the Proprietary Funds also made payments to SSB
under this program .
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147 .. Payments to SSB under the Strategic Partners Program were made in addition to
existing payments , such as up fiont commissions, 12b-1 trailing commissions paid to brokers
after the initial sale, shareholder servicing fees, and account maintenance fees Under the
Strategic Partners Program , SSB's Strategic Partners made payments to SSB in exchange for
SSB directing its clients into the Strategic Partners' funds Essentially , the Strategic Partners
Program participants were paying for "shelf space " in the mutual funds market run by SSB
SSB's Strategic Partners included the following fund families : AIM, Alliance, Fidelity, Lord
Abbett, MF S, Putnam and Van Kampe n
148 . In return for their payments , Strategic Partners received a number of marketin g
benefits . First, SSB identified program participants on an internal list of Strategic Partners
distributed to financial advisors via SSB's intranet . Second, SSB ensured that program
participants had a "higher profile" in SSB's sales system than non-participating funds by, inter
alia, increasing the visibility of the Strategic Partners Program participants on its financial
advisors' workstations . Additionally, SSB divided the mutual fund families it offers into three
tiers . The Proprietary Funds and those 10 fund families recognized by SSB as Strategic Partners
are designated as "Level 1" mutual funds and get the most favored treatment from SSB financial
advisors Other funds were placed into other categories such as Level 2 and Level 3 . These
assigned "levels" had little to do with the funds' actual performance, or favorable ratings, and
had everything to do with which funds generated extra compensation for SS B
149 In addition to promoting its Proprietary Funds, SSB also promoted the funds of it s
Strategic Partners For example, in the February 2, 2001, edition of the Financial Consultant,
SSB promoted certain funds of'Putnam Investments and one of'Putnam's fund managers .
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150 SSB was not alone in perpetrating this type of fraud . According to the Wall Street
Journal :
The SEC has been investigating the business arrangementsbetween fund companies and brokerage houses since last spring .[The SEC' s investigation ] .. . has found widespread evidence thatbrokerage houses steered investors to certain mutual funds becauseof payments they received from fund companies or theirinvestment advisers as part of sales agreements .
The SEC said payments varied between 0 .05% and 0 .4% of salesand as much as 0 25 % of assets that remained invested in the fund .So for every $100,000 in new sales, a broker-dealer would receivebetween $50 and $400, plus another $250 annually for every$100,000 that remained invested .
"In many cases we 're concerned that the disclosure [toshareholders] doesn't adequately re flect the nature of therelationship ," said Stephen Cutler , the SEC's Director ofEnforcement .
Tom Lauricella and Deborah Solomon, "SEC Readies Cases On Mutual Funds ' Deals With
Brokers," The Wall Street Journal, 2004 WL-WSJ 56917021 (Jan . 14, 2004) ..
151 . Because of the bene fits that would accrue to it, SSB created a compensation
structure, undisclosed to Plaintiffs, that rewarded SSB's brokers for pushing its
Proprietary/Strategic Partners' funds on investors, For example, actual sales commissions paid
to brokers that sold Class B Proprietary Fund shares would typically be 4 5%, compared to 4%
for a similar class in a non-proprietary fund .. Additionally, actual sales commissions paid to
brokers for selling a Proprietary Fund's Class C shares would typically be 2-3%, compared to
1% on other similar non-Proprietary Funds . Finally, actual sales commissions paid to brokers for
selling a Proprietary Fund's L shares would typically be 2% compared to 1% on non-proprietary
:funds .. Investors were unaware and brokers were careful not to disclose that this additional
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undisclosed sum - beyond the standard up-front commission - was being paid to brokers as an
incentive to sell the particular Proprietary/Strategic Partner Fund .
152 .. According to a former SSB broker that worked in SSB's Orange County office
between 1996 and 2001 ("SSB Broker 5"), Smith Barney constantly promoted contests and
prizes for brokers who sold the most Preferred Partner and Smith Barney Funds . Brokers who
sold the most shares of'Proprietary Funds in each office regularly received these benefits . SSB
Broker 5 stated that when a client walked into the Smith Barney offices, brokers would
determine the client's needs, such as investment horizon, risk tolerance, etc . However, when
selecting a fund, brokers were pressed to pick Smith Barney funds . According to SSB Broker 5,
brokers never, told clients about Smith Barney's incentive s
153 . Moreover, management treated brokers who sold substantial quantities of
Proprietary/Str'ategic Partner Funds "more fondly " Managers knew which brokers were selling
Smith Barney funds because broker sales were plotted on a grid for all to see Additionally,
Smith Barney compensated the managers based on the volume of Smith Barney products sold
from their offices
154 . The type of quid pro quo agreements that SSB had with its Strategic Partners has
been condemned by the SEC The SEC's action against Morgan Stanley charged Morgan
Stanley with giving its pay-to-play participants similar accommodations as bestowed by SSB
upon its Strategic Partners . Specifically, the SEC stated :
In return for their payments, program participants received anumber of marketing benefits . First, Morgan Stanley DW includedall Asset Retention Program Participants on its "preferred list,"which was a list of'fund complexes that FAs should look to first inmaking recommendations of mutual fund products.. Second, itensured that Asset Retention Program . Participants had a "higherprofile" in Morgan Stanley DW's sales system than non-participating fund complexes by, among other- things, increasing
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the visibility of the Asset Retention Program Participants on itsFAs' workstations .
In the Matter of Morgan Stanley DW Inc, Securities Act of 1933 Release No . 833 9 / November
17, 2003, Securities Exchange Act of 1934, Release No 48789 / November 17, 2003 ,
Administrative Proceedings File No .. 3-113.35 ..
155 .. In the press release accompanying the SEC's cease and desist order agains t
Morgan Stanley, the Commission further stated :
Stemming from the SEC's ongoing industry-wide investigation ofmutual fund sales practices, this inquiry uncovered two distinct,firm-wide disclosure failures by Morgan Stanley . . The first relatesto Morgan Stanley's "Partners Program" and its predecessor, inwhich a select group of mutual fund complexes paid MorganStanley substantial fees for preferred marketing of their funds .. Toincentivize its sales force to recommend the purchase of shares inthese "preferred" funds, Morgan Stanley paid increasedcompensation to individual registered representatives and branchmanagers on sales of those funds' shares . The fund complexes paid
these fees in cash or in the form of portfolio brokeragecommission s
The Commission's Order finds that this conduct violated Section17(a)(2) of the Securities Act of 1933 and Rule 10b-10 under the
Securities Exchange Act of 1934 Section 17(a)(2) prohibits themaking of materially misleading statements or omissions in theoffer and sale of securities Rule lOb-10 requires broker dealers todisclose the source and amount of any remuneration received fromthird parties in connection with a securities transaction, The Order
also finds that the conduct violated NASD Rule 2830(k), whichprohibits NASD members from favoring the sale of mutualfund shares based on the receipt of brokerage commissions
Stephen M . Cutler, Director of the Commission's Division ofEnforcement, said: "Unbeknownst to Morgan Stanley's customers,Morgan Stanley received monetary incentives -- in the form of"shelf' space" payments -- to sell particular mutual fields to itscustomers . When customers purchase mutual funds, they shouldunderstand the nature and extent of any conflicts of interest thatmay affect the transaction ."
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http://www ..see ..gov/news/press/2003-159 htm (emphasis added )
156 . As described herein, Morgan Stanley's deceptive conduct was mimicked by SSB,
which never disclosed to customers that it received monetary incentives in the farm of shelf
space payments to sell particular mutual funds to its customer s
157 .. SSB's illicit conduct has been confirmed by SSB's farmer Senior VP, who state d
that funds that refused to pay SSB's entrance fee were not listed in SSB's systems . Additionally,
SSB's former Senior VP reported that one of his former managers admitted to him that no
mutual funds were allowed in SSB's door unless they provided monetary benefits . Thus, only
funds that increased the size of SSB's coffers were given visibility by SSB, This scheme
completely ignored SSB's duty to act in its clients' best interests . Throughout the Class Period,
SSB and its employees acted in the interest of only one entity - SSB .
158 As indicated in screen printouts from SSB's systems, which were obtaine d
through Lead Plaintiff's investigation, SSB's Level I funds were identified not by a specific
.fund, but by fund families .. For example, the screen printouts state that Level I funds include
Oppenheimer (a fund family) rather than Oppenheimer Enterprise Fund (a specific fund)
According to SSB's former Senior VP the distinction is of vital importance because had SSB
recommended funds based on legitimate factors such as its due diligence, specific funds should
have been listed, rather than SSB's listing, which included only listings by fund families Thus,
again, the quality of a fund was of no concern to SSB ; the sole driver for SSB to recommend a
fund was whether that fund participated in SSB's "'pay-to-play shelf space program ."
159 . SSB's and its affiliates' technology was specifically programmed to steer
Plaintiffs into these funds . According to SSB's former Senior Vice President and SSB Broker 5,
SSB's computer system was promoted as being able to conduct in-depth analysis (investment
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risk, analysis of money manager, historical performance, etc .) so as to provide investment
products tailored to each client's investment objectives . However-, SSB's sophisticated computer
system was yet another mechanism to support its improper schemes In actuality, according to
SSB's former Senior Vice President, SSB's internal computer systems were programmed to
consistently suggest SSB's Proprietary Funds, or the funds of its Strategic Partners, rather than
the funds best suited to meet investors' objective s
160 . SSB's former Senior VP confirmed SSB's system was bogus by conducting hi s
own research on independent search engines such as Morningstar using the exact parameters he
entered into SSB's systems The results were shocking . On average, 9 of 10 funds suggested by
SSB's systems were not on Moiningstar's list .. Moreover, SSB's former Senior VP reported that
SSB's Proprietary Funds and Strategic Partners were suggested as investment options
:irrespective of the type of investment clients sought - the same family of funds was suggested
for mid-cap investments, small cap investments, fundamental value investments, etc .
161 . SSB's former Senior VP's Morningstar research was confirmed by another former
SSB broker employed in SSB's Boston, Massachusetts office ("SSB Broker 1") . SSB Broker- 1
stated that his research on Morningstar also revealed funds that were not found on SSB's
computer system . SSB Broker 1 stated that on occasion he would telephone SSB's mutual fund
desk to ask why specific funds could not be found on SSB's network to which the desk
frequently responded, "the fund is closed ."
162 .. SSB Broker 1 reported that after being told the fund was closed by SSB he
followed up directly with the fund and was often told, "[t]he fund is not closed . We just don't -
want to pay money to be listed with your firm .. "
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163 . In addition to SSB's computer system, SSB established a helpdesk to assist
brokers and financial consultants when advising clients .. According to SSB Broker 2, whenever
clients asked brokers about non-SSB funds, SSB's helpdesk immediately suggested a similar
SSB fund for the client As part of the ploy to entice clients to buy SSB funds, SSB Broker 2
reported that brokers would sell SSB funds by saying something along the lines of'- "normally I
would not suggest an SSB fund but this is 99% correlated with the outside fund and we get IPO
allocation rights with this fund ." However, Plaintiffs were conveniently kept in the dark
regarding SSB's conflicts of interests and broker incentives for promoting a particular fund .
Also, because of the purported correlation with outside funds, the SSB brokers did little, if any,
research on the Proprietary Funds, which further demonstrates that SSB's advisory fees were
excessiv e
164 SSB brokers who would attempt to purchase a fund from a fund family outside of
the Strategic Partner alliance were faced with a time-consuming process requiring paper tickets
and approvals rather than simply inputting the client's order directly into the SSB computer
system . In this way, SSB brokers were further discouraged from going outside of the "pay-to-
play" system .
165 . In addition to giving Strategic Partners enhanced exposure, SSB opened the door s
to its brokerage offices to those wholesalers that were willing to pay SSB's one million dollar
entrance fee .. SSB's former Senior VP explained that wholesalers knew that they could not enter
SSB's offices without making payments to SSB employees . SSB's former Senior VP stated that
SSB's pay-to-play expectation was prevalent at all levels of the firm - including the highest
levels . SSB's expectations were so notorious that wholesalers would take the initiative b y
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calling SSB's managers and saying - "this is what I can do for you" if you let us into your office
to pitch our product .
166 Additionally, according to SSB Broker, 5, Smith Barney limited the number of
wholesalers that were able to meet with Smith Barney brokers to promote their funds Broker 5
stated that only approximately twelve wholesalers were permitted to pitch their funds to Smith
Barney brokers Smith Barney's explanation for the reduction in wholesalers was that
wholesalers wasted the brokers' time . However, the wholesalers who offered outside mutual
funds - those not offered by Preferred Partners or by Smith Barney - were barred from Smith
Barney's offices . The outside mutual funds, however-, often were better performers financially
and offered lower risk for Smith Barney's clients . One particular mutual fund, First Eagle,
which SSB Broker 5 recommended to many clients, was barred from Smith Barney's offices .
SSB Broker 5 had a contact person who worked at First Eagle who confirmed that Smith Barney
blocked this particular fund
167 .. SSB Broker 5 indicated his understanding that Smith Barney requires a on e
million dollar payment from wholesalers who wish to push funds to Smith Barney brokers .
SSB's one million dollar fee was confirmed by SSB Broker 4 and SSB's farmer Senior VP, who
both stated that this was the level of payment SSB required to provide the wholesalers with
access to its brokerage offices
168 .. SSB's former Senior VP stated that SSB's shelf space program had two
components, a macro component and a micro component As described by SSB's former Senior
VP, before a wholesaler was given access to SSB's offices they had to make the one million
dollar payment to SSB. After such payment, outsiders were only permitted to enter SSB's office
and peddle their funds if they also made additional payments to branch managers and individua l
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brokers In fact, SSB's former Senior VP stated that he knew of a wholesaler who left envelopes
of cash in the desks of SSB employees to pay SSB's entry fee .,
169 According to SSB's former Senior VP, external wholesalers that participated in
SSB's partner program would also give SSB employees lavish vacations under the pretext of
training as a means to incentivize SSB's brokers to sell their funds . For instance, SSB's former
Senior VP stated that wholesalers who wanted access to SSB employees would pay for 3-4 day
"seminars" in exotic locations .. However, rather than spend any significant time training SSB
employees or educating them on a fund, the entire seminar usually lasted for half an hour leaving
SSB employees free to enjoy the rest of the time as they saw fit .
170 In addition to cash payments and lavish vacations, wholesalers also paid for
investor conferences held by individual SSB branches According to SSB's former Senior VP,
branch managers welcomed payments by wholesalers because each manager was responsible for
his/her own P&L (profit/loss) Thus, if a wholesaler offered to pay for a conference room in
exchange for speaking to SSB clients (or having an SSB employee speak on behalf of the
wholesaler), the branch manager would accept the offer because under this arrangement
wholesalers footed the bill for client conferences rather than the branches ; thus making the
branches appear more profitable .
171 . SSB Broker 2 also stated that external mutual funds ran a program called the
"fund of the month" where SSB brokers were given incentives for pushing that month's selected
fund . According to SSB Broker 2, every month there were certain outside funds that received
heightened levels of attention at sales meetings . The fund of' the month's wholesaler would
typically present road shows at SSB's offices to highlight the benefits of investing in the fund
These funds offered 3-4% sales commission concessions over the standard 1-2% sale s
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commission While some of the funds of the month permitted investment without a load, the real
incentive to push such funds was not driven by what benefited the customers, but how the broker
could receive the largest compensation . This is yet another example of SSB putting the interests
of its brokers and the firm ahead of its clients
172 SSB' s practice of opening its doors to those funds willing to pay its entrance fee s
produced shocking results . According to a post-Class Period statement on SSB's website, "Fund
Families With Branch Access represent[ed] approximately 96 .9% of [SSB's total mutual fund
sales fbr 2003] .. .. . " See http ://www smithbainey,com/products_seivices/mutual_funds/
investorrinformation/revenuesharehtml (June 2004) (emphasis added) . Despite the staggering
correlation between a particular fund's access to SSB's offices and the sale of those funds '
products, SSB only disclosed the impact of'this conduct after the Class Period .
B. Defendants' Improper And Undisclosed Schemes To Extract ExcessiveAnd Unwarranted Fees And Commissions From Plaintiffs
173 Having improperly directed Plaintiffs into the Proprietary Funds, Defendants then
engaged in a number- of improper and/or undisclosed schemes to extract the maximum possible
fees Each of the Proprietary Funds charged fees to the fund investors . There were three type s
of fees charged to mutual fund shareholders that were abused by Defendants . There is a fee
known as a front-end load that is collected from the customer at the time of sale of mutual fun d
shares . This is charged as a percentage of the mutual fund shares purchased . Mutual funds also
charge annual fees, known as 12b-1 trails, based on the value of customer assets held with the
mutual fund, the 12b-I payments are made pursuant to each fund's I2b-1 plan, which sets forth
the amount of the annual fee mutual funds pay for distribution costs, including payments to
broker-dealers . Finally, there are commissions that are charged for the execution of purchases
and/or sales.. While mutual funds are allowed to include amounts for services other tha n
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execution of purchases and sales in the "commissions" they charge, they may only include such
additional charges in the commission for services that provide "lawful and appropriate assistance
to the money manager in the performance of his investment decision-making responsibilities "
The commission amounts charged by brokerages to investment advisers in excess of the
purchase and sale charges are known within the industry as "Soft Dollars . "
174. There were five primary "tricks" employed by Defendants to improperly increase
the fees, each of which is discussed below .
1 . Defendants Failed To Disclose "Breakpoints" In The Fee ScheduleTo Plaintiffs And Manipulated Purchases To Maximize Fees
175 .. When investors purchase mutual fund shares they are charged an initial sales fee -
called a front-end load - calculated as a percentage of the offering price of'the shares . For each
of its Propriety Funds, SSB charged customers front load fees calculated at a progressively lower
per-centage of the purchase price of a given customer's initial investment in a fund . The levels of
investment at which the percentage charged was reduced are known as "breakpoints ." A typical
SSB breakpoint plan consists of six or seven investment tiers ranging from under $25,000 to over
$1,000,000, and charges front load fees starting at 4 ..0% to 5 75% at the most modest investment
tier to 0% at the high end tier At each breakpoint, the front load fee materially drops from one-
half' (0 .5) percentage point to as much as two (2) full points from the percentage charged in the
immediately lower investment tier .
176 . According to SSB's 2002 Prospectus for its Appreciation Fund, which is typical
of' SSB Proprietary Fund prospectuses throughout the Class Period, when investors purchase a
certain class of shares they are entitled to "pay a lower sales charge as the size of [the]
investment increases to certain levels called breakpoints . "
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177 .. Breakpoints offer customers material relief from high front load fees, channeling
a higher percentage of the customer's initial investment to the purchase of firnd shares and less
into the pockets of the broker This relief from fiont load fees increases the initial value of the
customer's account, and hence the size of the base flour which the customer's investment may
grow . While the initial savings f'om Breakpoints are significant in and of'themselves, over time
the increased investment gains from the money saved due to Breakpoints are much greater . .
However, Plaintiffs rarely, if ever, received breakpoint concessions because SSB devised,
promulgated and conducted a scheme to cheat and defraud customers of the full benefit of SSB's
Breakpoint discounts in order to cull a greater percentage of customers' initial investments in the
form of font load fees then would have been realized if the Breakpoint mechanism had bee n
fairly applied ,
178 .. According to SSB's former Senior VP, breakpoints were just another SSB
gimmick used to fleece investors ., SSB's former Senior VP reported that SSB brokers wer e
instructed by managers to break up larger orders and talk investors into investing in more than
one fund so that they would not receive the benefit of SSB's advertised Breakpoints .
179 . SSB Broker 2 confirmed SSB's former Vice President's statements that SSB
management instructed brokers to circumvent Breakpoints . According to SSB Broker 2, the
Breakpoint practices policy came down fiom SSB's West Coast Regional Director, his branc h
manager, and the sales manager . SSB Broker .3 also stated that he knew of brokers that split
orders to avoid Breakpoints .
180 .. According to SSB's former Senior VP, the culture of duping investors was s o
rampant at SSB that if 'a broker did in fact ignore management instructions to split orders t o
avoid Breakpoints, SSB's computer systems would default order sizes to one unit below th e
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amount triggering the Breakpoint discount .. Thus, SSB's infiastructure acted as a check agains t
any broker that unwittingly or intentionally sought to give customers the benefit of a program t o
which they were already entitle d
2. Improper "Rollovers" From Plaintiffs' Existing MutualFunds Into Proprietary Funds To Maximize Fee Incom e
181, Defendants also sought to fleece investors who sought to transfer money into SS B
from other funds . As explained by SSB's former Senior VP, brokers who transferred client
investments from outside funds would liquidate the client's holdings in the outside funds and bu y
SSB's funds with cash, rather than transferring the investment without liquidating the account a s
an "in-kind" transfer By making cash, rather than in-kind, purchases, Plaintiffs wer e
unknowingly forced to pay SSB's customary fees for purchasing shares .. According to SSB' s
former Senior VP, had the clients made in-kind transfers they would not have been subjected to
the fee However, as was the case with all SSB's programs, the course of conduct promoted b y
the firm was to advance the firm's best interest and not that of its clients .. SSB's former Senio r
VP also stated that execution slips requesting liquidation of external accounts would indicate tha t
the request was at the client's direction
182 . Internal SSB documentation corroborates SSB's former Senior VP's statement s
regarding SSB's culture of promoting brokers to encourage their clients to liquidate thei r
external accounts rather than making in-kind transfers .. In a document marked "internal us e
only" dated June 1, 2001, under the heading "What's New for the 2001 Series," SSB states that
In our continuing efforts to further investment opportunities, whilerecognizing the competitive forces within our industry, theStructured Portfolios Group, in partnership with Salomon SmithBarney Private Client Group, have evaluated the longstandingsales charge structure of the Uncommon Values unit trusts .. As aresult of this review, each of the three portfolios listed above willcarry 3 .50% up-front sales charge for "new money" and 2 .50%
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sales charge on exchanges Financial Consultants will receive
1 00% on "new money" and 2.20% on exchange s
Thus, SSB and its brokers benefited by bringing in "new money" rather than "exchanges" or
in-kind transfers
3. Improperly Steering Customers Into Class BFund Shares To Maximize Fee Income
181 Shares in mutual funds may be purchased through several types of shares tha t
vary depending, not on the assets owned, but on the fee structure attached to the shares Two
common share types sold by the Proprietary Funds are Class A shares and Class B shares .. Class
A shares generally have a much higher front-end fee than Class B shares, but have lower fees
over time .. According to SSB's former Senior VP, SSB employees were trained to steer clients
into certain classes of'shares that were the most beneficial to SSB . For example, SSB's former
Senior VP explained that, although Class A shares take a larger dollar amount of fees when
initially purchased, when the account value is above $50,000, Class A shares generally perform
better for clients than Class B shares, which pay brokers a percentage year after year .. Thus, in
the long run SSB's former Senior VP explained, investments in Class B shares diminished more
because of sales charges and fees than other classes . However, SSB's former Senior VP stated
that SSB received more money from the sale of Class B shares and so SSB and its affiliates
pressured brokers to sell Class B shares whenever possible . Moreover, investors were never
explained the ramifications of investing in Class A or B shares .
184 SSB's former Senior VP reported that the pressure to sell Class B shares ove r
other types of shares came from many sources including branch managers, sales managers and
national training conferences Further, according to SSB's former Senior VP, the pressure to
push Class B shares was constant and negatively enforced by branch managers telling brokers,
"if you don't want to make money don't sell Class B shares ."
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185 . The SEC has condemned the practice of pushing a certain class of shares without
fully explaining to investors the benefits of alternative fee structures (fiom a different class of
shares) . In its suit against Morgan Stanley for similar, if not the exact same conduct as alleged
herein, the Commission fined Morgan Stanley $50 million and stated :
As to the sale of Morgan Stanley Funds Class B mutual fundshares , at the point of sale, Morgan Stanley DW's FAs
recommended Class B shares to customers without adequatelydisclosing the differences in share classes , including informationabout commissions and annual expenses and, importantly, that anequal investment in Class A shares at certain dollar levels couldyield a higher retur n
In the Matter of Morgan Stanley DW Inc, Securities Act of 1933 Release No .. 8 .339 November
17, 2003, Securities Exchange Act of 1934, Release No .. 48789 November 17, 200.3,
.Administrative Proceedings File No.. 3-11335 . (Emphasis added) .
186 . Statements by SSB' s former Senior VP regarding SSB's and its affiliates' conduct
clearly show that SSB is guilty of the same conduct condemned by the SEC in its case against
.Morgan Stanley .
187 Moreover , SSB stated in a post-Class Period supplement dated September 28 ,
2004 that : "If you are choosing between Class A and Class B shares, it will in almost all cases be
the more economical choice for you to purchase Class A shares if' you plan to purchase shares in
an amount of $50,000 or more (whether in a single purchase or through aggregation of eligible
holdings) This is because of the reduced sales charge available on larger investments of Class A
shares and the lower ongoing expenses of Class A shares compared to Class B shares This
warning was never provided to investors prior to March 2004, and, in fact, constitutes an
acknowledgement that SSB's practice of promoting Class B shares, even to large account
holders, is clearly contrary to the interests of those large account holders .
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4. Excessive 12b-1 Trailer Fee s
188 . Rule 12b-1, promulgated by the SEC pursuant to the Investment Company Act ,
prohibits mutual funds from directly or indirectly distributing of marketing their own shares
unless certain enumerated conditions set forth in the Rule are met Rule l2b-1 requires, among
other things, that : (i) payments for marketing must be made pursuant to a written plan
"describing all material aspects of the proposed financing of distribution ;" (ii) all agreements
with any person relating to implementation of the plan must be in writing ; (iii) the plan and any
related agreements must be approved by a vote of the majority of the board of directors; and (iv)
the board of directors must review, at least quarterly, "a written report of the amounts so
expended and the purposes for which such expenditures were made .." See 17 CF R . § 270 12b -
11 . Additionally, the directors may continue the plan "only if the board of directors who vote t o
approve such implementation or continuation conclude, in the exercise of reasonable business
judgment, and in light of their fiduciary duties under state law and section 36(a) and (b) [15
U .S C . 80a-35(a) and (b)] of the Act that there is a reasonable likelihood that the plan will
benefit the company and its shat-eholders . ." (Emphasis added .)
189 . The exceptions to the Section 12b prohibition on mutual fund marketing wer e
enacted in 1980 under the theory that the marketing of mutual funds, all things being equal ,
should be encouraged because increased investment in mutual funds would presumably result i n
economies of'scale, the benefits of which would be shifted from fund managers to investor s
190 In theory, as a particular fund's total assets grow, the expenses borne by that fund
would be spread out and shared amongst fund investors, so that each investor's pro rata share of
the fund's expenses is correspondingly diminished However, because of the systemati c
overcharging of fees and expenses by defendants and the siphoning of money out of th e
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Proprietary Funds, whatever economies of scale that might have been achieved by the increase i n
overall fund assets were not passed on to investors To the contrary, as the Proprietary Funds '
assets increased, so too did the fees and expenses borne by investors .
191 . The failure of the Proprietary Funds to pass on the savings created by the growt h
of'the fund's assets is shown in each of the fund's annual and semi-annual reports issued during
the Class Period, which provided data -- from year to year and from fund to fund -- regarding the
total net assets of the fund and the ratio of expenses to net assets of the fund .. Despite the
increase in assets across the Proprietary Funds, the economies of'scale created did not result in a
corresponding decrease in the expense ratios of'the funds .
192 .. For example, between 2001 and 2003, according to its public filings, the Salomo n
Brothers Capital Fund's total net assets increased from $655,567,829 to $1,354,925,618 .. Despit e
this increase , the expense ratios for Class A shares of the Capital Fund actually went up year to
year, as follows :
Ratios to Average Net Assets : 2003 2002 2001Expenses .. . ... . . . . . . . . . . . .. . . .. . 1 ..13% 1 12% 1 ..07%
193 . Similarly, the total net assets of the Salomon Brothers Large Cap Growth Fun d
increased from 2000 to 2003 from $2,3 18,000 to $7,2 .35,257 .. Over this same period of time, and
despite the fact that the fund 's assets increased by over 300%, the savings on expenses and fees
were not passed onto investors , and the expense ratios for Class A investors remained identical
from year to year, as follows :
Ratios to Average Net Assets : 2003 2002 2001 2000Expenses . . . ... . . . . . .. . . . . . . . . 1 45% 1 ..45% 1 .45% 1 45 %
194 By looking at the expense ratio data of the Proprietary Funds, from fund to fund
and from year to year, the scheme of the Defendants is further exposed . The distribution of a
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fund's shares and the increase in overall assets of'a fund were supposed to be good for investors,
and the 12b-1 plans were supposed to exist in order to promote this salutary goal . However, the
systematic overcharging of' fees and expenses by the Defendants throughout the class period
eliminated any benefits of distribution for investors . In this case, the distribution plan and other
undisclosed incentives existed only to enrich the Defendants
195 As a result of'these practices, the mutual fund industry was enormously profitable
for SSB In this regard, a Forbes article, published on September 15, 2003, stated as follows :
The average net profit margin at publicly held mutual fund firm swas 18 .8% last year, blowing away the 14 .9% margin for thefinancial industry overal l
(Emphasis added .. )
196 . Plaintiffs and other members of the Class did not enjoy the benefits of th e
economies of'scale created by having larger funds . Once the Proprietary Funds reached a certain
critical mass, the directors knew that there was no discernible benefit from having the fund
become bigger by drawing in more investors ; in fact, they know the opposite to be true - once a
find becomes too large it loses the ability to trade in and out of positions without hurting it s
investors .
5. The Improper Use of "Soft Dollars" : The Investment AdviserDefendants Charged Their' Overhead To Proprietary Fund Investors
197 . Investment advisers routinely pay broker commissions on the purchase and sale of
fund securities, and such commissions may, under certain circumstances, properly be used to
purchase certain other services from brokers as well . Specifically, the Section 28(e) "safe
harbor" provision of the Exchange Act carves out an exception to the rule that requires
investment management companies to obtain the best possible execution price for their trades .
Section 28(e) provides that a fund manager shall not be deemed to have breached his fiduciar y
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duties "solely by reason of his having caused the account to pay a . . broker .. .. in excess of the
amount of'commission another . .. broker . would have charged for effecting the transaction,
if such person determined in good faith that the amount of the commission is reasonable in
relation to the value of the brokerage and research services provided" 15 U .S .C . §78bb(e) .,
(Emphasis added) In other words, mutual funds are allowed to include Soft Dollars in
"commissions" for not only purchase and sales execution, but also for specified services, which
the SEC has defined to include, "any service that provides lawful and appropriate assistance to
the money manager in the performance of his investment decision-making responsibilities "
198 The Investment Adviser Defendants went far beyond what is permitted by the
Section 28(e) safe harbor The Investment Adviser Defendants used Soft Dollars to pay
overhead costs, thus charging Proprietary Funds investors for costs not covered by the Section
28(e) safe harbor and that, consistent with the investment advisers' fiduciary duties, should
properly have been borne by the Investment Adviser Defendants and Citigrou p
199 .. All the Proprietary Funds are essentially alter egos of one another .
The Proprietary Funds are mainly pools of investor assets that are managed and administered by
officers and employees of SSB .. The Proprietary Funds share many common members of their
Boards of'Directors Individual Proprietary Funds are totally dominated by SSB and its affiliates
and the common body of directors established by SSB . In substance, the Proprietary Funds
function as components of one unitary organization .
200. All Proprietary Funds share Smith Barney Fund Management and Salomon
Brothers Asset Management as their investment adviser's and share SSB as their principal
underwriter and distributor.. Additionally, the Investment Adviser Defendants pool together fees
and expenses collected from the Proprietary Funds investors, resulting in the Proprietary Fund s
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sharing expenses with one another .. For instance, the SAI for the Salomon Brothers Series Funds
Inc . is identical in substance to the SAIs filed by other Proprietary Funds during the Class Period .
The SAI describes in the following terms how costs for research services, alleged herein to b e
excessive , are commingled and shared by the various Funds :
Research services furnished to [Smith Barney Fund Management orSalomon Brothers Asset Management] by brokers who effect securities
transactions for a Fund may be used by [Smith Barney Fund Managementor Salomon Brothers Asset Management] in servicing other investmentcompanies and accounts which it manages . Similarly, research servicesfurnished to [Smith Barney Fund Management or, Salomon BrothersAsset Management] by brokers who effect securities transactions forother investment companies and accounts which [Smith Barney FundManagement or Salomon Brothers Asset Management ] manages maybe used by [ Smith Barney Fund Management or Salomon BrothersAsset Management] in servicing a Fund . Not all of these researchservices are used by [Smith Barney Fund Management or SalomonBrothers Asset Management]in managing any particular account,including the Funds .
(Emphasis added )
C. Defendants Used The Proprietary FundsTo Support SSB's Investment Bankers
201 . SSB's treachery in its mutual fund business was not limited to improperly steering
investors and charging excessive fees . As has now been widely reported in the media, SSB
analysts such as Jack Grubman were encumbered with severe conflicts of interest .. According to
SSB's former Senior VP, SSB's mutual funds were no different as they also served the interests
of'SSB's investment banking business and SSB's analysts, above the interests of investors ..
202 As described by SSB's former Senior- VP, SSB's investment banking secto r
would direct SSB's proprietary mutual funds to invest in companies that the investment bankin g
division served. Thus, SSB earned a fee from handling companies' investment banking needs
and also generated a fee fiom including such companies in its mutual fund portfblios In the end ,
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the selection of certain companies for inclusion in SSB's mutual funds depended not on the
performance of a company, but on that company's overall relationship with SS B
203 With respect to SSB analysts, SSB's former Senior VP stated that SSB research
analysts directly advised Proprietary Fund managers to invest in companies with lucrative SSB
investment banking relationships, by saying things along the lines of; "if I am in your shoes I am
buying WoildCom," when, in fact, those analysts knew that such advice and investments served
only to foster the overall banking relationships of SSB with the subject company, without regard
to the soundness of the investment to shareholders .. The investment tips given by SSB research
analysts to the Proprietary Funds, therefore, were not in the best interest of the funds and the
funds did no due diligence to ensure that the research was legitimate .
204 According to SSB's former Senior VP, at times SSB's mutual funds would
purchase the stock of companies covered by SSB's analysts, certain of which were underwritte n
by SSB's investment banking sector . Those purchases were made because of the relationship
with the investment-banking clients, despite the unsuitability of their securities for the Funds .. In
this way, SSB's Senior VP stated that SSB encouraged outside funds to invest in downgraded
telecom companies . He stated, "if' [SSB] could negotiate an agreement with an outside fund
family that would specifically focus on telecom stock then that would be a way for- Jack
Grubman and our telecom group to offload increased buying power into Jack's hit list or buy
recommended stock, supporting his clients ." Additionally, according to SSB Broker 2, many of
the funds making road show presentations and offering funds of the month were telecom heavy
funds . Thus, in the end, all SSB sectors were working in concert to further the scheme to
defraud investors
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205 . The comments by the SSB Vice President and SSB Broker 2 are corroborated by
a November 2004 article published in Bloomberg Markets, titled "Bank Funds: Draining
Investors" (the "Bloomberg article")
206 The Bloomberg article charges that certain bank mutual funds, includin g
Citigroup/SSB's mutual funds, were providing a built-in demand for certain investment bankin g
customers by purchasing shares of investment banking clients without regard to the interests o f
the funds' investors
207 One of the most notorious examples of SSB's practice of using its mutual funds to
support its investment banking clients involved WorldCom According to the Bloomberg article,
"From 1997 to 2001, Citigroup's Salomon Smith Barney led all bankers by collecting $987
million in fees from telecommunication companies , ." Of this amount, Citigroup collected
$107 million from WorldCom between 1996 and 2002 ..
208 . However, these impressive fees carried with them an understanding that Citigrou p
would use its mutual funds to support WorldCom's stock . As uncovered by the Bloomber g
article, "[i]n the months before the July 2002 bankruptcy [of Wor]dCom], fund managers at
Fidelity, the world's largest mutual fund company, sold 76 percent of'their WorldCom shares ;
Vanguard Group Inc ., the second largest sold 98 percent [of its stake in WorldCom] .. . . In that
period, Citigroup's mutual funds and private investor accounts bought 8 .8 million additional
shares of' WoildCom . , " (emphasis added) . As WorldCom neared bankruptcy, Citigroup's
mutual funds and specially managed accounts collectively held 27 5 million shares of the failing
company The 1999 semi-annual report for SSB's Total Return fund shows that the fund not
only held 1 2 million shares of WorldCom (making WoxldCom a top ten holding) but that it also
held $5 .5 million in debt and hundreds of options the Bloomberg article also uncovered that six
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months before WorldCom's bankruptcy, the Smith Barney Appreciation fund held 14 .7 million
shares of WorldCom, an increase of '9 percent from the end of 2000 and up "more than 20-fold"
from the end of 1999 . "The bank's WoildCom holdings rose as WorldCom' s sales fell and some
analysts issued warnings about the accounting tactics and lower sales "
209 SSB' s increasing stake in WorldCom near the company's demise was not a matte r
of happenstance, but the result of undisclosed conflicts that caused SSB's mutual funds to buy -
shares of WorldCom based on its lucrative relationship with Citigroup's investment bankin g
division. These types of conflicts have recently drawn the attention of certain congressional
leaders that question the appropriateness of'this type of conflict The Bloomberg article quotes
Senator Peter Fitzgerald who states that the practices of mutual funds favoring fee producing
clients, "[is] a conflict of interest at least as great as the analysts on Wall Street were shown to
have when they were pushing dog stocks that were underwritten by their firms . "
210 . Patrick Byrne, CEO of Overstock corn was quoted in the Bloomberg article a s
saying, "[ i]t's no surprise bank funds buy client shares because underwriters use the funds'
buying power to pitch for banking work ." Byrne stated that when his company was about to go
public he was approached by two of the largest investment banks and was promised support from
their fund managers if his company selected the banks to underwrite the offering .
211 .. The findings in the Bloomberg article and the statements of SSB Broker 2 show
that SSB's practice of selecting investments based on a company's relationship with its
underwriting division was yet another means by which SSB increased its profits while leaving
investors to foot the bill .
DEFENDANTS HID THEIR FRAUDULENT PRACTICES FROM INVESTOR S
212 Defendants did not reveal that SSB financial advisors were not acting in the best
interests of their clients, but rather acting to increase their compensation and to generat e
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increased management fees for SSB . In fact, investors were never informed in SSB's fund
documents (i ..e,, prospectuses, annual reports, etc .) or in information (brochures, website,
correspondence, etc) provided by SSB's brokerage aim that : 1) brokers were incentivized to
steer investors into SSB's Proprietary Funds and the funds of its Strategic Partners, 2) SSB
brokers steered investors into classes of shares that were beneficial to SSB and its Strategic
Partners rather than its clients, 3) SSB's promotion of funds depended not on a fund's
performance, ratings or the needs of clients but rather on whether the fund participated in SSB's
"pay to play" program, 4) investors would rarely, if' ever, receive breakpoint concessions, or 5)
SSB selected companies for inclusion in its mutual funds based on their overall financial
relationship with SSB
213 . SSB's fraudulent practices presented clear undisclosed conflicts of interest, pittin g
the financial interest of the SSB financial advisors and/or the firm against that of' its client s
Disclosure of' these conflicts is clearly material if clients are expected to make informed
investment decisions However, knowing that a recommendation to purchase one of the
Proprietary Funds or the Strategic Partners Funds would be given lesser weight if' clients knew
that SSB financial advisors received special incentives for selling these funds over other funds,
SSB was strongly motivated to, and did, conceal the truth during the Class Period. Defendants
failed to disclose the secret incentives on their website, in sales brochures distributed to thei r
clients or in any other form or manner ..
214 .. SSB's breakpoint schemes and inclusion of'companies based on their relationshi p
with SSB likewise presented similar conflicts that hid from investors all material informatio n
needed to make a fully informed investment decisio n
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SSB'S MARKETING MATERIALS MATERIALLY MISREPRESENTEDTHE SERVICES BEING PROVIDED TO INVESTORS
215 .. During the Class Period, persons who sought to obtain financial advice and/o r
assistance in the purchase and sale of mutual finds from SSB brokerage affiliates were provide d
with a variety of information about the services SSB provides They were provided wit h
brochures, informational videos, access to the Smith Barney Website, individualized letters an d
other materials touting the financial expertise of SSB "Financial Consultants" and the
willingness of SSB Financial Consultants to work with investors to achieve the investors '
financial objectives .
216 . For example, the Smith Barney website contained (and contains) statements tha t
SSB Financial Consultants "will work with you to understand your financial goals . Together ,
you will be able to create a customized investment strategy designed to help you achieve your
goals ." They further stated that their "mission is to help you build a secure financial future" and
that toward that end they sell "thousand[s]" of mutual funds and that they will help you select the
funds to meet your investment goals .
217 Similar statements were made in a wide variety of brochures, letters, videotapes
and on the SSB website throughout the Class Perio d
218 The statements were all false and misleading, as were all of Defendants '
communications with Class members during the Class Period, because they failed to infor m
investors that Defendants were directing Class members into the Proprietary Funds, as well a s
Funds offered by the Strategic Partners . As set forth above at paras . 132-213, Defendants wholly
failed to inform investors of the unfair and improper actions undertaken by Defendants to direct
Class members' purchases of mutual funds into the Proprietary Funds and the funds offered b y
- 64 .-
the Strategic Partners, regardless of whether such funds were in the Class members' bes t
interests ..
THE PROSPECTUSES, SAIs, AND ANNUAL AND SEMI-ANNUAL REPORTSISSUED BY THE PROPRIETARY FUNDS OMITTED AND/OR MISSTATEDMATERIAL FACTS REGARDING FEES CHARGED TO CLASS MEMBER S
219 .. During the Class Period, Plaintiffs received numerous Prospectuses, as well as th e
SAIs included therein, and Annual and Semi-Annual Reports that were filed with the SEC by the
Proprietary Funds or "registrants" in which Plaintiffs invested . Defendants used a series of
combined Prospectuses in which several funds were covered by one Prospectus during the Class
Period to purportedly make required disclosures . Prospectuses are required to disclose all
material facts necessary to provide investors with information that will assist them in making
informed investment decisions when choosing a mutual fund . The laws and regulations
governing mutual funds require that all disclosures be straightforward and easy to understand b y
average investors
220 The Investment Adviser Defendants intentionally or recklessly misrepresented the
true nature and purpose of the fees and commissions that were being siphoned from the
Proprietary Funds to finance Defendant's fraudulent scheme and practices . Prior to selling the
shares or interests in the Proprietary Funds, Defendants were required to provide to investors one
or more of the Prospectuses pursuant to which shares of the Proprietary Funds were offered..
According to the SSB former Senior VP, SSB's brokers, at the direction of SSB management,
were encouraged not to provide the legally-required Prospectuses to investors prior to selling
shares of the Proprietary Funds to conceal poor performance, material risks and other adverse
information from the investors .
-65-
221 Moreover, the Prospectuses, SATs and Annual and Semi-Annual Reports for the
Proprietary Funds that were filed with the SEC and were provided to Plaintiffs and other
investors during the Class Period failed to provide the required straightforward disclosures of all
material facts necessary to provide Plaintiffs with information to assist them in making informed
decisions about investing in the Proprietary Fund s
222 . In each year from March 1999 through March 2004, Defendants issued a series o f
combined Prospectuses, SAIs, and Annual and Semi-Annual Reports for 36 different groups of
Proprietary Funds (the funds are grouped under various Propriety Fund Registrants) that are
listed in Exhibit B . The Prospectuses, SAIs, and Annual and Semi-Annual Reports issued for
each of the Proprietary Funds during the Class Period are incorporated herein by reference .. By
corralling certain Proprietary Funds together in a series of combined Prospectuses, SSB, the
investment Adviser Defendants and the Proprietary Funds' Boards of Directors and Trustees,
provided only general information about fees and expenses extracted from the funds under the
guise of approved plans and procedures . The Prospectuses, SAIs and Annual and Semi-Annual
Reports issued for the Proprietary Funds in each year during the Class Period, were false and
misleading and omitted material information that was necessary to fully understand the true
nature of deceptive and improper practices that SSB, and the fund advisers and managers
employed for their own financial benefi t
223 Each of the Proprietary Funds' Prospectuses, SAIs and Annual and Semi-Annual
Reports issued during the Class Period for the Proprietary Funds failed to adequately disclose to
investors material information regarding the excessive and undisclosed fees and costs associated
with the mutual funds.. As seen below, each of these disclosure documents issued for the
Proprietary Funds during the Class Period contained substantially the same false and misleadin g
-66-
statements and omissions regarding revenue sharing agreements, 12b-1 fees, Soft Dollars an d
Breakpoints .
A. False and Misleading Statements and MaterialOmissions Regarding Revenue Sharin g
224 . Each of the Proprietary Funds' Prospectuses , SAIs, Annual and Semi-Annua l
:Reports issued during the Class Period failed to properly disclose to Plaintiffs and other investor s
material information regarding the Strategic Partners Program and revenue-sharing agreement s
and the fees and costs associated with them ..
225, Defendants intentionally or recklessly omitted material information in th e
Prospectuses, SAIs, Annual and Semi-Annual Reports for the Proprietary Funds regarding th e
revenue-sharing payments that the Funds paid to SSB and the conflicts of interest that such
kickbacks created .
226 . In all Prospectuses , SAls, Annual and Semi-Annual Reports issued during the
Class Period for each of the Proprietary Funds, nothing was disclosed about revenue-sharing,
Strategic Partners, shelf'-spacing, or any additional payments being made by the Proprietary
Funds to SSB to steer clients to invest in the Proprietary Funds . Most importantly, the disabling
conflict of interest that the revenue-sharing payments and Strategic Partners program created by
pitting the financial interests of'broker/dealers against the interests of'their investor clients was
ignored and never disclosed .
227 The December 3, 2003 Prospectus for the Salomon Brothers Emerging Market s
Debt Fund, Inc .,6 is typical .. This prospectus is similar, in relevant part, to all Prospectuses issued
6 The same Prospectus also covers the Salomon Brothers Series funds, which includes the Salomon BrothersAll Cap Value Fund, Salomon Brothers Balanced Fund, Salomon Brothers High Yield Bond Fund, SalomonBrothers International Equity Fund, Salomon Brothers Large Cap Growth Fund, Salomon BrothersShort(Intermediate US Government Fund, Salomon Brothers Small Cap Growth Fund, Salomon Brothers StrategicBond Fund, Salomon Brothers California Tax Free Bond Fund, Salomon Brothers New York Tax Free Bond Fund ,
-67-
for the Proprietary Funds during the Class Period .. It provided specific information regarding the
fees and costs incurred by fund holders as follows:
The Fund's management fees and other expenses, including expenses incurred inBorrowings and/or the issuance of the Fund Preferred Shares, are borne by theCommon Shareholders ..
In addition to the fee paid to the Investment Manager, the Fund pays all othercosts and expenses of its operations, including, but not limited to, compensationof' its Directors (other than those affiliated with the Investment Manager),custodian, transfer agency and dividend disbursing expenses, rating agency fees,legal fees, expenses of independent auditors, expenses of registering andqualifying shares for sale, expenses of' repurchasing shares, expenses inconnection with any Borrowings, expenses of issuing any Fund Preferred Shares,expenses of being listed on a stock exchange, expenses of preparing, printing anddistributing shareholder reports, notices, proxy statements and reports to
governmental agencies, amendments to the Fund's registration statement,membership in investment company organizations and taxes, if any ..
Despite this extensive laundry list of fees and expenses paid by the Fund, it was materially false
and misleading because, as SSB now admits, this fee table and all others like it, failed to include
revenue-sharing amounts incurred and expended pursuant to the secret revenue sharing
agreements. In similar fashion, all of the Proprietary Funds throughout the Class Period failed to
disclose these fees and expenses in each and every Prospectus they filed .
228 .. Each of the Proprietary Funds, from year to year and from fund to fun d
throughout the Class Period, also made substantially similar disclosures in Annual and Semi-
Annual Reports regarding the fees and expenses incurred by the Proprietary Funds . For
example, the Semi-Annual Report dated Match .31, 2001 (filed .Tune 8, 2001) set forth the fees
and expenses of the Smith Barney Shearson Fundamental Value Fund, Inc , as follows :
Salomon Brothers Mid Cap Fund, Salomon Brothers Investors Value Fund, Salomon Brothers Cash ManagementFund, Salomon Brothers Capital Fund .
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Statement of Assets and Liabilities (unaudited)March 31, 200 1
------------------------------------------------------------------------------------------ -LIABILITIES :
------------------ -
Payable for securities purchased 6,643,31 0
Investment advisory fee payable 1,319,81 4
Distribution fee payable 945,090
Written options, at value (Premiums received -- $10,816,370) (Note 5) 865,528
Administration fee payable 397,994
Payable for Fund shares purchased 147,198
Accrued expense s--------------------------------------------------------------------------------- ---
564,523- ------- -
Total Liabilitie s---------------------------------------------------------- ---------------------------------
----------------- -10,883,45 7
----------------- -
Statement of Operations (unaudited)For the Six Months Ended Mauch 31, 200 1
--------------- --------------------------------------------------------- --- -EXPENSES :
------------------------------ -
Distribution fee (Note 3) 10,144,864
Investment advisory fee (Note 3 ) -7,802,64 7
Administration fee (Note 3) 2,764,95 1
Shareholder and system servicing fees 846,072
Audit and legal 69,92 1
Custody 49,589
Registration fees 49,589
Shareholder communications 42,93 3
Directors' fees 39,672
Other------------------------------------------------ ------------------------
16,86 1
Total Expense s----------------------------------------------------
21,827,09 9
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229 . This financial statement, and all of the other Annual and Semi-Annual Reports
issued by each of the Proprietary Funds throughout the Class Period, all of which were
substantially similar in the type of information provided to the report set forth above, failed to
disclose payments made by the Proprietary Funds pursuant to revenue-sharing agreements with
SSB .. These disclosures were materially false and misleading because the Proprietary Funds
were secretly paying millions of dollars to SSB for the shelf-spacing of the Proprietary Funds
and the distribution of those funds to the exclusion of other suitable fund s
230. The Proprietary Funds' revenue-sharing payments were material to the Clas s
members' investment decisions and should have been disclosed to the public by SSB, the
Investment Adviser Defendants and the Director Defendants as part of the funds' fee disclosures
The Proprietary Funds intentionally or recklessly failed to disclose this secret incentive program
in any of their public filings .. The financial disclosures for all of the Proprietary Funds failed to
disclose the fees paid pursuant to the revenue-sharing agreements with SSB in each and every
Prospectus, SAI, and Annual and Semi-Annual Report they filed during the Class Perio d
231 . In sum, the Prospectuses, SAIs, Annual and Semi-Annual Reports issued for all of'
the Proprietary Funds during the Class Period were materially false and misleading because,
among other things, they failed to disclose material and adverse facts which misled and damaged
Plaintiffs, including :
a) that the Investment Adviser Defendants and SSB used investor assets to satisfybilateral arrangements with brokerage firms known as Strategic PartnersPrograms whereby the broker improperly steered unsuspecting clients intoProprietary Funds in exchange for personal financial gain ;
b) that the Investment Adviser Defendants used brokerage commissions over andabove those allowed by Rule I2b-I, and over and above those permitted under theshareholder approved Distribution Plans to pay f'or the "shelf-space" in theStrategic Partners Programs ;
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c) that the Investment Adviser Defendants directed brokerage payments to brokeragefirms that favored the Proprietary Funds to satisfy bilateral arrangements with
SSB and its affiliated brokerage firms pursuant to Strategic Partners Programs andthat this directed brokerage was a form of marketing that was not disclosed in orauthorized by the Proprietary Funds Rule 12b-1 Plans ;
d) that SSB was compensated out of investor assets for payments made pursuant to
revenue-sharing agreements ;
e) that such revenue-sharing payments created undisclosed conflicts of interest ;
f) that any economies of scale achieved by increased marketing, promotion and saleof'Proprietary Fund shares were not passed on to Proprietary Fund investors ; butrather-, as the Proprietary Funds' assets grew, the fees charged to Proprietary Fund
investors continued to increase ; and ,
g) that the Director Defendants had abdicated their duties under the InvestmentCompany Act and their common law fiduciary duties, failed to monitor andsupervise the Investment Adviser Defendants and, as a consequence, theInvestment Adviser Defendants were able to systematically skim millions ofdollars from the Proprietary Funds
B. False and Misleading Statements and MaterialOmissions Regarding 12b-1 Fees
232 . Each of the Proprietary Funds' Prospectuses, SAIs, Annual Reports and Semi-
Annual Reports issued during the Class Period failed to properly disclose to Plaintiffs material
information about the purported Rule 12b-1 fees associated with the funds . The 12b-1 fees paid
to SSB and its affiliates from the Proprietary Funds collectively during the Class Period totaled
approximately $ 1.49 billion
233 . During the Class Period, the Prospectuses for the Proprietary Funds made material
.false and misleading statements and material omissions regarding service and distribution fees
paid by each of the Proprietary Funds pursuant to a 12b-1 plan that was approved by each of the
Proprietary Fund's Board of Directors or Trustees .
234 . During the Class Period, the Prospectuses provided minimal disclosure regarding
Rule 12b-1 service and distribution fees . Because Defendants undertook to disclose the amount
- 71 -
of fees paid pursuant to Rule 12b-l and the purported use of such fees, they had a duty to full y
disclose the nature and true purpose of the fees . For the years 1999 through 2003, the
Prospectuses contained the following information in exact or substantially similar form :
The fund has adopted a Rule 12b-1 distribution plan for its Class A, B and Cshares . Under the plan, the fund pays distribution and/or service fees These feesare an ongoing expense and, over time, may cost you more than other types of'sales charges
23 5 Beginning in 2001, the Smith Barney Small Cap Core Fund Inc, as well as a
number of other funds, included the following additional statement in the Prospectuses :
In addition, the distributor may make payments for distribution and/or shareholderservicing activities out of its past profits and other available sources .. Thedistributor may also make payments for marketing, promotional or relatedexpenses to dealers .. The amount of these payments is determined by thedistributor and may be substantial . The manager or an affiliate may make similarpayments under similar arrangements .
236 . The Prospectuses falsely represented that the distribution fees were paid fo r
legitimate marketing and other services, which purportedly benefited shareholders the
disclosures falsely stated that the distribution fees were used to cover certain expenses, when in
fact these distribution fees were being used for overhead, directed brokerage commissions to
supplement the kickbacks paid to SSB brokers for steering Plaintiffs to invest in the Proprietary
Funds .
23 7 .. During the Class Period, the Prospectuses for the Smith Barney Income Fund s
provided minimal disclosure regarding Rule 12b- 1 service and distribution fees .. For the year s
1999 and 2000, the Prospectuses contained the following information :
The fund has adopted a Rule 12b-l distribution plan for its Smith Barney Class A,B, C and 0 shares, Under the plan, the fund pays distribution and/or service fees .These fees are an ongoing expense and, over time, they increase the cost of yourinvestment and may cost you more than other types of sales charges ..
- 72 -
238 .. However, in 2001, the Smith Barney Income Funds began providing additiona l
statements in the Prospectuses :
In addition, the distributor may make payments for distribution and/or shareholderservicing activities out of their past profits and other available sources Thedistributors may also make payments for marketing, promotional or relatedexpenses to dealers The amount of these payments is determined by thedistributors and may be substantial . The manager or an affiliate may make similarpayments under similar arrangements .
239, The Prospectuses and SAIs for all of the Proprietary Funds that were filed durin g
the Class Period contained substantially similar materially false and misleading disclosures a s
those set forth above at paras 234-38 .
240 . All of the Prospectuses for all of the Proprietary Funds, throughout the Clas s
Period, were false and misleading because they omitted the true nature and purpose of th e
distribution fees which purportedly benefited shareholders .
241 . . Defendants failed to disclose in the Proprietary Funds' Prospectuses, inter alia ,
the following material and damaging adverse facts which damaged Plaintiffs and other member s
of the Class :
a) that the Investment Adviser Defendants authorized excessive commissionpayments from fund assets to broker dealers in exchange for preferentialmarketing services and that such payments were in breach of theirfiduciary duties, in violation of Section 12(b) of the Investment CompanyAct, and unprotected by any "safe harbor" ;
b) that the Investment Adviser Defendants directed brokerage payments tofirms that favored the Proprietary Funds, which was a form of marketingthat was not disclosed in or authorized by the Funds Rule 12b-1 plans ;
c) that the Proprietary Funds Rule 12b-1 plans were not in compliance withRule 12b-1, and that payments made pursuant to the plans were inviolation of Section 12 of the Investment Company Act because, amongother reasons, the plans were not properly evaluated by the ProprietaryFunds Directors and Trustees and there was not a reasonable likelihoodthat the plans would benefit the company and its shareholders ;
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d) that by paying brokers to aggressively steer their clients to the ProprietaryFunds, the Investment Adviser Defendants were knowingly aiding andabetting a breach of fiduciary duties, and profiting from the brokers'improper conduct;
e) that any economies of scale achieved by marketing of the ProprietaryFunds to new investors were not passed on to the Proprietary Fundsinvestors ;
f) that the Director Defendants failed to monitor and supervise theInvestment Adviser Defendants and that, as a consequence, the InvestmentAdviser Defendants were able to systematically skim millions andmillions of dollars from the Proprietary Fund s
242 During the Class Period , the Prospectuses, including the SAIs, for the Proprietary
Funds made material false and misleading statements and material omissions regarding servic e
and distribution fees paid by each of the Proprietary Funds pursuant to a 12b-1 plan that wa s
approved by each of the Proprietary Fund's Board of Directors or Trustees ..
243 . The Smith Barney Small Cap Core Fund Inc .'s Prospectus and SAI, filed in 1999 ,
included the following statement :
To compensate Salomon Smith Barney for the service it provides and for theexpense it bears under the Distribution Agreement, the fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940Act Under the Plan, the fund pays Salomon Smith Barney a service fee, accrueddaily and paid monthly, calculated at the annual rate of 0 .25% of the value of thefund's average daily net assets attributable to the Class A, Class B and Class Lshares In addition, the fund pays Salomon Smith Barney a distribution fee withrespect to Class B and Class L shares calculated at the annual rate of 0 75% of thevalue of the fund's average daily net assets attributable those shares primarilyintended to compensate Salomon Smith Barney for its initial expense of payingFinancial Consultants a commission upon sales of those shares .. Class B sharesthat automatically convert to Class A shares eight years after the date of originalpurchase will no longer be subject to a distribution fee .
For the year ended December 3 1, 1998, the fees which have been accrued and/orpaid to Salomon Smith Barney pursuant to Rule 12b-1 for the fund were $107,818for Class A shares, $193,723 for Class B shares and $47,398 for Class L shares ..The distribution expenses for 1998 included compensation of financialconsultants and printing costs of prospectuses and marketing materials .
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CFBDS will pay for the printing, at printer ' s overrun cost , of prospectuses andperiodic reports a fter they have been prepared , set in type and mailed toshareholders , and will also pay the cost of distributing such copies used inconnection with the offering to prospective investors and will also pay forsupplementary sales literature and other promotional costs .. Such expensesincurred by CFBDS are distribution expenses within the me aning of the Plans andmay be paid from amounts received by CFBDS from the Company under thePlans .
244, The Smith Barney Income Fund's SAI, filed in 1999, included the followin g
statement :
Under its terms, the [12b-1] Plan continues fiom year to year, provided suchcontinuance is approved annually by vote of the Board of Trustees, including amajority of the Independent Trustees who have no direct or indirect financialinterest in the operation of the Plan . The Plan may not be amended to increase theamount to be spent for the services provided by the Distributor without
shareholder approval, and all amendments of the Plan must be approved by theTrustees in the manner described above the Plan may be terminated with respectto a Class at any time, without penalty, by vote of a majority of the IndependentTrustees or, with respect to the fund, by vote of 'a majority of the outstandingvoting securities of the Class (as defined in the 1940 Act) Pursuant to the Plan,
the Distributor will provide the Board of Trustees with periodic reports ofamounts expended under the Plan and the purpose for which such expenditureswere made ..
245 The Smith Barney Income Fund's SAT filed with the SEC in 2003 made the
following additional obtuse disclosures with respect to Rule 12b-1 fees :
For the fiscal year ended December 31, 2002, CGM and PFS incurred distributionexpenses for the following : advertising, printing and mailing prospectuses,support services and overhead expenses to CGM Financial Consultants andaccruals for interest on the excess of CGM expenses incurred in the distribution ofthe fund's shares over the sum of the distribution fees and deferred sales chargesreceived by CGM .. .
246 The SATs for the Smith Barney Shearson Aggressive Growth Fund Inc that wer e
filed in 2000 and 2001, like most of the other SATs and Prospectuses filed with the SEC for the 1
Proprietary Funds during the Class Period, provide extensive disclosures regarding payments
under the Rule 12b-1 Plan, without providing any information about the abuses of the 12b- 1
Plans and impact on Plaintiffs and the other Class Members' investments, falsely stated that i ...
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distributions under the plan primarily benefited shareholders and had no impact on the ne t
amount invested as follows :
To compensate each of Salomon Smith Barney and PFSI for the service it provides andfbi the expense it bears, the fund has adopted a services and distribution plan (the "Plan")pursuant to Rule 12b 1 under the 1940 Act . . . ., The service fee is primarily used to pa ySalomon Smith Barney Financial Consultants (and PFSI Registered Representatives forservicing shareholder accounts .
From time to time, PFSI or its affiliates may also pay for certain non-cash salesincentives provided to PFSI Investments Representatives Such incentives do nothave any effect on the net amount invested . . . . (emphasis added)
247 The Prospectuses, including the SAIs, for all of the Proprietary Funds that wer e
:filed during the Class Period contained substantially similar materially false and misleadin g
disclosures as those set forth above at par-as, 243-46 .
248 All of the Prospectuses and SAIs for all of the Proprietary Funds, throughout th e
'Class Period , were false and misleading because they omitted the true nature and purposes of the
distribution fees which purportedly benefited shareholder s
249 . The Annual and Semi-Annual Reports for the Funds listed above simply provided
a blanket statement explaining that each Fund pays a service and/or distribution fee pursuant to a
Rule 12b-1 Distribution Plan, the annual rate of the fee, and the manner in which the fee is
calculated .
250 . The Annual and Semi-Annual Reports for the Smith Barney Trust II included th e
following disclosures regarding 12b-1 fees in substantially similar terms :
The Fund maintains separate Service Plans for Class A and Class B shares, whichhave been adopted in accordance with Rule 12b-1 under the 1940 Act Under theClass A Service Plan, the Fund may pay monthly fees at an annual rate not toexceed 0 .25% of the average daily net assets represented by Class A shares of theFund . The Service fees for Class A shares amounted to $1,210,672 for the yearended October 31, 2000 . Under the Class B and Class L Service Plan, the Fundmay pay a combined monthly distribution and service fee at an annual rate not t o
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exceed 1 .00% of the average daily net assets represented by Class B shares andClass L shares of the Fund The Distribution fees for Class B and Cl ass L sharesamounted to $277,3 71 and $29, respectively , for the year ended October 31, 2000 ..These fees may be used to make payments to the Distributor for distributionservices and to others as compensation for the sale of shares of the applicableclass of the Fund, for advertising, marketing or other promotional activity , and forpreparation, printing and distribution of prospectuses , statements of additionalinformation and reports for recipients other than regulators and existingshareholders, The Fund may also make payments to the Distributor and others forproviding personal service or the maintenance of shareholder accounts .
251 . the Annual and Semi-Annual Reports for all of the Proprietary Funds provid e
substantially similar false and misleading disclosures regarding 12b-1 fees .
252 Defendants failed to disclose in the Proprietary Funds' Prospectuses, SATs ,
Annual Reports, or Semi-Annual Reports, infer alia, the following material and damaging
adverse facts which damaged Plaintiffs and other members of the Class :
a) that the Investment Adviser Defendants authorized excessive commissionpayments from fund assets to broker dealers in exchange for preferentialmarketing services and that such payments were in breach of their-fiduciary duties, in violation of Section 12(b) of the Investment CompanyAct, and unprotected by any "safe harbor" ;
b) that the Investment Adviser Defendants directed brokerage payments tofirms that favored the Proprietary Funds, which was a form of marketingthat was not disclosed in or authorized by the Funds Rule 12b-1 plans ;
c) that the Proprietary Funds Rule 12b-1 plans were not in compliance withRule 12b-1, and that payments made pursuant to the plans were inviolation of Section 12 of the Investment Company Act because, amongother reasons, the plans were not properly evaluated by the ProprietaryFunds Directors and Trustees and there was not a reasonable likelihoodthat the plans would benefit the company and its shareholders ;
d) that by paying brokers to aggressively steer their clients to the ProprietaryFunds, the Investment Adviser Defendants were knowingly aiding andabetting a breach of fiduciary duties, and profiting from the brokers'improper conduct ;
e) that any economies of' scale achieved by marketing of the ProprietaryFunds to new investors were not passed on to the Proprietary Fundsinvestors ;
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f) that the Director Defendants failed to monitor and supervise theInvestment Adviser Defendants and that, as a consequence, the InvestmentAdviser Defendants were able to systematically skim millions andmillions of dollars from the Proprietary Funds
C. Material Omissions Regarding Soft Dollarsand Directed Brokerage Business
253 All of Prospectuses and SAIs issued for the Proprietary Funds during the Clas s
Period are materially Use and misleading because they all fail to disclose that the Investment
Adviser Defendants improperly directed brokerage commissions to SSB's affiliated brokers and
other broker-dealers to satisfy secret quid-pro-quo agreements to pay excessive commissions and
directed brokerage business to brokers and broker-dealers that steered their clients into pre-
determined Proprietary Funds These Prospectuses and SAIs provide materially misleading
:information under the heading "Portfolio Transactions " or "Portfolio Transactions and
Brokerage .." For example, the December 3 , 2003 prospectus and SAT for the Salomon Bros
Emerging Markets Debt Fund Inc .. states :
The general policy of the Fund in selecting brokers and dealers is to obtain thebest results taking into account factors such as the general execution andoperational facilities of the broker or dealer, the type and size of the transactioninvolved, the creditworthiness of the broker or dealer, the stability of the broker ordealer, execution and settlement capabilities of the broker or dealer, time required
to negotiate and execute the trade, research services and the InvestmentManager's arrangements related thereto (as described below), overallperformance, the dealer's risk in positioning the securities involved, and thebroker's commissions and dealer's spread or mark-up . While the InvestmentManager generally seeks the best price in placing its orders, the Fund may notnecessarily be paying the lowest price available ..
Notwithstanding the above, in compliance with Section 28(e) of the SecuritiesExchange Act of 1934, as amended, the Investment Manager may select brokerswho charge a commission in excess of that charged by other- brokers if' theInvestment Manager determines in good faith that the commission to be chargedis reasonable in relation to the brokerage and research services provided to theInvestment Manager by such brokers . (emphasis added) .
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254 .. The Prospectus SAI for the Smith Barney Mid Cap Core Fund (filed with the SE C
on March 28, 2003) stated as follows with respect to Soft Dollars and directed brokerage :
In executing portfolio transactions and selecting brokers or dealers, it is the fund'spolicy to seek the best overall terms available .. The manager, in seeking the mostfavorable price and execution, considers all factors it deems relevant, including,for example, the price, the size of'the transaction, the reputation, experience andfinancial stability of the broker-dealer involved and the quality of servicerendered by the broker-dealer in other transactions . The manager receivesresearch, statistical and quotation services from several broker-dealers with whichit places the fund's portfolio transactions . It is possible that certain of the servicesreceived primarily will benefit one or more other accounts for which the managerexercises investment discretion . For the fiscal year ended November 30, 2002,the fund directed brokerage transactions totaling $1,451,183,194 to brokersbecause of research services provided . The amount of brokerage commissionspaid on such transactions totaled $62,155,568 . (Emphasis added .)
255 . The Prospectuses and SAIs for all of the Proprietary Funds provide substantiall y
similar Use and misleading disclosures regarding Soft Dollars and directed brokerage fees and
commissions ..
256 The Prospectuses, SAIs and Annual and Semi-Annual Reports failed to disclos e
the following material , adverse facts which were necessary to fully inform Plaintiffs of the natur e
of the fees, commissions and expenses paid to SSB and the Investor Adviser Defendants and
their affiliates from Plaintiffs' investments :
a) that the Investment Adviser Defendants authorized the payment ofexcessive commissions from the Proprietary Funds' assets to brokerdealers in exchange fbi preferential marketing services and that suchpayments were in breach of'their fiduciary duties, in violation of Section12(b) of the Investment Company Act and unprotected by any "safeharbor" ;
b) that the Investment Adviser Defendants directed brokerage payments tofirms that aggressively steered clients to invest in the Proprietary Funds,which was a form of marketing that was not disclosed in or authorized bythe Proprietary Funds' purported Rule 12b-1 plans;
c) that by paying brokers to aggressively steer' their clients to the ProprietaryFunds, the Investment Adviser Defendants were knowingly aiding and
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abetting a breach of fiduciary duties and profiting from the brokers'improper conduct; and
d) that Defendants improperly used Soft Dollars and excessive commissions,paid from the Proprietary Funds assets, to pay for overhead expenses, thecost of which should have been borne by the Company and the InvestmentAdviser Defendants and not the Proprietary Funds investors .
D. Material Omissions Regarding Br-eakpoints
257. The Smith Barney Shearson Aggressive Growth Fund Prospectus dated Decembe r
.29, 2003, ("2003 Aggressive Growth Prospectus"), which is substantially similar in substance to
all Prospectuses issued for the Proprietary Funds that charged a front-load sales fee during the
Class Period, promised volume discounts at various investment levels as follows:
You buy Class A shares at the offering price, which is the net asset value plus asales charge You pay a lower sales charge as the size of your investmentincreases to certain levels called breakpoints . You do not pay a sales charge onthe fund's distributions or dividends you reinvest in additional Class A shares .
The table below shows the rate of'sales charge you pay, depending on the amountyou purchase . The table below also shows the amount of broker/dealercompensation that is paid out of the sales charge . This compensation includescommissions received by Service Agents that sell shares of the fund . Thedistributors keep up to approximately 10% of the sales charge imposed on ClassA shares, Service Agents also will receive the service fee payable on Class Ashares at an annual rate equal to 0 25% of the average daily net assets representedby the Class A shares serviced by them
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Amount of purchase
Sales Chargeas a % of
Offering price (%)
Broker/Deale iNet amountinvested(%)
Commission as %of offering pric e
Less than $25,000 5 .00 5,26 4 .5 0
$25,000 but less than $50,000 425 4 .44 3 8 3
$50,000 but less than $100,000 3,75 3 90 3,3 8
$100,000 but less than $250,000 3 .25 3 .36 293
$250,000 but less than $500,000 2 .75 2 83 2 48
$500,000 but less than $1,000,000 2 00 2 ..04 1 ..80
$1,000,000 or more 000 0 00 up to 1 .00 *
258 . The Prospectuses issued for the Proprietary Funds during the Class Period ar e
materially false and misleading because they omitted material information that should hav e
informed Plaintiffs and other Class members that SSB and its affiliated brokers were engaged i n
a deceptive practice to divide shareholders ' investments into separate funds to avoid offering
investors the promised Breakpoint reductions in up-front sales charges ,
THE PROPRIETARY FUNDS MISREPRESENTED THEIRINVESTMENT STRATEGY BECAUSE THEY FAILE D
TO INFORM INVESTORS THAT INVESTMENTS WEREBEING MADE TO SUPPORT SSB'S INVESTMENT BANKING BUSINES S
259 .. The Defendants misled customers regarding the methods by which the Proprietar y
Funds selected securities for investment by describing in their prospectuses sophisticated
research and decisional processes that were incomplete, false and misleading ..
260.. The following incomplete , false and misleading statements are made in the Smith
Barney Appreciation Fund, Inc .. prospectus dated April 30, 200 3 :
Selection process
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The manager's investment strategy consists of individual company selection andmanagement of'cash reserves . The manager looks for investments among a strongcore of growth stocks, consisting primarily of blue chip companies dominant intheir industries The fund may also invest in companies with prospects forsustained earnings growth and/or' a cyclical earnings record .
In selecting individual companies for the fund's portfolio, the manager looks forthe following :
• Strong or rapidly improving balance sheets• Recognized industry leadership• Effective management teams that exhibit a desire to earn consistent returns
for shareholder s
In addition, the manager considers the following characteristics :
• Past growth records
• Future earnings prospects
• Technological innovatio n
• General market and economic factor s• Current yield or' potential for dividend growt h
Generally, companies in the fund's portfolio fall into one of the followingcategories :
• Undervalued companies: companies with assets or earning power that areeither unrecognized or undervalued The manager generally looks for acatalyst that will unlock these values . The manager also looks forcompanies that are expected to have unusual earnings growth or whosestocks appear likely to go up in value because of marked changes in theway they do business (for example, a corporate restructuring) .
• Growth at a reasonable price : companies with superior demonstrated andexpected growth characteristics whose stocks are available at a reasonableprice . Typically, there is strong recurring demand for these companies'products .
The manager adjusts the amount held in cash reserves depending on the manager'soutlook for the stock market the manager will increase the fund's allocation tocash when, in the manager's opinion, market valuation levels become excessive .The manager may sometimes hold a significant portion of'the fund's assets in cashwhile waiting for buying opportunities or to provide a hedge against stock marketdeclines ..
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261 Similar statements are made in the other Proprietary Funds' Prospectuses issue d
to customers during the Class Period All of the investment strategies disclosed by th e
Proprietary Funds are set forth in Exhibit C, which is incorporated herein by reference ..
262 . The statements above, as well as the statements regarding the means by which th e
Proprietary Funds selected stocks for purchase by the Funds in all of the prospectuses issued by
the Proprietary Funds (see Exhibit C) throughout the Class Period are false and misleading
because, as described at paxas . 201-11, supra, the Proprietary Funds selected stocks based in part
upon the requirements of SSB's investment banking business . At no time was there ever any
disclosure to investors that stocks were purchased by the Proprietary Funds to assist SSB's
investment bankers in obtaining and retaining investment banking business ..
THE TRUTH BEGINS TO EMERGE
263 . In a Prospectus Supplement dated March 22, 2004, Defendants revealed, for th e
first time, that they had secret revenue-sharing agreements :
the distributors may make payments for distribution and/or shareholder servicingactivities out of their past profits and other available sources. . The distributorsmay also make payments for marketing, promotional or related expenses todealers . The amount of these payments is determined by the distributors and maybe substantial .. The manager or an affiliate may make similar payments undersimilar arrangements ..
The payments described above are often referred to as "revenue sharingpayments ." The recipients of such payments may include the funds' distributorand other affiliates of the manager, broker--dealers, financial institutions and otherfinancial intermediaries through which investors may purchase shares of a fund .In some circumstances, such payments may create an incentive for anintermediary or its employees or associated persons to recommend or sell sharesof a fund to ,you .
264 . As the March 22, 2004 prospectus amendment makes clear , the Proprietary Funds
Distributor and the Investment Adviser Defendants made undisclosed, improper "revenu e
sharing" payments to SSB and its affiliates, which created conflicts of interest and incentives for
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SSB's affiliated brokers to recommend and sell the Proprietary Funds to Plaintiff's and other
members of the Class .
265 . A few months later in 2004, Defendants disclosed for the first time on SSB' s
website (www smithbarney com) that :
For each fund family we offer, we seek to collect a mutual fund support fee, orwhat has come to be called a revenue-sharing payment These revenue-sharingpayments are in addition to the sales charges, annual service fees (referred to as
"12b-1 fees"), applicable redemption fees and deferred sales charges, and otherfees and expenses disclosed in a fund's prospectus fee table .
Because Fund Families With Branch Access have access to our branch offices andFinancial Consultants, they have enhanced opportunities to promote their funds toour Financial Consultants . This fact could , in turn , lead our ' FinancialConsultants to focus on those funds when recommending mutual fundinvestments to our clients instead of on funds from those fund families thatdo not have access to our branch offices and Financial Consultants. Fundfamilies (With or Without Branch Access ) that do not remit revenue-sharingpayments typically will not be provided such access and will not participatein or receive other corporate promotional support. In 2003 and prior years,those fund families now classified as Fund Families With Branch Access werecategorized as Level I, or Strategic Partners, and Level II fund families .Level I Strategic Partners generally were given greater access to ourFinancial Consultants than Level II fund families .
(emphasis added) . The Proprietary Funds are listed among the "Fund Families With Blanch
Access" on the websit e
266 . SSB's 2004 statement that the "revenue-sharing payments are in addition to the
sales charges, annual service fees (referred to as `12b-1 fees'), applicable redemption fees and
deferred sales charges, and other fees and expenses disclosed in a fund's prospectus fee table"
was an admission that all the Prospectus fee tables in 2003 and prior years during the Class
Period contained material omissions In 2004, amidst increasing industry-wide scrutiny over a
number of unscrupulous mutual fund practices, SSB and the Proprietary Funds finally came
clean and disclosed for the first time material information that shed light on the revenue-sharin g
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and shelf'-spacing schemes that permeated SSB and its affiliates and the Proprietary Funds durin g
the Class Period ..
267 SSB's website disclosures further made clear that its revenue sharing payment
formula was tied to the amount of shares sold to Plaintiffs and other Class members, as well a s
the overall size of the Funds ' assets :
For 2003, we received revenue-sharing payments that were generallybased upon a previous revenue-sharing formula that took intoaccount overall fund sales and fund assets held in client accountsduring the year . We expect overall levels of revenue-sharing payments toincrease in 2004
Set forth below is a listing of the fund families from which wereceived revenue-sharing payments in 2003 . The listing is divided intoFund families are listed within [two categories : "Fund Families WithBranch Access" and "Fund Families Without Branch Access ."] based uponthe total amount of revenue-sharing payments each fund family made to usfor 2003 Mutual funds offered by these two categories of fund familiesrepresented approximately 99 2% of our total mutual fund sales in 2003,with Fund Families With Branch Access representing approximately96.9% of the total . (emphasis added) .
268 . The practice of aggressively selling the Proprietary and Strategic Partners Fund s
to clients, without disclosing defendants' strong financial interest in recommending such funds
over other investment choices, coupled with the Proprietary and Strategic Partners Funds '
undisclosed practice of paying excessive commissions to SSB for steering investors their- way,
was a clear, violation of defendants' fiduciary obligations of loyalty and care to their clients ..
Additionally, this type of conduct operated as a fraud and deceit against Plaintiffs and other
members of the Class .
269 . SSB's website disclosures in 2004 also revealed for the first time that Class B
shares of the Proprietary Funds are subject to higher 12b-1 fees and higher ongoing expense s
than other shares that are subject to a front-end sales charge :
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Class B shares
Investments in Class B shares typically are not subject to a front-end sales charge,but purchasers normally are required to pay a contingent deferred sales charge
("CDSC") on shares sold during a specified time period (typically six years) . Inaddition, Class B shares are subject to higher l2b-1 fees, which result in higherongoing expenses, than Class A shares .. For this reason, even though they carryno front-end load, Class B shares are not, and should not be viewed as, "no-load"shares .. The CDSC associated with an investment in Class B shares declines overtime, and in most funds is eventually avoided entirely fbllowing the expiration ofa designated holding period . Upon the expiration of that holding period, orshortly thereafter, Class B shares typically "convert" into Class A shares, at whichpoint the investment will begin to be charged the Class A shares' lower 12b-1fees .
It is important to bear in mind that the CDSCs and higher annual fees (in partattributable to higher 12b-1 fees) charged on Class B shares can cost you more
than the Class A front-end sales charges, especially on purchases that are eligiblefor breakpoint discounts . This can make Class B shares more expensive to youand economically inferior to Class A shares depending upon the fund, the amountinvested in the fund, and the holding period If you are considering investing inClass B shares, you should discuss with your Financial Consultant whether an
investment in Class A shares might be preferable for you, considering theavailability of breakpoint discounts on the front-end sales charge and thegenerally lower 12b-1 fees of Class A shares Some fund companies arebrokerage firms (including Smith Barney) limit the amount of'Class B shares youcan purchase in a fund .
PLAINTIFF AND OTHER MEMBERS OF THE CLASS HAVE SUFFERED DAMAGE S
270 . As a result of Defendants' conduct alleged above, Plaintiffs suffered damages
The damages suffered by the Plaintiffs were a foreseeable consequence of Defendants' material
omissions and wrongful conduct Plaintiffs have suffered at least three different types of
damages.
271 . First, they were improperly directed into mutual funds (either Proprietary Fund s
or Strategic Partners' Funds) that provided Plaintiffs with lower returns then they would have
received had the SSB Financial Consultants directed them toward funds that were in their best
interests . Plaintiffs would not have purchased the inferior Proprietary and Strategic Partners'
Funds had they known of the illegal and improper practices the Defendants used to direc t
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Plaintiffs into the Proprietary and Strategic Partners' Funds By investing in Proprietary and
Strategic Partners' Funds, Plaintiffs received a return on their investment that was substantially
less than the return on investment that they would have received had they invested the same
dollars in a comparable fund..
272 . Second, Plaintiffs and members of the Class were forced to pay excessive an d
improper commissions in connection with their purchases and ownership of shares in the
Proprietary Funds through the various mechanisms described supra at paras .. 173-200 . Plaintiffs
have been damaged by the amounts of the excessive commissions they paid and the income they
could have earned had they not been charged those excessive and improper commissions .
Plaintiffs' damages as a result of the commissions they paid for shares of the Proprietary Fund s
was a foreseeable consequence of'Defendants ' failure to disclose their steering and compensation
practices .
273 . Third, Plaintiffs were damaged because the Proprietary Funds purchased fun d
assets in contravention of the investment guidelines disclosed in the fund Prospectuses and other
Fund documents .. Instead of following the disclosed guidelines, on many occasions, the
Proprietary Funds purchased assets to further the goals of SSB's investment banking business ..
Plaintiffs and members of the Class were damaged by the losses incurred in the Proprietary
Funds as a result of the acquisition of assets at the behest of SSB's investment banking business .
Plaintiffs' damages as a result of the improper acquisition of assets by the Proprietary Funds was
a foreseeable consequence of'Defendants' failure to disclose their asset acquisition practice s
274 Additionally, the Prospectus for the Smith Barney Appreciation Fund Inc .. states
that a table describing the Fund's fee structure "sets forth the fees and expenses you will pay if
You invest in fund shapes " (Emphasis added ), The Prospectuses for all of the Proprietary
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Funds that were filed during the Class Period contained substantially similar statements . The
table includes "Management fees" and "12b-1 Distribution and Service Fees," which are at the
heart of this action . In addition, the Prospectus also states that these fees "are an ongoing
expense and, over time, may cost ou more than other types of sales charges ." (Emphasis
added ..) . Therefore, mutual fund fees paid to investment advisers and their affiliates are paid
directly by investors ..
ADDITIONAL SCIENTER ALLEGATION S
275 . SSB and its affiliates aggressively sold Proprietary Funds to investors during the
Class Period without disclosing their strong financial interest in recommending Proprietary
Funds over other investment choices . This practice coupled with the Proprietary Funds'
undisclosed practice of paying excessive fees and commissions to SSB and its affiliated brokers
and financial advisors for steering the Plaintiff' Class to invest in the Proprietary Funds
constitutes a knowing violation of federal securities laws .. The Investment Adviser Defendants '
clear breach of their fiduciary obligations of loyalty and care to investors operated as a fraud and
deceit against the Plaintiff Class .. Each Defendant is liable for intentionally or recklessly : (i)
:failing to disclose material adverse facts while selling shares of the Proprietary Funds, and/or (ii)
participating in a scheme to defraud and/or a course of conduct that operated as a fraud or deceit
on purchasers of the Proprietary Funds shares during the Class Period . The wrongful conduct
alleged above enabled Defendants to profit extensively and surreptitiously at the expense of
Plaintiffs,
276 As alleged above, the Director Defendants and the Investment Advise r
Defendants acted with scienter by knowingly or recklessly disseminating public documents an d
statements in the name of the Proprietary Funds that they knew or recklessly disregarded were
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materially false and misleading because they omitted material facts regarding fees, expenses and
conflicts of interest .. The Board members of the Proprietary Funds and the Investment Adviser
Defendants knew that statements in the Prospectuses, SAIs and Annual and Semi-Annual
Reports would be issued to Plaintiffs and other members of the investing public and knowingly
or recklessly participated or acquiesced in the issuance and dissemination of materially false and
misleading statements and documents .
277 .. The Board members and the Investment Adviser Defendants at all times
throughout the Class Period maintained control over the true, material information that was
falsely communicated, or not communicated at all, to investors including all members of the
Plaintiff Class On account of their close association with the Proprietary Funds, the Director
Defendants and Investment Adviser Defendants were privy to confidential informatio n
concerning the Proprietary Funds, and all of the fees and expenses borne by the Funds . By
concealing the fraudulent scheme detailed herein, they knowingly and culpably participated in
the fraudulent course of conduct
278 . All Defendants were highly motivated to allow, facilitate, and participate in the
fraudulent conduct alleged herein and all Defendants had actual knowledge of such conduct In
exchange for allowing the unlawful practices alleged herein, the Investment Adviser Defendants,
inter alia, received increased management fees which inured to their benefit and to the benefit of
Citigroup and CGMI, as SSB's parent corporations . In addition, SSB, Citigroup and CGMI were
highly motivated to engage in the wrongdoing alleged herein because they incurred lower costs
selling the Proprietary Funds than funds sold by competitors, thereby increasing SSB' s
profitability and the profitability of SSB's parents .. Furthermore, the Investment Adviser
Defendants, Citigroup, and CGMI profited through the receipt of excessive fees, revenue-sharin g
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payments, bonuses, kickbacks, commissions, and numerous other incentives from the Proprietary
Funds and the funds of'Strategic Partners ..
279 . The financial incentives for SSB, and its affiliate brokers and financial advisors,
were massive, and touched upon every level of the organization : SSB received illegal,
undisclosed payments amounting to millions of dollars per year from Strategic Partners for
providing branch access and brokers who were instructed and encouraged to push the funds of
Strategic Partners on unsuspecting clients ; SSB collected excessive fees and directed brokerage
commissions from the Proprietary Funds and the funds of Strategic Partners which amounted to
.hundreds of millions of dollars over the Class Period as a quid pro quo for steering investors into
the Funds that paid-to-play; individual brokers, financial advisors, branch managers, and regional
managers received cash kickbacks, increased salaries and bonuses, dinners, event tickets,
vacations, lucrative IPO allocations, and other undisclosed incentives for participating in the
scheme to steer investors into the Funds that paid-to-play ; the Investment Adviser defendant s
also received higher, undisclosed sales commissions paid to financial advisors for selling
Proprietary Funds over other more suitable investments ; and the Investment Adviser Defendants
and managers also steered clients into Proprietary and Strategic Partner Funds, and paid
incentives to support steering, because upon increasing the size of the Fund the management fee
would correspondingly increase since it was most often calculated as a percentage of assets
under management .
280 The fact that the Investment Adviser defendants knew about, and participated in,
this illegal scheme is perhaps best illustrated by the sales and performance data of the Proprietary
Funds themselves . According to SSB's own sales figures, fund families who paid-to-play
represented 96 9% of total mutual fund sales for the organization in 2003 From 2001 to 2003 ,
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however, the Proprietary Funds performed in the bottom 1/3 of'549 mutual funds families in the
United States, and are thus listed among the worst performing funds . the Investment Adviser
Defendants conduct in steering virtually all of their clients into terrible investments cannot be
understood without taking into account the fact that the Investment Adviser Defendants stood to
benefit personally and substantially from the scheme .
281 .. Indeed , every facet of Investment Adviser Defendants ' operations was devised to
support this steering program and it was so all encompassing that if anyone did not have actua l
knowledge of it within the organization, they should have known about it, or were reckless in not
knowing ..
282 . For example, the set-up of the proprietary computer system,7 the compensatio n
practices that revolved around the pay-to-play steering program,8 the training of support
personnel at the mutual fund sales desk,9 the far more simplified process for purchasing
Proprietary over non-proprietary Funds,10
and the internal publication "I'he Financial
Consultant"" were all means of selling the brokers and financial advisors on the idea that the
Proprietary Funds were proper investment vehicles for their clients . In all of these ways, the
Investment Adviser Defendants were well-aware of the shelf spacing program, the pay-to-play
practices, and the financial and other incentives offered to them for steering clients into the
Proprietary of Strategic Partner Fund s
See supra 11 6, 158-6 0
8 See supra IT 136-37, 165-67
9 See supra IT 161-6 3
10 Sees upra 1 164 .
11 Seesuprall141 .
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281 The Investment Adviser Defendants were highly motivated to allow and facilitat e
the wrongful conduct alleged herein, and each Defendant participated in and/or had actual
knowledge of the fraudulent conduct . In exchange for allowing and facilitating all of these
unlawful practices, SSB received at least hundreds of millions of dollars from the sale of
Strategic Partner and Proprietary Funds based upon the improper inducements and incentives
:received fiom the these Funds, or the managers or affiliates of these Funds.
284 Moreover, Defendants were highly motivated to conceal from Plaintiffs the
receipt of directed brokerage fees, revenue-sharing payments, and other excessive fees fiom the
Funds, along with concealing the inherent, insurmountable conflicts of interest created by thes e
.practices, because Defendants knew that if SSB clients were aware that SSB was being paid cash
or otherwise compensated to make recommendations to invest in the Strategic Partner or
'Proprietary Funds, then such recommendations (and their corresponding financial rewards)
would be undermine d
285 .. As alleged above , moreover , Defendants were not only rewarded for steerin g
large numbers of clients into Proprietary or Strategic Partner Funds, but they were also censured
for failing to steer clients to these Funds ., The Investment Adviser Defendants instilled this
steering program into those who were less inclined to participate in the scheme by sendin g
constant email reminders about steering clients into Proprietary Funds, and by holding constant ,
mandatory meetings with managers and wholesalers to discuss ways in which to sell Proprietar y
Funds..
286. Defendants further acted with scienter because they knew, or were reckless in no t
knowing, that entering into the directed brokerage, revenue-sharing and the other improper pay-
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to-play practices that provided incentives to push the Proprietary Funds and funds of Strategic
Partners was illegal, created conflicts of interest and violated SEC and NASD Rules .
287 Section 17(a)(2) of the Securities Act prohibits one fiom obtaining money o r
property in the offer or sale of any securities "by means of any untrue statement of'a material fact
. .. .. necessary in order to make the statements made, in light of the circumstances under which
they were made, not misleading .." 15 U .S C § 77q(a)(2) . Defendants knew or were reckless in
not knowing that their failure to disclose the receipt of fees from directed brokerage, from so-
called "revenue-sharing" payments made to gain access to branch locations, and fi'om other
sources alleged herein violated the disclosure provisions of' the securities laws and created
inherent, insurmountable conflicts of interest ..
288 Defendants are also charged with knowledge of NASD Rule 2830(k), whic h
provides, in relevant part, the following :
No member shall, directly or indirectly, favor or disfavor the sale or distributionof'shares of any particular investment company or group of'investment companieson the basis of brokerage commissions received or expected by such memberfrom any source, including such investment company, or, any covered account
289 . Defendants knew or were reckless in not knowing that their acceptance of
directed brokerage commissions from the Strategic Partner's Program in return f'or steering SS B
clients into the Proprietary of Strategic Partner Funds violated Rule 2830(k) and they therefor e
acted with scienter .
290.. All of the Director Defendants failed to monitor and supervise the Investmen t
Adviser Defendants, and intentionally or recklessly turned a blind-eye when the Investment
Adviser Defendants systematically siphoned hundreds of millions of dollars from the Proprietar y
Funds .
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291 The Director Defendants, moreover, assumed an obligation to know In
representation upon representation throughout the Class Period, the Director Defendants
informed the Fund investors that they supervised, approved, and monitored the business affairs
of the Funds According to the Prospectuses of the Proprietary Funds, the Director Defendants
were charged with approving or disapproving all agreements entered by the Fund, including
revenue-sharing agreements, participation in any Strategic Partners Program, or any other
agreements For example, as stated in the Prospectus fbr the Salomon Brothers Small Cap
Growth Fund, which is typical of the representations made in other Proprietary Fund
Prospectuses:
The business and affairs of each Fund are managed under the direction of theBoard of Directors .. The Board of Directors approves all significantagreements between the Funds and the persons or- companies that furnishservices to the Fund, including agreements with its distributor, investmentmanager , administrator , custodian and transfer agent. The Funds' day-to-day
operations are delegated to the investment manager and administrato r
292 .. The Director Defendants are also directly responsible for promoting and
protecting the interests of shareholders by approving and supervising the 12b-1 Distribution
Plan, which was subject to annual or semi-annual review and approval by the Board ., For
example, in 1999 through 2002, the Salomon Brothers Series Funds contained the following
disclosure, or one similar in substance :
The Board of Dir-ectois of each Fund . . . has adopted a services and distributionplan with respect to each class of shares (other than Class 0) of each Fundpursuant to the Rule (the 'Plan ') . The Board of Directors of each Fund hasdetermined that there is a reasonable likelihood that the Plan will benefitsuch Fund and its shareholders .
A quarterly report of the amounts expended with respect to each Fund underthe applicable Plan , and the purposes for which such expenditures wereincurred , is presented to the Board of Directors for its review . In addition,each Plan provides that it may not be amended with respect to any class of' sharesof the applicable Fund to increase materially the costs which may be borne fo r
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distribution pursuant to the Plan without the approval of shareholders of thatclass, and that other material amendments of the Plan must be approved by theBoard of Directors, and by the Directors who ate neither 'interested persons,' as
defined in the 1940 Act, not have any direct or indirect financial interest in theoperation of the Plan or any related agreements, by vote cast in person at ameeting called for the purpose of considering such amendments .. Each Plan andany r elated agreements are subject to annual apps oval by such vote cast in personat a meeting called for the purpose of voting on the Plan . Each Plan may beterminated with respect to a Fund or any class thereof' at any time by vote of 'amajority of the Directors who are not 'interested persons' and have no direct orindirect financial interest in the operation of'the Plan or in any related agreementor by vote of a majority of'the shares offa Fund or class, as the case may be .
291 In this case , the Director Defendants ignored or abdicated their fiduciary duties t o
the Proprietary Funds and shareholders of the Proprietary Funds by either approving undisclosed
revenue-sharing and shelf-spacing arrangements, or deliberately or recklessly turning a blind-eye
to the existence of such a program regardless of the negative impact such arrangements had on
fund shareholders .
294 The Director Defendants were also directly responsible for overseeing portfoli o
transactions so as to prevent the type of'directed brokerage transactions that occurred in this case .
The Director Defendants either knew, or recklessly turned a blind-eye to the practice of directed
brokerage when it came to SSB In this regard, the Prospectuses and SAIs of the Proprietary
Funds throughout the Class Period would typically provide :
Subject to policy established by the Board of Directors, the investment manager isprimarily responsible for each Fund's portfolio decisions and the placing of theFund's portfolio transactions
Each Fund contemplates that, consistent with the policy of obtaining the best netresults, brokerage transactions may be conducted through 'affiliatedbroker/dealers,' as defined in the 1940 Act Each Company's Board of Directors
has adopted procedures in accordance with Rule I7e-1 promulgated under the1940 Act to ensure that all brokerage commissions paid to such affiliates arereasonable and fair in the context of'the market in which such affiliates operate .Any such compensation will be paid in accordance with applicable SEC
regulations ..
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295 . The pecuniary interests of the interested Directors Defendants are not disclosed in
any of SSB's filings with the SEC . The interested directors, however, are directly beholden to
SSB and its affiliates fbr their high-paying positions at SSB and lucrative benefits related to their
positions the interested Director Defendants maintain a business and financial relationship with
and are subject to a controlling influence of both SSB and its affiliate s
296 . In addition to the enormous financial rewards reaped by Citigroup on account of
the hundreds of' millions of dollars of' excessive fees being collected by its wholly owned
subsidiary, SSB, Citigroup was otherwise well-aware of the scheme, helped to conceive it, and
participated in i t
297. Throughout most of the Class Period, Citigroup and SSB worked as an integrated,
albeit conflicted, unit Research provided by SSB analysts were used to support both the SSB
retail sales side of the business and Citigroup's stake in fostering major investment banking
relationships . The fees generated from Citigroup's investment banking business were often
shared with SSB in the form of a "helper's fee " Likewise, fees generated by SSB were shared
with Citigroup to foster their symbiotic relationship .. Amidst several high profile government
investigations, however, which exposed the serious conflicts of interest existing between
Citigroup and SSB, Citigroup paid over $1 billion and agreed to separate its businesses as
required by law..
298 .. Still, however, Citigroup itself' generated fees from SSB's mutual fund business ,
and knows what fees were generated from SSB's mutual fund business . During the Class Period,
for- instance, a business unit of Citigroup called Citigroup Asset Management ("CAM") which
was involved in certain of the Proprietary Funds as a transfer agent collected over $16 million
from a sub-contractor pursuant to an illicit "revenue guarantee agreement," which agreement
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caused the Funds to incur excessive, undisclosed fees and expenses . Citigroup therefore did not
have its blinders on, rather it too had its hand out and was participating in the scheme to sipho n
shareholder wealth from the Proprietary Funds ..
299. Other fees were collected directly by Citigroup as well In a post-Class Perio d
representation contained on SSB's website, f'or instance, it was disclosed for the first time, a s
follows :
Compensation Citigrroup Receives from Fund s
Citigroup Global Markets Inc . ("CGMI") and other Citigroup affiliates receivefrom certain funds compensation in the form of commissions and other fees forproviding traditional brokerage services, including related research and advisorysupport, and for purchases and sales of securities for fund portfolios CGMI andother- Citigroup affiliates also receive other compensation from certain funds forfinancial services performed for the benefit of'such funds . We prohibit linking thedetermination of the amount of such brokerage commissions and service feescharged to a fund to the aggregate values of Smith Barney's overall fund sharesales, client holdings of' the fund, or to offset the revenue-sharing or expensereimbursement and administrative fees described above . We prohibit the use ofbrokerage commissions and other compensation to CGMI and Citigroup affiliatesto offset the revenue-sharing, expense reimbursement, or administrative feesdescribed above .. Moreover, such commissions or other compensation are not paidto or shared with Smith Barney's mutual fund sales business unit .
The Individual Board Members' Scienter is Demonstrated ByThe Fact That They Are Financially Beholden To SS B
300. The Proprietary Funds' Boards, i e , the Director Defendants, were captive to an d
controlled by Citigroup and the Investment Adviser Defendants, who induced the Director
Defendants to breach their statutory and fiduciary duties to manage and supervise the Proprietary
Funds in the best interest of the Fund and its investors . In many cases, key Proprietary Fund
directors and trustees were employees or former employees of Citigroup or the Investment
Adviser Defendants who were beholden for their positions, not to the Proprietary Funds
investors, but rather to the Investment Adviser Defendants they were supposed to oversee Th e
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Director Defendants served for indefinite terms at the pleasure of the Investment Adviser
Defendants and formed supposedly independent committees, charged with responsibility of
overseeing billions of dollars of fund assets (much of which was comprised of Plaintiff's' college
and retirement savings)
301 .. Moreover, to ensure that the directors were compliant, the Investment Advise r
Defendants often recruited key fund directors fiom the ranks of Citigroup or the Investment
Adviser Defendants. In exchange for creating and managing the Proprietary Funds, the
Investment Adviser Defendants charged the Proprietary Funds a variety of fees, each of which
was calculated as a percentage of assets under management . Hence, the more money invested in
the funds, the greater the fees ultimately paid to SSB, its affiliates and their corporate parents ..
302 . The Board members were willing to approve the improper- kickbacks paid t o
brokers and financial advisors who steered Plaintiff's to invest in the Proprietary Funds, and to
charge excessive fees to fund such kickbacks, because each Board member received substantial
payments and benefits by virtue of his or her membership on the Proprietary Funds' Boards, as
follows :
(1) Defendant Gerken served on the Boards for 227 Proprietary Fundsduring the Class Period, including Smith Barney Mid Cap CoreFund, Smith Barney Large Cap Value Fund, Smith BarneyShearson Fundamental Value Fund, Smith Barney DiversifiedStrategic Income Fund, Smith Barney High Income Fund, SmithBarney Large Cap Core Fund, Smith Barney Aggressive GrowthFund, Smith Barney Investment Grade Bond Fund and Smith
Barney Appreciation Fund Inc . In addition, the Proprietary Fundsdisclose Gerken as an interested director because he served, at allrelevant times, as a managing director of defendant SSB andChairman, President and CEO of defendant Smith Barney FundManagement .. As a Board member, President, and CEO ofnumerous Proprietary Funds, Defendant Gerken is (and was duringthe Class Period) responsible for the false and misleadingstatements and omissions in the Proprietary Funds' Prospectuse s
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and Annual and Semi-Annual Reports, which Gerken signed eachyear from 2002 to 2004
(2) Defendant McLendon served on the Boards for 228 ProprietaryFunds during the Class Period, including Smith Barney Mid CapCore Fund, Smith Barney Large Cap Value Fund, Smith BarneyShearson Fundamental Value Fund, Salomon Brothers High YieldBond Fund, Salomon Brothers International Equity Fund, SalomonBrothers Large Cap Growth Fund, Salomon BrothersShort/Intermediate US Government Fund, Salomon Brothers SmallCap Growth Fund, Salomon Brothers Capital Fund, Salomon
Brothers Investors Value Fund, Smith Barney Diversified StrategicIncome Fund, Smith Barney High Income Fund, Smith BarneyLarge Cap Core Fund, Smith Barney Aggressive Growth Fund,Smith Barney Investment Grade Bond Fund and Smith BarneyAppreciation Fund Inc . In addition, the Proprietary Funds discloseMcLendon as an interested director because he served, at allrelevant times, as Chairman, President and CEO of SSB Citi FundManagement, LLC ., and more than fifty investment companiessponsored by Salomon Smith Barney, Chairman or Co-Chairmanof the Board for mote than seventy investment companiesassociated with Salomon Smith Barney, Managing Director ofSmith Barney, Chairman of Smith Barney Strategy Advisers, Inc ,and President of SBMFM .. As a Board member, President, andCEO of numerous Proprietary Funds, Defendant McLendon wasresponsible for the false and misleading statements and omissionsin the Proprietary Funds' Prospectuses and Annual and Semi-Annual Reports, which McLendon signed each year from 1999 to2002 ..
(3) Defendant Coolidge served on the Boards for at least forty-sevenProprietary Funds during the Class Period, including SalomonFunds Trust . In addition, the Proprietary Funds disclose Coolidgeas an interested director because he served, at all relevant times, asPresident and CEO of'Signature Financial Group, Inc .. and CFBDS,Inc As a Board member, President, and CEO of' numerousProprietary Funds, Defendant Coolidge was responsible for thefalse and misleading statements and omissions in the ProprietaryFunds' Prospectuses and Annual and Semi-Annual Reports, whichCoolidge signed each year from 1999 to 200 0
(4) Defendant Colman served on the Boards for at least thirty-fiveProprietary Funds during the Class Period, including SalomonBrothers Emerging Markets Debt Fund Inc.., Salomon BrothersHigh Yield Bond Fund, Salomon Brothers International EquityFund, Salomon Brothers Large Cap Growth Fund, SalomonBrothers Short/Intermediate US Government Fund, Salomon
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Brothers Small Cap Growth Fund, Salomon Brothers Capital Fund,and Salomon Brothers Investors Value Fund, and receivedcompensation of approximately $54,225, $52,5 34, $36,875,$90,950 and $197,350, respectively, in 1999, 2000, 2001, 2002 and2003 totalling $431,934 during the Class Period . DefendantColman signed the materially false and misleading Prospectusesfiled with the SEC in each year from 1999 to 2003 for theProprietary Funds on which Colman served as a Board member orTrustee .
(5) Defendant Cronin served on the Boards for at least sevenProprietary Funds during the Class Period, including SalomonBrothers Emerging Markets Debt Fund Inc ., Salomon BrothersHigh Yield Bond Fund, Salomon Brothers International EquityFund, Salomon Brothers Large Cap Growth Fund, SalomonBrothers Short/Intermediate US Government Fund and SalomonBrothers Small Cap Growth Fund, and received compensation ofapproximately $50,200, $57,109, $52,700, $90,300 and $117,450,respectively, in 1999, 2000, 2001, 2002 and 2003 . DefendantCronin signed the materially false and misleading Prospectusesfiled with the SEC in each year from 1999 to 2003 for theProprietary Funds on which Cronin served as a Board member orTrustee ..
(6) Defendant Gelb served on the Boards for at least thirty-twoProprietary Funds during the Class Period, including SalomonBrothers Emerging Markets Debt Fund Inc ., Salomon BrothersHigh Yield Bond Fund, Salomon Brothers International EquityFund, Salomon Brothers Large Cap Growth Fund, SalomonBrothers Short/Intermediate US Government Fund and SalomonBrothers Small Cap Growth Fund, and received compensation ofapproximately $81,700 and $111,150 .11, respectively, in 2002and 2003 .. Defendant Gelb signed the materially false andmisleading Prospectuses filed with the SEC in at least 2003 for the
Proprietary Funds on which Gelb served as a Board member orTrustee ..
(7) Defendant Hutchinson served on the Boards for at least forty-twoProprietary Funds during the Class Period, including SalomonBrothers Emerging Markets Debt Fund Inc, Salomon BrothersCapital Fund and Salomon Brothers Investors Value Fund, andreceived compensation of approximately $49,350, $38,300,$43,900, $46,750 and $114,600, respectively, in 1999, 2000, 2001,2002 and 2003 totalling at least $192,805 during the Class Period ..Defendant Hutchinson signed the materially false and misleadingProspectuses filed with the SEC in each year from 1999 to 2003
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for the Proprietary Funds on which Hutchinson served as a Boardmember oi''Irustee .
(8) Defendant Roett served on the Boards for at least thirty-two
Proprietary Funds during the Class Period, including SalomonBrothels Emerging Markets Debt Fund Inc ., Salomon Brothers
High Yield Bond Fund, Salomon Brothers International EquityFund, Salomon Brothers Large Cap Growth Fund, SalomonBrothers Shoit/Intermediate US Government Fund and SalomonBrothers Small Cap Growth Fund, and received compensation of'approximately $93,400 and $163 ,300, respectively, in 2002 and
2003 . Defendant Roett signed the materially false and misleadingProspectuses filed with the SEC in at least 2003 for the ProprietaryFunds on which Roett served as a Board member or Trustee.,
(9) Defendant Salacuse served on the Boards for at least thirty-twoProprietary Funds during the Class Period, including SalomonBrothers Emerging Markets Debt Fund Inc, Salomon BrothersHigh Yield Bond Fund, Salomon Brothers International EquityFund, Salomon Brothers Large Cap Growth Fund, SalomonBrothers Short/Intermediate US Government Fund and SalomonBrothers Small Cap Growth Fund, and received compensation ofapproximately $90,300 and $1 37,150, respectively, in 2002 and
2003 Defendant Salacuse signed the materially Use and
misleading Prospectuses filed with the SEC in at least 2003 for theProprietary Funds on which Salacuse served as a Board member orTrustee ..
(10) Defendant Berv served on the Boards for at least thirty-sevenProprietary Funds during the Class Period, including Smith BarneyLarge Cap Core Fund, and received compensation ofapproximately $69,500, $68,000, $90,403, $70,000 and $80,300,respectively, in 1999, 2000, 2001, 2002 and 2003, Defendant Beivsigned the materially false and misleading Prospectuses filed withthe SEC in each year from 1999 to 2004 for the Proprietary Fundson which Berv served as a Board member or Trustee ,
(11) Defendant Finn served on the Boards for at least thirty-sevenProprietary Funds during the Class Period, including Smith BarneyLarge Cap Core Fund, and received compensation ofapproximately $63 ,250, $71,000, $84,467, $72,500 and $84,450,respectively, in 1999, 2000, 2001, 2002 and 200 3 . Defendant Finnsigned the materially false and misleading Prospectuses filed withthe SEC in each year from 1999 to 2004 for the Proprietary Funds
on which Finn served as a Board member or Trustee ..
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(12) Defendant Gross served on the Boards for at least thirty-twoProprietary Funds during the Class Period, including Smith BarneyLarge Cap Core Fund, and received compensation ofapproximately $59,000, $59,000, $72,600, $72,500 and $81,350,respectively, in 1999, 2000, 2001, 2002 and 2003 DefendantGross signed the materially Use and misleading Prospectuses filedwith the SEC in each year from 1999 to 2004 for the Proprietary
Funds on which Gross served as a Board member or Truste e
(13) Defendant Harrington served on the Boards for at least thirty-sevenProprietary Funds during the Class Period, including Smith BarneyLarge Cap Core Fund, and received compensation of $71,250,$67,500, $90,400, $72,500 and $80,200, respectively, in 1999,
2000, 2001, 2002 and 2003 . Defendant Harrington signed the
materially false and misleading Prospectuses filed with the SEC ineach year- from 1999 to 2004 for the Proprietary Funds on whichHarrington served as a Board member or Truste e
(14) Defendant Kerley served on the Boards for at least thirty-sevenProprietary Funds during the Class Period, including Smith BarneyLarge Cap Core Fund, and received compensation ofapproximately $69,750, $66,000, $90,400, $72,500 and $80,300,respectively, in 1999, 2000, 2001, 2002 and 2003 . Defendant
Kerley signed the materially false and misleading Prospectuses
filed with the SEC in each year from 1999 to 2004 for theProprietary Funds on which Kerley served as a Board member or
Trustee
(15) Defendant Breech served on the Boards for at least fourProprietary Funds during the Class Period, including SalomonBrothers Capital Fund and Salomon Brothers Investors ValueFund, and received compensation of approximately $26,875,
$32,625, $15,250, $35,500 and $29,500, respectively, in 1999,
2000, 2001, 2002 and 2003 . Defendant Breech signed thematerially false and misleading Prospectuses filed with the SEC ineach year from 1999 to 2003 f'or the Proprietary Funds on which
Breech served as a Board member or Truste e
(16) Defendant Dill served on the Boards for at least four ProprietaryFunds during the Class Period, including Salomon Brothers Capital
Fund and Salomon Brothers Investors Value Fund, and receivedcompensation of approximately $26,8 75, $30,3 75, $13,875,$35,500 and $28,250, respectively, in 1999, 2000, 2001, 2002 and
2003 . Defendant Dill signed the materially false and misleading
Prospectuses filed with the SEC in each year fiom 1999 to 2003for the Proprietary Funds on which Dill served as a Board member
or Trustee ..
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(17) Defendant Kirtland served on the Boards for at least four'Proprietary Funds during the Class Period, including SalomonBrothers Capital Fund and Salomon Brothers Investors Value
Fund, and received compensation of approximately $28,250,$28,375, $15,375, $35,500 and $28,250, respectively, in 1999,2000, 2001, 2002 and 2003 . Defendant Kirtland signed the
materially false and misleading Prospectuses filed with the SEC ineach year from 1999 to 2003 for the Proprietary Funds on whichKirtland served as a Board member or' Trustee .
(18) Defendant Mattis served on the Boards for at least threeProprietary Funds during the Class Period, including SalomonBrothers Capital Fund and Salomon Brothers Investors Value
Fund, and received compensation of' approximately $26,000,$27,500, $11,000, $25,250 and $25,250, respectively, in 1999,
2000, 2001, 2002 and 2003 . Defendant Mattis signed the
materially false and misleading Prospectuses filed with the SEC in
each year from 1999 to 200 3 for the Proprietary Funds on which
Mattis served as a Board member or Trustee
(19) Defendant Schlafly served on the Boards for at least threeProprietary Funds during the Class Period, including SalomonBrothers Capital Fund and Salomon Brothers Investors Value
Fund, and received compensation of approximately $28,250,$29,750, $14,000, $32,750 and $28,250, respectively, in 1999,
2000, 2001, 2002 and 2003 . Defendant Schlafly signed the
materially false and misleading Prospectuses filed with the SEC ineach year' fiom 1999 to 2003 f'or the Proprietary Funds on which
Schlafly served as a Board member or Trustee ..
(20) Defendant Abraham served on the Boards for at least twenty-eightProprietary Funds during the Class Period, including Smith BarneyLarge Cap Value Fund, Smith Barney Diversified Strategic IncomeFund and Smith Barney High Income Fund, and received
compensation of approximately $71,133, $72,800, $73,500,$75,000 and $76,300, respectively, in 1999, 2000, 2001, 2002 and2003 Defendant Abraham signed the materially false andmisleading Prospectuses filed with the SEC in each year from 1999
to 2004 for the Proprietary Funds on which Abraham served as aBoard member or Trustee .
(21) Defendant Bloostein served on the Boards for at least thirty-fiveProprietary Funds during the Class Period, including Smith BarneyLarge Cap Value Fund, Smith Barney Diversified Strategic IncomeFund and Smith Barney High Income Fund, and receivedcompensation of approximately $112,483, $109,950, $117,100,$122,250 and $126,600, respectively, in 1999, 2000, 2001, 200 2
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and 2003 . Defendant Bloostein signed the materially false andmisleading Prospectuses filed with the SEC in each year from 1999to 2003 for the Proprietary Funds on which Bloostein served as aBoard member or Trustee .
(22) Defendant Dasher, served on the Boards for at least twenty-eightProprietary Funds during the Class Period, including Smith Barney
Large Cap Value Fund, Smith Barney Diversified Strategic IncomeFund and Smith Barney High Income Fund, and receivedcompensation of approximately $65,733, $75,000, $75,000,$76,600 and $80,150, respectively, in 1999, 2000, 2001, 2002 and
2003 ,.Defendant Dasher signed the materially false and
misleading Prospectuses filed with the SEC in each year from 1999to 2003 for the Proprietary Funds on which Dasher served as aBoard member or Truste e
(23) Defendant Hat-din served on the Boards for at least thirty-fiveProprietary Funds during the Class Period, including Smith BarneyLarge Cap Value Fund, Smith Barney Diversified Strategic IncomeFund and Smith Barney High Income Fund, and receivedcompensation of approximately $90,450, $93,150, $110,800,
$132,300 and $128,775, respectively, in 1999, 2000, 2001, 2002and 2003 Defendant Hardin signed the materially false and
misleading Prospectuses filed with the SEC in each year from 1999to 2003 for the Proprietary Funds on which Hardin served as a
Board member or Truste e
(24) Defendant Rasmussen served on the Boards for at least twenty-eight Proprietary Funds during the Class Period, including SmithBarney Large Cap Value Fund, Smith Barney Diversified StrategicIncome Fund and Smith Barney High Income Fund, and receivedcompensation of approximately $71,200, $74,900, $74,900,$75,200 and $76,100, respectively, in 1999, 2000, 2001, 2002 and2003 Defendant Rasmussen signed the materially false andmisleading Prospectuses filed with the SEC in each year from 1999
to 200.3 for the Proprietary Funds on which Rasmussen served as aBoard member or Trustee ..
(25) Defendant Toolan served on the Boards f'or at least twenty-eightProprietary Funds during the Class Period, including Smith BarneyLarge Cap Value Fund, Smith Barney Diversified Strategic IncomeFund and Smith Barney High Income Fund, and receivedcompensation of approximately $69,100, $74,900, $74,900,$73,400 and $77,050, respectively, in 1999, 2000, 2001, 2002 and
2003 Defendant Toolan signed the materially Use andmisleading Prospectuses filed with the SEC in each year from 1999
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to 2003 for the Proprietary Funds on which Toolan served as aBoard member or Irustee ..
(26) Defendant Foley served on the Boards for at least twenty-eightProprietary Funds during the Class Period, including Smith BarneyLarge Cap Value Fund, Smith Barney Diversified Strategic IncomeFund and Smith Barney High Income Fund, and received
compensation of approximately $71,300, $74,900, $74,900,$75,000 and $53,700, respectively, in 1999, 2000, 2001, 2002 and2003 . Defendant Foley signed the materially Use and misleadingProspectuses filed with the SEC in each year from 1999 to 2003for the Proprietary Funds on which Foley served as a Board
member or Trustee .
(27) Defendant Hanson served on the Boards for at least twenty-eightProprietary Funds during the Class Period, including Smith BarneyLarge Cap Value Fund, Smith Barney Diversified Strategic Income
Fund and Smith Barney High Income Fund, and receivedcompensation of approximately $68,233, $74,800, $74,800,
$73,900 and $76,600, respectively, in 1999, 2000, 2001, 2002 and2003 .. Defendant Hanson signed the materially false and
misleading Prospectuses filed with the SEC in each year from 1999to 2003 for the Proprietary Funds on which Hanson served as a
Board member or Trustee .
(28) Defendant Carlton served on the Boards for at least thirty-twoProprietary Funds during the Class Period, including Smith BarneyLarge Cap Core Fund, and received compensation ofapproximately $56,000, $56,000, $73,600, $70,000 and $82,600,respectively, in 1999, 2000, 2001, 2002 and 2003 . Defendant
Carlton signed the materially false and misleading Prospectusesfiled with the SEC in each year from 1999 to 2004 for theProprietary Funds on which Carlton served as a Board member or
Irustee ..
(29) Defendant Cocanougher served on the Boards for at least thirty-two Proprietary Funds during the Class Period, including SmithBarney Large Cap Core Fund, and received compensation of
approximately $57,000, $57,000, $ 74,600, $70,100 and $86,200,
respectively, in 1999, 2000, 2001, 2002 and 2003 . DefendantCocanougher signed the materially false and misleadingProspectuses filed with the SEC in each year from 1999 to 2004for the Proprietary Funds on which Cocanougher- served as a Board
member or Irustee .
(30) Defendant Merten served on the Boards for at least thirty-twoProprietary Funds during the Class Period, including Smith Barne y
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Large Cap Core Fund, and received compensation of
approximately $56,000, $56,000, $72,600, $70,000 and $77,800,respectively, in 1999, 2000, 2001, 2002 and 2003 .. Defendant
Merten signed the materially false and misleading Prospectusesfiled with the SEC in each year from 1999 to 2004 for theProprietary Funds on which Merten served as a Board member or
Trustee .
(31) Defendant Pettit served on the Boards for at least thirty-twoProprietary Funds during the Class Period, including Smith Barney
Large Cap Core Fund, and received compensation ofapproximately $59,000, $59,000, $ 72,500, $72,500 and $82,700,respectively, in 1999, 2000, 2001, 2002 and 2003 .. Defendant
Pettit signed the materially false and misleading Prospectuses filedwith the SEC in each year from 1999 to 2004 for the ProprietaryFunds on which Pettit served as a Board member or Truste e
(32) Defendant Ades served on the Boards for at least fifteenProprietary Funds during the Class Period, including Smith BarneyAggressive Growth Fund and Smith Barney Investment GradeBond Fund, and received compensation of approximately $56,238,
$56;775, $52,500, $56,050 and $60,575, respectively, in 1999,2000, 2001, 2002 and 2003 Defendant Ades signed the materially
false and misleading Prospectuses filed with the SEC in each yearfrom 1999 to 2004 for the Proprietary Funds on which Ades servedas a Board member or Trustee .
(33) Defendant Barg served on the Boards for at least forty-twoProprietary Funds during the Class Period, including Smith Barney
Mid Cap Core Fund, Smith Barney Aggressive Growth Fund,Smith Barney Investment Grade Bond Fund and Smith BarneyAppreciation Fund Inc ., and received compensation ofapproximately $114,288, $116,075, $146,000, $119,450 and
$127,963, respectively, in 1999, 2000, 2001, 2002 and 2003 .
Defendant Barg signed the materially false and misleadingProspectuses filed with the SEC in each year fiom 1999 to 2003for the Proprietary Funds on which Barg served as a Boardmember or Trustee .
(34) Defendant Crane served on the Boards for at least forty-nineProprietary Funds during the Class Period, including Smith BarneyMid Cap Core Fund, Smith Barney Aggressive Growth Fund,Smith Barney Investment Grade Bond Fund and Smith BarneyAppreciation Fund Inc, and received compensation ofapproximately $155,363, $155,375, $143,550, $152,200 and$168,875, rrespectively, in 1999, 2000, 2001, 2002 and 2003 .Defendant Crane signed the materially false and misleadin g
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Prospectuses filed with the SEC in each year from 1999 to 2004for the Proprietary Funds on which Crane served as a Board
member or Trustee .,
(35) Defendant Hubbard served on the Boards for at least fifteenProprietary Funds during the Class Period, including Smith BarneyAggressive Growth Fund and Smith Barney Investment GradeBond Fund, and received compensation of approximately $56,1 38,$56,675, $52,400, $56,050 and $60,675, respectively, in 1999,2000, 2001, 2002 and 2003 . Defendant Hubbard signed thematerially false and misleading Prospectuses filed with the SEC ineach year fiom 1999 to 2004 for the Proprietary Funds on whichHubbard served as a Board member or- Trustee .
(36) Defendant Jerome H . Miller served on the Boards for at leastfifteen Proprietary Funds during the Class Period, including SmithBarney Aggressive Growth Fund and Smith Barney InvestmentGrade Bond Fund, and received compensation of approximately$51,61 3 , $56,275, $47,675, $56,060 and $60,575, respectively, in1999, 2000, 2001, 2002 and 2003 .. Defendant Jerome H . Millersigned the materially false and misleading Prospectuses filed withthe SEC in each year from 1999 to 2004 for the Proprietary Fundson which Jerome H .. Miller served as a Board member- or Trustee .
(37) Defendant Ken Miller served on the Boards for at least fifteenProprietary Funds during the Class Period, including Smith BarneyAggressive Growth Fund and Smith Barney Investment GradeBond Fund, and received compensation of approximately $47,188,$56,475, $52,200, $56,050 and $60,575, respectively, in 1999,2000, 2001, 2002 and 2003 Defendant Ken Miller signed the
materially false and misleading Prospectuses filed with the SEC ineach year from 1999 to 2004 for the Proprietary Funds on whichKen Miller served as a Board member or Trustee ..
(38) Defendant Dorsett served on the Boards for at least twenty-seven
Proprietary Funds during the Class Period, including Smith BarneyMid Cap Core Fund and Smith Barney Appreciation Fund Inc, andreceived compensation of approximately $57,950, $59,500,$61,300, $61,300 and $66,050, respectively, in 1999, 2000, 2001,2002 and 2003. .. consider a demand from shareholders of theProprietary Funds Defendant Dorsett signed the materially falseand misleading Prospectuses filed with the SEC in each year from1999 to 2004 for' the Proprietary Funds on which Dorsett served asa Board member or Trustee .
(3 9) Defendant Jaffe served on the Boards for at least twenty-sevenProprietary Funds during the Class Period, including Smith Barne y
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Mid Cap Cote Fund and Smith Barney Appreciation Fund Inc .., andreceived compensation of approximately $45,100, $58,700,$115,000, $60,900 and $58,250, respectively, in 1999, 2000, 2001,2002 and 2003 Defendant Jaffe signed the materially false andmisleading Prospectuses filed with the SEC in each year from 1999to 2004 for the Proprietary Funds on which Jaffe served as a Board
member or Trustee -
(40) Defendant Kaufman served on the Boards for at least fifty-sixProprietary Funds during the Class Period, including Smith BarneyMid Cap Core Fund and Smith Barney Appreciation Fund Inc, andreceived compensation of approximately $110,650, $114,400,
$115,000, $114,700 and $119,350, respectively, in 1999, 2000,2001, 2002 and 2003 Defendant Kaufman signed the materially
false and misleading Prospectuses filed with the SEC in each yearfrom 1999 to 2004 for the Proprietary Funds on which Kaufmanserved as a Board member or Trustee .
(41) Defendant McCann served on the Boards for at least twenty-sevenProprietary Funds during the Class Period, including Smith BarneyMid Cap Core Fund and Smith Barney Appreciation Fund inc , andreceived compensation of approximately $58,050, $59,500,$61,300, $62,400 and $66,050, respectively, in 1999, 2000, 2001,
2002 and 2003 Defendant McCann signed the materially falseand misleading Prospectuses filed with the SEC in each year fiom1999 to 2004 for the Proprietary Funds on which McCann servedas a Board member or Trustee .,
(42) Defendant Rose served on the Boards for at least twenty-sevenProprietary Funds during the Class Period, including Smith BarneyMid Cap Core Fund and Smith Barney Appreciation Fund Inc .., andreceived compensation of approximately $53,500, $59,500,$61,300, $58,050 and $63,000, respectively, in 1999, 2000, 2001,2002 and 2003 . Defendant Rose signed the materially false andmisleading Prospectuses filed with the SEC in each year from 1999to 2004 for the Proprietary Funds on which Rose served as a Boardmember or Trustee..
(43) Defendant Ellis served on the Boards for- at least thirty-fourProprietary Funds during the Class Period, including Smith BarneyAllocation Series Inc .., and received compensation ofapproximately $50,600, $54,900, $52,132, $50,900 and $63,800,respectively, in 1999, 2000, 2001, 2002 and 2003 . Defendant Ellis
signed the materially false and misleading Prospectuses filed withthe SEC in each year from 1999 to 2003 for the Proprietary Funds
on which Ellis served as a Board member or Trustee
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(44) Defendant Kamesar served on the Boards for at least thirty-fourProprietary Funds during the Class Period, including Smith BarneyAllocation Series Inc.., and received compensation ofapproximately $52,600, $55,100, $51,932, $50,000 and $63,900,
respectively, in 1999, 2000, 2001, 2002 and 2003 DefendantKamesar signed the materially false and misleading Prospectusesfiled with the SEC in each year from 1999 to 2003 for theProprietary Funds on which Kamesar served as a Board member orTrustee
(45) Defendant Murphy served on the Boards for at least thirty-four
Proprietary Funds during the Class Period, including Smith BarneyAllocation Series Inc ., and received compensation of
approximately $39,900 and $64,100, respectively, in 2002 and2003 . Defendant Murphy signed the materially false andmisleading Prospectuses filed with the SEC in each year from 2002to 2003 for the Proprietary Funds on which Murphy served as aBoard member or Trustee .
(46) Defendant Frayn served on the Board for at least one ProprietaryFund during the Class Period, including Smith Barney ShearsonFundamental Value Fund, and received compensation ofapproximately $11,000, $9,300, $10,400, $10,000 and $22,500,
respectively, in 1999, 2000, 2001, 2002 and 200 3 . Defendant
Frayn signed the materially false and misleading Prospectuses filedwith the SEC in at least 2000 to 2003 for the Proprietary Funds onwhich Frayn served as a Board member or Truste e
(47) Defendant Johnson served on the Board for at least one ProprietaryFund during the Class Period, including Smith Barney ShearsonFundamental Value Fund, and received compensation ofapproximately $7,700, $10,000 and $24,000, respectively, in 2001,
2002 and 2003 ,.Defendant Johnson signed the materially false and
misleading Prospectuses filed with the SEC in each year, from 2001to 2004 for the Proprietary Funds on which Johnson served as aBoard member or Trustee
(48) Defendant Maiyatt served on the Board for' at least one ProprietaryFund during the Class Period, including Smith Barney ShearsonFundamental Value Fund, and received compensation of'approximately $11,000, $9,400, $10,500, $10,000 and $22,500,respectively, in 1999, 2000, 2001, 2002 and 2003 .. DefendantMaryatt signed the materially false and misleading Prospectusesfiled with the SEC in at least 2000 to 2004 for the ProprietaryFunds on which Maryatt served as a Board member or Trustee ..
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(49) Defendant Viscione served on the Board for at least oneProprietary Fund during the Class Period, including Smith BarneyShearson Fundamental Value Fund, and received compensation ofapproximately $11,000, $9,300, $10,400, $10,000 and $22,500,respectively, in 1999, 2000, 2001, 2002 and 2001 DefendantViscione signed the materially false and misleading Prospectusesfiled with the SEC in at least 2000 to 2004 for the Proprietary
Funds on which Viscione served as a Board member or Trustee ,
(50) Defendant Cohen served on the Boards for at least seventeenProprietary Funds during the Class Period, including Travelers
Series Fund Inc . formally known as Smith Barney Travelers SeriesFund Inc, and received compensation of approximately $27,800,
$25,500, $25,600, $25,500 and $25,500, respectively, in 1999,2000, 2001, 2002 and 2003 Defendant Cohen signed thematerially Use and misleading Prospectuses filed with the SEC inat least 2000 to 2004 for the Proprietary Funds on which Cohen
served as a Board member or Trustee .
(51) Defendant Frankel served on the Boards for at least twenty-fourProprietary Funds during the Class Period, including Smith BarneyInternational All Cap Growth Portfolio, and received compensationof approximately $79,450, $72,850, $77,600, $73,450 and$83,900, respectively, in 1999, 2000, 2001, 2002 and 2003 ..
Defendant Frankel signed the materially false and misleadingProspectuses filed with the SEC in each year from 1999 to 2004for the Proprietary Funds on which Frankel served as a Boardmember or Trustee .
(52) Defendant Gellert served on the Boards for at least seventeenProprietary Funds during the Class Period, including TravelersSeries Fund Inc formally known as Smith Barney Travelers Series
Fund Inc ., and received compensation of approximately $22,700,$28,800, $29,600, $25,500 and $25,400, respectively, in 1999,2000, 2001, 2002 and 2003 . Defendant Gellert signed thematerially false and misleading Prospectuses filed with the SEC inat least 2000 to 2004 for the Proprietary Funds on which Gellertserved as a Board member or Trustee .
(53) Defendant Greeven served on the Boards for at least seventeenProprietary Funds during the Class Period, including TravelersSeries Fund Inc, formally known as Smith Barney Travelers SeriesFund Inc, and received compensation of approximately $25,800,$27,600, $29,400, $27,100 and $27,100, respectively, in 1999,2000, 2001, 2002 and 2003 . Defendant Greeven signed thematerially false and misleading Prospectuses filed with the SEC i n
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each year fiom 1999 to 2004 for the Proprietary Funds on which
Greeven served as a Board member or Trustee .
(54) Defendant Heilbron served on the Boards for at least seventeenProprietary Funds during the Class Period, including Smith BarneyInternational All Cap Growth Portfolio, and received compensation
of approximately $29,600, $29,600, $29,500, $27,100 and$27,100, respectively, in 1999, 2000, 2001, 2002 and 2003Defendant Heilbron signed the materially false and misleadingProspectuses filed with the SEC in each year from 1999 to 2004for the Proprietary Funds on which Heilbzon served as a Board
member or, Trustee . .
(55) Defendant Cucchi served on the Boards for at least eightProprietary Funds during the Class Period, including Smith BarneySB Adjustable Rate Income Fund, and received compensation ofapproximately $38,300, $30,100, $44,400 and $50,400,respectively, in 2000, 2001, 2002 and 2003 Defendant Cucchisigned the materially false and misleading Prospectuses filed withthe SEC in at least 2002 to 2003 for the Proprietary Funds onwhich Cucchi served as a Board member or Trustee ..
(56) Defendant Pavia served on the Boards for at least nine ProprietaryFunds during the Class Period, including Smith Barney SB
Adjustable Rate Income Fund, and received compensation ofapproximately $18,350, $40,600, $57,800 and $51,625,respectively, in 2000, 2001, 2002 and 2003 . Defendant Paviasigned the materially false and misleading Prospectuses filed withthe SEC in at least 2002 to 2003 for the Proprietary Funds on
which Pavia served as a Board member or Trustee ..
(57) Defendant Barber served on the Boards for at least sixteenProprietary Funds during the Class Period, including SalomonBrothers High Yield Bond Fund, Salomon Brothers InternationalEquity Fund, Salomon Brothers Large Cap Growth Fund, SalomonBrothers Short/Intermediate US Government Fund, SalomonBrothers Small Cap Growth Fund, Salomon Brothers Capital Fundand Salomon Brothers Investors Value Fund, and receivedcompensation of approximately $135,100, $136,359 and $111,350,
respectively, in 1999, 2000 and 2001 . Defendant Barber signedthe materially false and misleading Prospectuses filed with theSEC in each year from 1999 to 2001 for the Proprietary Funds onwhich Barber served as a Board member or Truste e
(58) Defendant Morong served on the Boards for at least thirty-sevenProprietary Funds during the Class Period, including Smith BarneyLarge Cap Core Fund, and received compensation o f
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approximately $92,000, $93,500, $117,900, $90,500 and $80, 300,
respectively, in 1999, 2000, 2001, 2002 and 2003 DefendantMorong signed the materially false and misleading Prospectusesfiled with the SEC in each year from 1999 to 2003 for the
Proprietary Funds on which Morong served as a Board member or
Trustee
(59) Defendant Robb served on the Boards for at least thirty-eightProprietary Funds during the Class Period, including Smith BarneyLarge Cap Core Fund, and received compensation ofapproximately $67,500, $63,000, $90,300, $72,500 and $80,600,
respectively, in 1999, 2000, 2001, 2002 and 2003 . Defendant
Robb signed the materially false and misleading Prospectuses filedwith the SEC in at least 2000 to 2003 for the Proprietary Funds onwhich Robb served as a Board member or Trustee .
(60) Defendant Gilley served on the Boards fbr at least thirty-five
Proprietary Funds during the Class Period, including Smith BarneyLarge Cap Core Fund, and received compensation ofapproximately $65,250, $70,500, $76,867 and $47,500,respectively, in 1999, 2000, 2001 and 2002 . Defendant Gilley
signed the materially false and misleading Prospectuses filed withthe SEC in each year from 1999 to 2002 for the Proprietary Fundson which Gilley served as a Board member or Truste e
(61) Defendant Lawless served on the Boards for at least fourProprietary Funds during the Class Period, including SalomonBrothers Capital Fund and Salomon Brothers Investors ValueFund, and received compensation of' approximately $29,000,
$31,375 and $15,250, respectively, in 1999, 2000 and 2001 .
Defendant Lawless signed the materially false and misleadingProspectuses filed with the SEC in each year from 1999 to 2001for the Proprietary Funds on which Lawless served as a Board
member or Trustee ..
(62) Defendant Woods served on the Boards for at least thirty-eightProprietary Funds during the Class Period, including SalomonFunds Trust, and received compensation of approximately $66,000and $44,250, respectively, in 1999 and 2000 . Defendant Woodssigned the materially false and misleading Prospectuses filed withthe SEC in at least 1999 for the Proprietary Funds on which woods
served as a Board member or Trustee .
(63) Defendant Brody served on the Boards for at least twentyProprietary Funds during the Class Period, including Smith BarneyMid Cap Core Fund and Smith Barney Appreciation Fund Inc, andreceived compensation of approximately $138,600, $138,600 and
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$141,650, respectively, in 1999, 2000 and 2001, Defendant Brodysigned the materially false and misleading Prospectuses filed withthe SEC in each year from 1999 to 2002 for the Proprietary Fundson which Brody served as a Board member or Truste e
(64) Defendant Auch served on the Boards for at least two Proprietary
Funds during the Class Period, including Smith Barney AllocationSeries Inc , and received compensation of approximately $50,600,$52,800 and $52,000, respectively, in 1999, 2000 and 2001Defendant Auch signed the materially false and misleadingProspectuses filed with the SEC in each year from 1999 to 2001for the Proprietary Funds on which Auch served as a Boardmember or Trustee ,
(65) Defendant Paulsell served on the Board for at least one ProprietaryFund during the Class Period, including Smith Barney ShearsonFundamental Value Fund, and received compensation ofapproximately $9,000, $9,200, $10,400, $10,000 and $63,627,respectively, in 1999, 2000, 2001, 2002 and 2003 . DefendantPaulsell signed the materially false and misleading Prospectusesfiled with the SEC in at least 2000 to 2002 for the ProprietaryFunds on which Paulsell served as a Board member or Truste e
(66) Defendant Weston served on the Board for at least one Proprietary
Fund during the Class Period, including Smith Barney ShearsonFundamental Value Fund, and received compensation ofapproximately $10,000, $9,200, $10,300 and $10,000,respectively, in 1999, 2000, 2001 and 2002 .. Defendant Westonsigned the materially false and misleading Prospectuses filed withthe SEC in at least 2000 to 2002 for the Proprietary Funds onwhich Weston served as a Board member or Trustee .
(67) Defendant Andrews served on the Board for at least one
Proprietary Fund during the Class Period, including Smith BarneySheaison Fundamental Value Fund, and received compensation of'approximately $11,000, $9,200 and $10,250, respectively, in 1999,2000 and 2001 .. Defendant Andrews signed the materially falseand misleading Prospectuses filed with the SEC in at least 2000 for'the Proprietary Funds on which Andrews served as a Boardmember or Trustee
(68) Defendant Atkins served on the Boards for at least two ProprietaryFunds during the Class Period, including Travelers Series FundInc . formally known as Smith Barney Travelers Series Fund Inc .,and received compensation of approximately $27,600, $25,300 and$29,200, respectively, in 1999, 2000 and 2001 . Defendant Atkinssigned the materially false and misleading Prospectuses filed wit h
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the SEC in each year from 1999 to 2002 for the Proprietary Fundson which Atkins served as a Board member or Trustee .
(69) Defendant Gaguine served on the Board for at least one ProprietaryFund during the Class Period, including Salomon BrothersOpportunity Funds, and received compensation of approximately$2,000, $1,500, $2,000, $1,500 and $3,500, respectively, in 1999,2000, 2001, 2002 and 2003 .. Defendant Gaguine signed thematerially false and misleading Prospectuses filed with the SEC ineach year from 1999 to 2003 for the Proprietary Funds on whichGaguine served as a Board member or Truste e
(70) Defendant Kochman served on the Board for at least oneProprietary Fund during the Class Period, including SalomonBrothers Opportunity Fund Inc, and received compensation ofapproximately $2,000, $1,500, $2,500, $1,500 and $4,500,respectively, in 1999, 2000, 2001, 2002 and 2003 DefendantKochman signed the materially false and misleading Prospectusesfiled with the SEC in each year fiom 1999 to 200 3 for theProprietary Funds on which Kochman served as a Board memberor Trustee
(71) Defendant Sonnenschein served on the Board for at least one
Proprietary Fund during the Class Period, including SalomonBrothers Opportunity Funds, and received compensation ofapproximately $2,000, $1,500, $2,500, $1,500 and $3,500,respectively, in 1999, 2000, 2001, 2002 and 2003, DefendantSonnenschein signed the materially false and misleading
Prospectuses filed with the SEC in each year from 1999 to 2003for the Proprietary Funds on which Sonnenschein served as aBoard member or Trustee .,
('72) Defendant Warren served on the Boards for at least thirty-fiveProprietary Funds during the Class Period, including Smith BarneyLarge Cap Core Fund, and received compensation ofapproximately $62,750, $68,250, $90,400 and $55,000,respectively, in 1999, 2000, 2001 and 2002 . Defendant Warrensigned the materially false and misleading Prospectuses filed withthe SEC in each year from 1999 to 2002 for the Proprietary Fundson which Warren served as a Board member or Truste e
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FRAUD-ON-THE MARKET ALLEGATIONS
301 At all relevant times , the market for the Proprietary Funds was efficient for, inter
alia, the following reasons :
a) The Proprietary Funds met the requirements for listing, and were listedand actively traded through a highly efficient and automated market ;
b) As regulated entitles, periodic public reports concerning the ProprietaryFunds were regularly filed with the SEC ;
c) Persons associated with the Proprietary Funds regularly communicatedwith public investors via established market communication mechanisms,including through regular disseminations of press releases on the nationalcircuits of major newswire services and through other wide-ranging publicdisclosures, such as communications with the financial press and othersimilar reporting services ; and
d) The Proprietary Funds were followed by several securities analystsemployed by major brokerage firms who wrote reports that weredistributed to the sales force and certain customers of their respectivebrokerage firms . Each of these reports was publicly available and enteredthe public marketplace .
As a result of the foregoing, the market for the Proprietary Funds promptly digested curren t
information regarding the Proprietary Funds from all publicly-available sources and reflecte d
such information in the respective Proprietary Fund's Net Asset Value ("NAV") as well as th e
market trend and demand for the shares of the Proprietary Funds . Investors who purchased or
otherwise acquired shares or interests in the Proprietary Funds relied on the integrity of the
market for such securities . Under the circumstances, all purchasers of the Proprietary Funds
during the Class Period suffered similar injury through their purchase or acquisition of the
Proprietary Funds at prices that did not reflect the risks and costs of the continuing course of
conduct alleged herein, and a presumption of reliance applies .
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CLASS ACTION ALLEGATION S
304. Plaintiffs bring this action as a class action pursuant to Rule 23(a) and (b)(3) of
the Federal Rules of Civil Procedure on behalf' of a class of all persons or entities that purchased
or held one or more shares or other ownership units of proprietary mutual funds organized and
offered by SSB and its affiliates between March 22, 1999 and Match 22, 2004, inclusive (the
"Class Period"), and who were damaged thereby (the "Class") Excluded from the Class are
Defendants, members of their immediate families and their legal representatives, heirs,
successors, or assigns and any entity in which Defendants have or had a controlling interest. .
305 . The Class is divided into two subclasses-the Purchasers Subclass and th e
Holders Subclass The Purchasers Subclass includes all persons or entities that purchased one or
more shares or other ownership units of the Proprietary Funds at any time during the Class
Period (the "Purchasers Subclass") the Holders Subclass includes all persons or entities that
held one or more shares or other ownership units of the Proprietary Funds at any time during the
Class Period (the "Holders Subclass") .
306 The members of the Class are so numerous that joinder of all members i s
impracticable While the exact number of the Class members is currently unknown to Plaintiffs
at this time, Plaintiffs believe that there are thousands of members in the proposed Class . Record
owners and other members of the Class may be identified from records maintained by the
Proprietary Funds and other Defendants and may be notified of the pendency of this action by
mail, using a form of'notice similar to that customarily used in securities class actions .
307 Plaintiff's' claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by Defendants' wrongful conduct in violation of the
federal securities laws and other laws that are complained of herei n
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308 . Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class Among the
questions of law and fact common to the Class are :
a) Whether Defendants' acts and conduct as alleged herein violated thefederal securities laws, the Investment Company Act, and state lawgoverning fiduciary duties ;
b) Whether Defendants failed to disclose to Plaintiffs during the Class Periodmaterial facts about the business, sales practices and sources ofcompensation of SSB brokers and financial advisors ;
c) Whether Defendants failed to disclose to Plaintiffs during the Class Periodmaterial facts about the business, operations, kickbacks and revenue-sharing fees and expenses of the Proprietary Funds ; and
d) The amount of damages the members of the Class have sustained and theproper measure of such damages ,
309 . A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy because joinder of all members is impracticable . Furthermore,
as the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it virtually impossible for members of the Class to
individually redress the wrongs alleged herein There will be no difficulty in the management of
this action as a class actio n
310 . A class action will redress Defendants' wrongful conduct described herein,
:including Defendants' constant and improper pressure on brokers to steer Plaintiffs to invest in
Proprietary Funds; the Defendants' creation of a Strategic Partners program to favor their
Strategic Partners who paid the Defendants undisclosed sums to be favored by the SSB brokers
and financial advisors; the improper use of Rule 12b-1 fees, Soft Dollars and excessive
commissions to further this scheme; and the Defendants' intentionally concealing their improper
conduct from Plaintiffs and the investing public .
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FIRST CLAIM FOR RELIE F
ON BEHALF OF THE PURCHASERS SUBCLASS AGAINST THEPROPRIETARY FUNDS REGISTRANTS, THE DIRECTOR DEFENDANTS ,
AND SSB FOR VIOLATIONS OFSECTION 11 OF THE SECURITIES AC T
311 . Members of the Purchasers Subclass repeat and reallege each and every allegatio n
contained above as if' fully set forth herein, except that, for purposes of this claim, members o f
the Purchasers Subclass expressly exclude and disclaim any allegation that could be construed a s
alleging fraud or intentional or reckless misconduct .
312 This claim is brought pursuant to Section 11 of the Securities Act, 15 U .S .C .
§ 77k, on behalf of the Purchasers Subclass against the Proprietary Funds Registrants, th e
Director Defendants and SSB, the Proprietary Funds Distributor .
313 . Prior to purchasing shares or like interests of one or more of the Proprietary
Funds, members of'the Purchasers Subclass were provided with one of the materially false and
misleading Proprietary Funds Prospectuses . Members of the Purchasers Subclass purchased
shares of one or more of the Proprietary Funds traceable to the materially Use and misleading
Prospectuses and were damaged thereby
314 . As set forth herein, when they became effective, all of the Proprietary Funds '
Prospectuses issued during the Class Period were materially false and misleading as they omitte d
the following material facts :
a) that SSB improperly directed Plaintiffs and other members of the Class to
certain Proprietary Funds because the entities operating such funds hadmade substantial payments to SSB to steer Plaintiffs and other members ofthe Class to invest in the Proprietary Funds ;
b) that to incentivize its affiliated broker-dealers and brokers to recommendthe purchase of shares of the Proprietary Funds, SSB and the ProprietaryFunds paid undisclosed increased compensation to broker-dealers andbrokers on sales of the Proprietary Funds' shares ;
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c) that by paying brokers to aggressively steer their clients to the ProprietaryFunds, the Investment Adviser Defendants were knowingly aiding andabetting a breach of fiduciary duties, and profiting from the brokers'improper conduct ;
d) that any economies of scale achieved by marketing of the ProprietaryFunds to new investors were not passed on to the Proprietary Funds
investors ; on the contrary, as the Proprietary Funds grew, fees charged tothe Proprietary Funds also increased, and shareholders' investments weredivided to avoid promised breakpoint reductions in sales charges ;
e) that the Proprietary Funds were advised to and did improperly investPlaintiff's' and other members of the Class's funds into the securities of
certain of SSB's investment-banking clients to foster SSB's investmentbanking business, without regard to Fund's investment objectives, theFund's stated investment-selection process, or the soundness of theinvestment ;
f) that the Proprietary Funds and the Investment Adviser Defendantssystematically overcharged fees and expenses to Plaintiffs and othermembers of the Class and improperly siphoned money out of the funds ;
g) that the Director Defendants failed to monitor and supervise the
Investment Adviser Defendants and that, as a consequence, the InvestmentAdviser Defendants were able to systematically skim millions andmillions of dollars from the Proprietary Funds ;
h) that the Investment Adviser Defendants authorized the payment from
plaintiffs and other members of the Class of excessive commissions tobroker-dealers in exchange for preferential marketing services and thatsuch payments were in breach of their' fiduciary duties, in violation ofSection 12(b) of the Investment Company Act, and unprotected by any"safe harbor";
i) that the Investment Adviser Defendants directed brokerage payments toSSB-affiliated broker-dealers that pushed clients to invest in theProprietary Funds, which was a fbrm of marketing that was not disclosedin or authorized by the Funds Rule 12b-I plans ;
j) that the Proprietary Funds' Rule 12b-1 plans failed to comply with Rule12b-1, and such plans were not properly evaluated by the ProprietaryFunds' Directors and Trustees and there was not a reasonable likelihoodthat the plans would benefit the Proprietary Funds and their shareholders ;
k) that Defendants improperly used Soft Dollars and excessive commissions,paid from the Proprietary Funds assets, to pay for overhead expenses, thecost of which should have been borne by SSB or Citigroup and theInvestment Adviser- Defendants and not the Proprietary Funds' investors
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1} That SSB's employees and affiliates steered clients into certain classes ofshares of the Proprietary Funds that were the most beneficial to SSB, andthat SSB received more money from the sale of Class B share s
315 . Each of the Director Defendants either personally or through an attorney -in-fact ,
signed the Prospectuses for one or more of the Proprietary Funds or was a director or perso n
performing similar functions for the Proprietary Funds Registrants during the Class Period .
316 . The Proprietary Funds Distributor acted as an underwriter for each of th e
Proprietary Funds within the meaning of the Securities Act and is therefore liable under th e
Securities Act..
317 Each of the Proprietary Funds Registrants issued, caused to be issued an d
participated in the issuance of its respective misleading Proprietary Fund Prospectus that omitte d
material facts and is statutorily liable under Section 11 .
318 . At the time they purchased the Proprietary Funds shares traceable to the defectiv e
Prospectuses, members of the Purchasers Subclass were without knowledge of the fact s
concerning the material omissions alleged herein and could not reasonably have possessed suc h
knowledge This claim was brought within the applicable statute of limitations .
SECOND CLAIM FOR RELIE F
ON BEHALF OF THE PURCHASERS SUBCLASS AGAINSTTHE PROPRIETARY FUNDS FOR VIOLATIONS OF
SECTION 12(A)(2) OF THE SECURITIES AC T
319, Members of the Proprietary Funds Purchasers Subclass repeat and reallege each
and every allegation contained above as if fully set forth herein, except that, for purposes of'thi s
claim, members of the Purchasers Subclass expressly exclude and disclaim any allegation tha t
could be construed as alleging fraud or intentional or reckless misconduct ..
320 . This claim is brought pursuant to Section 12(a)(2) of the Securities Act, 15 U .S . C
§ 77l(a)(2), on behalf of the Purchasers Subclass against the Proprietary Funds
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321 . Each of the Proprietary Funds was the seller, or the successor-in-interest to the
seller, within the meaning of the Securities Act, fbr one or more of the respective fund shares
sold to members of the Purchasers Subclass because it either : (a) transferred title to members of
the Proprietary Funds Purchasers Subclass of the Proprietary Funds ; (b) transferred title to shares
of the Proprietary Funds to the Proprietary Funds Distributor that in turn sold shares of the
Proprietary Funds as an agent for the Proprietary Funds ; and/or (c) solicited the purchase of
shares of the Proprietary Funds by members of the Purchasers Subclass ..
322 . Each of the Proprietary Funds issued, caused to be issued and/or participated in
the issuance of its respective misleading Prospectus that omitted materials facts and is statutoril y
liable under Section 1 2
323 . Prior to purchasing shares of the Proprietary Funds, members of the Purchasers
Subclass were provided with a Proprietary Fund Prospectus Members of the Purchasers
Subclass purchased shares of the Proprietary Funds traceable to a misleading Prospectus and
were damaged thereby
324 As set forth herein, when they became effective, the Prospectuses were materially
false and misleading as they omitted the following material facts :
a) that SSB improperly directed Plaintiffs and other members of the Class tocertain Proprietary Funds because the entities operating such funds hadmade substantial payments to SSB to steer Plaintiffs and other members of
the Class to invest in the Proprietary Funds ;
b) that to incentivize its affiliated broker-dealers and brokers to recommendthe purchase of shares of the Proprietary Funds, SSB and the ProprietaryFunds paid undisclosed increased compensation to broker-dealers andbrokers on sales of the Proprietary Funds' shares ;
c) that by paying brokers to aggressively steer their clients to the ProprietaryFunds, the Investment Adviser Defendants were knowingly aiding andabetting a breach of fiduciary duties, and profiting from the brokers'improper conduct ;
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d) that any economies of scale achieved by marketing of the ProprietaryFunds to new investors were not passed on to the Proprietary Funds
investors ; on the contrary, as the Proprietary Funds grew, fees charged to
the Proprietary Funds also increased, and shareholders' investments weredivided to avoid promised breakpoint reductions in sales charges ;
e) that the Proprietary Funds were advised to and did improperly investPlaintiffs' and other members of the Class's funds into the securities ofcertain of SSB's investment-banking clients to foster SSB's investmentbanking business, without regard to Fund's investment objectives, theFund's stated investment-selection process, or the soundness of the
investment ;
f) that the Proprietary Funds and the Investment Adviser Defendantssystematically overcharged fees and expenses to Plaintiffs and othermembers of the Class and improperly siphoned money out of the funds ;
g) that the Director Defendants failed to monitor and supervise theInvestment Adviser Defendants and that, as a consequence, the InvestmentAdviser Defendants were able to systematically skim millions and
millions of'dollars from the Proprietary Funds ;
h) that the Investment Adviser Defendants authorized the payment fromplaintiffs and other members of the Class of excessive commissions tobroker-dealers in exchange for preferential marketing services and thatsuch payments were in breach of their fiduciary duties, in violation of
Section 12(b) of the Investment Company Act, and unprotected by any
"safe harbor" ;
i) that the Investment Adviser Defendants directed brokerage payments to
SSB-affiliated broker-dealers that pushed clients to invest in theProprietary Funds, which was a fbrm of marketing that was not disclosed
in or authorized by the Funds Rule 12b-1 plans ;
j) that the Proprietary Funds' Rule 12b-1 plans failed to comply with Rule12b-1, and such plans were not properly evaluated by the ProprietaryFunds' Directors and Trustees and there was not a reasonable likelihoodthat the plans would benefit the Proprietary Funds and their shareholders ;
k) that Defendants improperly used Soft Dollars and excessive commissions,paid from the Proprietary Funds assets, to pay for overhead expenses, thecost of which should have been borne by SSB or Citigroup and theInvestment Adviser Defendants and not the Proprietary Funds' investors ,
I) That SSB's employees and affiliates steered clients into certain classes ofshares of'the Proprietary Funds that were the most beneficial to SSB, andthat SSB received more money fiom the sale of'Class B shares .
- 122 -
325 . Members of the Purchasers Subclass have sustained damages due to the
Proprietary Funds' violations
326 At the time they purchased the Proprietary Funds shares traceable to the defectiv e
Prospectuses, members of the Purchasers Subclass were without knowledge of the fact s
concerning the material omissions alleged herein and could not reasonably have possessed such
knowledge, This claim was brought within the applicable statute of limitations .
THIRD CLAIM FOR RELIE F
ON BEHALF OF THE PURCHASERS SUBCLASSAGAINST SSB FOR VIOLATIONS OF
SECTION 12(A)(2) OF THE SECURITIES AC T
327 Members of the Purchasers Subclass repeat and reallege each and every allegation
contained above as if fully set forth herein, except that, for purposes of this claim, members o f
the Purchasers Subclass expressly exclude and disclaim any allegation that could be construed a s
alleging fraud or intentional or reckless misconduct ..
328 .. This claim is brought pursuant to Section 12(a)(2) of the Securities Act, 15 U S C
§ 771(a)(2), on behalf' of the Purchasers Subclass against SSB for SSB 's failure to disclose sales
practices that created an insurmountable conflict-of-interes t
329 SSB was the seller, or the successor in interest to the seller, within the meaning of
the Securities Act, f'or one or more of the respective fund shares sold to members of' the
Purchasers Subclass because it either : (a) transferred title to shares of the Proprietary Funds to
members of the Purchasers Subclass; (b) transferred title to shares of the Proprietary Funds to the
Proprietary Funds Distributor that in turn sold shares of the Proprietary Funds as an agent for the
Proprietary Funds ; and/or (c) solicited the purchase of shares of the Proprietary Funds by
members of'the Purchasers Subclass .
- 123 -
330 During its sale of Proprietary Funds to members of the Purchasers Subclass, SS B
failed to disclose the inducements alleged herein that its financial advisors received and created
an insurmountable conflict-of interest . SSB also caused to be issued to members of the
Purchasers Subclass the Prospectuses that failed to disclose that fees and commissions lom the
Proprietary Funds would be used to pay brokers for directing investors into the Proprietary
Funds .
331 .. As set forth herein, when they became effective, all Proprietary Fund s
Prospectuses were misleading as they omitted the following material facts :
a) that SSB improperly directed Plaintiffs and other members of'the Class tocertain Proprietary Funds because the entities operating such funds hadmade substantial payments to SSB to steer Plaintiffs and other members ofthe Class to invest in the Proprietary Funds ;
b) that to incentivize its affiliated broker-dealers and brokers to recommendthe purchase of'shares of the Proprietary Funds, SSB and the ProprietaryFunds paid undisclosed increased compensation to broker-dealers andbrokers on sales of'the Proprietary Funds' shares ;
c) that by paying brokers to aggressively steer their clients to the ProprietaryFunds, the Investment Adviser Defendants were knowingly aiding andabetting a breach of fiduciary duties, and profiting from the brokers'improper conduct ;
d) that any economies of' scale achieved by marketing of the ProprietaryFunds to new investors were not passed on to the Proprietary Fundsinvestors; on the contrary, as the Proprietary Funds grew, fees charged tothe Proprietary Funds also increased, and shareholders' investments weredivided to avoid promised breakpoint reductions in sales charges .
e) that the Proprietary Funds were advised to and did improperly invest
Plaintiffs' and other members of the Class's funds into the securities of'certain of SSB's investment-banking clients to foster SSB's investmentbanking business, without regard to Fund's investment objectives, theFund's stated investment-selection process, or the soundness of theinvestment ;
f) that the Proprietary Funds and the Investment Adviser Defendantssystematically overcharged fees and expenses to Plaintiffs and othermembers of the Class and improperly siphoned money out of the fiends ;
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g) that the Director Defendants failed to monitor and supervise theInvestment Adviser Defendants and that, as a consequence, the InvestmentAdviser Defendants were able to systematically skim millions and
millions of dollars from the Proprietary Funds ;
h) that the Investment Adviser Defendants authorized the payment from
plaintiffs and other members of the Class of excessive commissions tobr-oker-dealers in exchange for preferential marketing services and thatsuch payments were in breach of their fiduciary duties, in violation ofSection 12(b) of the Investment Company Act, and unprotected by any
"safe harbor" ;
i) that the Investment Adviser Defendants directed brokerage payments toSSB-affiliated broker-dealers that pushed clients to invest in theProprietary Funds, which was a form of marketing that was not disclosedin or authorized by the Funds Rule 12b-1 plans ;
j) that the Proprietary Funds' Rule 12b-1 plans failed to comply with Rule12b-1, and such plans were not properly evaluated by the ProprietaryFunds' Directors and Trustees and there was not a reasonable likelihoodthat the plans would benefit the Proprietary Funds and their shareholders ;
k) that Defendants improperly used Soft Dollars and excessive commissions,paid from the Proprietary Funds assets, to pay for overhead expenses, thecost of' which should have been borne by SSB or Citigroup and theInvestment Adviser Defendants and not the Proprietary Funds' investors .
1) That SSB's employees and affiliates steered clients into certain classes ofshares of the Proprietary Funds that were the most beneficial to SSB, andthat SSB received more money from the sale of Class B shares than otherclasses of shares .
Plaintiff and the other members of the Purchasers Subclass have sustained damages due to SSB' s
violations
332 At the time they purchased the Proprietary Funds shares traceable to the defectiv e
Prospectuses, members of the Purchasers Subclass were without knowledge of the fact s
concerning the material omissions alleged herein and could not reasonably have possessed suc h
knowledge This claim was brought within the applicable statute of limitations .
-125-
FOURTH CLAIM FOR RELIEF
ON BEHALF OF THE PURCHASERS SUBCLASS AGAINST CITIGROUP, CGMHI,THE INVESTMENT ADVISER DEFENDANTS AND THE DIRECTOR DEFENDANTS
FOR VIOLATIONS OF SECTION 15 OF THE SECURITIES AC T
333 . Members of the Purchasers Subclass repeat and reallege each and every allegation
contained above, except that for purposes of this claim, members of the Purchasers Subclass
expressly exclude and disclaim any allegation that could be construed as alleging fraud or
intentional or reckless misconduct .
334 . This claim is brought pursuant to Section 15 of the Securities Act agains t
,Citigr-oup, CGMHI, the Investment Adviser Defendants and the Director Defendants as control
persons of the Proprietary Funds, the Proprietary Funds Registrants, the Director Defendants
(with the exception that the Director Defendants are not alleged to be "control persons" of
themselves) and the Proprietary Funds Distributor (with the exception that SSB is not alleged t o
be a "control person" of itself) . It is appropriate to treat these Defendants as a group for pleading
purposes and to presume that the false, misleading, and incomplete information conveyed in the
Prospectuses, public filings, press releases and other publications are the collective actions of
Citigioup, CGMHI, the Investment Adviser Defendants, the Director Defendants, the Proprietary
Funds Distributor, the Proprietary Funds and the Proprietary Funds Registrant s
335 . The Proprietary Funds Registrants, the Director Defendants and the Proprietary
Funds Distributor are liable under Section 11 and/or Section 12 of the Securities Act as set forth
herein
3 36 Each of Citigroup, CGMHI, the Investment Adviser' Defendants and the Director
Defendants was a "control person" of the Proprietary Funds Registrants, the Proprietary Funds,
the Directors Defendants and/or the Proprietary Funds Distributor within the meaning of Sectio n
- 126 -
15 of the Securities Act, by virtue of its position of'operational control and/or ownership, At the
time that members of the Purchasers Subclass purchased shares of'one or more of the Proprietary
Funds-by virtue of their positions of control and authority over the Proprietary Funds
Registrants, the Proprietary Funds, the Director Defendants and the Proprietary Funds
Distributor-Citigrooup, CGMHI, the Investment Adviser Defendants and the Director
Defendants, directly and indirectly, had the power and authority, and exercised the same, to
cause the Proprietary Funds Registrants, the Proprietary Funds, the Director Defendants and the
Proprietary Funds Distributor to engage in the conduct complained of herein Citigroup,
CGMHI, the Investment Adviser Defendants and the Director Defendants issued, caused to be
issued, and participated in the issuance of materially false and misleading statements in the
Prospectuses .
337 . Pursuant to Section 15 of the Securities Act, by reason of the fbregoing ,
Citigroup, CGMHI, the Investment Adviser Defendants and the Director Defendants are liable to
members of the Purchasers Subclass to the same extent as are the Proprietary Funds, the
Proprietary Funds Registrants, the Director Defendants and the Proprietary Funds Distributor for
their primary violations of Section 11 of the Securities Act and for the Proprietary Funds and
SSB for their primary violation of Section 12(a)(2) of the Securities Act .
338 . By virtue of the foregoing, members of the Purchasers Subclass are entitled to
damages against Citigroup, CGMHI, the Investment Adviser Defendants and the Director
Defendants
-127-
FIFTH CLAIM FOR RELIEF
ON BEHALF OF THE PURCHASERS SUBCLASS AGAINST SSB AND THEPROPRIETARY FUNDS FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE
ACT AND RULES 10b-5(b) AND 10b-10 PROMULGATED THEREUNDE R
339 . Members of the Purchasers Subclass repeat and reallege each and every allegation
contained above as if fully set forth herein except for claims brought pursuant to the Securitie s
Act .
340 This claim is asserted by the Purchasers Subclass against SSB and the Proprietar y
Funds and is based on Section 10(b) of the Exchange Act, 15 U S C . § 78j(b), and Rules lob-5
and l Ob-10 , 17 C . F .R § 240 . l Ob-5, -10, promulgated thereunder .
341 .. During the Class Period, SSB and the Proprietary Funds employed manipulativ e
and deceptive devices and contrivances in that they omitted to state material facts, i .e ., disclose
the improper incentives and compensation offered and provided to SSB broker-dealers, brokers
and financial advisors in connection with their sales of the Proprietary Funds that created an
insurmountable conflict of interest (which Plaintiffs and other members of the Class were not
informed of or otherwise aware of) and that such incentives were intended to and did deceive the
Purchasers Subclass, and caused members of the Purchasers Subclass to purchase Proprietar y
Funds and consequently suffer damages .
342 SSB and the Proprietary Funds, individually and in concert, directly an d
indirectly, by the use, means or' instrumentalities of interstate commerce and/or of the mails ,
engaged and participated in a continuous course of conduct to conceal the adverse materia l
information about the improper inducements alleged herein .
343 .. SSB and the Proprietary Funds employed manipulative and deceptive devices a s
alleged herein to unlawfully manipulate and profit from excess fees and commissions paid to i t
as a result of its undisclosed incentives to peddle the Proprietary Funds as well as benefit from
- 128 -
the improper inducements offered through the sales campaigns alleged above which operated a s
a fraud and deceit upon members of the Purchasers Subclass .
344 . SSB and the Proprietary Funds had actual knowledge of the omissions of materia l
facts set forth herein, or acted with reckless disregard for the truth in that it failed to ascertain
and to disclose such facts, even though such facts were available to it SSB's material omissions
were done knowingly or recklessly and for the purpose and effect of'concealing the truth .. As set
forth herein, all Proprietary Funds Prospectuses, Annual Reports, Semi-Annual Reports and SATs
filed with the SEC during the Class Period were misleading as they omitted the followin g
material facts :
a) that SSB improperly directed Plaintiffs and other members of the Class tocertain Proprietary Funds because the entities operating such fiends hadmade substantial payments to SSB to steer Plaintiffs and other members ofthe Class to invest in the Proprietary Funds ;
b) that to incentivize its affiliated broker-dealers and brokers to recommendthe purchase of shares of the Proprietary Funds, SSB and the ProprietaryFunds paid undisclosed increased compensation to broker-dealers andbrokers on sales of the Proprietary Funds' shares ;
c) that by paying brokers to aggressively steer their clients to the ProprietaryFunds, the Investment Adviser Defendants were knowingly aiding andabetting a breach of fiduciary duties, and profiting from the brokers'
improper conduct ;
d) that any economies of scale achieved by marketing of the ProprietaryFunds to new investors were not passed on to the Proprietary Funds
investors; on the contrary, as the Proprietary Funds grew, fees charged tothe Proprietary Funds also increased, and shareholders' investments were
divided to avoid promised breakpoint reductions in sales charges ;
e) that the Proprietary Funds were advised toPlaintiffs' and other members of the Class'scertain of SSB's investment-banking clientsbanking business, without regard to Fund'sFund's stated investment-selection process,investment ;
and did improperly investfunds into the securities ofto foster SSB's investmentinvestment objectives, theor the soundness of the
- 129 -
f) that the Proprietary Funds and the Investment Adviser Defendantssystematically overcharged fees and expenses to Plaintiff's and othermembers of the Class and improperly siphoned money out of the funds ;
g) that the Director Defendants failed to monitor- and supervise theInvestment Adviser Defendants and that, as a consequence, the InvestmentAdviser Defendants were able to systematically skim millions and
millions of dollars from the Proprietary Funds ;
h) that the Investment Adviser Defendants authorized the payment fiomplaintiff's and other members of the Class of excessive commissions tobroker-dealers in exchange for preferential marketing services and thatsuch payments were in breach of their fiduciary duties, in violation of
Section 12(b) of the Investment Company Act, and unprotected by any"safe harbor" ;
i) that the Investment Adviser Defendants directed brokerage payments toSSB-affiliated broker-dealers that pushed clients to invest in theProprietary Funds, which was a form of marketing that was not disclosedin or authorized by the Funds Rule 12b-1 plans ;
j) that the Proprietary Funds' Rule 12b-1 plans failed to comply with Rule12b-1, and such plans were not properly evaluated by the ProprietaryFunds' Directors and Trustees and there was not a reasonable likelihood
that the plans would benefit the Proprietary Funds and their shareholders ;
k) that Defendants improperly used Soft Dollars and excessive commissions,paid from the Proprietary Funds assets, to pay for overhead expenses, the
cost of which should have been borne by SSB or Citigroup and theInvestment Adviser Defendants and not the Proprietary Funds' investors .
1) That SSB's employees and affiliates steered clients into certain classes ofshares of the Proprietary Funds that were the most beneficial to SSB, andthat SSB received more money from the sale of Class B shares than otherclasses of'share s
345 .. As a result of the failure to disclose material facts , as set forth above, the market
prices and market trends of the Proprietary Funds were distorted during the Class Period such
that they did not reflect the risks and costs of the continuing course of'conduct alleged herein In
ignorance of the fact that market prices and market trends for the shares were distorted, and
relying directly or indirectly on the false and misleading statements made by SSB and the
Proprietary Funds, or upon the integrity of the market in which the securities trade, and/or on th e
-130-
absence of material adverse information that was known to or recklessly disregarded by SSB but
not disclosed in public statements by SSB and the Proprietary Funds during the Class Period,
members of the Purchasers Subclass bought shares of mutual funds they would not have
otherwise purchased; purchased Proprietary Funds instead of better-performing comparable
funds with a higher rate of return ; and paid excessive fees and commissions for mutual funds
they would not have otherwise purchased and were damaged thereby .
346 .. At the time of'said omissions , members of the Purchasers Subclass were unawar e
of the truth. Had members of the Purchasers Subclass known the truth concerning SSB' s
operations, which were not disclosed by SSB or the Proprietary Funds, members of the
Purchasers Subclass would not have purchased or otherwise acquired their shares or, if they ha d
acquired such shares during the Class Period , they would not have done so at the prices which
they paid
347 By virtue of the foregoing, SSB and the Proprietary Funds have violated Section
l 0(b) of the Exchange Act and Rule 10b-5(b) and Rule I Ob-10 promulgated thereunder ,
348 . As a direct and proximate result of SSB's wrongful conduct, members of the
Purchasers Subclass suffered damages in connection with their purchases and acquisitions o f
Proprietary Funds during the Class Period ..
SIXTH CLAIM FOR RELIEF
ON BEHALF OF THE PURCHASERS SUBCLASS AGAINST THE PROPRIETARYFUNDS REGISTRANTS FOR VIOLATIONS OF SECTION 10(b) O F
THE EXCHANGE ACT AND RULE 10b- 5(b) PROMULGATED THEREUNDER
349, Members of the Purchasers Subclass repeat and reallege each and every allegatio n
contained above as if fully set forth herein except for claims brought pursuant to the Securitie s
Act .
- 131 -
350 This claim is asserted by the Purchasers Subclass against the Proprietary Fund s
Registrants and is based on Section 10(b) of'the Exchange Act, 15 U .S C . § 78j(b), and Rules
I Ob-5 and 17 C F .R. § 240 ..10b-5, promulgated thereunder . .
351 . During the Class Period, the Proprietary Funds Registrants employed
manipulative and deceptive devices and contrivances in that they omitted to state material fact s
in their Prospectuses, i .e ., disclose the improper incentives they offered to SSB to direct investor s
into the Proprietary Funds, which was intended to and, throughout the Class Period, did deceiv e
the Purchasers Subclass, as alleged herein, and caused members of the Purchasers Subclass t o
purchase Proprietary Funds and suffer damages .
352 . The Proprietary Funds Registrants, individually and in conceit, directly and
.indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails ,
engaged and participated in a continuous course of conduct to conceal the adverse material
iinfbrmation about the improper inducements alleged herein ,
353 The Proprietary Funds Registrants employed manipulative and deceptive devices
as alleged herein as they failed to disclose in their Prospectuses that they paid SSB brokers t o
peddle the Proprietary Funds which operated as a fraud and deceit upon members of the
Purchasers Subclass
354 . The Proprietary Funds Registrants had actual knowledge of the omissions of'
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and to disclose such facts, even though such facts were available to them . The
Proprietary Funds Registrants' material omissions were done knowingly or recklessly and for the
purpose and effect of concealing the truth . As set forth herein, all Proprietary Funds
- 132 -
Prospectuses, Annual Reports, Semi-Annual Reports and SAIs filed with the SEC during th e
Class Period were misleading as they omitted the following material facts :
a) that SSB improperly directed Plaintiffs and other, members of the Class tocertain Proprietary Funds because the entities operating such funds hadmade substantial payments to SSB to steer Plaintiffs and other members of'the Class to invest in the Proprietary Funds ;
b) that to incentivize its affiliated broker-dealers and brokers to recommendthe purchase of shares of the Proprietary Funds, SSB and the Proprietary
Funds paid undisclosed increased compensation to broker-dealers andbrokers on sales of'the Proprietary Funds' shares ;
c) that by paying brokers to aggressively steer their clients to the ProprietaryFunds, the Investment Adviser Defendants were knowingly aiding andabetting a breach of fiduciary duties, and profiting from the brokers'
improper, conduct ;
d) that any economies of scale achieved by marketing of' the ProprietaryFunds to new investors were not passed on to the Proprietary Funds
investors; on the contrary, as the Proprietary Funds grew, fees charged to
the Proprietary Funds also increased, and shareholders' investments weredivided to avoid promised breakpoint reductions in sales charges ;
e) that the Proprietary Funds were advised to and did improperly investPlaintiffs' and other members of the Class's funds into the securities ofcertain of SSB's investment-banking clients to foster SSB's investmentbanking business, without regard to Fund's investment objectives, theFund's stated investment-selection process, or the soundness of the
investment ;
f) that the Proprietary Funds and the Investment Adviser Defendantssystematically overcharged fees and expenses to Plaintiffs and othermembers of the Class and improperly siphoned money out of the funds ;
g) that the Director Defendants failed to monitor and supervise theInvestment Adviser Defendants and that, as a consequence, the InvestmentAdviser Defendants were able to systematically skim millions and
millions of dollars from the Proprietary Funds ;
h) that the Investment Adviser Defendants authorized the payment fromplaintiffs and other members of the Class of excessive commissions tobroker-dealers in exchange for preferential marketing services and thatsuch payments were in breach of their fiduciary duties, in violation ofSection 12(b) of the Investment Company Act, and unprotected by any"safe harbor" ;
-133-
i} that the Investment Adviser Defendants directed brokerage payments to
SSB-affiliated broker-dealers that pushed clients to invest in theProprietary Funds, which was a form of marketing that was not disclosedin or authorized by the Funds Rule 12b-1 plans ;
j) that the Proprietary Funds' Rule 12b-1 plans failed to comply with Rule12b-1, and such plans were not properly evaluated by the ProprietaryFunds' Directors and Trustees and there was not a reasonable likelihoodthat the plans would benefit the Proprietary Funds and their shareholders ;
k) that Defendants improperly used Soft Dollars and excessive commissions,paid from the Proprietary Funds assets, to pay for overhead expenses, thecost of which should have been borne by SSB or Citigroup and theInvestment Adviser Defendants and not the Proprietary Funds' investors ..
1) That SSB's employees and affiliates steered clients into certain classes ofshares of the Proprietary Funds that were the most beneficial to SSB, andthat SSB received more money from the sale of Class B shares than other
classes of'shares .
355 . As a result of the failure to disclose material facts, as set forth above, the market
prices and market trends of the Proprietary Funds were distorted during the Class Period such
that they did not reflect the risks and costs of'the continuing course of conduct alleged herein .. In
ignorance of the fact that market prices and market trends for the shares were distorted, and
relying directly or indirectly on the false and misleading statements made by the Proprietary
Funds Registrants, or upon the integrity of the market in which the securities trade, and/or on the
absence of material adverse information that was known to or recklessly disregarded by the
Proprietary Funds Registrants but not disclosed in public statements by the Proprietary Funds
Registrants during the Class Period, members of the Purchasers Subclass acquired the shares or
interests in the Proprietary Funds during the Class Period and were damaged thereb y
356 At the time of said omissions, members of the Purchasers Subclass were ignorant
of the truth . Had members of the Purchasers Subclass known the truth concerning the
Proprietary Funds operations, which were not disclosed by the Proprietary Funds Registrants,
members of the Purchasers Subclass would not have purchased or otherwise acquired their '
- 134 -
shares or, if they had acquired such shares during the Class Period, they would not have done so
at the prices which they pai d
357 . By virtue of the foregoing, the Proprietary Funds Registrants have violated
Section 10(b) of the Exchange Act and Rule l Ob-5(b) promulgated thereunder .
358 .. As a direct and proximate result of'the Proprietary Funds Registrants' wrongful
conduct, members of the Purchasers Subclass suffered damages in connection with their
;purchases and acquisitions of'Proprietary Funds during the Class Perio d
SEVENTH CLAIM FOR RELIE F
ON BEHALF OF THE PURCHASERS SUBCLASS AGAINST ALL DEFENDANTSFOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AN D
RULE 10b -5(a) AND (c) PROMULGATED THEREUNDE R
359 Members of'the Purchasers Subclass repeat and reallege each and every allegation
contained above as if fully set forth herein except for claims brought pursuant to the Securities
Act .
360 During the Class Period , each of the Defendants carried out a plan, scheme an d
course of conduct which was intended to and, throughout the Class Period, did deceive the
investing public, including members of the Purchasers Subclass, as alleged herein and caused
members of'the Purchasers Subclass to purchase shares of the Proprietary Funds and to otherwise
suffer damages In furtherance of'this unlawful scheme, plan and course of'conduct, Defendants
took the actions set forth herein .
361 . Defendants (i) employed devices, schemes, and artifices to defraud; and (ii)
engaged in acts, practices, and a course of conduct which operated as a fraud and deceit upon the
purchasers of'the Proprietary Funds, including members of'the Purchasers Subclass, in an effort
to enrich themselves through undisclosed manipulative tactics by which they wrongfully
distorted the pricing and market trends of the Proprietary Funds in violation of Section 10(b) o f
- 135 -
the Exchange Act and Rule lOb-5 .. All Defendants are sued as primary participants in the
wrongful and illegal conduct and scheme charged herein ,
362 Defendants, individually and in concert, directly and indirectly, by the use, mean s
or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about SSB and th e
Proprietary Funds operations, as specified herein ..
363 Defendants employed devices and artifices to defraud and engaged in a course of
conduct and scheme as alleged herein to unlawfully manipulate and profit from excessive fees
and commissions as a result of the undisclosed sales practices to peddle the Proprietary Funds
alleged above and thereby engaged in transactions, practices and a course of conduct which
operated as a fraud and deceit upon members of'the Purchasers Subclass ..
364 . The members of the Purchasers Subcl ass reasonably relied upon the integrity o f
the market in which the Proprietary Funds traded .
365 .. Members of the Purchasers Subclass were ignorant of Defendants' fraudulent
scheme . Had members of the Purchasers Subclass known of Defendants' unlawful scheme, they
would not have purchased or' otherwise acquired shares of the Proprietary Funds or if'they had,
they would not have purchased or otherwise acquired them at the artificially prices they paid fo r
such securities .
366 Member's of the Purchasers Subclass were injured because the risks that
materialized were risks of which they were unaware as a result of' Defendants' scheme to defraud
as alleged herein .. Absent Defendants' wrongful conduct, members of the Purchasers Subclas s
would not have been injured .
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367 . By virtue of the foregoing, Defendants each violated Section 10(b) of th e
Exchange Act and Rule I0b-5(a) and (c) promulgated thereunder .
368 . As a direct and proximate result of Defendants' wrongful conduct, members of
the Purchasers Subclass suffered damages in connection with their purchases and acquisitions o f
Proprietary Funds during the Class Period .
EIGHTH CLAIM FOR RELIE F
ON BEHALF OF THE PURCHASERS SUBCLASS AGAINST CITIGROUP, CGMHI,THE INVESTMENT ADVISER DEFENDANTS AND THE DIRECTOR DEFENDANTS
FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE AC T
369 Plaintiff' repeats and realleges each and every allegation contained above as i f
fully set forth herein except for claims brought pursuant to the Securities Act .
370 . This claim is brought pursuant to Section 20(a) of'the Exchange Act against : (a )
Citigroup and CGMHI as control persons of SSB, and (b) Citigroup, CGMHI, the Investmen t
Adviser Defendants and the Director Defendants as control persons of the Proprietary Funds an d
the Proprietary Funds Registrants .
371 . It is appropriate to treat Defendants Citigroup, CGMHI and SSB as a group fo r
pleading purposes and to presume that the issuance of materially false, misleading, an d
incomplete information conveyed by Citigroup Global Markets' public filings, including th e
Prospectuses , was the collective action of'Citigroup , CGMHI and SSB .
372 .. It is appropriate to treat Defendants Citigroup , CGMHI, the Investment Advise r
Defendants, the Director Defendants, the Proprietary Funds and the Proprietary Funds
Registrants as a group for pleading purposes and to presume that the issuance of materially false ,
misleading, and incomplete information conveyed in the Proprietary Funds public filings ,
including the Prospectuses, was the collective action of Citigroup, CGMHI, the Investmen t
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Adviser Defendants, the Director Defendants, the Proprietary Funds and the Proprietary Funds
Registrants
373 Each of Citigroup, CGMHI, the Investment Adviser Defendants and the Director
Defendants acted as a controlling person of the Proprietary Funds and the Proprietary Funds
Registrants within the meaning of Section 20(a) of the Exchange Act for the reasons alleged
herein By virtue of their operational and management control of the Proprietary Funds and the
Proprietary Funds Registrants' respective businesses and systematic involvement in the
fraudulent scheme alleged herein, Citigroup, CGMHI, the Investment Adviser Defendants and
the Director Defendants each had the power to influence and control and did influence and
control, directly or indirectly, the decision-making and actions of the Proprietary Funds and the
Proprietary Funds Registrants, including the content and dissemination of the various statements
which Plaintiff contends are false and misleading Citigroup, CGMHI, the Investment Adviser
Defendants and the Director Defendants had the ability to prevent the issuance of'the statements
alleged to be false and misleading or cause such statements to be corrected ..
374 . In particular, each of Citigroup, CGMHI, the Investment Adviser Defendants an d
the Director Defendants had direct and supervisory involvement in the operations of the
Proprietary Funds and the Proprietary Funds Registrants and, therefore, is presumed to :have had
the power to control or influence the particular transactions giving rise to the securities violations
as alleged herein, and to have exercised the same .
375 . As set forth above, each and all of the Proprietary Funds and Proprietary Funds
Registrants violated Section 10(b) and Rule 10b-5(a) and (c) by their acts and omissions as
.alleged in this Complaint . By virtue of their positions as controlling persons, Citigroup,
CGMHI, the Investment Adviser Defendants and the Director Defendants are liable pursuant t o
-138-
Section 20(a) of the Exchange Act . As a direct and proximate result of the Defendants' wrongful
conduct, Plaintiff and other members of the Class suffered damages in connection with their
purchases of Proprietary Funds securities during the Class Period .
376, Additionally, Citigroup and CGMHI acted as controlling persons of SSB withi n
the meaning of Section 20(a) of ' the Exchange Act for the reasons alleged herein By virtue of
their operational and management control of SSB and its respective businesses and systematic
involvement in the fraudulent scheme alleged herein , Citigroup and CGMHI had the power to
in fluence and control and did influence and control , directly or indirectly , the decision-making
and actions of SSB, including the content and dissemination of the various statements which
Plaintiff contends are false and misleading .. Citigroup and CGMHI had the ability to prevent the
issuance of the statements alleged to be false and misleading or cause such statements to be
corrected .
377., In particular , Citigroup and CGMHI had direct and supervisory involvement in
the operations of SSB (a wholly-owned subsidiary) and, therefore , are presumed to have had the
power to control or influence the particular transaction giving rise to the securities violations as
alleged herein , and to have exercised sam e
378 .. As set forth above , SSB violated Section 10(b) and Rule 10b-5(a ) and (c) by it s
acts and omissions as alleged in this Complaint By virtue of their position as controlling
persons, Citigroup and CGMHI are liable pursuant to Section 20(a) of'the Exchange Act . As a
direct and proximate result of the Defendants' wrongful conduct, Plaintiff and other members of
the Class suffered damages in connection with SSB's conduct during the Class Period .
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NINTH CLAIM FOR RELIEF
ON BEHALF OF THE HOLDERS SUBCLASS AGAINSTTHE INVESTMENT ADVISER DEFENDANTS FOR VIOLATIONS OF
SECTION 34(b) OF THE INVESTMENT COMPANY ACT
3 79 Members of the Holders Subclass repeat and reallege each and every allegatio n
contained above as if fully set forth herein .
380. This Count is asserted against the Investment Adviser Defendants in their tole a s
investment advisers to the Proprietary Fund s
381 . The Investment Adviser Defendants made untrue statements of material fact i n
registration statements and reports filed and disseminated pursuant to the Investment Company
Act and omitted to state facts necessary to prevent the statements made therein, in light of th e
circumstances under which they were made, from being materially false and misleading, The
Investment Adviser Defendants failed to disclose the following :
a) that SSB improperly directed Plaintiffs and other members of the Class tocertain Proprietary Funds because the entities operating such funds hadmade substantial payments to SSB to steer Plaintiffs and other members ofthe Class to invest in the Proprietary Funds ;
b) that to incentivize its affiliated broker-dealers and brokers to recommendthe purchase of shares of the Proprietary Funds, SSB and the ProprietaryFunds paid undisclosed increased compensation to broker-dealers andbrokers on sales of the Proprietary Funds' shares ;
c) that by paying brokers to aggressively steer their clients to the ProprietaryFunds, the Investment Adviser Defendants were knowingly aiding andabetting a breach of fiduciary duties, and profiting from the brokers'improper conduct ;
d) that any economies of scale achieved by marketing of the ProprietaryFunds to new investors were not passed on to the Proprietary Fundsinvestors ; on the contrary, as the Proprietary Funds grew, fees charged tothe Proprietary Funds also increased, and shareholders' investments weredivided to avoid promised breakpoint reductions in sales charges ;
e) that the Proprietary Funds were advised to and did improperly investPlaintiffs' and other members of the Class's funds into the securities o f
- 140 -
certain of SSB's investment-banking clients to foster SSB's investmentbanking business, without regard to Fund's investment objectives, theFund's stated investment-selection process, or the soundness of the
investment ;
f) that the Proprietary Funds and the Investment Adviser Defendants
systematically overcharged fees and expenses to Plaintiffs and othermembers of the Class and improperly siphoned money out of the funds ;
g) that the Director Defendants failed to monitor and supervise theInvestment Adviser Defendants and that, as a consequence, the InvestmentAdviser Defendants were able to systematically skim millions and
millions of dollars from the Proprietary Funds ;
h) that the Investment Adviser Defendants authorized the payment fromplaintiffs and other members of the Class of excessive commissions tobroker-dealers in exchange for preferential marketing services and thatsuch payments were in breach of their fiduciary duties, in violation ofSection 12(b) of the Investment Company Act, and unprotected by any"safe harbor" ;
i) that the Investment Adviser Defendants directed brokerage payments toSSB-affiliated broker-dealers that pushed clients to invest in theProprietary Funds, which was a form of marketing that was not disclosedin or authorized by the Funds Rule 12b-1 plans ;
j) that the Proprietary Funds' Rule 12b-1 plans failed to comply with Rule12b-1, and such plans were not properly evaluated by the ProprietaryFunds' Directors and Irustees and there was not a reasonable likelihoodthat the plans would benefit the Proprietary Funds and their shareholders ;
k) that Defendants improperly used Soft Dollars and excessive commissions,paid from the Proprietary Funds assets, to pay for overhead expenses, thecost of which should have been borne by SSB or Citigroup and theInvestment Adviser Defendants and not the Proprietary Funds' investor s
1) That SSB's employees and affiliates steered clients into certain classes ofshares of the Proprietary Funds that were the most beneficial to SSB, andthat SSB received more money from the sale of Class B shares than other
classes of shares
382 . By reason of the conduct described above, the Investment Adviser Defendant s
violated Section 34(b) of the Investment Company Ac t
-141-
383 As a direct, proximate and foreseeable result of the Investment Advise r
Defendants ' violation of Section 34(b) of the Investment Company Act, members of the Holder s
Subclass have incurred damages .
384 . Members of the Holders Subclass have been injured by Defendants' violations o f
Section 34(b) of the Investment Company Act .. Such injuries were suffered directly by the
shareholders .
385 The Investment Adviser Defendants, individually and in concert, directly and
indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails ,
engaged and participated in a continuous course of conduct to conceal such adverse materia l
information
TENTH CLAIM FOR RELIEF
ON BEHALF OF THE HOLDERS SUBCLASS AGAINSTTHE INVESTMENT ADVISER DEFENDANTS PURSUANT TO
SECTION 36(b) OF THE INVESTMENT COMPANY ACT
386 Plaintiff repeats and realleges each and every allegation contained above an d
otherwise incorporates the allegations contained above .
387. This Count is brought by the Holders Subclass (as Proprietary Funds securitie s
holders) against the Investment Adviser Defendants for breach of their fiduciary duties a s
defined by Section 36(b) of the Investment Company Act .
.388 .. The Investment Adviser Defendants had a fiduciary duty to the Class with respec t
to the receipt of compensation for services and of payments of a material nature made by and t o
the Investment Adviser Defendants
389. . The Investment Adviser Defendants violated Section 36(b) by improperl y
charging investors in the Proprietary Funds purported Rule 12b-1 marketing fees, and by
- 142 -
drawing on Proprietary Funds assets to make undisclosed payments of Soft Dollars and
excessive commissions, as defined herein, in violation of Rule 12b- 1
390 By reason of the conduct described above, the Investment Adviser Defendant s
violated Section 36(b) of the Investment Company Act ..
391 . As a direct, proximate and foreseeable result of the Investment Advise r
Defendants ' breach of their fiduciary duty of loyalty in their role as investment advisers to
Proprietary Funds investors, the Proprietary Funds and the Class have incurred millions o f
dollars in damages .
392 .. Plaintiff, in this count, seeks to recover the Rule 12b-1 fees, Soft Dollars ,
excessive commissions and the management fees charged the Proprietary Funds and the Holder s
Subclass by the Investment Adviser Defendants .
ELEVENTH CLAIM FOR RELIEF
ON BEHALF OF THE HOLDERS SUBCLASS AGAINST CITIGROUP, CGMHI ANDTHE DIRECTOR DEFENDANTS (AS CONTROL PERSONS OF THE INVESTMENT
ADVISER DEFENDANTS) FOR VIOLATIONS OF SECTION 48(a) OF THEINVESTMENT COMPANY ACT BY THE CLAS S
393 .. Plaintiff' repeats and realleges each and every allegation contained above as i f
fully set forth herein .
394 .. This Count is brought by the Holders Subclass pursuant to Section 48(a) of the
Investment Company Act against Citigroup, CGMHI and the Director Defendants, as control
persons of the Investment Adviser Defendants, who caused the Investment Adviser Defendants,
to commit the violations of the Investment Company Act alleged herein . It is appropriate to treat
these Defendants as a group for pleading purposes and to presume that the misconduct
complained of herein is the collective actions of Citigroup, CGMHI and the Director Defendants
and the Investment Adviser Defendants ..
-143-
395 . The Investment Adviser Defendants are liable under Sections 34(b) and 3 6(b) of
the Investment Company Act to the Holders Subclass, i .e ., investors in the Proprietary Funds a s
set forth herein..
396 . Citigroup, CGMHI and the Director Defendants were "control persons" of th e
Investment Adviser Defendants and caused the violations complained of herein . By virtue of
their positions of operational control and/or authority over the Investment Adviser Defendants,
Citigroup, CGMHI and the Director Defendants directly and indirectly, had the power and
authority, and exercised the same, to cause the Investment Adviser Defendants to engage in the
wrongful conduct complained of herei n
397. Pursuant to Section 48(a) of the Investment Company Act, by reason of th e
foregoing, Citigroup, CGMHI and the Director Defendants are liable to members of the Holder s
Subclass to the same extent as are the Investment Adviser Defendants for their primar y
violations of' Sections 34(b) and 36(b) of the Investment Company Act ..
398 . By virtue of the foregoing, members of the Holders Subclass and the Proprietar y
Funds are entitled to damages against Citigroup, CGMHI and the Director Defendants .
TWELFTH CLAIM FOR RELIE F
BREACH OF FIDUCIARY DUTY AGAINST THE INVESTMENT ADVISERDEFENDANTS ON BEHALF OF THE HOLDERS SUBCLAS S
399 . Members of the Holders Subclass repeat and reallege each of the preceding
allegations as though fully set forth herein .
400 . As investment advisers to the Proprietary Funds, the Investment Advise r
Defendants were fiduciaries to members of the Holders Subclass and were required to act wit h
the highest obligations of good faith, loyalty, fair dealing, due care and cando r
-144-
401 As set forth above, the Investment Adviser Defendants breached their fiduciar y
duties to members ofthe Holders Subclass ,
402 . Members of the Holders Subclass have been injured as a direct, proximate and
foreseeable result of such breach on the part of the Investment Adviser Defendants and hav e
suffered substantial damages
403 . Because the Investment Adviser Defendants acted with reckless and willfu l
disregard fbr the rights of members of the Holders Subclass, the Investment Adviser Defendant s
are liable for punitive damages in an amount to be determined by the jury .
THIRTEENTH CLAIM FOR RELIEF
BREACH OF FIDUCIARY DUTY AGAINST THE DIRECTORDEFENDANTS ON BEHALF OF THE HOLDERS SUBCLASS
404, Plaintiff repeats and realleges each of the preceding allegations as though fully set
forth herein..
405 . As Proprietary Funds Directors and Trustees , the Director Defendants had a
fiduciary duty to the Proprietary Funds and Proprietary Funds investors to supervise and monito r
the Investment Adviser Defendants
406 . The Director Defendants breached their fiduciary duties by reason of' the acts
alleged herein, including their knowing or reckless failure to prevent the Investment Adviser
Defendants from (1) charging the Proprietary Funds and Proprietary Funds investors imprope r
Rule 12b-1 marketing fees ; (2) making improper undisclosed payments of Soft Dollars ; (3)
making unauthorized use of "directed brokerage" as a marketing tool ; and (4) charging the
Proprietary Funds for excessive and improper commission payments to brokers and financial
advisors .
-145-
407 . Members of the Holders Subclass have been injured as a direct, proximate an d
foreseeable result of such breach on the part of the Director Defendants and have suffere d
substantial damage s
408 . Because the Director Defendants acted with reckless and willful disregard for, th e
rights of members of the Holder's Subclass, the Director Defendants are liable for punitiv e
damages in an amount to be determined by the jury
PRAYER FOR RELIEF
WHEREFORE, Plaintiff' prays for relief and judgment as follows :
A. . Awarding compensatory damages in favor of Plaintiffs and the other Clas s
members against all Defendants, jointly and severally, far all damages sustained as a result o f
Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;
B . Awarding rescission and/or rescissionary damages, where appropriate, t o
:Planitiffs and the other members of the Class against all Defendants ;
C . Awarding Plaintiffs and other members of the Class rescission of their contract s
with the Investment Adviser- Defendants, where appropriate, and recovery of all attendant fee s
that would otherwise apply and recovery of all fees paid to the Investment Adviser Defendant s
pursuant to such agreements ;
D . Enjoining Defendants from engaging in the improper sales practices allege d
herein ;
E Awarding Plaintiffs and the Class members their reasonable costs and expense s
incurred in this action, including counsel fees and expert fees ;
-146-
F . Awarding Plaintiffs an accounting of all fees and commissions paid, received o r
shared by Defendants that relate in any way to the Proprietary Funds or the Strategic Partner s
Program; and
G Granting such other and further relief as the Court may deem just and proper .
- 147 -
JURY TRIAL DEMANDE D
Plaintiffs hereby demand a trial by jury
Respectfully submitted ,
Dated: December 15, 2004James J Sa elb la (JS-5434)Sidney S Liebesman (SL-8444)GRANT & EISENHOFER P A445 Park Avenue .• Suite 900New York, New York 10022Tel: (212) 755-650 1Fax: (212) 755-6503
Jay W EisenhoferGeoffiey JarvisLauren E . WagnerJeff AlmeidaRedmond L. ClevengerNaumon A AmjedGRANT & EISENHOFER P.A .Chase Manhattan Centre1201 North Market Street - Suite 2100Wilmington, Delaware 1980 1Tel : (302) 622.7000Fax: (302) 622-710 0
LEAD COUNSEL FOR PLAINTIFF S
MILBERG WEISS BERSHAD &SCHULMAN LLP
Jerome M Cargress (JC-.2060Kim E Levy (KL-6996)Janine L.. Pollak (JP-0178)Michael R Reese (MR-318 .3)One Pennsylvania PlazaNew York, NY 10119-0165Tel : (212) 594-5300Fax: (212) 868-1229
EXHIBIT "A"
EXHIBIT AProprietary Fund Defendants
Salomon Brothers All Cap Value FundSalomon Brothers Balanced FundSalomon Brothers California Tax Free Bond FundSalomon Brothers Capital FundSalomon Brothers Emerging Markets Debt Fund Inc .Salomon Brothers High Yield Bond Fun dSalomon Brothers International Equity FundSalomon Brothers Investors Value Fund
Salomon Brothers Large Cap Growth FundSalomon Brothers Mid Cap Fun dSalomon Brothers National Tax Free Bond FundSalomon Brothers New York Tax Free Bond FondSalomon Brothers Opportunity Fund In cSalomon Brothers SB Capital and Income FundSalomon Brothers SB Convertible FundSalomon Brothers SB Growth & Income FundSalomon Brothers Short/Intermediate US Government FundSalomon Brothers Small Cap Growth FundSalomon Brothers Strategic Bond FundSmith Barney Aggressive Growth Fun dSmith Barney All Cap Growth and Value FundSmith Barney Allocation Series, Inc .Smith Barney Appreciation Fund IncSmith Barney Arizona Municipals Funds IncSmith Barney Balanced Portfoli oSmith Barney California Municipals Funds IncSmith Barney Classic Values FundSmith Barney Conservative Portfoli oSmith Barney Diversified Large Cap Growth FundSmith Barney Diversified Strategic Income FundSmith Barney Dividend and Income FundSmith Barney Financial Services FundSmith Barney Florida Portfoli oSmith Barney Fundamental Value FundSmith Barney Georgia Portfoli oSmith Barney Global All Cap Growth and Value FundSmith Barney Global Government Bond PortfolioSmith Barney Global PortfolioSmith Barney Government Securities FundSmith Barney Group Spectrum FundSmith Barney Growth and Income FundSmith Barney Growth Portfoli oSmith Barney Hansberger Global Value Fund
Smith Barney Health Sciences FundSmith Barney High Growth PortfolioSmith Barney High Income FundSmith Barney Income PortfolioSmith Barney Institutional Cash Management Fund In cSmith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals FundSmith Barney International All Cap Growth PortfolioSmith Barney International Large Cap FundSmith Barney Investment Grade Bond Fund
Smith Barney Large Cap Core FundSmith Barney Large Cap Growth and Value FundSmith Barney Large Cap Value FundSmith Barney Large Capitalization Growth FundSmith Barney Limited Term PortfolioSmith Barney Managed Government FundSmith Barney Managed Municipals Fund IncSmith Barney Massachusetts Municipals Fund
Smith Barney Mid Cap Core FundSmith Barney Money Funds IncSmith Barney Multiple Discipline Trust
Smith Barney Municipal High Income FundSmith Barney Municipal Money Market Fund IncSmith Barney National Portfoli oSmith Barney New Jersey Municipals FundSmith Barney New York Portfoli oSmith Barney Oregon Municipals FundSmith Barney Pennsylvania PortfolioSmith Barney Principal Return Fund
Smith Barney S&P 500 Index Fun dSmith Barney SB Adjustable Rate Income FundSmith Barney SB Capital and Income FundSmith Barney SB Convertible Fun dSmith Barney Shearson Telecommunications TrustSmith Barney Short Duration Municipal Income Fund
Smith Barney Short Term Investment Grade Bond FundSmith Barney Small Cap Core Fund In cSmith Barney Small Cap Growth Fun dSmith Barney Small Cap Growth Opportunities FundSmith Barney Small Cap Value FundSmith Barney Social Awareness Fund
Smith Barney Technology FundSmith Barney Total Return Bond FundSmith Barney U .S Government Securities FundTravelers Series Fund Inc, F/K/A : "Smith Barney Travelers Series Fund Inc"
EXHIBIT "B"
EXHIBIT BRegistrants
I Salomon Brothers Capital Fund In c2 . Salomon Brothers Emerging Markets Debt Fund Inc .3 .. Salomon Brothers Investors Fund Inc4 Salomon Brothers Opportunity Funds5 . Salomon Brothers Series Funds Inc6 . Salomon Funds Trus t7. Smith Barney Adjustable Rate Government Income Fund8 . Smith Barney Appreciation Fund Inc9 Smith Barney Arizona Municipals Funds Inc10 . Smith Barney California Municipals Funds Inc11 . Smith Barney Concert Series Inc12 . Smith Barney Equity Funds13 . Smith Barney Funds In c14 Smith Barney Income Funds15 . Smith Barney Institutional Cash Management Fund Inc16 .. Smith Barney Investment Funds Inc /MD/17 Smith Barney Investment Series18 . Smith Barney Investment Trust19 . Smith Barney Managed Municipals Fund Inc20 Smith Barney Massachusetts Municipals Fund21 . Smith Barney Money Funds In c22 . Smith Barney Multiple Discipline Trust23 . Smith Barney Muni Funds24 .. Smith Barney Municipal Money Market Fund Inc25 . Smith Barney Principal Return Fund26 . Smith Barney Sector Series Funds27 .. Smith Barney Shearson Aggressive Growth Fund Inc28 . Smith Barney Shearson Fundamental Value Fund Inc29 . Smith Barney Shearson Managed Governments Fund Inc30 . Smith Barney Shear son New Jersey Municipals Fund Inc31 . Smith Barney Shearson Oregon Municipal Fun d32 .. Smith Barney Shearson Telecommunications Trust33 . Smith Barney Small Cap Core Fund Inc.34 .. Smith Barney Trust II35 . Smith Barney World Funds Inc36 . Travelers Series Fund Inc
EXHIBIT "C"
EXHIBIT CProprietary Funds' Stated Investment Selection Processes
1 . SALOMON BROTHERS CAPITAL FUND IN C
1. Salomon Brother-s Capital Fun d(Salomon Br-others Series Funds Inc Prospectus filed April 29,
2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
The manager emphasizes individual security selection while diversifyingthe fund's investments across industries, which may help to reduce risk .The manager seeks to identify those companies which offer the greatest
potential for capital appreciation through careful fundamental analysis ofeach company and its financial characteristics The manager evaluatescompanies of all sizes but emphasizes those with market capitalizationsabove $1 billion .. In selecting individual companies for investment, themanager looks for the following : Security prices which appear toundervalue the company's assets or do not adequately reflect factors suchas favorable industry trends, lack of investor recognition or the short-termnature of earnings declines . Special situations such as existing or possiblechanges in management, corporate policies, capitalization or regulatoryenvironment which may boost earnings or the market price of thecompany's securities . Growth potential due to technological advances,new products or services, new methods of marketing or production,
changes in demand or other significant new developments which mayenhance future earnings ..
II . SALOMON BROTHERS EMERGING MARKETS DEBT FUND IN C
1 . Salomon Brothers Emerging Markets Debt Fund Inc(Prospectus filed 12/3/2003 )
Selection Process
In selecting investments for the Fund, the Fund's Investment Manager uses acombination of qualitative assessments and quantitative models which seek tomeasure the relative risks and opportunities of each market segment based upon
economic, market, political, currency and technical data and its own assessmentof economic and market conditions to create an optimal risk/return allocation ofthe Fund's assets among various segments of the emerging markets debt market ..After- the Investment Manager makes its sector allocations, the InvestmentManager uses traditional credit analysis to identify individual securities for theFund's portfolio
• In selecting foreign and emerging market issuer debt for investment, theInvestment Manager considers the economic and political conditionswithin the issuer's country, overall and external debt levels and debtservice ratios, access to capital markets and debt service payment history .
III. SALOMON BROTHERS INVESTORS FUND INC
1 . Salomon Brothers Investors Value Fund(Salomon Brothers Series Funds Inc Prospectus filed April 29,2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
The manager emphasizes individual security selection while diversifying thefund's investments across industries, which may help to reduce risk .. The managerfocuses on established large capitalization companies (over $5 billion in marketcapitalization), seeking to identify those companies with favorable valuations andattractive growth potential . The manager employs fundamental analysis to analyzeeach company in detail, ranking its management, strategy and competitive marketposition
In selecting individual companies for investment, the manager looks for :
• Share prices that appear to be temporarily oversold or do not reflectpositive company development s
• Share prices that appear to undervalue the company's assets, particularlyon a sum-of-the-parts basis ..
• Special situations including corporate events, changes in management,regulatory changes or turnaround situation s
• Company specific items such as competitive market position, competitiveproducts and services, experienced management team and stable financialcondition .
(Salomon Brothers Series Funds Inc Prospectuses filed in 1999, 2000, and 2001 )
HOW THE MANAGER SELECTS THE FUND'S INVESTMENTS
The manager emphasizes individual security selection while diversifying thefund's investments across industries, which may help to reduce risk, . The managerfocuses on established large capitalization companies (over $5 billion in marketcapitalization), seeking to identify those companies with solid growth potential atreasonable values .. The manager employs fundamental analysis to analyze eachcompany in detail, ranking its management, strategy and competitive marketposition .
In selecting individual companies for investment, the manager looks for :
2
• Long-term history of performance
• Competitive market position
• Competitive products and services• Strong cash flow• High return on equity
• Strong financial condition• Experienced and effective management
• Global scope
IV .. SALOMON BROTHERS OPPORTUNITY FUND S
1. Salomon Brothers Opportunity Fund s(Salomon Brothers Series Funds Inc Prospectus filed12/29/2003)
How The Manager Selects The Fund' s Investment s
The Manager emphasizes individual security selection while varying the Fund'sinvestments across industries, which may help to reduce risk . The Managerevaluates companies of all sizes -- from established large capitalization companiesto young start-up companies . The Manager seeks to identify those companieswhose securities are trading at prices which are below the company's intrinsicvalue . This style of stock selection is known as `value' investing The Manageremploys fundamental analysis to analyze each company in detail, ranking itsmanagement, strategy and competitive market position .
The Manager currently pursues a strategy of'retaining unrealized long-termcapital gain and avoiding the tax impact of realizing such gain . This strategyreflects the belief of the Manager that these securities continue to have long-termgrowth potential .
In selecting individual companies for investment, the Manager considers how thefollowing would affect a company's earnings, the market price of its shares andthe market's evaluation of the company's future earnings :
• Changes in management, policies, corporate control or capitalization;• Changes in technology, marketing or production, the development of new
products or services or, the demand for existing products or services ;• The effect of recent and anticipated capital expenditures ; and• The effect of'social, economic, political, legal and international
developments
V. SALOMON BROTHERS SERIES FUND INC .
Salomon Brothers All Cap Value Fund(Salomon Brothers Series Funds Inc Prospectus filed April 29,2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
The manager employs a two-step stock selection process in its search fbrundervalued stocks of temporarily out of favor companies .. First, the manager usesproprietary models and fundamental research to try to identify stocks that areunderpriced in the market relative to their fundamental value Next, the managerlooks for a positive catalyst in the company's near term outlook which themanager believes will accelerate earnings or' improve the value of the company'sassets .. The manager also emphasizes companies in those sectors of the economywhich the manager believes are undervalued relative to other sector s
When evaluating an individual stock, the manager looks for :
Low market valuations measured by the manager's valuation models .Positive changes in earnings prospects because of factors such as :
- New, improved or unique products and services ..
- New or rapidly expanding markets for the company's products .
- New management .
- Changes in the economic, financial, regulatory or politicalenvironment particularly affecting the company .
- Effective research, product development and marketing .
- A business strategy not yet recognized by the marketplace .
2. Salomon Brother's Balanced Fun d(Salomon Brothers Series Funds Inc Prospectus filed April 29,2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
In selecting stocks for investment, the manager applies a bottom-up analysis,focusing on companies with :
+ Large market capitalizations .
• Favorable dividend yields and price-to-earnings ratios .• Stocks that historically have been less volatile than the market as a whole ..
• Strong balance sheets
• A catalyst for appreciation and restructuring potential, product innovationor new development .
4
The manager considers both macroeconomic and issuer specific factors inselecting debt securities f'or its portfolio . In assessing the appropriate maturity,rating and sector weighting of'the fund's portfolio, the manager considers avariety of'macroeconomic factors that are expected to influence economic activityand interest rates .. These factors include fundamental economic indicators, FederalReserve monetary policy and the relative value of the U ..S . dollar compared toother currencies . Once the manager determines the preferable portfoliocharacteristic, the manager selects individual securities based upon the terms ofthe securities (such as yields compared to U .S Treasuries or comparable issuers),liquidity and rating, and sector and issuer diversification The manager alsoemploys fundamental research and due diligence to assess an issuer-'s :
• Credit quality taking into account financial condition and profitability .• Future capital need s
• Potential for change in rating and industry outloo k
• Management's ability to be competitive in its particular industry ..
3. Salomon Brothers High Yield Bond Fun d(Salomon Brothers Series Funds Inc Prospectus filed April 29,200.3)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
Individual security selection is driven by the manager's economic view, industryoutlook and rigorous credit analysis The manager then selects those individualsecurities that appear to be most undervalued and to offer the highest potentialreturns relative to the amount of credit, these securities . The manager allocates thefund's investments across a broad range of issuers and industries, which can helpto reduce risk
In evaluating the issuer's creditworthiness, the manager employs fundamentalanalysis and considers the following factors :
• The strength ofthe issuer's financial resources .• The issuer's sensitivity to economic conditions and trends
• The issuer's operating history ..
• The experience and track record of the issuer's management or politicalleadership .
4. Salomon Brothers International Equity Fun d(Salomon Brothers Series Funds Inc Prospectus filed April 29,2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
The fund's subadvisei looks for the securities of'well-established companies(typically with capitalizations of $750 million or more) believed to have superiormanagement teams and histories ofabove--average revenues and earnings growthwhich appear to be reasonably valued compared to their long-term earningspotential . The subadviser uses fundamental analysis to find companies that itbelieves have growth potential, and looks first at a particular company and then atthe country in which the company is located and the industry in which thecompany participates . The subadvisei eliminates stocks that it believes areoverpriced relative to a company's financial statements and projections . Thesubadviser then analyzes company to find those believed to have superiormanagement teams, solid product lines, strong competitive positioning, attractivecash flows and histories of above-average revenues and earnings growth .. Thesubadvisei seeks opportunities to invest in foreign economies that are growingfaster than the U S economy .
(Salomon Brothers Series Funds Inc Prospectus filed in 2000 , 2001, 2002)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
In selecting portfolio securities, Citibank, N A .., the fund's subadviser, employs a .disciplined investment process that emphasizes individual security selection .. Theinvestment focus is on companies that participate in growth industries and candeliver sustainable, above average growth in earnings per share over a two tothree year horizon Final security selection is a function of'detailed industry andcompany specific analysis and ongoing interviews with the company's seniormanagement . A strict valuation discipline is employed to insure that the fund doesnot overpay for earnings growth.. The fund closely monitors the investment on anongoing basis for possible changes in company or industry fundamentals .Turnover is typically low, and the average holding period for a fund investment iscurrently three years . The subadviser manages the fund's portfblio compared to itsbenchmark, the MSCI EAFE'r' Index, which is not hedged, and therefore,typically does not hedge portfolio securities or currencies .. The subadviser may,however, engage in hedging strategies when it believes it is desirable to do soThe fund seeks to reduce overall portfolio risk by investing in a wide range of
countries
6
5. Salomon Brothers Large Cap Growth Fun d(Salomon Brothers Series Funds Inc Prospectus files April 29,2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENTS
The subadviser seeks to create a diversified portfolio of well established largecapitalization companies with a proven track record of'consistent, above averageearnings and revenue growth, solid prospects for continued superior, and aneffective management team committed to these goals .
The subadviser incorporates quantitative analysis, multi-factor screens andmodels, as well as fundamental stock research to identify high quality, largecompanies that exhibit the potential f'or sustainable growth . In selecting individua lcompanies f'or investment, the subadviser screens companies on the following
factors :
• Earnings per share growt h
• Earnings per share growth consistency .
• Sales growth ..
• Return on shareholder equity• Strength of'balance sheet
6. Salomon Brother's Short/Intermediate U .S . Government Fund
(Salomon Brothers Series Funds Inc Prospectus filed April 29,2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
The manager focuses on identifying undervalued sectors and securities ..Specifically, the manager :
• Monitors the spread between U .S . Treasury and government agency orinstrumentality issues and purchases agency and instrumentality issueswhich it believes will provide a total return advantage .
• Determines sector or maturity weightings based on intermediate and long-term assessments of the economic environment and relative value factorsbased on interest rate outlook
• Uses research to uncover inefficient sectors of the and mortgage marketsand adjusts portfolio positions to take advantage of new information .
• Measures the potential impact of'supply/demand imbalances, yield curveshifts and changing prepayment patterns to identify individual securitiesthat balance potential return and risk .
7. Salomon Brothers Small Cap Growth Fun d(Salomon Brothers Series Funds Inc Prospectus files April 29,
2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
The manager emphasizes companies which it believes have favorable growth
prospects and potential fbi significant capital appreciation . In selecting individual
companies for investment, the manager looks for :
• Companies that either occupy a dominant position in an emerging industryor a growing market share in larger, fragmented industries .
• Favorable sales and/or earnings growth trends .
• High or improving return on capital .
• Strong financial condition .
• Experienced and effective management .
8. Salomon Brothers Strategic Bond Fun d(Salomon Brothers Series Funds Inc Prospectus filed April 29,
2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENTS
The manager uses a combination of quantitative models which to measure therelative risks and opportunities of each market segment based upon economic,market, political, currency and technical data and its own assessment of economicand market conditions to create an optimal risk/return allocation of the fund's
assets among various segments of the fixed income market . . After the manager
makes its sector allocations, the manager uses traditional credit analysis toidentify individual securities for the fund's portfolio .
In selecting corporate debt for investment, the manager considers the issuer's :
• Financial condition .• Sensitivity to economic conditions and trends ..
• Operating history .
• Experience and track record of management ..
In selecting foreign government debt for investment, the manager considers the
issuer's :
• Economic and political conditions within the issuer's country .• Overall and external debt levels and debt service ratio s• Access to capital markets .• Debt service payment history
In selecting U .S . government and agency obligations and mortgage-backed
securities for investment, the manager considers the following factors :
• Yield curve shifts• Credit quality
• Changing prepayment pattern s
VL SALOMON FUNDS TRUS T
1. Salomon Brothers California Tax Free Bond Fun d(Salomon Brothers Series Funds Inc Prospectus filed April 29,
2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
When selecting securities for the fund and managing the portfolio, the managerlooks for both income and potential gain The fund is managed by employing acombination of qualitative and quantitative analysis . The manager decides which
securities to purchase by first developing an interest rate forecast and analysis ofgeneral economic conditions for the United States as a whole, with a particular-
focus on California.. Then the manager compares specific sectors to identify broadsegments of the municipal market poised to benefit in this environment . Themanager also closely studies the yields and other characteristics of specific issues
to identify attractive opportunities . The manager seeks to add value by investing
in a range of municipal bonds, representing different market sectors, structuresand maturities The manager uses this same approach when deciding which
securities to sell . Securities are sold when the fund needs cash to meetredemptions, or when the manager- believes that better opportunities exist or thatthe security no longer fits within the manager's overall strategies for achieving the
fund's investment objective .
(Salomon Brothers Series Funds Inc Prospectuses filed in 1999, 2000, 2001 and 2002 underthe name California Tax Free Income Fund)
Citibank seeks to minimize the Fund's exposure to the risk of default by investingin debt securities that are :
Investment grade (investment grade securities are those rated Baa or betterby Moody's or BBB or better by Standard & Poor's, or which Citibankbelieves to be of comparable quality), or
Issued or guaranteed by the U .S .. Government or one of its agencies or
instrumentalities, o rObligations (including certificates of' deposit, bankers' acceptances andrepurchase agreements) of banks with at least $1 billion of assets .
9
2 .. Salomon Brothers Mid Cap Fun d(Salomon Brothers Series Funds Inc Prospectus filed April 29,
200.3 )
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
The manager emphasizes medium sized U S companies with good prospects for
revenue and earnings growth that meet the manager's valuation criteria . In
selecting investments, the manager looks for issuers that are among the leaders intheir industries
• The manager generally uses a'bottom-up' approach when selectingsecurities for the fund . This means that the manager looks primarily atindividual companies against the context of broader market forces .
3. Salomon Brothers National Tax Free Bond Fund(Salomon Brothers Series Funds Inc Prospectus filedApril 29, 200.3)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENT S
When selecting securities for the find and managing the portfolio, the managerlooks for both income and potential for gain The fund is managed using acombination of'qualitative and quantitative analysis . The manager decides whichsecurities to purchase by first developing an interest rate forecast and analysis of
general economic conditions throughout the United States . Then the managercompares specific regions and sectors to identify broad segments of the municipal
market poised to benefit in this environment The manager also closely studies theyields and other characteristics of specific issues to identify attractiveopportunities The manager uses a geographically diversified approach, seeking aportfolio of bonds representing a wide range of'sectors, maturities and regions .
The manager uses this same approach when deciding which securities to sellSecurities are sold when the fund needs cash to meet redemptions, or when themanager believes that better opportunities exist or that the security no longer fitswithin the manager's overall strategies for achieving the fund's investment
objective ..
(Prospectuses filed in 1999, 2000, 2001 and 2002 )
Citibank seeks to minimize the Fund's exposure to the risk of default by investingin debt securities that are :
• Investment grade (investment grade securities are those rated Baa or betterby Moody's or BBB or better by Standard & Poor's, or which Citibankbelieves to be of comparable quality), or
• Issued or guaranteed by the U S Government or one of its agencies orinstrumentalities, or
10
Obligations (including certi ficates of deposit, bankers' acceptances andrepurchase agreements) of banks with at least $1 billion of assets ..
Salomon Brothers New York Tax Free Bond Fund(Salomon Brothers Series Funds Inc Prospectus filedApril 29, 2003)
HOW THE MANAGER SELECTS THE FUND'S INVESTMENTS
When selecting securities f'or the fund and managing the portfolio, the managerlooks for both income and potential for gain . The fund is managed with acombination of'qualitative and quantitative analysis .. The manager decides whichsecurities to purchase by first developing an interest rate forecast and analysis ofgeneral economic conditions for the United States as a whole, with a particular
focus on the New York area . The manager compares specific sectors to identify
broad segments of the municipal market poised to benefit in this environmentThe manager also closely studies the yields and other characteristics of specificissues to identify attractive opportunities . . The manager- seeks to add value by
investing in a range of municipal bonds, representing different market sectors,structures and maturities .. The manager uses this same approach when decidingwhich securities to sell Securities are sold when the fund needs cash to meetredemptions, or when the manager believes that better opportunities exist or thatthe security no longer fits within the manager's overall strategies for achieving thefund's investment objectiv e
(Salomon Brothers Series Funds Inc Prospectuses filed in 1999, 2000, and 2001 )
Citibank seeks to minimize the Fund's exposure to the risk of default by investing
in debt securities that are :
Investment grade (investment grade securities are those rated Baa or betterby Moody's or BBB or better by Standard & Poor's, or which Citibankbelieves to be of'comparable quality), or
Issued or guaranteed by the U S Government or one of its agencies orinstrumentalities, or
Obligations (including certificates of deposit, bankers' acceptances andrepurchase agreements) of banks with at least $1 billion of assets .
VII. SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUN D
1 . Smith Barney SB Adjustable Rate Government Income Fund(Prospectus filed 9/26/2003 )
Selection process
The fund's manager seeks to achieve low volatility of net asset value bydiversifying the fund's assets among investments the manager believes will, in theaggregate, be resistant to significant fluctuations in market value The manager
evaluates the attractiveness off different sectors of the bond market and valuesindividual securities within those sectors relative to other available securities ..
In selecting individual securities for the fund' s portfolio , the manager takes intoaccount various factors that may affect the fund 's volatility, including :
• Remaining time to the security's next interest rate reset date
• The security's payment characteristic s
The security's impact on the dollar- weighted average life of the fund's portfoli o
VIII. SMITH BARNEY APPRECIATION FUND INC.
1 . Smith Barney Appreciation Fund Inc .,(Prospectus Filed April 30, 2003)
Selection proces s
the manager's investment strategy consists of individual company selection and
management of'cash reserves . The manager looks for investments among a strongcore of growth stocks, consisting primarily of blue chip companies dominant in
their industries .. The fund may also invest in companies with prospects for
sustained earnings growth and/or a cyclical earnings recor d
In selecting individual companies for the fund's portfolio, the manager looks for
the following :
• Strong or rapidly improving balance sheets
• Recognized industry leadership
• Effective management teams that exhibit a desire to earn consistent returnsfor shareholders
In addition , the manager- considers the following characteristics :
• Past growth record s• Future earnings prospects• Technological innovatio n
• General market and economic factor s
• Current yield or potential for dividend growt h
Generally, companies in the f'und's portfolio fall into one of the following
categories :
12
Undervalued companies : companies with assets or earning power that are
either unrecognized or undervalued The manager generally looks for acatalyst that will unlock these values .. The manager also looks for
companies that are expected to have unusual earnings growth or whosestocks appear likely to go up in value because of marked changes in theway they do business (for example, a corporate restructuring) .
Growth at a reasonable price : companies with superior demonstrated andexpected growth characteristics whose stocks are available at a reasonableprice . Typically, there is strong recurring demand for these companies'products ,
The manager adjusts the amount held in cash reserves depending on themanager's outlook for the stock market . The manager will increase the fund's
allocation to cash when, in the manager's opinion, market valuation levelsbecome excessive The manager may sometimes hold a significant portion of thefund's assets in cash while waiting for buying opportunities or to provide a hedge
against stock market declines .
IX. SMITH BARNEY ARIZONA MUNICIPALS FUND INC .
1 . Smith Barney Arizona Municipals Fund Inc .(Prospectus filed September' 26, 2003 )
Selection process
The manager selects securities primarily by identifying undervalued sectors andindividual securities, while also selecting securities it believes will benefit fromchanges in market conditions In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sectors and to exploit opportunitiesin the municipal bond marke t
• May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative value s
• Considers the yield available for securities with different maturities and asecurity's maturity in light of the outlook for the issuer, its sector and
interest rate s
• Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
13
X. SMITH BARNEY CALIFORNIA MUNICIPALS FUNDS IN C
1. Smith Barney California Municipa ls Funds Inc(Prospectus filed 6/25/2003)
Selection proces s
the manager selects securities primarily by identifying undervalued sectors andindividual securities, while also selecting securities it believes will benefit fiom
changes in market conditions . In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sectors and to exploit opportunitiesin the municipal bond market
• May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrial
development, based on their apparent relative value s
• Considers the yield available for securities with different maturities and asecurity's maturity in light of the outlook for the issuer and its sector and
interest rate s
• Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
XI. SMITH BARNEY CONCERT ALLOCATION SERIES INC .
1. Smith Barney Concert Allocation Series Inc ., N/K/A Smith
Barney Allocation Series Inc .. (See 485BPOS filed May 29,
2003.)
The following Proprietary Funds administered by Smith Barney Allocation Series
Inc .. are "funds of funds" and invest only in other Proprietary Funds and do notindependently select non-Proprietary Fund securities for investment and do notdisclose to customers that the Proprietary Funds in which they are invested makefalse, incomplete and misleading statements in their prospectuses regarding their
securities investment selection processes :
• Smith Barney Balanced Portfolio
• Smith Barney Conservative Portfolio
• Smith Barney Global Portfoli o
• Smith Barney Growth Portfoli o
• Smith Barney High Growth Portfolio
• Smith Barney Income Portfolio
14
XII . SMITH BARNEY EQUITY FUND S
1 . Smith Barney Social Awareness Fund(Prospectus filed May 29, 2003)
Selection process
Equity Securities .
The fund invests in a broad range of companies, industries and sectors, withoutregard to market capitalization . The manager uses a "core" approach to selectingequity securities .
In selecting individual equity securities, the manager looks for companies itbelieves are undervalued Specifically, the manager looks for :
Attractive risk-adjusted price/earnings ratio, relative to growth
Positive earnings trend s
Favorable financial condition
Fixed Income Securities .
In selecting fixed income investments , the manager :
• Determines sector and maturity weightings based on intermediate andlong-term assessments of the economic environment and interest rateoutlook
• Uses fundamental credit analysis to determine the relative value of bondissues
• Identifies undervalued bonds and attempts to avoid bonds that may besubject to credit downgrade s
Social Awareness Criteria .
As a component of the selection process, the manager considers whether, relativeto other companies in an industry, a company that meets these investment criteriaalso is sensitive to social issues related to its products, services, or methods ofdoing business
Social factors considered include :
• Fairness of employment policies and labor relations
• Involvement in community causes
• Efforts and strategies to minimize the negative impact of businessactivities and products and to embrace alternatives to unsafe polluting andwasteful activities or product s
• Responsibility and fairness of advertising and marketing practice s
15
In addition, the fund seeks to avoid investing in a company if the manager hassignificant reason to believe it is engaged in :
Tobacco production
Production of weapons
Ownership or design of'nuclear facilities
XIII . SMITH BARNEY FUNDS INC.
I . Smith Barney Large Cap Value Fund(Prospectus filed 4/29/2003)
Selection Process
The manager emphasizes individual security selection while diversifying thefund's investments across industries, which may help to reduce risk . The managerseeks to identify those companies with favorable valuations and attractive growthpotential the manager employs fundamental analysis to analyze each company indetail, evaluating its management, strategy and competitive market positio n
In selecting individual companies for investment, the manager looks for :
• Share prices that appear to be temporarily oversold of do not reflect thepositive company developments .
• Share prices that appear to undervalue the company's assets, particularlyon a sum-of=the-parts basi s
• Special situations including corporate events, changes in management,regulatory changes or turnaround situation s
• Company specific items such as competitive market position, competitiveproducts and services, experienced management team and stable financialsituation
2. Smith Barney Short-Term High Grade Bond Fund
(Prospectus filed 4/29/200.3)
Selection proces s
The manager focuses on minimizing fluctuations in the fund's net asset value byidentifying short-term fixed income securities the manager believes areundervalued and that offer better protection of capital given current interest rate
and market conditions . In selecting individual securities for investment, the
manager :
• Monitors the spreads between U ..S .. Treasury and government agency orinstrumentality issuers and purchases agency and instrumentality issuesthat it believes will provide a yield advantage
16
Determines sector and maturity weightings based on assessments of theeconomic environment and relative value factors based on interest rateoutlookMeasures the potential impact of'supply/demand imbalances, yield curveshifts and changing prepayment patterns to identify individual securitiesthat balance potential return and ris kUses research to uncover inefficient sectors of the government securitiesand mortgage markets and adjusts portfolio positions to take advantage of
new information
3. Smith Barney U.S. Government Securities Fund
(Prospectus filed 4/2912003)
Selection proces s
the manager selects individual securities that it believes are undervalued or will
offer better protection of'capital during periods of changing market conditions ..
The manager spreads the fund's investments among various sectors, focusingmore heavily on sectors it believes will experience less price volatility givenprevailing interest rates and expected interest rate movements . In selecting
individual securities, the manager :
• Determines sector and maturity weightings based on intermediate andlong-term assessments of the economic environment and relative valuefactors based on interest rate outlook
• Measures the potential impact of'supplyldemand imbalances, yield curveshifts and changing prepayment patterns to identify individual securities
that balance potential return and risk
• Monitors the spreads between U S Treasury and government agency or,instrumentality issuers and purchases agency and instrumentality issuesthat it believes will provide a yield advantage
Uses research to uncover inefficient sectors of'the government securities andmortgage markets and adjusts portfolio positions to take advantage of new
information
XIV. SMITH BARNEY INCOME FUND S
1 . Salomon Brothers SB Capital and Income Fund(Prospectus filed May 19, 2003 )
How the Manager selects the fund's investment s
The manager employs fundamental research and due diligence to assess acompany's :
• Growth potential, stock price , potential appreciation and valuatio n
17
• Credit quality taking into account financial condition and profitability
• Future capital need s
• Potential for change in bond rating and industry outlook
• Competitive environment and management ability
2. Salomon Brothers SB Convertible Fund(Prospectus filed November 28, 2003 )
Selection process
in evaluating a convertible security, the sub-adviser analyzes both the equity andthe fixed income characteristics of the security .
Equity characteristics the sub-adviser looks for include :
• Companies with potential for real, sustainable growth• Companies with competent and accessible management
• Companies with favorable cash flow
• Securities of companies in which the sub-adviser believes the underlyingcommon stock has the potential for significant appreciation over a 12-18month perio d
Fixed income characteristics the sub-adviser looks for include :
• Favorable financial condition and capital structure
• Securities structured in a manner that reduces ris k
• Securities where the yield more than compensates for the degree of risk
3. Smith Barney Capital and Income Fund(Prospectus filed May 19, 2003)
Selection process
The manager employs fundamental research and due diligence to assess acompany's :
• Growth potential, stock price, potential appreciation and valuatio n
• Credit quality, taking into account financial condition and profitability
• Future capital needs
• Potential for change in bond rating and industry outlook• Competitive environment and management abilit y
18
4. Smith Barney Diversified Strategic Income Fund(Prospectus filed November 28, 2403)
Selection process
The manager uses a combination of quantitative models that seek to measure the
relative risks and opportunities of each market segment based upon economic,market, political, currency and technical data and its own assessment of economicand market conditions in an effort to create an optimal risk/return allocation of thefund's assets among various segments of the fixed income market .. After the
manager makes its sector allocations, the manager uses traditional credit analysisto identify individual securities for the hind's portfolio ..
Government and mortgage- and asset-backed securitie s
In selecting government and mortgage- and asset-backed securities, the managerfocuses on identifying undervalued sectors and securities . Specifically, the
manager :
• Emphasizes those sectors and maturities that seem to be most undervaluedor appropriate based on the manager's economic and interest rate outlook
• Monitors the yield spreads between U.S .. Treasury and government agencyor instrumentality securities and purchases agency and instrumentalitysecurities when their additional yield justifies their additional ris k
• Uses research to uncover inefficient sectors of the government andmortgage- and asset-backed markets and adjusts portfolio positions to take
advantage of new information• Measures the potential impact of supply/demand imbalances, changes in
the relative yields for securities with different maturities, and changingprepayment patterns to identify individual securities that balance potential
return and ris k
Foreign government deb t
In selecting foreign government debt, the subadviser considers and compares therelative yields of various foreign government obligations . The subadviser,
diversifies this portion of the portfolio by spreading assets among countries and
regions . The subadviser also may attempt to preserve the U .S .. dollar- value of
securities by using currency derivatives to hedge foreign currency exposure . The
subadviser looks for :
• Economic and political conditions within the issuer's country• Overall and external debt levels and debt services ratio s
• Access to capital markets• Debt service payment history
19
U.S .. and foreign corporate debt securities In selecting U .S and foreign corporatedebt securities, the manager considers and compares the relative yields of'various
types of'obligations and employs a forward looking strategy seeking to identifycompanies that exhibit or demonstrate a potential for higher ratings over time .
The manager considers the issuer's :
• Financial condition
• Sensitivity to economic conditions and trends
• Operating history
• Experience and track record of management
The manager also employs an active sell strategy to dispose of securities that have
a rising risk of default due to material changes in management , operations,earnings , or other internal or external factors
5. Smith Barney Dividend and Income Fund(Prospectus filed November 28, 2003 )
Selection process
Equity investments
the manager's investment strategy for equity investments consists of individualcompany selection The manager looks for investments among a strong core ofgrowth and value stocks, consisting primarily of dividend-paying, blue chipcompanies dominant in their industries . The fund may also invest in companieswith prospects for sustained earnings growth and/or a cyclical earnings record .
In selecting individual companies for the fund's portfolio, the manager looks for
the following :
• Current yield or potential for dividend growth
• Strong or rapidly improving balance sheets
• Recognized industry leadership
• Effective management teams that exhibit a desire to earn consistent
In addition, the manager considers the following characteristics :
• Consistency and growth of dividends
• Past growth records• Future earnings prospects
• Technological innovatio n
• General market and economic factor s
20
Gener ally, companies in the equity portion of the fund's portfolio fall into one ormore of the following categories :
Undervalued companies : companies with assets or earning power that areeither- unrecognized or undervalued .. The manager generally looks for acatalyst that will unlock these values The manager also looks forcompanies that are expected to have unusual earnings growth or whosestocks appear likely to go up in value because of market changes in theway they do business (for example, a corporate restructuring) ..Growth at a reasonable price : companies with superior demonstrated andexpected growth characteristics whose stocks are available at a reasonable
price .. Typically, there is strong recurring demand for these companies'
products .
Fixed Income Investments
the fund invests in a broad range of fixed-income securities In selectingindividual fixed income securities for the fund's portfolio, the manager primarilyfocuses on the relative yields of'securities and at various maturities The manager
looks for :
Favor able sector and maturity weightings based on interest rate outlookStable or improving credit qualit yLow price relative to credit and interest rate characteristic s
6. Smith Barney High Income Fund(Prospectus filed November- 28, 200 .3 )
SELECTION PROCESS The manager attempts to minimize the risk of anyindividual security by diversifying the fund's investments across a r ange of issues,industries and maturity dates . In selecting high yield corporate fixed incomesecurities , the manager- considers and compares the relative yields of ' various typesof'obligations and employs a forward looking strategy seeking to identifycompanies that exhibit favorable earnings prospects or demonstrate a potential forhigher ratings over- time . The manager looks for:
Well-known companies with credit ratings within the upper- and middle-
rated tiers of the high-yield debt market
"Fallen angels" or companies that are repositioning in the marketplacewhich the manager believes are temporarily undervalue d
Younger companies with smaller capitalizations that have exhibitedimproving financial strength or improving credit ratings over time
the manager also employs an active sell strategy to dispose of securities that havea rising risk of default due to material changes in management, operations,earnings, or other internal or external factors ..
21
7. Smith Barney Municipal High Income Fund(Prospectus filed November 28, 2003)
SELECTION PROCESS The manager selects securities primarily by identifyingundervalued sectors and individual securities, while also selecting securities itbelieves will benefit from changes in market conditions . In selecting individual
securities , the manager:
• Uses fundamental credit analysis to estimate the relative value andattractiveness off various securities and sectors and to exploit opportunitiesin the municipal bond market
• Measures the potential impact of supply/demand imbalances for,obligations of different states, the yields available for securities withdifferent maturities and a security's maturity in light of'the outlook forinterest rates to identify individual securities that balance potential return
and risk
• May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative value s
• Seeks to identify individual securities with the most potential for addedvalue, such as those involving unusual situations, new issuers, thepotential for credit upgrades, unique structural characteristics orinnovative feature s
8. Smith Barney SB Convertible Fund(Prospectus filed November- 28, 2003 )
Selection proces s
In evaluating a convertible security, the sub-adviser analyzes both the equity and
the fixed income characteristics of the security
Equity characteristics the sub-adviser looks for include :
• Companies with potential f'or real, sustainable growt h• Companies with competent and accessible management
Companies with favorable cash flow
• Securities of companies in which the sub-adviser believes the underlyingcommon stock has the potential for significant appreciation over a 12-18month perio d
Fixed income characteristics the sub-adviser looks for include :
Favorable financial condition and capital structure
Securities structured in a manner that reduces ris k
Securities where the yield more than compensates for the degree of'ris k
22
9. Smith Barney Total Return Bond Fund(Prospectus filed November 28, 2003)
SELECTION PROCESS The manager actively allocates and reallocates thefund 's investments among the above securities categories . In allocatinginvestments among categories , the manager considers economic and marketconditions and the relative risks and opportunities of each category .. The manager,looks for :
• Categories most favorably positioned in light of the manager's interest rateoutlook
• Categories with favorable relative yields of securities and at variousmaturities
• Categories with the highest availability of attractive securitie s
Once the fund's category allocation has been determined, the manager selectsindividual securities within each category The manager uses fundamental andquantitative analysis to select individual securities The manager looks for :
Stable or improving credit quality
Low price relative to credit and interest characteristic sPotential for credit upgrades, unique structural characteristics orinnovative feature s
XV. SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT FUND IN C
1. Smith Barney Ins titutional Cash Management Fund Inc(Prospectus filed 9/26/200.3 )
Selection process
In selecting investments for the portfolios, the manager looks for :
• The best relative values based on an analysis of yield, price, interest ratesensitivity and credit quality
• Issuers it believes offer minimal credit ris k• Maturities consistent with the manager's outlook for interest rate s
XVI. SMITH BARNEY INVESTMENT FUNDS INC /MD /
Premier Selections All Cap Growth Fund , F/K/A Smith BarneyAll Cap Growth and Value Fund (Prospectus filed August 28,2003)
Selection process
23
Large Cap Growth segment
the Large Cap Growth segment manager emphasizes individual security selectionwhile diversifying this segment of the All Cap Growth Fund's investments acrossindustries, which may help to reduce risk The Large Cap Growth segment
manager attempts to identify established large capitalization companies with the
highest growth potential the Large Cap Growth segment manager then analyzeseach company in detail, ranking its management, strategy and competitive market
position . Finally, the Large Cap Growth segment manager attempts to identify thebest values available among the growth companies identified .
In selecting individual companies for investment, the Large Cap Growth segmentmanager considers :
• Favorable earnings prospects
• Technological innovatio n
• Industry dominanc e
• Competitive products and services
• Global scope
• Long--term operating history
• Consistent and sustainable long-term growth in dividends and earnings pershare
• Strong cash flow
• High return on equity
• Strong financial conditio n• Experienced and effective management
Mid Cap Growth segment
The Mid Cap Growth segment manager focuses on medium capitalizationcompanies that exhibit attractive growth characteristics .. The Mid Cap Growth
segment manager selects individual "growth" stocks for investment in two ways :
by identifying those companies which exhibit the most favorable growthprospects and by identifying those companies in the Mid Cap Growth segment'ssize range which have favorable valuations relative to their growth characteristics ..
This strategy is commonly known as "growth at a reasonable price" and offersinvestors style diversification . In selecting individual companies for investment,
the Mid Cap Growth segment manager considers :
• Growth characteristics, including high historic growth rates and highrelative growth compared with companies in the same industry or sector
• Increasing profits and sale s
• Competitive advantages that could be more fully exploited by a company
• Skilled management committed to long-term growt h
• Potential for a long-term investment by this segment of the All CapGrowth Fund
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The Mid Cap Growth segment manager uses fundamental research to find stockswith strong growth potential and also uses quantitative analysis to determinewhether these stocks are relatively undervalued or overvalued compared to stocks
with similar fundamental characteristics .. The Mid Cap Growth segment
manager's valuations determine whether and when this segment of the All CapGrowth Fund will purchase or sell the stocks it identifies through fundamentalresearch ..
Small Cap Growth segment
The Small Cap Growth segment manager focuses on small capitalizationcompanies that exhibit attractive growth characteristics The Small Cap Growth
segment manager selects individual stocks for investment by identifying thosecompanies which exhibit the most favorable growth prospects . In selecting
individual companies for investment, the Small Cap Growth segment managerconsiders :
• Growth characteristics, including high historic growth rates and highfbrecasted growth of sales and profits and a high return on equit y
• Innovative companies at the cutting edge of positive and dynamic
demographic and economic trend s
• Products and services that give a company a competitive advantage
• Skilled management committed to long-term growt h
• Potential for a long-term investment by this segment of the All CapGrowth Fund
• The Small Cap Growth segment manager uses a disciplined investmentprocess to identify small growth companies it believes are financiallysound and that exhibit the potential to become much larger- and moresuccessful Elements of this process include fundamental research,evaluation of key management and screening techniques .
2. Premier Selections Global Growth Fund, F/K/A Smith BarneyGlobal All Cap Growth and Value Fund (Prospectus filedAugust 28, 2003)
Selection proces s
U .S . Equity segment
the U S . Equity segment manager emphasizes individual security selection whilediversifying across industries, which may help to reduce risk . The U .S . Equitysegment manager focuses primarily, but not exclusively, on companies that havecompleted their "start-up" phase and show positive earnings and the prospect ofachieving significant profits beginning in the two to three years after acquisitionof their stocks .
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When evaluating an individual stock, the US .. Equity segment manager considerswhether the company may benefit from :
• New technologies, products or services
• New cost reducing measures
• Changes in management
• Favorable changes in government regulations
International Equity segment
the International Equity segment manager emphasizes individual securityselection while diversifying across regions and countries which can help to reducerisk .. While the International Equity segment manager selects investmentsprimarily for their capital appreciation potential, some investments have anincome component as well . Companies may have large, mid or small marketcapitalizations and may operate in any market sector. Market conditions aroundthe world change constantly as does the location of'potential investmentopportunities Depending on the International Equity segment manager's
assessment of overseas potential for long-term growth, this segment's emphasisamong foreign markets (including emerging markets) and types of issuers mayvary .
In selecting individual companies for investment, the International Equitysegment manager looks for the following :
• Above-average earnings growth• High relative return on invested capital
• Experienced and effective management
• Effective research, product development and marketing
• Competitive advantages
• Strong financial condition or stable or improving credit quality
By spreading investments across many international markets, the InternationalEquity segment manager- seeks to reduce volatility compared to an investment in asingle region .. Unlike global mutual funds which may allocate a substantialsegment of assets to the U .S markets, this portion of'the Global Growth Fundinvests its assets primarily in countries outside of the U .S
In allocating assets among countries and regions, the economic and politicalfactors the segment manager evaluates include :
• Low or decelerating inflation which creates a favorable environment forsecurities market s
• More stable governments with policies that encourage economic growth,equity investment and development of'securities market s
• Currency stability• The range of individual investment opportunitie s
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3. Premier Selections Large Cap Fund, F/K/A Smith Barney
Large Cap Growth and Value Fund (Prospectus filed August28, 2003)
Selection process
Growth segment
The segment manager emphasizes individual security selection .. The segmentmanager attempts to identify established large capitalization companies with thehighest growth potential The segment manager then analyzes each company indetail, focusing on its management, strategy and competitive market position .Finally, the segment manager attempts to identify the most attractively pricedsecurities among the growth companies identifie d
In selecting individual companies for investment, the segment manager considers :
• Above-average growth prospects
• Technological innovatio n
• Industry dominanc e
• Competitive products and services
• Global scope• Long-term operating history
• Strong cash flow
• High return on equity
• Strong financial conditio n
• Experienced and effective management
• Value segment
The segment manager employs a two-step stock selection process in the search forundervalued stocks of established, well-recognized but temporarily out of favor
companies.. First, the segment manager uses proprietary models and fundamentalresearch to identify stocks that are underpriced in the market relative to their
estimated value . Next, the segment manager looks for a positive catalyst in thecompany's near-term outlook which the segment manager believes will accelerateearnings and positively change the market's view of the company's prospects ..
In selecting individual companies for- investment, the segment manager considers :
• Demonstrated financial strength• Improving returns on invested capital and cash flow
• New managemen t
• New product development or change in competitive position
• Regulatory changes favoring a company
• Restructuring
• New business strategy not yet recognized by the marketplace
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4. Smith Barney Government Securities Fund(Prospectus filed April .30, 2003)
SELECTION PROCES S
The manager focuses on identifying undervalued securities Specifically, the
manager:
• Monitors the spreads between U .S . Treasury and government agency orinstrumentality issuers, and purchases agency and instrumentality issuesthat it believes will provide a yield advantag e
• Determines sector and maturity weightings based on intermediate- andlong-term assessments of the economic environment and relative valuefactors based on interest rate outloo k
• Uses research to identify sectors of the government and mortgage marketsthat are inefficiently priced, and adjusts portfolio positions to takeadvantage of new information
• Measures the potential impact of supply/demand imbalances, yield curveshifts and changing prepayment patterns to identify individual securitiesthat balance potential return and ris k
5. Smith Barney Group Spectrum Fund(Prospectus Filed January 28, 2004)
Selection process
The manager does not seek to select securities based on their individualpotential to outperform the S&P 500 Index Instead , the manager seeks toreplicate the performance of the Allocation Model by basing itsinvestment decisions on the recommendations of the Allocation Model .Once the Allocation Model deems a sub-industry of the S&P 500 Index tobe technically stronger , the manager will purchase the securities of allcompan ies in the sub-industry proportionate to their weightings therein..Conversely , when the Allocation Model downgrades a sub-industry from"hold" to "avoid," the manager will sell the securities of each issuer withinthe sub - industry To the extent the recommendations of the AllocationModel or other factors do not permit the fund to be fully invested, the fundintends to invest in any type of money market instrument .. The managerwill become aware of the Allocation Model's weekly sub-industryrecommendations when such recommendations are made publiclyavailable .
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6. Smith Barney Hansberger Global Value Fund(Prospectus Filed August 28, 2003)
Selection process
the subadviser uses a "bottom-.up" approach to security selection, focusingprimarily on identifying individual securities that meet the fund's value criteria .The fund seeks to invest in companies with low share prices relative to their
earnings, cash flow and/or net asset value .
First, the subadviser uses fundamental analysis to identify a universe of securitiesof'companies the subadviser believes are undervalued . Specifically, thesubadviser uses proprietary valuation screens, internal and external researchsources and other fundamental analysis to identify these undervalued securities .The subadviser considers companies in various industries and sectors, andsearches a wide variety of countries and region s
Once the subadviser has identified a range of securities that appear undervalued,
the subadviser further- analyzes each security to determine whether- it meets thefund's strict value criteria For each security, the subadviser considers economicand other fundamental factors, including :
• Sales and earnings growth
• New product development
• Cash flow
• Track record and structure of managemen t• The subadviser will consider a security for investment in the fund only if it
meets the fund's strict value criteria (Emphasis Added )
7. Smith Barney Investment Grade Bond Fund(Prospectus filed April 30, 2003)
SELECTION PROCES S
The manager emphasizes individual bond selection while diversifying the fund'sinvestments across a range of issues, industries and maturity dates . In selectingindividual corporate bonds for investment, the manager :
Uses fundamental credit analysis to estimate the relative value andattractiveness of various companies and bond issue sIdentifies undervalued corporate bond . issues and avoids issues that may besubject to credit downgrade sDetermines sector and maturity weightings based on intermediate andlong-term assessments of the economic environment and interest rateoutlook
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The manager monitors the fund's portfolio and makes ongoing adjustments basedon the relative values or maturities of individual corporate bonds or changes in thecreditworthiness or overall investment merits of an issue ..
8. Smith Barney Small Cap Growth Fund
(Prospectus Filed January 28, 2004)
Selection process
The manager focuses on small capitalization companies that exhibit attractivegrowth characteristics . The manager selects individual stocks for investment byidentifying those companies which exhibit the most favorable growth prospects .
In selecting individual companies fbi investment, the manager considers :
• Growth characteristics, including high historic growth rates and highforecasted growth of sales, profits and return on equit y
• Innovative companies at the cutting edge of positive and dynamicdemographic and economic trends
• Products and services that give the company a competitive advantage
• Skilled management committed to long-term growth
• Potential fbr a long-term investment by the fun d
• The manager uses a disciplined investment process to identify smallfinancially sound growth companies that exhibit the potential to becomemuch larger and more successful Elements of this process includefundamental research , evaluation of key management and screeningtechniques .
9. Smith Barney Small Cap Value Fund(Prospectus Filed January 28, 2004)
Selection process
The manager emphasizes individual security selection while spreading the fund's
investments among industries and sectors . The manager uses both quantitative
and fundamental methods to identify stocks off smaller capitalization companies itbelieves have a high probability of outperforming other stocks in the sameindustry or secto r
The manager uses quantitative parameters to select a universe of'smallercapitalized companies that fit the fund's general investment criteria . . In selecting,individual securities from within this range , the manager looks for "value"attributes , such as :
Low stock price relative to earnings, book value and cash flow
High return on invested capital
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• The manager also uses quantitative methods to identify catalysts andtrends that might influence the fund's industry or sector focus, or themanager's individual security selection
XVII . SMITH BARNEY INVESTMENT SERIE S
1 . Smith Barney Growth and Income Portfolio(Pr•ospectus filed February 27, 2004)
How the manager selects the fund's investment s
The manager emphasizes individual security selection while spreading the fund'sinvestments among industries and sectors for broad market exposure .. Themanager seeks to construct an investment portfolio whose weighted averagemarket capitalization is similar to the S&P 500 Index .. The manager usesfundamental analysis to identify high-quality companies and then considerswhether the stocks are relatively over- or under-valued . The manager also looksfor a catalyst for stock price appreciation, such as good management, positivechanges in strategy or improvement in the company's competitive position . Themanager, favors companies with above-average dividend yields ..
2. Smith Barney Large Cap Core Portfolio(Prospectus riled February 27, 2004 )
How the manager selects the fund's investment s
The manager uses a "bottom-up" strategy, primarily focusing on individualsecurity selection, with less emphasis on industry and sector allocation . Themanager- selects investments for their capital appreciation potential ; any ordinaryincome is incidental .. In selecting individual companies for investment, themanager looks for companies thought to have :
• Growth characteristics, including high historic growth rates and highrelative growth compared with companies in the same industry or sector-
• Value characteristics, including low price/earnings ratios and otherstatistics indicating that a security is undervalued
• Increasing profits and sale s
• Competitive advantages that could be more fully exploited
• Skilled management that is committed to long-term growth• Potential for a long-term investment by the fun d
the manager uses fundamental research to find stocks with strong growthpotential, and then uses quantitative analysis to determine whether these stocksare relatively undervalued or overvalued compared to stocks with similarfundamental characteristics, The manager's quantitative valuations determinewhether and when the fund will purchase or sell the stocks that it identifie s
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through fundamental research This style of stock selection is commonly known
as "growth at a reasonable price "
XVIIL. SMITH BARNEY INVEST MEN I I RUST
1. Smith Barney Classic Values Fund(Prospectus filed 3/29/2004 )
Selection proces s
The basic tenet of the sub-adviser's philosophy is to analyze each company'sfinancial statements in order to assess a company's "quality of earnings" . Thesub-adviser defines the term "quality of earnings" as a subjective assessment ofhow realistic each company's reporting practices are in relation to the sub-
adviser's view of economic reality
the implementation of'generally accepted accounting principles by a company isbased on assumptions and estimates by a company's management The sub-adviser reassesses a company's financial statements based on its view ofeconomic reality and values the company based on its own assessments. It is the
sub-adviser's opinion that most companies utilize assumptions which may beaggressive or conservative, and therefore the sub-adviser's proprietaryassessments are critical to valuing a company Notwithstanding the sub-adviser'sbest efforts to reassess a company's financial statements, the process by which
financial statements are produced leaves considerable discretion to the company'smanagement and auditors and it may be impossible to detect certain aggressiveaccounting practices As a result, the fact that a company is chosen by the sub-adviser for investment by the fund should not be considered as an endorsement bythe sub-adviser or the fund of the company's accounting practices or the financialstatements resulting from such accounting practice s
2. Smith Barney Intermediate Maturity California MunicipalsFund (Prospectus :filed 3/28/2003 )
Selection process
the manager selects securities primarily by identifying undervalued sectors andindividual securities, while also selecting securities it believes will benefit fromchanges in market conditions . In selecting individual securities, the manager :
Uses fundamental credit analysis to estimate the relative value andattractiveness ofvarious securities and sectors and to exploit opportunitiesin the municipal bond marke tMay trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative value s
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• Considers the yields available for securities with different maturities and a
security's maturity in light of the outlook for the issuer, its sector and
interest rate s
• Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
3. Smith Barney Intermediate Maturity New York MunicipalsFund (Prospectus filed 3/28/2003)
Selection process
the manager selects securities primarily by identifying undervalued sectors andindividual securities , while also selecting securities it believes will benefit from
changes in market conditions In selecting individual securities , the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sectors and to exploit opportunities
in the municipal bond marke t
• May trade between general . obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrial
development, based on their apparent relative value s
• Considers the yields available for securities with different maturities and asecurity's maturity in light of the outlook for the issuer, its sector and
interest rate s
• Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential for-credit upgrades, unique structural characteristics or innovative feature s
4. Smith Barney Large Capitalization Growth Fund(Prospectus filed 3/28/2003 )
Selection process
The manager- emphasizes individual security selection while diversifying the
fund's investments across industries, which may help to reduce risk The managerattempts to identify established large capitalization companies with the highest
growth potential . The manager then analyzes each company in detail, ranking its
management, strategy and competitive market position . Finally, the managerattempts to identify the best values available among the growth companies
identified .
33
In selecting individual companies for investment, the manager considers :
• Favorable earnings prospects
• Technological innovatio n
• Industry dominance• Competitive products and services
• Global scope
• Long term operating histor y• Consistent and sustainable long-term growth in dividends and earnings per
shar e
• Strong cash flow• High return on equity
• Strong financial condition
• Experienced and effective management
Smith Barney Mid Cap Core Fund(Prospectus filed 3/28/2003)
Selection proces s
The fund pursues a core growth investment strategy using a "growth at areasonable price" approach This means that the manager studies the fundamental
characteristics of'medium capitalization companies appropriate for the fund andfrom those fundamentals makes a judgment that certain companies are poised forgrowth and at the same time are available to the fund at a reasonable valuation . Inselecting individual companies for investment, the manager considers :
• Growth characteristics, including high historic growth rates and highrelative growth compared with companies in the same industry or secto r
• Value characteristics, including relative attractiveness suggesting asecurity is mispriced in the market
• Increasing profits and sale s
• Competitive advantages that could be more fully exploited by a company
• Shareholder-oriented management teams committed to long-term growth
• Potential for a long-term investment by the find
The manager uses fundamental research to find stocks with strong growthpotential and also uses quantitative analysis to determine whether these stocks arerelatively undervalued or overvalued compared to stocks with similarfundamental characteristics The manager's quantitative valuations help todetermine whether and when the fund will purchase or sell the stocks it identifiesthrough fundamental research ..
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6. Smith Barney S&P 500 Index Fund(Prospectus filed 4/24/2003)
Selection proces s
the fund is managed as a "pure" index fund . This means that the manager does
not evaluate individual companies to identify attractive investment candidates .
Instead, the manager attempts to minor the investment performance of the Indexas closely as possible by adjusting the fund's portfolio daily to reflect thecompanies included in the Index and their weightings .. Like most index funds, the
fund does not mirror the Index exactly because, unlike the Index, the fund mustmaintain a portion of its assets in cash and liquid short-term securities to meetredemption requests and pay the Band's expenses . The fund's returns are likely tobe below those of the Index because of the fund's operating expenses .
XIX. SMITH BARNEY MANAGED MUNICIPALS FUND IN C
Smith Barney Managed Municipals Fund Inc(Pr,ospectus filed (1/25/2003)
Selection process
The manager selects securities primarily by identifying undervalued sectors andindividual securities, while also selecting securities it believes will benefit fromchanges in market conditions .. In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of'various securities and sectors and to exploit opportunitiesin the municipal bond market
• Measures the potential impact of supply/demand imbalances forobligations of different states, the yields available for securities withdifferent maturities and a security's maturity in light of the outlook forinterest rates to identify individual securities that balance potential return
and risk
• May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative value s
• Identifies individual securities with the most potential f'or added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
35
XX . SMITH BARNEY MASSACHUSETTS M UNICIPALS FUN D
1. Smith Barney Massachusetts Municipals Fund(Prospectus filed 3/26/200.3)
Selection process
The manager- selects individual securities it believes are undervalued or willbenefit from changes in market conditions .. The manager spreads the fund'sinvestments among various sectors, focusing more heavily on sectors it believesare relatively undervalued In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value and
attractiveness of various securities and sectors and to exploit opportunitiesin the municipal bond market
• May trade between general obligation and revenue bonds, and amongvarious revenue bond sectors, such as hospital, industrial development andhousing, based on their apparent relative values
• Considers the yields available for securities with different maturities and asecurity's maturity in light of the outlook for the issuer, its sector and forinterest rate s
• Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
XXI . SMITH BARNEY MONEY FUNDS IN C
1 . Smith Barney Money Funds Inc(Prospectus filed 4/24/2003)
Selection proces s
In selecting investments for the funds, the manager looks for :
The best relative values based on an analysis of yield, price, interest ratesensitivity and credit qualit y
Issuers offering minimal credit risk
Maturities consistent with the manager's outlook for interest rate s
36
XXII. SMITH BARNEY MULTIPLE DISCIPLINE TRUS T
1 . Smith Barney Multiple Discipline Trust(Prospectus filed 4/29/2003)
Selection process
the All Cap Portfolio 's strategy is to combine the efforts of two segmentmanagers and to invest in the stock selections considered most attractive in theopinion of each segment manager . Each segment manager builds a portfolio ofstocks which he or she believes will offer superior long-term capital growthpotential . The target allocations are 50% to the All Cap Growth segment and 50%to the All Cap Value segment The All Cap Portfolio is coordinated by a portfoliomanager who purchases and sells securities for the portfolio on the basis ofrecommendations received from each segment ' s portfolio manager . Thecoordinating portfolio manager identifies and attempts to eliminate duplicatepositions that occur as a result of different portfolio managers recommending thesame security for their respective segments Upon consultation with the segmentmanagers , the coordinating manager may also (but is not required to) makeadjustments if one or more segments become over - or under-weighted as a resultof market appreciation or depreciation Such adjustments will be made at thediscretion of the coordinating portfolio manager and the segment managers . As aresult of the elimination of duplicate positions , and the possibility of allocationadjustments , the performance of, and the tax attributes associated with, the AllCap Portfolio may differ from the performance of, and tax attributes associatedwith, each segment it it had been maintained as a separate portfolio .,
In order to maintain approximately the target allocations of the All CapPortfolio's assets among the two segment managers, the coordinating portfoliomanager will :
Divide all daily cash inflows (purchases and reinvested distributions) andoutflows (redemptions and expense items) between the two segmentmanagers, as appropriate
Rebalance the allocation of the All Cap Value segment and the All CapGrowth segment securities in the All Cap Portfolio's portfolio promptly tothe extent the percentage of the All Cap Portfolio's portfolio invested ineither the All Cap Growth segment's or All Cap Value segment'ssecurities equals or exceeds 60% of the All Cap Portfolio's total assetsinvested in both All Cap Value and All Cap Growth segment securities
As a consequence of its efforts to maintain assets at targeted percentages, thecoordinating portfolio manager will allocate assets and rebalance when necessaryby (1) allocating cash inflow to portfolio segments that are below their targetedpercentages, or (2) by selling securities in the portfolio segment that exceeds itstargeted percentage with proceeds being reallocated to the portfolio segment thatis below its targeted percentage . Reallocations may result in early recognition oftaxable gains and in additional transaction costs to the extent the sales of
37
securities as part of these reallocations result in higher portfolio turnover. In
addition, if' one segment manager buys a security during a time frame when theother segment manager sells it, the net position of the All Cap Portfolio in thesecurity may be approximately the same as it would have been with a single
segment manager and no such sale : and purchase . The coordinating portfolio
manager will consider these costs :in determining the allocation and reallocation of
assets . Where possible, in these instances, the coordinating portfolio manager will
seek to avoid transaction cost s
The All Cap Growth segment managers seek to identify the stocks of'companies
of'all capitalizations that exhibit superior balance sheets, exceptionalmanagements, and long-term consistent operating histories .. The segment
managers also consider stocks of companies with rapid earnings growth potential,unrecognized values, industry leadership and management teams that have asignificant ownership stake in a company .
The All Cap Value segment manager applies a selection process that is based onfundamental security analysis and stresses a long-term value orientation .. Thesegment manager seeks to invest in companies whose stock price the segmentmanager believes is undervalued relative to the long-term business fundamentals
of'the company . The segment manager favors companies that have strong balancesheets, but have stock prices that do not accurately reflect cash flows, tangible
assets or management skills .. Cyclical stocks and companies currently out of favor
with analysts and investors are also emphasized .. As part of the value orientation,
the segment manager also emphasizes industry sectors perceived to beundervalued relative to the broad market
The segment manager monitors portfolio holdings on both a technical andfundamental basis The segment manager also tracks the buying and selling
patterns of 'a company's insiders .
XXIII . SMITH BARNEY MUNI FUND S
1 . Smith Barney Flor-ida Portfolio (Prospectus filed 7/28/2003 )
Selection Process
the manager selects securities primarily by identifying undervalued sector's andindividual securities, while also selecting securities it believes will benefit fromchanges in market conditions In selecting individual securities, the manager :
Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sectors and to exploit opportunitiesin the municipal bond market
May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrial
38
development, based on their apparent relative values and their impact onthe level of'dividends generated by the overall portfoli o
Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential for
credit upgrades, unique structural characteristics or innovative features
Considers the yield available for securities with different maturities and asecurity's maturity in light of the outlook for the issuer and its sector andinterest rate s
2. Smith Barney Georgia Portfolio (Prospectus filed 7 /28/2003)
Selection Process
The manager selects securities primarily by identifying undervalued sectors and
individual securities, while also selecting securities it believes will benefit fromchanges in market conditions In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sectors and to exploit opportunitiesin the municipal bond marke t
• May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative values and their impact onthe level of'dividends generated by the overall portfoli o
• Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
• Considers the yield available for securities with different maturities and asecurity's maturity in light of the outlook for the issuer and its sector andinterest rate s
3. Smith Barney Limited Term Portfolio(Prospectus filed 7,128/2003 )
Selection process
the manager selects securities primarily by identifying undervalued sectors andindividual securities, while also selecting securities it believes will benefit fromchanges in market conditions . In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sectors and to exploit opportunitiesin the municipal bond market
• Considers the potential impact of supply/demand imbalances for fixedversus variable rate securities and for obligations of different states, theyield available for securities with different maturities and a security' s
39
maturity in light of the outlook for the issuer and its sector and interestrates
May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative value s
Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
4. Smith Barney National Portfolio (Prospectus filed 7/28/2003 )
Selection process
The manager selects securities primarily by identifying undervalued sector s andindividual securities , while also selecting securities it believes will benefit fromchanges in market conditions . In selecting individual securities , the manager :
• Uses fundamental credit analysis to estimate the relative value and
attractiveness of various securities and sectors and to exploit opportunitiesin the municipal bond market
• Considers the potential impact of supply/demand imbalances forobligations of different states, the yield available for securities withdifferent maturities and a security's maturity in light of the outlook for theissuer- and its sector and interest rates
• May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative values and their impact onthe level of dividends generated by the overall portfoli o
• Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
5. Smith Barney New York Portfolio (Prospectus filed 7/28/2003)
Selection process
the manager selects securities primarily by identifying undervalued sectors andindividual securities, while also selecting securities it believes will benefit fromchanges in market conditions In selecting individual securities, the manager :
Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sectors and to exploit opportunitiesin the municipal bond market
May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative value s
40
Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative features
Considers the yield available for securities with different maturities and asecurity's maturity in light of the outlook for the issuer and its sector andinterest rate s
6 . Smith Barney Pennsylvania Portfolio(Prospectus filed 7/28/2003)
Selection Process
The manager- selects securities primarily by identifying undervalued sectors andindividual securities, while also selecting securities it believes will benefit fiomchanges in market conditions In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sectors and to exploit opportunities
in the municipal bond market
• May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrial
development, based on their apparent relative values and their impact onthe level of dividends generated by the overall portfoli o
• Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
• Considers the yield available for securities with different maturities and asecurity's maturity in light of the outlook for the issuer and its sector andinterest rate s
XXIV. SMITH BARNEY MUNICIPAL MONEY MARKET FUND IN C
1 . Smith Barney Municipal Money Market Fund Inc(Prospectus filed 7/28/2003)
Selection Proces s
The manager selects securities primarily by identifying undervalued sectors andindividual securities The manager only selects securities of issuers that it believespresent minimal credit risk . In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sector s
• Measures the potential impact of supply/demand imbalances for fixedversus variable rate securities and f'or obligations of different states
41
Measures the yields available for securities with different maturities and asecurity's maturity in light of the outlook for interest rates to identifyindividual securities that offer return advantages at similar risk levels
May trade between general, obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative value s
XXV . SMITH BARNEY PRINCIPAL RET URN FUN D
Smith Barney Principal Return Fund(Prospectus filed 3/28/2003)
Selection proces s
the manager seeks zero coupon securities that will mature within one year beforethe Maturity Date The manager expects that the aggregate stated principalamount of the zero coupon securities will be sufficient to meet the fund'sobjective of repaying the investor's original investment . As the fund's zerocoupon securities mature, the proceeds will be invested in short term U ..S ,government securities .
In selecting individual securities for the actively managed portion of the fund, themanager seeks to identify companies with excellent long term growth prospectsbut which are temporarily out of favor with investors The manager's investment
process emphasizes limiting downside risk as an important factor in maintainingfavorable risk/reward ratios in the :fund .
When analyzing potential investment candidates for the fund, the manager looksfor the following factors :
• New or innovative products, especially those likely to enhance revenuesand earnings in the next 12 months
• High technology companies with substantial operating leverage and futureearning power
Catalysts such as a change in management, restructuring or othercorporate events designed to reduce costs and increase earnings and cashflow
• Themes or trends likely to persist for a number of years that could benefita company and/or industry
• Companies that are industry leaders or have a market niche differentiatingthem from other companie s
• Strong balance sheets or ones likely to improve in a relatively short periodof time as a result of asset sales or rapid growth of earnings and cash flow
Maturity date
On the fund's Maturity Date, the following events will occur :
42
• The fund's zero coupon investments will have mature d• The fund's remaining assets and liabilities will be liquidated
• The fund's shares will be redeemed
Within seven days after the Maturity Date, proceeds will be distributed to theshareholders and the fund will be terminate d
XXVI . SMITH BARNEY SECTOR SERIES FUND S
1. Smith Barney Financial Services Fund(Prospectus filed 2/27/2004)
Selection process
The fund normally invests at least 80% of its assets in companies doing businessin the financial services sector . The remainder of the fund's assets are not requiredto be invested in that sector To determine whether a company is principally doingbusiness in the sector, it must meet at least one of the following tests :
At least 50% of its gross income or its net sales must come from activitiesin the sector ;
At least 50% of its assets must be devoted to producing revenues from the
sector ; or
Based on other available information, the manager determines that thecompany's primary business is within the sector .
In buying and selling securities, the fund relies on fundamental analysis of eachissuer and its potential for success in light of its current financial condition and itsindustry position Factors considered, among other things, include long-termgrowth potential, earnings estimates and quality of management
The fund may lend its securities to earn income for the fund .
The fund may, but is not required to, use various techniques, such asbuying and selling futures and options contracts, to increase or decrease its
exposure to changing security prices or other factors that affect securityvalues . The fund may engage in foreign currency transactions solely to
manage its exposure to foreign securities .. If the fund's strategies do notwork as intended, the fund may not achieve its objective .
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2. Smith Barney Health Sciences Fund(Prospectus filed 2/27/2004)
Selection process
The fund normally invests at least 80% of its assets in companies doing businessin the health sciences sector The remainder of the fund's assets are not require dto be invested in that sector. . To determine whether a company is principally doingbusiness in the sector, it must meet at least one of the following tests :
• At least 50% of its gross income or its net sales must come from activitiesin the sector ;
• At least 50% of its assets must be devoted to producing revenues from thesector ; or
• Based on other available information, the manager determines that thecompany's primary business is within the secto r
In buying and selling securities, the fund relies on fundamental analysis of each
issuer and its potential for success in light of its current financial condition and itsindustry position . Factors considered, among other things, include long-termgrowth potential, earnings estimates and quality of management
the fund may lend its securities to earn income for the fund .
The fund may, but is not required to, use various techniques, such as buying andselling futures and options contracts, to increase or decrease the fund's exposureto changing security prices or other factors that affect security values . The fundmay engage in foreign currency transactions solely to manage its exposure toforeign securities . If the fund's strategies do not work as intended, the fund maynot achieve its objectiv e
3. Smith Barney Technology Fund (Prospectus filed 2/27/2004 )
Selection proces s
The fund normally invests at least 80% of its assets in companies doing businessin the technology sector, The remainder of the fund's assets are not required to beinvested in that sector . To determine whether a company is principally doing
business in the sector, it must meet at least one of the following tests :
At least 50% of its gross income or its net sales must come from activitiesin the sector ;
At least 50% of its assets must be devoted to producing revenues from thesector ; or
Based on other available information, the manager determines that thecompany's primary business is within the secto r
44
In buying and selling securities, the fund relies on fundamental analysis of eachissuer and its potential for success in light of its current financial condition and itsindustry position .. Factors considered, among other things, include long-termgrowth potential, earnings estimates and quality of management .
The fund may lend its securities to earn income for the fund .
The fund may, but is not required to, use various techniques, such as buying andselling futures and options contracts, to increase or decrease the fund's exposureto changing security prices or other factors that affect security values the fund
may engage in foreign currency transactions solely to manage its exposure toforeign securities If the fund's strategies do not work as intended, the fund maynot achieve its objective .
XXVII . SMITH BARNEY SHEARSON AG GRESSIVE GROWTH FUND INC .
Smith Barney Aggressive Growth Fund Inc(Prospectus filed December' :Z9, 200 .3)
Selection proces s
The manager emphasizes individual security selection while diversifying the
fund's investments across industries, which may help to reduce risk .. The managerfocuses primarily, but not exclusively, on emerging growth companies that havepassed their "start-up" phase and show positive earnings and the prospect ofachieving significant profit gains beginning in the two to three years after the fundacquires their stocks.. When evaluating an individual stock, the manager considers
whether the company may benefit :From :
• new technologies, products or services
• new cost reducing measure s• changes in management
• favorable changes in government regulation s
XXVIIL SMITH BARNEY SHEA RSON FUNDAMENTAL VALUE FUND IN C
1 . Smith Barney Fundamental Value Fund(Prospectus filed 1)28/2004 )
Selection process
The manager employs a two-step stock selection process in its search forundervalued stocks of temporarily out of'favor companies First, the manager usesproprietary models and fundamental research to try to identify stocks that areunderpriced in the market relative to their fundamental value .. Next, the managerlooks for a positive catalyst in the company's near term outlook which th e
45
manager- believes will accelerate earnings or improve the value of the company'sassets . The manager also emphasizes companies in those sectors of the economywhich the manager believes are undervalued relative to other sectors
When evaluating an individual stock, the manager looks for :
• Low market valuations measured by the manager's valuation models• Positive changes in earnings prospects because of factors such as :• New, improved or unique products and service s
• New or rapidly expanding markets for the company's product s
• New management
• Changes in the economic, financial, regulatory or political environmentparticularly affecting the company
• Effective research, product development and marketin g
• A business strategy not yet recognized by the marketplac e
XXIX . SMITH BARNEY SHEARSON MANAGED GOVERNMENTS FUND IN C
1„ Smith Barney Managed Government Fund(Prospectus filed 11/25/2003
Selection proces s
The manager focuses on identifying undervalued sectors and securities .Specifically, the manager :
• Determines sector and maturity weightings based on intermediate andlong-term assessments of the economic environment and relative valuefactors based on interest rate outlook
• Measures the potential impact of supply/demand imbalances, yield curveshifts and changing prepayment patterns to identify individual securities
that balance potential return and ris k
• Monitors the spreads between U .S . Treasury and government agency orinstrumentality issuers and purchases agency and instrumentality issuesthat it believes will provide a yield advantage
• Uses research to uncover inefficient sectors of the government securitiesand mortgage markets and adjusts portfolio positions to take advantage ofnew information
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XXX. SMITH BARNEY SHEARSON NEW JERSEY MUNICIPALS FUND IN C
Smith Barney Shearson New Jersey Municipals Fund Inc(Prospectus filed 7/28/200.3 )
Selection proces s
The manager selects securities primarily by identifying undervalued sectors andindividual securities, while also selecting securities it believes will benefit fromchanges in market conditions . In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sectors and to exploit opportunitiesin the municipal bond marke t
• May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative value s
• Considers the yield available for securities with different maturities and a
security's maturity in light of the outlook for the issuer and its sector and
interest rate s
• Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
XXXI. SMITH BARNEY SHEARSON OREGON MUNICIPAL FUN D
1 . Smith Barney Or,e,gon Municipals Fund(Prospectus filed 8/27/2003)
Selection process
The manager selects securities primarily by identifying undervalued sectors andindividual securities, while also selecting securities it believes will benefit fromchanges in market conditions . In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of various securities and sectors and to exploit opportunitiesin the municipal bond marke t
• May trade between general obligation and revenue bonds and amongvarious revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative value s
• Considers the yield available for securities with different maturities and a
security's maturity in light of the outlook for the issuer, its sector andinterest rates
• Identifies individual securities with the most potential for added value,such as those involving unusual situations, new issuers, the potential forcredit upgrades, unique structural characteristics or innovative feature s
47
XXXII . SMITH BARNEY SHEARSON TELECOMMUNICATIONS TRUS T
1 . Smith Barney Shearson Telecommunications Trust(Prospectus filed 41/30/2003)
Selection process
The manager holds a portfolio of stocks in the telecommunications industry that itbelieves has the potential to produce high current income, Although this portfolio
currently consists of'a narrow group of companies, the manager, after consideringall the facts and circumstances, may seek to expand the number and variety ofsecurities in the fund's portfolio The manager recognizes that particular securitiesit may acquire may not generate the same level of dividend income that has beenhistorically generated by the regional telephone operating companies currentlyheld by the fund ..
In the past, for tax efficiency purposes and because the fund does not currentlyoffer shares to the public, the manager generally has not purchased additionalstocks for the fund's portfolio nor sold shares of stocks held by the fund except tosatisfy redemption requests and other fund expenses ; however, in order to achieveexposure to a broader list of companies and to better take advantage of otheropportunities in the telecommunications sector, the fund may sell certain portfoliosecurities from time to time and invest the proceeds in other companies in thetelecommunications industry after taking into account the resulting capital gainsdistributions the fund will be required to make .
XXXIII. SMITH BARNEY SMALL CAP CORE FUND INC
1. Smith Barney Small Cap Core Fund Inc(Prospectus filed 4/28/2003)
Selection process
the manager employs an active investment strategy that focuses primarily onindividual stock selection and remains diversified across several industries andsector's .. The manager uses quantitative analysis to identify stocks that possessattractive growth or value characteristics . This style of stock selection, whichblends in similar proportions both the growth and value disciplines of investing, iscommonly known as "growth at a reasonable price " Quantitative methods arealso used to control portfolio risk related to broad macroeconomic factors such asinterest rate changes ..
In selecting stocks based on growth characteristics, the manager generally looksfor companies with :
Above average earnings growth
A pattern of reported earnings that exceeds market expectation s
48
Rising earnings estimates over the next several quarters
High relative return based on invested capita l
In selecting stocks with value characteristics, the manager looks fbi companieswhose stock price is undervalued relative to their earnings, sale or book values .The timing of buy and sell decisions is based on recent price trends
XXXIV. SMITH BARNEY TRUST I I
1. Smith Barney Diversified Large Cap Growth Fund(Prospectus filed 3/1/2004)
Selection Proces s
The manager uses a growth approach, emphasizing well-established companiesbelieved to have superior management teams The manager looks principally forissuers with long histories of strong, relatively predictable earnings growth ratesand the products and strategies for continuing above-average growth Th emanager seeks issuers that build earnings by increasing sales, productivity andmarket share rather than by cutting costs the manager also emphasizes issuerswith stable financial characteristics and low debt levels . The fund may continue tohold securities of issuers that become mid cap or small cap issuers if, in themanager's judgment, these securities remain good investments fbr the fund .,
The manager generally uses a "bottom-up" approach when selecting securities forthe fund .. This means that the manager looks primarily at individual companieswith consistent earnings growth against the context of'broader market forces .
2. Smith Barney International Large Cap Growth Fund(Prospectus filed 4/.3012003)
Selection Process
the subadvisei looks for the securities of well- established, large cap companies(typically with capitalizations of'at least $750 million) believed to have superiormanagement teams and histories of above average revenues and earnings growthwhich appear to be reasonably valued compared to their long-term earningspotential .. The subadviser uses fundamental analysis to find companies that itbelieves have growth potential, and looks first at a particular company and then atthe country in which the company is located and the industry in which thecompany participates . The subadviser eliminates stocks that it believes areoverpriced relative to a company's financial statements and projections . . Thesubadviser then analyzes each company to find those believed to have superiormanagement teams, solid product lines, strong competitive positioning, attractivecash flows and histories of above-average revenues and earnings growth .. The
49
subadviser seeks opportunities to invest in foreign economies that are growingfaster than the U S .. economy
3., Smith Barney Short Duration Municipal Income Fund(Prospectus filed 2/27/2004 )
Selection Process
The manager selects securities that it believes have strong credit quality and areattractively priced . These may include investments with unusual features orprivately placed issues that are not widely followed in the fixed incomemarketplace . In selecting individual securities, the manager :
• Uses fundamental credit analysis to estimate the relative value andattractiveness of'vaiious securities and sectors and to exploit opportunitiesin the municipal bond market
• Considers the potential impact of supply/demand imbalances for fixedversus variable rate securities and for obligations of different states, theyield available for securities with different durations and a security'sduration in light of the outlook for the issuer and its sector and interestrate s
• May trade between general obligation and revenue bonds and among
various revenue bond sectors, such as housing, hospital and industrialdevelopment, based on their apparent relative value s
4. Smith Barney Small Cap Growth Opportunities Fund(Prospectus filed 3/1/2004 )
Selection Proces s
the fund is managed by a team of'portfolio managers, with each member of the
team focusing on a different industry sector The manager uses a growth-orientedinvestment style that emphasizes small U S companies believed to have one ormore of following :
• superior management teams• good prospects for growth
• predictable, growing demand for their products or service s• dominant positions in a niche market or customers who are very large
companies
• cyclical recovery potentia l• strong or improving financial condition s
In addition, the fund may invest in companies believed to be emerging companiesrelative to potential markets or undervalued relative to their peers . The fund may
50
continue to hold securities of issuers that become mid cap or large cap issuers if;in the manager-'s judgment, these securities remain good investments for the fund ..
The manager generally uses a "bottom-up" approach when selecting securities forthe fund . This means that the manager looks primarily at individual companiesagainst the context of broader market forces .
XXXV. SMITH BARNEY WORLD FUNDS IN C
1. Global Government Bond Portfolio(Prospectus Filed 2/27/200 4
Selection process
In seeking to achieve the fiend's income objective, the manager considers andcompares the relative yields of various obligations of various developed nations .In seeking to achieve the fund's capital appreciation objective, the manager seeksthe best values currently available in the marketplace In both cases, the manageruses quantitative techniques to measure and assess risk . Depending on themanager's outlook, the fund's emphasis among foreign markets and betweencapital appreciation- and income-oriented investments may vary. The fund willnot invest more than 45% of its assets in a single country other than the UnitedStates . Allocation of the fund's investments will depend upon the relativeattractiveness of the global markets and particular issuers .
In allocating assets among countries and regions, the economic and politicalfactors the manager looks for include :
• Political and economic stability and favorable inflation and governmentdeficit prospect s
• Favorable currency movements
In selecting securities of particular issuers, the manager looks for :
• Favorable yield, maturity, issue classification and quality characteristics• Strong financial condition ar stable or improving credit qualit y
51
2. Smith Barney International All Cap Growth Portfolio(Prospectus filed 2/27/2004)
Selection Proces s
In selecting individual companies for investment, the manager looks for thefollowing :
• Above average earnings growth
• High relative return on invested capital• Experienced and effective management• Effective research, product development and marketing• Competitive advantages• Strong financial condition or stable or improving credit quality
By spreading the fund's investments across many international markets, themanager seeks to reduce volatility compared to an investment in a single region ..Unlike global mutual funds which may allocate a substantial portion of assets tothe U .S .. markets, the fund invests substantially all of its assets in countries outsideof the U ..S ..
In allocating assets among countries and regions, the economic and politicalfactors the manager evaluates include :
• Low of decelerating inflation which creates a favorable environment forsecurities markets
• Stable governments with policies that encourage economic growth, equityinvestment and development of'securities markets
• Currency stability
The range of individual investment opportunitie s
XXXVI . TRAVELERS SERIES FUND INC
1 . Travelers Series Fund Inc, F/K/A Smith Barney Travelers
Series Fund Inc (Prospectus filed 2/28/2003 )
Selection proces s
The manager emphasizes individual security selection while diversifying thefund's investments across regions and countries which can help to reduce risk ..While the manager selects investments primarily for their capital appreciationpotential, some investments have an income component as well Companies inwhich the fund invests may have large, mid or small size market capitalizationsand may operate in any market sector . Market conditions around the world changeconstantly as does the location of'potential investment opportunities . Depending
52
on the manager's assessment offoverseas potential for long-term growth, thefund's emphasis among foreign markets and types of issuers may vary..
In selecting individual companies for investment, the manager looks for :
• Above average earnings growth High relative return on invested capital
• Experienced and effective management
• Competitive advantages• Strong financial conditio n
• The range of individual investment opportunitie s
By spreading the fund's investments across many international markets, themanager seeks to reduce volatility compared to an investment in a single region .Unlike global mutual funds which may allocate a substantial portion of assets tothe U S markets, the fund invests substantially all of its assets in countries outsideof the U . S
In allocating assets among countries and regions, the economic and politicalfactors that the manager evaluates include :
• Low or decelerating inflation which creates a favorable environment forsecurities market s
• Stable government with policies that encourage economic growth, equityinvestment and development of securities market s
• Currency stability
F :\TMDOCS\1348 Ol\041215131613 DOC'
53
EXHIBIT "D"
t'ERTIFICATION OF PROPOSED LEAD PLAINTIFFPURSUANT TO F EDERAL SECURITIES LAWS
1 . lr R)LtLeelare rho; tio llowirty as to the claims atserreit .. or to be asserted ..undetr nc~ tedet' al : C Curitie4 iat4 :w :
I have reviectied the Smi th Bame. %, and Setomun Brothers family of fundscomplaint p repared by Milherg Weiss Herchad & Schulman LIT, whom I desisnare a: mtcounsel in this action for all purposes .
' . 1 did not Liogtrire or hold Smith Harne} and Salomon Brothers Mutual Fund unirsat the direction of pluintift' % counsel or in nt'dcr to participate in any private action under thefedera l seruritie, laws .,
3 1 any Zvifling to N erve as a lead plainritt either individually or as part of a group . Aread plaintiff f is a representative party who acts on behalt of other class members in directing theaction . and whose duties ni a} include. testifying at deposition :u1d tsial _
4 I wil l nor accept any payment for tier , i nag a . a representative party beyond my protarn share at any recovery , except reasonable cost s and expen ses, such as lost wages and uuvelexpenses. directly related to the class representation , as ordered or approved by the courtpursuant to law ..
5 T has a not sought to serve or Served a5 a representative party for a clas s in anacrion under the federal securities laws within the past three years , except:
6 1 understand that this is not a claim roost .. and that my ability to sharp in anyrecotieiv is a memhei of the class is unat'N i. ted by my Lleci,aun to serve as a representative part}
7 Since Match 22 . 1999 ., 1 hat e ni .ute the t vtlowirtr transactions or held units i nSmith Hurttey anti Salomon Hrothers tnmik of lumis . staid will provide records of thosetransactions upon request :
ut 'I " No . ofti hnre `/Jjnirs
Buy/SeII ate Price Perh+lr !I inl i
tt "f y 5~~ 1 O .L v$a
please use and attach additional pages it' necessary
1 declare under penalty of perjury that the foregoing is true and correct
Executed this .11- dot of ' 2004
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