Nationwide Financial ordered to pay $10.3 million

Citing "institutional incompetence" at Nationwide Financial's mutual-funds business, based in King of Prussia, a Delaware judge ordered the company to pay a Michigan investment manager $10.3 million for breaching a contract.

The lawsuit in Superior Court related to the 2007 management buyout of Nationwide's 65 percent stake in NorthPointe Holdings L.L.C., of Troy, which managed assets for some of Nationwide's retail mutual funds.

As part of the $25 million buyout, NorthPointe managers negotiated provisions to protect their business with Nationwide Funds Group, which accounted for 22 percent of NorthPointe's $3.5 billion in assets under management, for three years.

But nine months after the deal was completed in September 2007, Nationwide redeemed $260 million from the biggest mutual fund NorthPointe managed for Nationwide, a move Judge Andrea L. Rocanelli called "looting" in her 60-page decision.

About half of that money was immediately deposited in a new Nationwide mutual fund designed to compete directly with NorthPointe's, but with "artificially low fees," according to the opinion.

The judge found that the $260 million redemption from the NorthPointe fund financially devastated NorthPointe and violated the sales agreement.

Nationwide, which employs about 100 in King of Prussia, said Friday that it was disappointed in the July 16 ruling and would explore its legal options.

"This lawsuit arose over a contract dispute between Nationwide and NorthPointe. Nationwide stands behind its business practices and leadership. We believe we acted appropriately throughout and in the best interest of the funds' shareholders," the company said.

Nationwide's sale of NorthPointe was part of the Columbus, Ohio, company's exit from the management of mutual fund assets - a business launched in 1999 in partnership with Philadelphia native Paul J. Hondros - to focus on marketing and distributing funds.

John H. Grady, who succeeded Hondros as president of Nationwide's mutual fund operations in late 2006 and stayed until January 2008, played a key role in negotiating the sale of NorthPointe. Grady was followed in quick succession by two other presidents, giving the firm four presidents in three years.

"The court finds that high turnover in key positions at Nationwide resulted in institutional incompetence," the judge wrote.

Grady, who was based in Nationwide's suburban Philadelphia offices and was a key witness in the case, got a relatively glowing review by the judge.

"Other than Grady," the judge wrote, "the Nationwide witnesses were evasive and made efforts to shift blame and escape responsibility."

215-854-4651 @InqBrubaker