Vanguard sued for "illegal gambling" investments

By Grant McCool

NEW YORK, Aug 29 (Reuters) - Shareholders in Vanguard funds sued the Vanguard Group Inc on Friday, accusing fund managers of investing their money in illegal gambling businesses before the government cracked down on them in 2006.

The lawsuit filed in U.S. District Court in Manhattan said "these unlawful investments suffered significant losses when the government began arresting principals of the gambling enterprises," but it did not provide a specific amount.

A spokeswoman for Vanguard Group in Malvern, Pennsylvania said the investment fund management firm had not yet been served with the lawsuit and she could not comment.

An attorney for the two plaintiffs, Tom Sheridan, said the exact amounts would be revealed in the discovery process, but he estimated Vanguard's losses exceeded $10 million.

"The investments by the plaintiffs are not worthless, but they are less than they would have been if the money had not been invested in offshore gambling companies," Sheridan said.

The U.S. cracked down on offshore betting companies in 2006 that included the arrests of executives from British online companies such as Sportingbet and BetOnSports Plc.

Large public companies lost billions of dollars in market value and millions of customers when they shut down their Web sites for sports betting, poker and other games in the United States.

Friday's class action lawsuit brought by Deanna McBrearty of New York, New York, and Marylynn Hartsel of Boca Raton, Florida, makes claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) and seeks a jury trial, compensatory and punitive damages.

A similar lawsuit was filed in U.S. District Court in San Francisco on Thursday against American Century Companies Inc.

The funds named as defendants in the New York lawsuit include Vanguard International Equity Index Funds, Vanguard European Stock Index Fund, Vanguard Horizon Funds and the Vanguard Global Equity Fund.

McBrearty first purchased shares in Vanguard European through her individual retirement account in May 2005, the lawsuit said. It said Hartsel bought shares before July 1, 2006 for investment purposes.

The lawsuit does not name any of the online sites. The largest sites such as PartyGaming and Sportingbet earned most of their money from the United States. PartyGaming suspended its U.S. business after President George W. Bush signed the Unlawful Internet Gambling Enforcement Act on Oct. 13, 2006.

Other defendants named in the lawsuit are Alliance Bernstein LP, Acadian Asset Management LLC, Marathon Asset Management LLP.

A spokesman for Alliance Bernstein LP declined comment. Representatives of Acadian and Marathon could not be reached for comment. (Editing by Andre Grenon)