Summary
holding that there is no implied private right of action under Section 36 of the ICA
Summary of this case from In re Mutual Funds Inv. LitigationOpinion
No. 02 CV 5870 (SJ).
January 21, 2005
WECHSLER HARWOOD HALEBIAN FEFFER LLP, New York, NY, Joel Carl Feffer, Nadeem Faruqi, Attorneys for Plaintiffs.
DECHERT LLP, New York, NY, Melvin A. Schwarz, Attorney for Defendants.
MEMORANDUM AND ORDER
Plaintiffs Loren Chamberlain, on behalf of himself and all other similarly situated common shareholders of Aberdeen Global Income Fund, Inc., and Richard Potapchuk, on behalf of himself and all other similarly situated common shareholders of Aberdeen Asia-Pacific Income Fund, Inc. ("Plaintiffs") bring this class action against Defendants Aberdeen Asset Management Limited and Aberdeen Asset Managers (C.I.) Limited (collectively, "Defendants"), investment manager and investment adviser, respectively, of the Aberdeen Asia-Pacific Income Fund, Inc. and Aberdeen Global Income Fund, Inc ("the Funds"). (Am. Compl. ¶ 1.)
Plaintiffs allege that Defendants breached their fiduciary duty to the Funds and to their shareholders by devising and seeking to implement a scheme in which the Funds would issue rights to their common shareholders ("the Rights Offering scheme"), in violation of Section 36(a) of the Investment Company Act ("ICA"), 15 U.S.C. § 80a-35(a), and Maryland common law. (Id. ¶¶ 5, 13.)
Presently before this Court is Defendants' Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendants assert that: 1) Plaintiffs do not allege any injury, because they did not suffer any injury; 2) Plaintiffs have not alleged that Defendants had any responsibility for the decision to announce the Rights Offerings, and Defendants did not have this responsibility; 3) Plaintiffs' claims are derivative and cannot be pleaded as direct claims; and 4) there is no private cause of action under ICA § 36(a). (Defs.' Mem. Law Supp. Mot. Dismiss)
STANDARD OF REVIEW
Rule 12(b)(6) of the Federal Rules of Civil Procedure provides for the dismissal of a claim for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). The court should not dismiss the complaint for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). On a motion to dismiss a complaint under Rule 12(b)(6), a court "must accept as true all of the factual allegations set out in plaintiff's complaint, draw inferences from those allegations in the light most favorable to plaintiff, and construe the complaint liberally." Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2001). The following summary of the factual background is therefore based upon the Amended Complaint.
FACTUAL BACKGROUND
Plaintiffs allege that Defendants devised and sought to implement a scheme in which the Funds would issue rights to their common shareholders ("the Rights Offerings"). (Am. Compl. ¶ 5.) On October 8, 2002 Defendants "caused to be filed" with the Securities and Exchange Commission ("SEC") registration statements for the Rights Offerings. (Id. ¶ 6.) The registration statements were subsequently withdrawn on approximately January 10, 2003. (Id. ¶ 6.)
Plaintiffs assert that the purpose of the proposed rights offerings was to coerce shareholders into increasing their investment in the Funds, thereby increasing Defendants' fees but negatively impacting existing shareholders. (Id. ¶¶ 7-8.) Although the rights were never in fact issued (see id. ¶ 6), Plaintiffs state that even the proposal of the Rights Offerings lowered the value of the Funds' shares during the month of October 2002 (id. ¶ 55) and "caused the investment community to realize that [D]efendants were willing and inclined to subordinate their fiduciary duties to their own avarice, thereby chilling the demand for the Funds' shares for the foreseeable future." (Id. ¶ 53.)
DISCUSSION Existence of a Private Right of Action
The law in this Circuit regarding the existence of a private right of action under ICA § 36(a) is somewhat in flux, but this Court finds that the Second Circuit has indicated that there is no private right of action under this provision. In Olmsted v. Pruco Life Ins. Co. of New Jersey, 283 F.3d 429, 432-36 (2d Cir. 2002), the Second Circuit discussed the history of Supreme Court jurisprudence regarding private rights of action, and the approach courts must take in determining whether a statutory provision confers a private right of action in light of the recent Supreme Court decision Alexander v. Sandoval, 532 U.S. 275 (2001). The Olmsted court explained that the Supreme Court has increasingly emphasized the importance of looking to statutory text to determine whether Congress created a private right of action, rather than implying private rights of action based on the court's interpretation of statutory policy. Id. at 432-34.
The court concluded that "[p]ast decisions reflecting judicial willingness to `make effective [statutory] purpose' in the context of implied rights of action belong to an ` ancien regime.'" Id. at 434 (quoting Sandoval, 532 U.S. at 287). The Second Circuit noted that although "an overwhelming majority" of earlier decisions interpreting provisions of the ICA had found implied private rights of action, "[w]hen those cases were decided . . . courts had more latitude to weigh statutory policy and other considerations than they do now." Id. at 434. The Olmsted court listed among these cases representing the ancien regime a number of cases finding private rights of action under ICA § 36(a). Id. at 434 n. 4 (citing McLachlan v. Simon, 31 F.Supp.2d 731, 737 (N.D.Ca. 1998); Young v. Nationwide Life Ins. Co., 2 F.Supp.2d 914, 926 (S.D.Texas 1998); Strougo v. Scudder, Stevens, Clark, Inc., 964 F.Supp. 783, 798 (S.D.N.Y. 1997);In re Nuveen Fund Litig., No. 94-C-360, 1996 WL 328006, at *6 (N.D.Ill. June 11, 1996); Seidel v. Lee, No. Civ A. 93-494, 1994 WL 913930, at *2 (D.Del. Oct. 14, 1994); In re ML-Lee Acquisition Fund II, L.P., 848 F.Supp. 527, 539-45 (D.Del. 1994)).
The Olmsted court also outlined the factors that courts should assess when determining whether a private right of action exists. Although the Olmsted decision addressed other provisions of the ICA, when the analysis mandated by the decision is applied to ICA § 36(a), 15 U.S.C. § 80a-35(a), it is evident that there is no private right of action for enforcement of this section of the statute.
"A court must `begin [its] search for Congress's intent with the text and structure' of the statute and cannot ordinarily conclude that Congress intended to create a right of action when none was explicitly provided.'" Id. at 432 (quoting Sandoval, 532 U.S. at 288) (internal citations omitted). The first question, therefore, is whether a provision explicitly provides a private right of action; if the answer is in the negative, a court must presume that Congress did not intend to create one. Id. at 432. ICA § 36(a) states, in relevant part, that "[t]he [Securities and Exchange] Commission is authorized to bring an action" alleging certain violations of fiduciary duties. This does not explicitly provide a private right of action.
Second, a court must look at whether a provision "contain[s] rights-creating language" for persons who are protected under the statute, or instead focuses only on the persons regulated. Id. at 433. If "[t]he language of [the] sections only describes actions by insurance companies that are prohibited" and "does not mention investors such as the plaintiffs," there is "`no implication of an intent to confer rights on a particular class of persons.'" Id. at 433 (quoting Sandoval, 532 U.S. at 289). ICA § 36(a) is devoted primarily to describing the actions that are prohibited. To the extent that it mentions investors, it is only to say that a court, in awarding relief after the Securities and Exchange Commission has established its allegations of breach of fiduciary duty, should give "due regard to the protection of investors and to the effectuation of the policies declared in section 80a-1(b) of this title." 15 U.S.C. § 80a-35(a).
Third, a court must consider whether the statute has provided an alternative method of enforcement, because "The express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others." Id. at 433 (quotingSandoval, 532 U.S. at 290). As the Olmsted court pointed out, Section 42 of the ICA, 15 U.S.C. § 80a-41, "explicitly provides for enforcement of all ICA provisions . . . by the Securities and Exchange Commission . . . through investigations and civil suits for injunctions and penalties." Id. at 433. ICA § 36(a) likewise begins by granting the Commission the authority to bring an action alleging violation of fiduciary duties.
Finally, a court must consider whether Congress provided a private right of action for enforcement of any other section of the statute, because "Congress's explicit provision of a private right of action to enforce one section of a statute suggests that omission of an explicit private right to enforce other sections was intentional." In the case of the ICA, Section 36(b) creates a private right of action by a shareholder against the adviser for a breach of the duty not to charge excessive fees. 15 U.S.C. § 80a-35(b); Strougo v. BEA Associates, 188 F.Supp.2d 373, 379 (S.D.N.Y. 2002). The implication, therefore, is that if Congress wished to create a private right of action for violations of Section 36(a), it could have done so, as it did for Section 36(b).
These factors give rise to a strong presumption that Congress did not intend to create a private right of action for enforcement of ICA § 36(a). Although there is legislative history indicating that Congress may have intended to create a private right of action for this provision, see Olmsted, 283 F.3d at 435, "[w]here the text of a statute is unambiguous, `judicial inquiry is complete except in rare and exceptional circumstances,' and legislative history [is] instructive only upon `the most extraordinary showing of contrary intentions.'"Id. This Court finds that the legislative history available in this instance does not constitute such an "extraordinary showing."
Although, as Plaintiffs point out (Pl. Mem. Law Opp'n Defs.' Mot. Dismiss at 15-16), a reading of Olmsted that gives rise to a finding that there is no private right of action under ICA § 36(a) may imply discordance between the Olmsted opinion and theStrougo opinion issued by the same court only a week earlier,Strougo v. Bassini, 282 F.3d 162 (2d Cir. 2002), the fact remains that the Olmsted opinion is the Second Circuit's more recent ruling on the issue. Additionally, the opinion lists the District Court's opinion in Strougo as one of the cases representing the ancien regime. Olmsted, 283 F.3d at 434 n. 4, suggesting that this Court is no longer bound to follow it.
Since the Olmsted decision, no court in this Circuit has decided the question of whether a private right of action exists under ICA § 36(a). See In re Merrill Lynch Focus Twenty Fund Investment Co. Act Litigation, 218 F.R.D. 377, 379 (E.D.N.Y. 2003) (noting that "§ 36(a), on its face, applies to the SEC and not to private citizens such as Plaintiffs in the instant case" but that many federal courts have recognized implied private rights of action in § 36(a) in decisions subsequently called into doubt by Olmsted and Sandoval, and deciding that "in view of the conflicting arguments on this question, the Court declines, at this time, to make any sweeping judgment of law regarding the existence of private rights of action under § 36(a), because, assuming arguendo that such a right exists, Plaintiff in the instant case failed to fulfill the demand requirement under Fed.R.Civ.P. 23.1"); Scalisi v. Fund Asset Management, L.P., 380 F.3d 133, 136 n. 4 (2d Cir. 2004) (declining to reach the issue of whether ICA § 36(a) creates a private right of action because of the finding that Plaintiffs failed to sufficiently plead demand futility under Fed.R.Civ.P. 23.1). This Court finds that when Olmsted and Sandoval are applied to ICA § 36(a), it is evident that the provision does not give rise to a private right of action.
CONCLUSION
For the reasons stated herein, Defendants' Motion to Dismiss is GRANTED. As Plaintiff's only federal cause of action have now been dismissed, this Court declines to exercise supplemental jurisdiction over Plaintiff's remaining state law claims pursuant to 28 U.S.C. § 1367(c)(3). The Clerk of Court is directed to enter a final judgment of dismissal.
Because this Court has found that the Amended Complaint may be dismissed on the grounds that there is no private right of action for their claim, it is not necessary to address the other grounds asserted in Defendants' Motion to Dismiss.
SO ORDERED.