Opinion
No. C 98-3130 MMC
May 17, 2002
ORDER GRANTING DEFENDANT'S MOTION TO DISMISS FEDERAL CLAIMS; REMANDING STATE LAW CLAIMS
Before the Court is defendants' motion to dismiss plaintiffs' Amended Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiffs have filed opposition, to which defendants have replied.
The matter came on regularly for hearing on December 21, 2001. Jared B. Stamell of Stamell Schager, LLP, and Joseph J. Tabacco, Jr., of Berman DeValerio Pease Tabacco Burt Pucillo appeared for plaintiffs. Kevin P. Muck and James N. Kramer of Brobeck, Phleger Harrison LLP appeared for defendants. At the December 21, 2001 hearing, the Court ordered the parties to file supplemental memorandum, which the parties subsequently filed. Having considered the papers submitted in support of and in opposition to the motion, the arguments of counsel, and the supplemental memorandum, the Court rules as follows.
BACKGROUND
Defendant Robertson Stephens Investment Trust ("the Trust"), an "open-end investment company" registered with the Securities and Exchange Commission ("SEC"), offers shares in eleven mutual funds, including the Contrarian Fund ("the Fund"). (See Amended Compl. ("AC") at ¶¶ 1, 6.) Plaintiffs allege that defendants Robertson, Stephens Company Investment Management, L.P. ("RSIM LP"), and Robertson, Stephens Investment Management, Inc., were the Trust's investment advisers, that defendant Robertson, Stephens Company, Inc., was a general partner in RSIM LP and was the Trust's principal underwriter, that defendant Robertson, Stephens Company, LLC, participated in management of the Trust and its investment advisers, that defendant G. Randall Hecht was the President, Chief Executive Officer, and a Trustee of the Trust, and that defendant Paul H. Stephens was the Fund's portfolio manager during the relevant time. (See id. at ¶¶ 7-12.)
On February 27, 1997, plaintiffs purchased 4,365.5410 shares in the Contrarian Fund for $75,000, and sold the shares on September 10, 1997, at a loss of $9,560.54. (See id. at ¶ 5.) In the Amended Complaint, plaintiffs allege that their losses were caused by defendants' violations of "investment policies of the Contrarian Fund that could only be changed by a majority vote of the shareholders." (See id. at ¶ 18.) Specifically, according to plaintiffs, "[d]efendants violated investment limitations on borrowing, issuing senior securities, pledging assets, short sales and concentration of investments" (see id. at ¶ 82), and "materially chang[ed] the investment objective of the Fund" (see id. at ¶ 86), all without shareholder approval (see id. at ¶¶ 82, 86) in violation of § 13(a) of the Investment Company Act of 1940 ("the 1940 Act") and state statutory and common law. (See id. at ¶¶ 3, 74).
LEGAL STANDARD
A motion to dismiss under Rule 12(b)(6) cannot be granted 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" See Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. See Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). In analyzing a motion to dismiss, the court must accept as true all material allegations in the complaint and construe them in the light most favorable to the nonmoving party. See NL Industries, Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986).
DISCUSSION
Defendants seek dismissal of plaintiffs claims, arguing that plaintiffs fail to state a claim under federal or state law.
A. Federal Claims
In their First and Second Causes of Action, plaintiffs allege that defendants violated § 13(a) of the 1940 Act. Section 13(a), in relevant part, provides:
No registered investment company shall, unless authorized by the vote of a majority of its outstanding voting securities —
. . .
(2) borrow money, issue senior securities, underwrite securities issued by other persons, purchase or sell real estate or commodities or make loans to other persons, except in each case in accordance with the recitals of policy contained in its registration statement in respect thereto;
(3) deviate from its policy in respect of concentration of investments in any particular industry or group of industries as recited in its registration statement, deviate from any investment policy which is changeable only if authorized by shareholder vote, or deviate from any policy recited in its registration statement pursuant to section 80a-8(b)(3) of this title;See 15 U.S.C. § 80a-13(a) ("§ 13(a)")
An investment company must include in its registration statement filed with the SEC a recital of the policy of the registrant in respect of [specified] activities," including borrowing of money and issuing senior securities, see 15 U.S.C. § 80a-8(b)(1), "a recital of all investment policies of the registrant . . . which are changeable only if authorized by shareholder vote," see 15 U.S.C. § 80a-8(b)(2), and "a recital of all policies . . . which the registrant deems matters of fundamental policy." See 15 U.S.C. § 80a-8(b)(3).
1. First Cause of Action
As part of the registration statement the Trust was required to file with the SEC, the Trust filed a Statement of Additional Information. (See AC at ¶ 29.) The Statement of Additional Information, in a section entitled "The Funds' Investment Limitations," lists 15 "fundamental investment restrictions" which the Trust specified could not be changed without shareholder approval. (See Welch Decl. Ex. B at B-15-16.) In relevant part, the Statement of Additional Information states:
The Statement of Additional Information is dated August 15, 1996, and was revised on December 20, 1996. (See Welch Decl. Ex. B at B-1.) Plaintiffs allege that the Statement of Additional Information is part of the Registration Statement that had earlier been filed on January 16, 1996. (See AC at ¶ 29.)
The Welch Declaration is Exhibit 1 to the Muck Declaration. For ease of reference, the Court refers to Exhibit 1 as "Welch Decl."
The Trust has adopted the following fundamental restrictions which (except to the extent they are designated as nonfundamental as to any Fund) may not be changed without the affirmative vote of a majority of the outstanding voting securities of the affected Fund.
The Contrarian Fund, the Developing Countries Fund, the Emerging Growth Fund and the Value + Growth Fund.
A Fund may not:
. . .
3. make short sales or purchases on margin, although it ma obtain short-term credit necessary for the clearance of purchases and sales o its portfolio securities and except as required in connection with permissible options, futures, short selling and leverage activities as described elsewhere in the Prospectus and this g Statement;
. . .
5. mortgage, hypothecate, or pledge any of its assets as security for any of its obligations, except as required for otherwise permissible borrowings (including reverse repurchase agreements), short sales, financial options and other hedging activities;
. . .
7. borrow money, except from banks for temporary or emergency purposes or in connection with otherwise permissible leverage activities, and then only in an amount not in excess of one-third of the value of the [Fund's] total assets . . .;
. . .
9. invest more than 25% of the value of the Fund's total assets in the securities of companies engaged in any one industry (except securities issued by the U.S. Government, its agencies and instrumentalities);
10. issue senior securities, as defined in the 1940 Act, except that this restriction shall not be deemed to prohibit the Fund from making any otherwise permissible borrowings, mortgages or pledges, or entering into permissible reverse repurchase changes, and options and futures transactions;
. . .
Both parties have offered certain documents the Trust filed with the SEC pursuant to the registration process. Plaintiffs refer to such documents in the Amended Complaint. Documents which must be filed with the SEC are properly considered on a motion to dismiss, see Kramer v. Time Warner, Inc., 937 F.2d 767, 773-74 (2nd Cir. 1991), as are SEC filings to which a plaintiff refers in a complaint See In re Silicon Graphics Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999). Accordingly, the Court grants the parties' respective requests for judicial notice, and takes judicial notice of the registration statement documents the Trust filed with the SEC.
In the First Cause of Action, plaintiffs allege that defendants violated the above five fundamental restrictions by deviating from those restrictions without shareholder approval.
a. Short Sales/Pledging of Assets
Plaintiffs allege that defendants deviated from the third fundamental restriction, which addresses short sales, and the fifth fundamental restriction, which addresses pledging of assets, when defendants held more than 25% of the Fund's total assets in securities sold short.
"A short sale is a term of art used for a security trading practice in which a party speculates that a particular stock will go down in price and seeks to profit from that drop." Lapidus v. Hecht, 232 F.3d 679, 680-81 (9th Cir. 2000) (internal quotations and citation omitted). The practice has been explained by the Ninth Circuit as follows:
Typically, the party places an order to sell a security that it does not own. In order to meet its contractual obligation, the party borrows the security from a broker. The party covers the short by subsequently purchasing an identical security and returning this identical security to the broker. If the price of the security has declined by the time of the party's purchase, the party profits from the difference between the earlier sale price and the subsequent purchase price. If the price of the security has increased by the time of the purchase, the party's loss is the amount of the price increase.Id. at 681.
In a Prospectus dated August 15, 1996, as revised October 11, 1996 ("August 1996 Prospectus"), which the Trust filed with the SEC, the Trust stated that "[a]ll short sales must be fully collateralized, and no Fund will sell securities short it immediately after and as a result of the sale, the value of all securities sold short by the Fund exceeds 25% of its total assets." (See Welch Decl. Ex. A at 14.) On May 5, 1997, the Trust filed with the SEC a Fund Prospectus Supplement, which replaced the earlier 25% limitation on short sales with a 40% limitation:
The Fund Prospectus Supplement amended a Prospectus dated April 1, 1997 ("April 1997 Prospectus"), which was filed with the SEC. (See Stamell Decl. Ex. C at 2 Welch Decl. Ex. C.) The April 1997 Prospectus contained no percentage limitation on short sales. (See Welch Decl. Ex. C at 14.)
The Contrarian Fund may enter into short sales on securities with a value of up to 40% of the Fund's total assets, and its positions in short sales may have the effect of providing the Fund with investment leverage. To the extent the Fund enters into short sales on a substantial portion of its assets, the Fund will to that extent be exposed to the risks of short sales described above.
(See Stamell Decl. Ex. C at 2.) Plaintiffs allege that because defendants did not obtain shareholder approval prior to revising the 25% limitation on short sales to 40%, defendants violated § 13(a) when the Fund's holdings in securities held short exceeded 25%.
Plaintiffs allege that, after the end of the first quarter of 1997, the Fund's short positions were increased to approximately 26% to 27% of the Fund's assets (see AC at ¶ 56), and that "for most of 1997" the Fund's short positions constituted 25% to 35% of its assets. (See id. at ¶ 59.)
Defendants argue that plaintiffs' claims based on short selling fail as a matter of law because the Trust never designated the 25% limitation as fundamental or changeable only if authorized by shareholder vote. See Krouner v. American Heritage Fund, Inc., 899 F. Supp. 142, 148-49 (S.D. N.Y. 1995) (holding plaintiff failed to state claim under § 13(a) where complaint alleged defendants deviated from investment policies not identified in fund's registration statement or prospectus as policies changeable only by shareholder vote; dismissing action).
As noted, the third fundamental restriction provides that the Trust cannot engage in short selling except as permitted in the Prospectus or Registration Statement, and the fifth fundamental restriction provides that the Trust cannot pledge assets except as required for otherwise permissible short sales. At the time defendants are alleged to have increased the percentage of the Fund's holdings in securities sold short to over 25% of the Fund's assets, that conduct was specifically provided for in the April 1997 Prospectus and Fund Prospectus Supplement. In short, the face of the amended complaint establishes that defendants' short selling activities were always in compliance with the most recent Prospectus then on file with the SEC.
Plaintiffs do not disagree. Instead, plaintiffs argue that the 25% limitation stated in the August 1996 Prospectus was incorporated into the fundamental restrictions set forth in the Statement of Additional Information. This argument fails for several reasons. First, there is no language in the Statement of Additional Information or August 1996 Prospectus purporting to incorporate a given percentage limitation into the listed fundamental restrictions. Rather, the section of the Statement of Additional Information on which plaintiffs rely sets forth the limitation in the most general of terms: "A fund may not . . . make short sales . . . except as required in connection with permissible short selling and leverage activities as described elsewhere in the Prospectus . . . ." (See Welch Decl. Ex. B at B-15.) The Prospectus, in turn, states: "The investment policies of each Fund may, unless otherwise specifically stated, be changed by the Trustees of the Trust without shareholder approval, as may each Fund's investment objective." (See id. Ex. A at 7.) Because the 25% limitation is not "specifically stated" in the August 1996 Prospectus, or elsewhere, to be a policy that may be changed only by shareholder approval, the 25% limitation was subject to change without shareholder approval.
A comparison of the language used in setting forth the fundamental restrictions further supports this conclusion. Other fundamental restrictions listed in the Statement of Additional Information do include specified percentage limitations. For example, the fourth fundamental restriction provides that the Fund may not "with respect to 50% of its total assets, invest in the securities of any one issuer (other than the U.S. Government and its agencies and instrumentalities), if immediately after and as a result of such investment more than 5% of the total assets of the Fund would be invested in such issuer . . . ." (See id. Ex. B at B-15.) Similarly, the twelfth restriction provides that the Fund may not "purchase more than 10% of the outstanding voting securities of anyone issuer," and may not "own, directly or indirectly, more than 25% of the voting securities of any one issuer or affiliated person of the issuer . . . ." (See id. Ex. B at B-16.) By contrast, the third restriction contains no specified percentage as to short selling, thus manifesting the Trust's intent to retain greater flexibility and freedom of action as to that activity.
Plaintiffs reliance on SEC Release No. 1C-167, 1941 WL 37719, is unavailing. In that opinion letter, the SEC stated that an investment company cannot, in its registration statement, simply "reserve freedom of action" to issue senior securities. Rather, an investment company must indicate, "insofar as is practicable, the extent to which the registrant intends to engage in the particular activity." See SEC Release No. IC-167, 1941 WL 37719 at *3. In so finding, the SEC clearly distinguished between what constitutes a sufficient statement of policy for activities covered under § 80a-8(b)(1) of the 1940 Act, such as the issuance of senior securities, and a statement of policy for activities covered under § 80a-8(b)(2) of the Act. As noted by the SEC, § 8(b)(2) "merely affords the registrant an opportunity, without in any way obliging it, to make statements of fundamental policy." For the reasons stated infra, the short sales at issue herein do not constitute the issuance of senior securities. Rather, such sales are activities covered by §§ 80a-8(b)(2)-(3). Consequently, in accordance with SEC No. 1C-167, the Trust was entitled, as a matter of fundamental policy, to reserve freedom of action as to short sales.
The 1940 Act was amended in 1970 and, as a result, the provisions of former § 80a-8(b)(2) are now covered by § 80a-8(b)(3).
For purposes of the issues presented, there is no material distinction between between § 8(b)(2) and § 8(b)(3). See 15 U.S.C. § 80a-13(a)(3).
Defendants came close to reserving freedom of action but did not do so. Absent the third restriction, the Fund's Portfolio Manager, (see Welch Decl. Ex. G at 19), would have free rein to engage in short sales without any notice to the shareholders. The third restriction precludes the Fund from engaging in short selling unless such activity is approved by a vote of the Trustees and then only after the results of that vote have been published.
Accordingly, plaintiffs have failed to state a claim that defendants violated § 13(a) by investing in securities held short in excess of 25% of the Fund's total assets.
b. Senior Securities
The tenth fundamental restriction prohibits the Fund from issuing "senior securities," except as allowed for "otherwise permissible borrowing, mortgages, or pledges . . . ., without shareholder approval. (See Welch Decl. Ex. B at B-16.)
Plaintiffs argue that short sales involve the issuance of "senior securities," and that the 25% restriction on short sales was incorporated into the tenth fundamental restriction. This argument is not persuasive. First, for the reasons discussed above, the 25% restriction was not so incorporated. Second, the SEC has determined that when an investment company engages in short sale transactions, the company does not issue "senior securities" if the company has created a segregated account containing liquid assets sufficient to "cover" the short sales. See Dreyfus Strategic Investing (SEC No. Action Letter), 1987 WL 108242, at * 5-6, 8; SEC Release No. IC-10666, 1979 WL 171288, at *8. Plaintiffs allege that "the Registration Statement represents that every short sale will be collateralized by a pledge of liquid securities." (See AC at ¶ 43) There is no allegation that defendants failed to adhere to that representation. Under such circumstances, plaintiffs have not alleged that defendants issued senior securities.
Accordingly, plaintiffs fail to state a claim under § 13(a) based on the theory that defendants issued senior securities without shareholder approval in violation of the tenth fundamental restriction.
c. Borrowing Money
The seventh fundamental restriction prohibits the Fund from borrowing money in excess of 33% of the value of the Fund's total assets without shareholder approval. (See Welch Decl. Ex. B at B-16.) Plaintiffs argue that defendants violated the seventh fundamental restriction (1) by increasing the percentage limitation on short sales from 25% to 40%, and (2) by increasing the Fund's holdings in securities held short to 35% of the Fund's assets.
For the reasons set forth above, this theory lacks merit.
Defendants argue that plaintiffs theories are legally flawed because short selling involves the borrowing of securities, not the borrowing of money. See 17 C.F.R. § 240.3b-3 (defining "short sale" as sale consummated by delivery of "security borrowed"); Lapidus, 232 F.3d at 681 (explaining that party selling short "borrows the security from a broker," and then "covers the short by subsequently purchasing an identical security and returning this identical security to the broker"); Vucinich v. Paine, Webber, Jackson Curtis, Inc., 803 F.2d 454, 460 (9th Cir. 1986) (noting short sales involve borrowing stock that broker has on hand). Indeed, in their amended complaint, plaintiffs appear to adopt defendants' definition of short sales (see AC at ¶ 40) (referencing Registration Statement); plaintiffs do not allege that defendants borrowed money from their broker, or anyone else, to consummate the short sales.
17 C.F.R. § 240.3b-3 provides in relevant part:
"The term "short sale" means any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller." 17 C.F.R. § 240.3b-3.
Plaintiffs argue that the phrase "borrowing money," as used in the Fund's Statement of Additional Information, should not be interpreted narrowly. Plaintiffs, however, offer no authority interpreting "money" to mean or include "securities." The 1940 Act itself does not define "money." "When a word is not defined by statute, we normally construe it in accord with its ordinary or natural meaning." Smith v. United States, 508 U.S. 223, 228 (1993). "Money" ordinarily is defined as "something generally accepted as a medium of exchange, a measure of value, or a means of payment." See Merriam-Webster's Collegiate Dictionary (10th ed. 2001). A "security" ordinarily is defined as "evidence of debt or of ownership (as a stock certificate or bond)." See id. Thus, the words "money" and "security," in their ordinary or natural meaning, are not synonymous.
Nothing in the documents filed by defendants as part of the registration process indicates that "borrowing money" should be given anything other than its ordinary meaning or, in particular, that it should be interpreted to mean "short selling." The Statement of Additional Information discusses borrowing money and short selling in separate fundamental restrictions. Such a distinction is in accord with SEC opinion letters and orders differentiating between the two activities. See, e.g., SEC Release No. IC-6194, 1970 WL 103702 (noting, pursuant to investment company's plan, company "would not borrow money, issue senior securities, make short sales, purchase on margin" or engage in other specified activities"); SEC Release No. IC-5017, WL 1967 88430 (providing by order that "[investment company] . . . (c) will not borrow money . . . (d) will not engage in short sales").
Additionally, the 1940 Act itself recognizes a distinction between borrowing money and borrowing other property. See 15 U.S.C. § 80a-17(a) (providing that it is unlawful for "affiliated person or promoter of or principal underwriter for a registered investment company . . . to borrow money or other property from such registered company"); 15 U.S.C. § 80a-56(a) (providing that it is unlawful for "any person who is related to a business development company . . . knowingly to borrow money or other property from such business development company").
Finally, plaintiffs argue that a motion to dismiss should not be granted "so long as [the pleading] puts the party on notice of the claim." (See Pls.' Response to Defs.' Supp. Mem. at 1:27-2:1.) A motion to dismiss, however, is properly granted where a claim is based on a legal theory that is not cognizable. See Balistreri, 901 F.2d at 699. Here, plaintiffs have failed to provide any authority for their allegation that defendants have "borrowed money" by engaging in short sales.
Accordingly, plaintiffs have failed to state a claim under § 13(a) based on the theory that defendants borrowed money without shareholder approval.
d. "One Industry"
The ninth fundamental restriction provides, with certain exceptions not relevant to the instant action, that the Fund will not invest more than 25% of the value of the Fund's total assets in the securities of companies engaged in "any one industry." (See Welch Decl. Ex. B at B-16.)
Plaintiffs allege that defendants, as of June 30, 1997, had invested "approximately 26% to 27% of total assets" in one industry, identified by plaintiffs as the "mining industry," and that, as of December 31, 1997, defendants had invested 36.4% of the Fund's total assets in the "mining industry." (See AC at ¶¶ 56, 57, 60.) Plaintiffs allege such investments were made without shareholder approval. (See id. at ¶¶ 57, 60.) Plaintiffs make this claim for the first time in their Amended Complaint, filed August 29, 2001. Defendants argue that plaintiffs' new claim is barred by the statute of limitations.
According to defendants, there is no "mining industry," but rather four separate industries, specifically gold mining, nickel mining, diamond mining, and copper mining. Although there is evidence in the record supporting defendants' position, (see Welch Decl. Ex. A at 17; Muck Decl. Ex. 4 at 9), this issue cannot be resolved on a motion to dismiss.
A claim for violation of § 13(a) of the 1940 Act must be filed no later than one year from the date the violation should have been discovered in the exercise of ordinary diligence, but in no event more than three years from the date of the alleged violation. See Friedlob v. Trustees of Alpine Mutual Fund Trust, 905 F. Supp. 843, 853 (D. Colo. 1995). Plaintiffs allege they did not have notice until August 13, 1997, that defendants had invested in the "mining industry" in excess of 25% of total assets. (See AC at ¶ 71.) As defendants point out, however, the Amended Complaint was not filed for more than four years after that date.
In response, plaintiffs argue that the new claim "relates back" to August 12, 1998, the date the original complaint was filed. Under Rule 15(c), "[a]n amendment of a pleading relates back to the date of the original pleading when . . . the claim . . . asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading." See Fed.R.Civ.P. 15(c).
An amendment alleging a new theory of recovery based on conduct alleged in the original complaint relates back to the original complaint. See Tiller v. Atlantic Coast Line R. Co., 323 U.S. 574, 580-81 (1945) (holding amendment alleging railroad violated Federal Boiler Inspection Act by failing to keep locomotive properly lighted, thus causing decedent's death, related back to original complaint alleging railroad violated Federal Employers' Liability Act by failing to keep locomotive properly lighted and thus causing decedent's death). The Ninth Circuit has explained the reasoning behind this rule: "[T]he defendant knows that the whole transaction described in [the original complaint] will be fully sifted, by amendment if need be, and that the form of the action or the relief prayed or the law relied on will not be confined to their first statement." See Union Pacific Railroad Co. v. Nevada Power Co., 950 F.2d 1429, 1432 (9th Cir. 1991) (holding amendment seeking overcharges paid under one tariff related back to original complaint seeking overcharges paid under earlier tariff where new claim "arose as a direct result of the facts surrounding" plaintiffs original claim) (internal quotations and citations omitted).
In their original complaint, plaintiffs alleged that defendants violated state and federal laws by changing investment policies on "senior securities, borrowing, short sales, or other leverage creating investment techniques" without shareholder approval. (See Compl. at ¶ 49.) The only facts alleged in the original complaint concern defendants' failure to obtain shareholder approval before changing the percentage limitation on short sales from 25% to 40%. (See id. at ¶¶ 30-55.) The original complaint does not allege that defendants violated any fundamental restrictions by engaging in conduct other than changing the percentage of allowable short sales. The allegation that defendants invested more than 25% of the Fund's total assets in the "mining industry" involves a different fundamental restriction, different types of transactions, and different types of trading practices. In sum, plaintiffs' "mining industry" claim does not arise out of the same conduct, transactions, or occurrences described in the original complaint. Consequently, the claim that defendants violated the ninth fundamental restriction by investing more than 25% in one industry does not relate back to the date the original complaint was filed. See Sierra Club v. Penfold, 857 F.2d 1307, 1316 (9th Cir. 1988) (holding new claim does not relate back where "amendment goes beyond alleging a different theory of recovery" and instead seeks relief for conduct not challenged in original complaint).
Additionally, the Court notes that when the instant action was pending before the Ninth Circuit, plaintiffs described it as follows: "The suit involves defendants' use of so-called `short sales.'" (See Lee Decl. Ex. 1 at 4.)
Accordingly, plaintiffs' claim that defendants deviated from the ninth fundamental restriction is barred by the statute of limitations.
2. Second Cause of Action
The Fund's Prospectus states that the Fund's "investment objective" is "maximum long-term growth." (See Welch Decl. Ex. A at 7.) In their Second Cause of Action, plaintiffs allege that defendants violated § 13(a) of the 1940 Act by "materially changing the investment objective of the Fund from maximum long-term growth to speculative investment without a shareholders' vote." (See AC at ¶ 86.) In other words, plaintiffs again allege an improper change in a fundamental policy.
The Statement of Additional Information addresses changes to investment policies generally, and changes to investment objectives specifically, as follows:
Except for the investment restrictions listed above as fundamental or to the extent designated as such in a Prospectus, the other investment policies described in this Statement or in the Prospectus are not fundamental and may be changed by approval of the Trustees. As a matter of policy, the Trustees would not materially change a Fund's investment objective without shareholder approval. y
(See Welch Decl. Ex. B at B-18.)
Plaintiffs rely on the second of the above two sentences, arguing that because defendants stated that "as a matter of policy" the investment objective would be changed only with shareholder approval, § 13(a) prohibited defendants from changing the investment objective without shareholder approval. Plaintiffs' theory, however, ignores the sentence immediately preceding the sentence on which they rely. That sentence provides that if an investment policy is not identified "above" in the Statement of Additional Information, or in the Prospectus, as an investment policy that can only be changed with shareholder approval, the investment policy may be changed without shareholder approval. The "investment objective" is not listed "above" in the list of 15 fundamental restrictions in the Statement of Additional Information. (See id. Ex. B. at B-15-16.) Neither does the Prospectus designate the Fund's investment objective as a policy that may be changed only with shareholder approval. Rather, the Prospectus states that "each Fund's investment objectives" may be changed "without shareholder approval." (See id. Ex. A at 7.) Thus, the second sentence, read in context, states only that the Trustees ordinarily would not change the investment objective without shareholder approval, not that the Trustees are prohibited from doing so. In other words, the subject sentence does not set forth a fundamental policy.
As noted, the 1940 Act requires that an investment company recite in its registration statement "all investment policies . . . which are changeable only if authorized by shareholder vote." See 15 U.S.C. § 80a-8(b)(2).
Accordingly, plaintiffs have failed to state a claim under § 13(a) based on defendants' having changed the Fund's investment objective without shareholder approval.
B. State Law Claims
Defendants removed the instant action, alleging federal question jurisdiction. The Court's jurisdiction over plaintiffs' state law claims is supplemental in nature. (See AC at ¶ 3.) As the federal claims raised in this action have been dismissed, the Court declines to exercise supplemental jurisdiction over the remaining state law claims. See 28 U.S.C. § 1367(c)(3) (providing district court may decline to exercise supplemental jurisdiction over state claims when it has dismissed claims over which it has original jurisdiction).
Accordingly, plaintiffs' state law claims will be remanded to state court.
CONCLUSION
For the reasons stated above:
1. Plaintiffs First and Second Causes of Action are hereby DISMISSED without leave to amend.
2. Plaintiffs Third, Fourth, Fifth, and Sixth Causes of Action are hereby REMANDED to the Superior Court of California, in and for the County of Alameda.
3. The Clerk of the Court shall close the file and terminate all pending motions.