Opinion
Civil Action No. 01-5734.
February 9, 2004
James V. Bashian, Esq., LAW OFFICES OF JAMES V. BASHIAN, P.C., Fairfield Commons, Fairfield, New Jersey. Paul O. Paradis, Esq., ABBEY GARDY, LLP, New York, New York, Attorneys for Plaintiff.
Mark A. Kirsch, Esq., CLIFFORD CHANCE US LLP, New York, New York, Herbert J. Stern, Esq., STERN, GREENBERG KILCULLEN Roseland, New Jersey, Attorneys for Defendant.
OPINION ORDER
On January 6, 2003, Plaintiff Patricia Benak filed a complaint on behalf of the Alliance Premier Growth Fund (the "Fund") in the United States District Court for the District of New Jersey against Defendant Alliance Capital Management, L.P. pursuant to section 36(b) of the Investment Company Act of 1940, 15 U.S.C. § 80a-35 (1997). On March 21, 2003, Defendant filed the present motion seeking to dismiss Plaintiff's complaint for the failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). See Fed.R.Civ.P. 12(b)(6). The Honorable William J. Martini, U.S.D.J., heard oral arguments on this issue on August 21, 2003. The case was reassigned to this Court on January 21, 2004. Upon reviewing the transcript of that hearing, the submissions of the parties, as well as the applicable case law and legislative history, for the reasons that follow, the Court will GRANT Defendant's motion and dismiss Plaintiff's complaint in its entirety.
The Court notes that Magistrate Judge Hedges consolidated this case with the Jaffe and Goggins cases on January 22, 2004. The present dismissal affects only the original parties inBenak, and not the Jaffee and Goggins parties who have presented claims which do not relate to § 36(b) of the Investment Company Act.
Statement of Facts
Plaintiff purchased approximately 250 shares of the Fund in June of 2000, and continues to own these shares today. (Complaint ¶ 4) (hereinafter "Cplt"). The Fund is a registered investment company under the Investment Company Act of 1940, 15 U.S.C. § 80a-1, et seq. Plaintiff filed the present action on behalf of the Fund to recover the investment advisory fees paid by the Fund to its investment advisor, Defendant Alliance Capital Management, L.P. (hereinafter "Defendant"), during the period of time that Defendant was allegedly in breach of its fiduciary duties "in respect of the receipt of compensation" for its services. (Cplt. ¶ 5).Defendant is a registered investment advisor primarily engaged in the business of rendering investment advisory services. (Cplt. ¶ 6). Defendant is the nation's largest publicly traded asset management firm with $446 billion in assets under management as of February 2002. (Cplt. ¶ 6). The Fund and Defendant entered into an Advisory Agreement on September 17, 1992. (Cplt. ¶ 5). Under the terms of the Advisory Agreement, the Fund pays Defendant an advisory fee equal to the annualized rate of 1.00% of the Fund's average daily net assets up to $5 billion, .95% of the next $2.5 billion of the Fund's average daily net assets, .90% of the next $2.5 billion of the Fund's average daily net assets, and .85% of the Fund's average daily net assets over $10 billion. (Cplt. ¶ 5). Defendant's fee is accrued daily and paid monthly by the Fund. (Cplt. ¶ 5). In exchange for its advisory fees, Defendant performs investment advisory services for the Fund, and is specifically obligated to provide the Fund with "fundamental research" with respect to the purchase of securities. (Cplt. ¶ 9). The main focus of the Fund is to seek the "long-term growth of capital by investing in a limited number of large, carefully selected, high-quality United States companies." (Cplt. ¶ 28). During the twelve-month period immediately preceding the institution of Plaintiff's complaint, Defendant charged the Fund in excess of $140 million for its investment advisory services. (Cplt. ¶ 12).
In conjunction with the Advisory Agreement, Defendant established a "Concentrated Large Cap Growth Strategy" in providing investment advisory services to clients such as the Fund. (Cplt. ¶ 31). This strategy is set forth in one of Defendant's internal documents entitled, " Narrative of Manager's Strategic Approach — Alliance Capital Management Large Cap Growth Equity." According to this document, Defendant is required to adhere to certain well-established rules and procedures in providing investment advisory services. (Cplt. ¶ 31). Among such rules and procedures is Defendant's "Security Selection and Portfolio Construction" procedure that Defendant is required to employ in managing the Fund and other large cap growth accounts. (Cplt. ¶ 10). On this issue, Defendant's internal documents provide in relevant part:
Stock selection is driven by strong, fundamental research provided by [Defendant's] research staff. The objective is to purchase stocks with superior earnings growth at reasonable valuations. Each week from the primary universe of approximately 500 companies, research analysts produce a 1-rated stock list consisting of approximately 100 stocks. The Large Capitalization Growth Team further distills the Alliance 100 down to the "best of the best." This final list of securities is known as the Favored 25. A concentrated Large Cap Growth portfolio is selected from the Favored 25 and typically consists of between 20-25 stocks.
(Cplt. ¶ 32).
With respect to the "Security Selection and Portfolio Construction" procedure, Defendant's analysts utilized a three-tiered ranking system in rating stocks, with "1" representing the highest possible rating and "3" representing the lowest rating. (Cplt. ¶ 48). According to its operating procedures, once one of Defendant's analysts downgraded a stock from a "1" to a "2" rating, the stock no longer qualified for inclusion on Defendant's "Favored 25" list. (Cplt. ¶ 48). On August 16, 2001, Defendant's Senior Electric Utilities Analyst, Annie Tsao, downgraded Enron from a "1" to a "2" rated stock. (Cplt. ¶ 48). According to Plaintiff, because of its "2" rating following Ms. Tsao's downgrade, "Enron no longer qualified for inclusion in the "Alliance 100" — let alone the Alliance "Favored 25." (Cplt. ¶ 48). Further, Ms. Tsao also directed that all Enron shares owned by the Alliance Analyst Portfolio be sold in August of 2001. (Cplt. ¶ 46).
Despite these facts, Defendant purchased more than one-third of a billion dollars in Enron common stock, for a total of 16.3 million shares, for three consecutive months after Ms. Tsao downgraded the stock in August of 2001. (Cplt. ¶ 46). According to Plaintiff, such purchases were unprecedented with respect to both the quantity of shares purchased and the frequency of purchases. Defendant's purchases on Enron common stock were occurring at the exact time when the media were reporting the financial deterioration of Enron. As summarized by Plaintiff in her complaint:
Despite the unexplained resignation of Enron's CEO, the disclosures concerning Enron's partnerships, numerous questions and concerns about Enron's financial statements, and the progressive deterioration of Enron's fundamentals and stock price, [Defendant] disregarded its stated "Sell Discipline" and continued to buy Enron shares on behalf of the Fund — purchasing a total of 6,701,517 Enron shares (at a cost of $208,265,451) from August 15, 2001 through mid-October, 2001, at prices ranging from a high of $37.47 to a low of $24.90 per share.
(Cplt. ¶ 57).
Plaintiff contends that just as Defendant failed to employ its strategy of "Security Selection and Portfolio Construction," it also failed to comply with the "Sell Discipline" outlined in its Narrative of Manager's Strategic Approach — Alliance Capital Management Large Cap Growth Equity, in connection with the management of the Fund. (Cplt. ¶ 65). According to this "Sell Discipline," Defendant is to eliminate "security positions" "when a company's fundamentals deteriorate." (Cplt. ¶ 51). On October 22, 2001, the United States Securities Exchange Commission ("SEC") announced that it had commenced an inquiry into Enron's accounting and financial reporting practices. On October 24, 2001, Enron fired its Chief Financial Officer, Andrew Fastow. (Cplt. ¶ 60). On October 28, 2001, Enron's debt "was downgraded to `junk' status and the SEC announced that its Enron `inquiry' had ripened into a formal investigation." (Cplt. ¶ 60).
In the face of these "devastatingly negative facts and Enron's ever-deteriorating fundamentals," Plaintiff maintains that Defendant ignored its "Sell Discipline" and instead "caused the [Fund] to purchase a total of 4,989,980 more Enron shares (at a cost of $81,271,460) during the period of October 22, 2001 through October 30, 2001. (Cplt. ¶ 61). Further, on November 8, 2001, Enron announced that it was Arestating its financial results" for the approximately five-year period from 1997 to 2001. (Cplt. ¶ 62). On November 15, 2001, Enron's former Chairman, Kenneth Lay, announced that Enron had made "billions of dollars worth of very bad investments." (Cplt. ¶ 62). Moreover, on November 19, 2001, Enron announced the possibility of taking "an additional $700 million pre-tax charge." (Cplt. ¶ 62). According to Plaintiff, Defendant once again ignored its "Sell Discipline" and caused the Fund to purchase an additional 4,635,350 shares of Enron common stock (at a cost of $43,706,333) during this period of time. (Cplt. ¶ 63).
According to Plaintiff, Alfred Harrison managed the Alliance Capital team assigned to the Fund. (Cplt. ¶ 7). In this capacity, "Harrison possessed the power, control, and ability to cause [Defendant] to act in accordance with the requirements of the Advisory Agreement, and to ensure that [Defendant] satisfied the fiduciary duties it owed to the [Fund]." (Cplt. ¶ 9). As stated in Plaintiff's complaint, Harrison admitted that Defendant failed to conduct the "strong fundamental research" that it was obligated to provide to the Fund "in respect of the more than $140 million in compensation the [Fund] paid to [Defendant]." (Cplt. ¶ 35). In support of this allegation, Plaintiff relies on Harrison's admission that "other than a very few short sellers, nobody really dug into the footnotes" of Enron's financial structure. (Cplt. ¶ 40). Moreover, the February 2002 edition of Money magazine quoted Harrison as saying that "`Enron has so many moving parts, nobody knows how they put it together'" and that Enron was a "`faith stock.'" (Cplt. ¶ 35).
The Uniform Application For Investment Advisory Registration filed by Defendant with the United States Securities and Exchange Commission on October 29, 1999 expressly identifies Harrison as a "Control Person" of Defendant, or one who is charged with the responsibility of determining "general client advice." (Cplt. ¶ 8).
In addition to the above, Plaintiff maintains that Defendant also failed to comply with its "Risk Management" procedure, as detailed in Defendant's " Narrative of Managers Strategic Approach — Alliance Capital Management Large Cap Growth Equity." (Cplt. ¶¶ 66, 67, and 68). According to Defendant's "Risk Management" procedure, "portfolios are actively managed to react quickly to changing company fundamentals." (Cplt. ¶ 66). Plaintiff claims that instead of "reacting quickly" to Enron's fundamentals, which Plaintiff submits that Harrison knew were deteriorating, Defendant not only continued to purchase Enron stock, but purchased "an ever increasing number of Enron shares as increasingly negative news concerning Enron's fundamentals was revealed. . . ." (Cplt. ¶ 68).
As stated in Plaintiff's complaint, Harrison caused Defendant "to act with willful misfeasance, bad faith, gross negligence, or reckless disregard of its obligations and duties under the Advisory Agreement, through a series of acts, and failures to act, which caused [Defendant] to breach the fiduciary duties it owed to the [Fund] with respect to the receipt of compensation for such services." (Cplt. ¶ 9). Plaintiff claims that Defendant acted improperly in causing the Fund to purchase 16.3 million shares of Enron common stock at a cost of $333.2 million, at prices that Defendant knew were "materially" and "artifically" inflated. (Cplt. ¶ 9). Specifically, Plaintiff maintains that Defendant failed to: 1) conduct fundamental research with respect to the Enron stock; 2) employ its "Security Selection and Portfolio Construction" procedure; 3) employ its stated "Sell Discipline" procedure; and 4) employ its "Risk Management" procedure. (Cplt. ¶¶ 29, 34, 35, 45, 48, 54, 65, 68).
Plaintiff further claims that Defendant's alleged breach of duty with respect to compensation received was compounded by the "actions and inactions" of Frank Savage, who simultaneously served as a Director of Alliance Capital Management Corporation ("ACMC") (the general partner of Defendant), the Chairman of Alliance Capital Management International, a member of Enron's Board of Directors, and a Member of the Finance and Compensation Committees of Enron's Board of Directors. (Cplt. ¶ 71). Like Harrison, Savage was also a "control person" of Defendant, as detailed in Defendant's Investment Advisor Registration Application. (Cplt. ¶ 72). Plaintiff contends that "[b]ecause Savage simultaneously served as management of Defendant and a Director of ACMC, and as a Director of Enron, Savage was irreconcilably conflicted during the period when [Defendant][allegedly] breached its fiduciary duty to the [Fund] with respect to compensation" received. (Pl.'s Opp'n Br., 8) (Cplt. ¶ 74). As a result, Plaintiff maintains, instead of acting to prevent or halt the purchases of Enron common stock by the Fund during this period of time, "Savage permitted such purchases to occur despite his knowledge that the price of Enron's common stock was grossly artificially inflated because of the massive financial fraud perpetrated at Enron." (Pl.'s Opp'n. Br., 8) (Cplt. ¶¶ 74-76). Savage's knowledge of Enron's fraud was either directly or indirectly transmitted to Defendant and its Officers and Directors, including Harrison, through Savage because of his authority as a "control person" for Defendant. (Cplt. ¶ 76).
Discussion
As previously indicated, Defendant moves for an order dismissing Plaintiff's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). See Fed.R.Civ.P. 12(b)(6) (West 2003). In deciding a motion to dismiss for failure to state a claim under Rule 12(b)(6), the Court must "`accept as true all the allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the non-moving party.'" LG Elecs. Inc. v. First Int'l Computer, Inc., 138 F. Supp.2d 574, 582-83 (D.N.J. 2001) (quoting Rocks v. Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989)). A complaint may be dismissed for failure to state a claim "where it appears beyond any doubt that no relief could be granted under any set of facts which could be proved consistent with the allegations." Doe v. Div. of Youth Family Servs., 148 F. Supp.2d 462, 481 (D.N.J. 2001) (quoting Hishon v. King Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984)). In reviewing the sufficiency of a complaint, the district court plays a limited role. Id. "`The issue is not whether a plaintiff will ultimately prevail[,] but whether the claimant is entitled to offer evidence to support his [or her] claims.'" Id. (quoting Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974)). Generally, when conducting such an inquiry, material beyond the pleadings should not be considered. Id. (citing In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997)). Finally, legal conclusions made in the guise of factual allegations are given "no presumptions of truthfulness." Id. (citing Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986)).
Beginning in 1935, Congress recognized that investment companies and those who entrust their savings to such companies stand in special need of legal protection. Sen. Rep. No. 91-184 (1969), reprinted in 1970 U.S.C.C.A.N. 4897, 4899. Section 30 of the Public Utility Holding Company Act of 1935 directed the Securities and Exchange Commission to make a study of investment trusts and investment companies and to report its findings to the Congress. Id. The study resulted in the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. (hereinafter the "ICA"). The ICA constituted Congress' response to the growing significance of mutual fund companies as an investment medium. Id.
Mutual funds were "originally organized by private investment counselors or by securities dealers to provide the advantage of professional investment guidance and diversification of investment risk to small investors at a modest cost." Id. at 4901. As a practical matter, mutual funds, with rare exception, are not operated by their own employees. Most funds are formed, sold, and managed by external organizations that are separately owned and operated. These separate organizations are usually called investment advisers. In short, the advisers select the funds' investments and operate their businesses and for these services, the advisers receive management or advisory fees. As exemplified in the Advisory Agreement in the present dispute, the fees are usually calculated as a percentage of the funds' net assets and fluctuate with the value of the funds' portfolio. Because of the "unique structure of this industry the relationship between mutual funds and their investment adviser is not the same as that usually existing between buyers and sellers or in conventional corporate relationships." Id. Since a typical fund "is organized by its investment adviser which provides it with almost all management services and because its shares are bought by investors who rely on that service, a mutual fund cannot, as a practical matter sever its relationship with the adviser." Id. Consequently, "the forces of arm's length bargaining do not work in the mutual fund industry in the same manner as they do in other sectors of the American economy."Id.
Recognizing the unique nature of the mutual fund industry, Congress determined that the investment adviser should be a fiduciary of the fund "in such matters as the handling of the fund's assets and investments." Id. at 4902. Consequently, in 1970, Congress added section 36(b) to the Investment Company Act "to specify that the adviser has a fiduciary duty with respect to compensation for services or other payments paid by the fund or its shareholders to the adviser or to affiliated persons of the adviser." Congress enacted § 36(b) in large part because it recognized "that as mutual funds grew larger, it became less expensive for investment advisers to provide additional services." Migdal v. Rowe Price-Fleming Int'l, Inc., 248 F.3d 321, 326-27 (4th Cir. 2001). As such, Congress wanted "to ensure that investment advisers passed on to fund investors the savings that they realized from these economies of scale." Id. at 27 (citing Fogel v. Chestnutt, 668 F.2d 100, 111 (2d Cir. 1981),cert. denied, 459 U.S. 828, 103 S.Ct. 65, 74 L.Ed.2d 66 (1982)).
In its present incarnation, § 36(b) of the ICA provides that "the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services" paid by the investment company or its security holders. In an action by a security holder on behalf of the investment company against the adviser or affiliate, "it shall not be necessary to allege or prove that any defendant engaged in personal misconduct," but "the plaintiff shall have the burden of proving a breach of fiduciary duty." 15 U.S.C. § 80a-35(b) (1997); see also Gartenberg v. Merrill Lynch Asset Mgmt, Inc., 694 F.2d 923, 927 (2d Cir. 1982). However, Congress did not attempt to "set forth a definitive test by which observance or breach of fiduciary duty was to be determined."Gartenberg, 694 F.2d at 927. Despite this, both parties agree upon the applicable standard to be applied under the ICA. To be found liable for a violation of § 36(b) of the ICA, the investment adviser "must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." Gartenberg, 694 F.2d at 928 (citingFogel v. Chestnutt, 668 F.2d 100, 112 (2d Cir. 1981), cert. denied, 459 U.S. 828, 103 S.Ct. 65, 74 L.Ed.2d 66 (1982)). In order to determine whether an investment adviser's fee is excessive for purposes of the statute, "a court must examine the relationship between the fees charged and the services rendered by the investment adviser." Krantz v. Prudential Invs. Fund Mgmt. LLC, 305 F.3d 140, 143 (3d Cir. 2002), cert. denied, 537 U.S. 1113, 123 S.Ct. 928, 154 L.Ed.2d 787 (2003); see also Migdal v. Rowe Price-Fleming Int'l, Inc., 248 F.3d 321, 327 (4th Cir. 2001) (holding that in determining whether fees received by the investment advisers are so disproportionately large that they bore no reasonable relationship to the services rendered, a court "must examine the relationship between the fees charged and the services rendered by the investment adviser").
As noted by the Second Circuit Court of Appeals, courts will utilize the following six factors in deciding whether an investment adviser's fee is excessive under the ICA: 1) the nature and quality of services provided to fund shareholders; 2) the profitability of the fund to the adviser-manager; 3) "fall-out benefits" (benefits other than the advisory fee that accrue to the adviser or its affiliates as a result of the adviser's relationship with the fund); 4) economies of scale; 5) comparative fee structures; and 6) the independence and conscientiousness of the trustees. Krinsk v. Fund Asset Mgmt, Inc., 875 F.2d 404, 409 (2d Cir.), cert. denied, 493 U.S. 919, 110 S.Ct. 281, 107 L.Ed.2d 261 (1989); Krantz v. Prudential Invs. Fund Mgmt LLC, 77 F. Supp.2d 559, 564 (D.N.J. 1999), aff'd, 305 F.3d 140, 143 (3d Cir. 2002), cert. denied, 537 U.S. 1113, 123 S.Ct. 928, 154 L.Ed.2d 787 (2003); Levy v. Alliance Capital Mgmt. L.P., 1998 WL 744005, at *2 (S.D.N.Y. Oct. 26, 1998).
Against this background, the gravamen of Plaintiff's complaint alleges that Defendant "breached its fiduciary duty with respect to compensation for services when it charged Plaintiff $140 million despite its failure to adhere to certain well-established rules and procedures in providing investment advisory services" solely in connection with the Fund's purchase of stock in Enron Corporation. (Pl.'s Opp'n Br., pg. 11). That is, Plaintiff maintains that Defendant failed to conduct "fundamental research" with respect to the Fund's purchase of Stock in Enron Corporation. A close reading of the complaint in this matter evidences that Plaintiff is actually attacking the business judgment of Defendant in investing in Enron at a time when such investments seemed questionable. However, the import of the legislative history behind the enactment of § 36(b) does not support Plaintiff's theory; namely, that a plaintiff can utilize § 36(b) in hindsight as a vehicle to challenge an investment advisor's performance regarding a particular aspect of the overall services provided. As Congress stated, § 36(b) "is not intended to authorize a court to substitute its business judgment for that of the mutual fund's Board of Directors in the area of management fees. It does, however, authorize the court to determine whether the investment adviser has committed a breach of fiduciary duty in determining or receiving the fee." 1970 U.S.C.C.A.N. 4902.
Consistent with this legislative intent, those courts analyzing § 36(b) have emphasized its inapplicability to allegations of corporate mismanagement. See Green v. Nuveen Advisory Corp., 295 F.3d 738, 744 n. 9 (7th Cir. 2002) ("[F]und mismanagement issues are within the purview of § 36(a), not § 36(b)."); In re Nuveen Fund Litigation, 1996 WL 328006, at *12 (N.D. Ill. 1996) (§ 36(b) "indicates a standard of care that only runs to the terms and receipt of compensation and not one that broadly governs an investment adviser's performance."). This does not mean that such breaches of fiduciary duty will go unremedied, only that such relief cannot be had under § 36(b). See Migdal, 248 F.3d at 329 ("Thus, if the claim for general breach of fiduciary is to be brought, it must be done under some other section of the ICA [besides § 36(b)], or alternatively under state law."); Strougo v. BEA Assocs., 1999 WL 147737, at *12-13 (S.D.N.Y. March 18, 1999) (finding that § 36(b) was enacted "`to address a narrow area of concern: the negotiation and enforcement of payment arrangements between the investment adviser and its fund'" and not to provide a cause of action "separate from § 36(a) [of the ICA] to govern the adviser's general performance or financial advice with respect to particular transactions." (internal citation omitted))
Plaintiff attempts to distinguish the prior § 36(b) cases by claiming that in her case, she has alleged a "direct connection" between Defendant's behavior and the advisory fees in that "[d]espite the failure to perform these services, defendant charged the Premier Growth Fund a fee of $140 million." (Pl.'s Br., 17). Plaintiff's allegations are rooted in Defendant's alleged unwise and improper administration of the Fund by purchasing Enron shares. In reality, this assertion is no different than a claim of fiduciary breach for mismanagement. The fact that Defendant received payment for its suspect actions does not make the fee arrangement itself improper and does not alone make the claim cognizable under § 36(b). The features of the fee arrangement are at best incidentally related to the crux of Plaintiff's claims. See, e.g., Migdal, 248 F.3d at 329 ("General breach of fiduciary claims which involve merely an incidental or speculative effect on advisory fees are not properly within the scope of Section 36(b)").
Plaintiff's attempt to shoehorn her claim into § 36(b) by alleging that Defendant received a fee for its work despite a breach of its duties are of unpersuasive. The Court will not stretch the language of § 36(b) to address all improper transactions involving investment advisers simply because they received fees for them. See In re Nuveen Fund Litigation, 1996 WL 328006, at *15 ("While § 36(b) may regulate more than the mere terms of the fee arrangement between the investment adviser and the investment company, the court does not believe that it regulates the propriety of the transactions for which fees are paid.") Allowing an ICA claim to proceed in this instance would permit litigants to attack any aspect of an investment adviser's services under § 36(b) as long as the adviser was paid a fee for the services. Such an expansive interpretation would run counter to the narrow scope intended for the provision. See, e.g., Green v. Fund Asset Management, 286 F.3d 682, 685 (3d Cir. 2002) ("§ 36(b) was intended to provide a very specific, narrow federal remedy that is more limited than the common law doctrines. . . ."). Because Plaintiff's claim is not cognizable under § 36(b), Defendant's motion to dismiss must be granted.
Inasmuch as Plaintiff claims that Defendant Savage's behavior establishes a violation of 36(b), such a claim is also misplaced. First, Plaintiff cites to no legal authority that Savage's dual board membership (general partner of Alliance Capital and outside director of Enron) is illegal. As the Defendant notes, the SEC does not prohibit this practice. Moreover, as in the other allegations, Savage's board membership is at best incidentally related to the advisory fees central to a § 36(b) claim. Whatever potential breach of duty may exist against Mr. Savage is unrelated to the liability of Defendant in this matter under § 36(b). Plaintiff makes no claim that Defendant did not comply with requirements of the Investment Company Act that at least forty percent of an investment company's directors be "disinterested," 15 U.S.C. § 80a-10(a), and that an agreement with an investment adviser be approved by a majority of the disinterested directors, 15 U.S.C. § 80a-15(c). As noted in Migdal in response to similar allegations: Other sections (besides 36(b)) address the independence of the funds' directors. For instance, Section 10(a) addresses the composition of a fund's board of directors, and Section 15(c) addresses the requisite percentage of disinterested directors necessary to ratify an advisory agreement. Furthermore, Section 36(a) imposes a general fiduciary duty upon both the directors and investment advisers of a fund. Section 36(b) was not enacted to provide a cause of action separate from Section 36(a) to govern the directors' independence or the investment adviser's general performance."
Migdal, 248 F.3d at 328-29.
For the sake of completeness, the Court will address why even if Plaintiff's allegations did constitute a proper type of claim under § 36(b), they would not withstand a motion to dismiss. As Defendant correctly submits, under § 36(b) it is the overall nature and quality of the services provided by the investment adviser that is at issue — not merely some small percentage of those services. Plaintiff concedes this point in her opposition brief, and the relevant legislative history supports this conclusion, which provides as follows:
In the event that court action is brought to enforce this fiduciary duty of the investment adviser as to compensation or payments received by him [or her], it is intended that the court look at all the facts in connection with the determination and receipt of such compensation, including all services rendered to the fund or its shareholders and all compensation and payments received, in order to reach a decision as to whether the adviser has properly acted as a fiduciary in relation to such compensation.
Sen. Rep. No. 91-184 (1969), reprinted in 1970 U.S.C.C.A.N. 4897, 4910 (emphasis added). In this instance, however, Plaintiff's complaint fails to address the overall services provided by Defendant to the Fund. Rather, Plaintiff's complaint focuses on Defendant's investments in only one out of the approximately fifty different stocks that Defendant purchased on behalf of the Fund's portfolio, insufficient to support a § 36(b) claim.
Moreover, the complaint must be dismissed because Plaintiff has failed to satisfy her burden of demonstrating that under the particular facts of this case, Defendant's fee was "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." Gartenberg, 694 F.2d at 928 (citation omitted). In applying the six factors outlined in the Krinsk and Krantz decisions to this matter in determining whether Defendant's "fee is so disproportionately large," at best Plaintiff satisfies only one of the factors; namely, "the nature and quality of services provided to fund shareholders." Significantly, a fair reading of Plaintiff's complaint demonstrates that she is only challenging the "quality" of the services provided by Defendant in deciding to invest in shares of Enron during its publicized decline. As noted by the Fourth Circuit Court of Appeals in Migdal, "[w]hile performance may be marginally helpful in evaluating the services which a fund offers, allegations of underperformance alone are insufficient to prove that an investment adviser's fees are excessive." 248 F.3d at 327. As recent times have clearly shown, investing is by no means a risk-free endeavor. Id. "Even the most knowledgeable advisers do not always perform up to expectations, and investments themselves involve quite different magnitudes of risk. Furthermore, investment results are themselves cyclical. An under-achieving fund one year may be an overachieving fund the next." Id. at 327-28.
While Plaintiff is correct that the nature and quality of the services provided by the investment adviser is a relevant factor to be considered in applying the standard, that one factor, in and of itself, is not dispositive. Rather, the Second Circuit Court of Appeals in Krinsk noted that all six factors are to be considered by a court in determining whether a defendant has breached his or her fiduciary duty under § 36(b) of the ICA. 875 F.2d at 409. As Defendant notes, Plaintiff has not pointed to a single case where allegations of excessive fees were sustained on the basis of only one of the six factors. This Court has previously concluded that the dismissal of a complaint pursuant to Rule 12(b)(6) is appropriate when a plaintiff's complaint only addresses one of the six factors utilized by courts in determining whether a § 36(b) violation has occurred. See Krantz, 77 F. Supp.2d at 565 (dismissing a complaint under § 36(b) that only addressed the last factor in the relevant analysis). In this matter, therefore, even accepting that Plaintiff's claim fits within the contours of § 36(b) of the ICA, Plaintiff has likewise failed to satisfactorily plead a prima facie cause of action, and her claim must be dismissed.
Conclusion
Based upon the foregoing reasons, this Court concludes that Plaintiff has failed to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), and will accordingly grant Defendant's motion and dismiss Plaintiff's complaint. This dismissal will be with prejudice pursuant to the decision in Krantz v. Prudential Invs. Fund Mgmt LLC, 305 F.3d 140, 144 (3d Cir. 2002) (denying leave to amend "where the plaintiff was put on notice as to the deficiencies of the complaint, but chose not to resolve them") and Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644, 654 (3d Cir. 1998) (same).
The need to dismiss this motion with prejudice is apparent from the case's procedural history. Several individual complaints had been filed against Alliance Capital alleging that the Fund's investments in Enron violated Section 36(b). On March 11, 2002, prior to these actions being consolidated, Defendant moved to dismiss one of these actions, Roy v. Alliance Capital Mgmt. (Middle District of Florida, Case No. 8:01-CV-2449-T-24MSS), on grounds similar to those presented here. Before that motion was decided, the Roy action was transferred to the District of New Jersey and the motion was later withdrawn due to the consolidation. Plaintiff does not dispute Defendant's assertion that Plaintiff failed to rectify the deficiencies in her amended complaint despite being on notice as to those deficiencies from Defendant's earlier motion to dismiss.
In accordance with this decision, IT IS on this 9th day of February, 2004, hereby;
ORDERED that Defendant's motion to dismiss with prejudice is GRANTED.