Source: https://law.justia.com/cases/federal/appellate-courts/F2/825/731/450213/
Timestamp: 2019-10-15 13:39:29
Document Index: 579203181

Matched Legal Cases: ['§ 80', '§ 80', '§ 80', '§ 80', '§ 80', '§ 80', '§ 80', '§ 80']

Fed. Sec. L. Rep. P 93,327bancroft Convertible Fund, Inc. v. Zico Investment Holdings Inc., Michael B. Javett, Firstfidelity Bank, N.a., Georgeson & Company Inc. Andluthie Intercontinentale, Inc.appeal of Zico Investment Holdings Inc, 825 F.2d 731 (3d Cir. 1987) :: Justia
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Fed. Sec. L. Rep. P 93,327bancroft Convertible Fund, Inc. v. Zico Investment Holdings Inc., Michael B. Javett, Firstfidelity Bank, N.a., Georgeson & Company Inc. Andluthie Intercontinentale, Inc.appeal of Zico Investment Holdings Inc, 825 F.2d 731 (3d Cir. 1987)
US Court of Appeals for the Third Circuit - 825 F.2d 731 (3d Cir. 1987) Argued June 23, 1987. Decided July 29, 1987
Zico Investment Holdings Inc. (Zico) appeals from orders of the district court which granted a preliminary injunction against its tender offer for shares of Bancroft Convertible Fund, Inc. (Bancroft) and which denied its motion to vacate that injunction. Bancroft is a closed-end investment company. The district court granted the preliminary injunction after concluding that Bancroft was likely to succeed in establishing that completion of the tender offer by Zico would result in a violation of section 12(d) (1) (A) of the Investment Company Act of 1940, 15 U.S.C. § 80a-12(d) (1) (A) (1982) (the Act). Section 12(d) (1) (A) prohibits an investment company from acquiring more than three (3) percent of the outstanding voting stock of another investment company. Zico contends that the preliminary injunction should be reversed because (1) there is no private cause of action for enforcement of the prohibition in section 12(d) (1) (A) of the Act; (2) the court erred in concluding Bancroft is likely to succeed in proving that Zico is an investment company; and (3) Bancroft made an inadequate showing of irreparable harm. We affirm.
Relying on Judge Hastie's opinion in Taussig v. Wellington Fund, Inc., 313 F.2d 472, 476 (3d Cir.), cert. denied, 374 U.S. 806, 83 S. Ct. 1695, 10 L. Ed. 2d 1031 (1963), the district court concluded that Bancroft's complaint states a claim upon which a private party can seek enforcement of the prohibition in section 12(d) (1) (A) of the Act. In Taussig, this court held that a complaint seeking private enforcement of the prohibition against use of deceptive investment company names, section 35(d) of the Act, 15 U.S.C. § 80a-34(d), stated a claim arising under the laws of the United States, and was sufficient to support pendent jurisdiction over a common-law unfair competition claim. Zico maintains that the district court's reliance on Taussig was misplaced for several reasons.
Zico's first objection is that, unlike the case at bar which involves private enforcement of section 12(d) (1) (A), Taussig involved private enforcement of section 35(d). Admittedly, there is no reported case in this court or any other which deals specifically with private enforcement of the anti-pyramiding prohibition in section 12(d) (1) (A). Zico makes no persuasive argument, however, which suggests congressional intention to treat the prohibition against investment company pyramiding differently, for purposes of private enforcement, than are the various other prohibitions in the Act which are also intended to protect investors.
Finally, Zico urges that Taussig, and the many other cases in other courts,1 which have recognized the availability of private enforcement of the Investment Company Act have been overruled by the line of Supreme Court cases that followed Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975). See, e.g., Touche Ross & Co. v. Redington, 442 U.S. 560, 572, 99 S. Ct. 2479, 2487, 61 L. Ed. 2d 82 (1979); Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 100 S. Ct. 242, 62 L. Ed. 2d 146 (1979); Cannon v. University of Chicago, 441 U.S. 677, 742, 99 S. Ct. 1946, 1981, 60 L. Ed. 2d 560 (1979). Those cases suggest that, in determining whether a private cause of action may be implied from a federal regulatory statute, the starting point is congressional intention.
In Fogel v. Chestnutt, a characteristically thorough and analytical opinion, Judge Friendly considered and rejected the contention that the post-Cort v. Ash cases overruled the settled law on private causes of action under the Investment Company Act. See Fogel v. Chestnutt, 668 F.2d 100, 105-12 (2d Cir. 1981), cert. denied, 459 U.S. 828, 103 S. Ct. 65, 74 L. Ed. 2d 66 (1982). Pointing to the numerous decisions in courts of appeals which, from 1961 forward, upheld private causes of action under the Investment Company Act, Judge Friendly concluded that the issue should be resolved in the same manner as was the question of private causes of action under Rule 10b-5. See Fogel, 668 F.2d at 111, citing Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S. Ct. 165, 30 L. Ed. 2d 128 (1971)).
We need not repeat Judge Friendly's Fogel v. Chestnutt analysis here. We do note, however, that it is consistent with the analysis made a short time later by the Supreme Court in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S. Ct. 1825, 72 L. Ed. 2d 182 (1982). In Curran, the Court considered whether there is an implied private right of action for enforcement of the Commodity Exchange Act (CEA). After many courts of appeals had so held, Congress amended the CEA in 1974 and 1978, but neither the original act nor the amendments addressed the subject of private judicial remedies. The Curran Court, stating that the crucial issue was whether Congress, in amending the CEA, intended to preserve pre-existing implied remedies, reasoned:
Id. at 378-79, 102 S. Ct. at 1839 (footnote omitted). Noting that prior to the amendments, federal courts routinely and consistently recognized an implied private cause of action under the CEA, the Curran Court concluded that an implied cause of action under the CEA was, therefore, part of the "contemporary legal context" in which Congress acted in amending the Act. See id. at 381, 102 S. Ct. at 1841. The Supreme Court found that:
Id. at 381-82, 102 S. Ct. at 1841 (footnote omitted). Therefore, the Curran Court held, the prior law on implied causes of action for enforcement of the statute survived.
We find Fogel v. Chestnutt persuasive authority and Curran controlling. Thus, we turn to the facts presented in the instant appeal and apply the Curran Court's reasoning. In 1970, Congress comprehensively reexamined and significantly amended the Investment Company Act. See Investment Company Amendments Act of 1970, Pub. L. No. 91-547, 84 Stat. 1413. By then, courts of appeals had routinely recognized private causes of action under the statute.2 As was the case with the Commodity Exchange Act amendments, the legislative history of the 1970 amendments to the Investment Company Act is silent with respect to congressional intent to preserve or deny pre-existing remedies. See S.Rep. No. 184, 91st Cong., 2d Sess. (1970); H.R.Conf.Rep. No. 1631, 91st Cong., 2d Sess. (1970), reprinted in 1970 U.S. Code Cong. & Admin. News 4897-4948. Zico points out that section 20 of the 1970 amendments did add one specific private cause of action for damages which permits a shareholder of an investment company to sue the investment company's investment adviser on the company's behalf for recovery of excessive fees. See 15 U.S.C. § 80(a)-35(b) (1982). That substantive change in the law authorizing shareholders to sue to enforce a new standard3 was necessary to overcome the substantive effect, in the derivative suit context, of the business judgment rule because the fees of fund managers are agreed to by fund directors. Inclusion of such an express private remedy has nothing to do with other sections of the Act, however, and in no way suggests a congressional intent to abolish established implied causes of action for their enforcement. See Fogel v. Chestnutt, 668 F.2d at 111; Tannenbaum v. Zeller, 552 F.2d 402, 417 (2d Cir.), cert. denied, 434 U.S. 934, 98 S. Ct. 421, 54 L. Ed. 2d 293 (1977).
H.R.Rep. No. 1341, 96th Cong., 2d Sess. 28-29 (1980), reprinted in 1980 U.S.Code Cong. & Admin.News 4800, 4810-11 (footnotes within footnotes omitted). Clearly, the Committee Report expressly approves the position of those courts which, following the 1970 amendments, held that private causes of action should be implied from the Investment Company Act. Curran, therefore, compels the rejection of Zico's contrary position. We conclude that the district court correctly held that there is an implied private cause of action under section 12(d) (1) (A) of the Investment Company Act.
As previously noted, section 12(d) (1) (A) prohibits an investment company from purchasing any security of another investment company if, after the purchase, the acquiring company owns more than 3 percent of the outstanding voting stock of the acquired company. Bancroft is an investment company and the tender offer contemplates that Zico will acquire a controlling interest in Bancroft. Thus, if Zico is an investment company, the acquisition would be illegal. Zico argues that it is not an investment company. The district court held, however, that Bancroft is likely to succeed in establishing that Zico is. In so ruling, the district court applied the definition of investment company in section 3 of the Act, 15 U.S.C. § 80a-3 (1982) and the attribution provisions within that section. Zico does not dispute that it falls within the basic definition in section 3(a) of the Act, since it is in the business of investing and reinvesting in investment securities. Zico contends, however, that it falls within the exemption in section 3(c), which provides:
15 U.S.C. § 80a-3(c). Zico's position is that the attribution rule of section 3(c) (1) (A) is inapplicable because Zico Investment Holdings Inc. has fewer than 100 stockholders and no stockholder owns 10 percent or more of its stock. The district court concluded, however, that Bancroft is likely to prove that the stock of Zico Investment Holdings Inc. is held by a well-organized coordinated group which, for purposes of the exemption, should be treated as a single company. "Company" is defined in section 2(a) (8) of the Act as
15 U.S.C. § 80a-2(a) (8). "Person" is defined as "a natural person or a company." 15 U.S.C. § 80a-2(a) (28) (1982). Thus, an organized group of natural and artificial persons can be a "company" for purposes of the Act.
Relying on Prudential Ins. Co. of America v. SEC, 326 F.2d 383, 387 (3d Cir.), cert. denied, 377 U.S. 953, 84 S. Ct. 1629, 12 L. Ed. 2d 497 (1964), Zico maintains that the "organized group of persons" to which section 2(a) (8) refers is confined to unincorporated organizations like the so-called "Alexander Fund," in which a group of individual investors pool their funds and entrust them for investment to a manager who acts as their agent. Prudential, however, is not dispositive of the issue presented here. In Prudential, we affirmed an SEC ruling that an account in which Prudential Insurance Company proposed to invest premiums of variable annuity contracts was an investment company because the purchasers of those contracts were an "organized group of persons." We rejected the argument that the definition refers only to recognizable business entities. See id. at 387. Although Zico contends otherwise, Prudential does not stand for the proposition that, absent a common pool or fund, such an organized group is not a company. Thus, we reject Zico's contention that the district court misconstrued section 2(a) (8) and 2(a) (28) of the Act.
Thus, except for Javett, no shareholder in Zico Investment Holdings Inc. owned more than 10 percent of its voting stock. That pattern, Zico contends, qualified Zico Investment Holdings Inc. for the exemption in section 3(c) (1) (A).
Zico's final objection to the irreparable harm finding is that Bancroft delayed in applying for a preliminary injunction, thereby permitting Zico to go forward with an earlier tender offer in which it acquired more than 3% of the shares. Zico insists that Bancroft should have moved for a preliminary injunction after 3% of the shares were tendered. We are unpersuaded. Zico attempts to confuse pendente lite and final relief. It may be that, at final hearing, Zico will be forced to divest itself of all Bancroft shares in excess of 3%. See 15 U.S.C. § 80a-12(d) (1) (A). But it is only the spectre of change in control, pendente lite, which justifies pendente lite relief. Certainly, Bancroft applied for such relief when a change in control became a realistic possibility. Thus, Zico's contention is without merit.
There is an implied private cause of action for enforcement of the Investment Company Act. The district court did not err in concluding that Bancroft is likely to succeed in establishing that the Zico tender offer, if successful, would violate section 12(d) (1) (A) of the Investment Company Act because the Zico shareholders are a well-organized and coordinated group, and thus a company. The court properly found the likelihood of irreparable harm. Thus, the orders appealed from will be affirmed.
See Esplin v. Hirschi, 402 F.2d 94, 103 (10th Cir. 1968), cert. denied, 394 U.S. 928, 89 S. Ct. 1194, 22 L. Ed. 2d 459 (1969); Levitt v. Johnson, 334 F.2d 815, 819 (1st Cir. 1964), cert. denied, 379 U.S. 961, 85 S. Ct. 649, 13 L. Ed. 2d 556 (1965); Brown v. Bullock, 294 F.2d 415, 418 (2d Cir. 1961). But see Brouk v. Managed Funds, Inc., 286 F.2d 901, 912 (8th Cir.), cert. denied, 366 U.S. 958, 81 S. Ct. 1921, 6 L. Ed. 2d 1252 (1961), vacated as moot per curiam, 369 U.S. 424, 82 S. Ct. 878, 8 L. Ed. 2d 6 (1962), later questioned by the Eighth Circuit in Greater Iowa Corp. v. McLendon, 378 F.2d 783, 793 (8th Cir. 1967)
J.I. Case Co. v. Borak, 377 U.S. 426, at 433, 84 S. Ct. 1555, at 1560, 12 L. Ed. 2d 423 (1964)
Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S. Ct. 2479, 61 L. Ed. 2d 82 (1979); Transamerica Mortgage Investors, Inc. v. Lewis, 444 U.S. 11, 100 S. Ct. 242, 62 L. Ed. 2d 146 (1979). In Transamerica, as in Redington, the Court did not go beyond a consideration of historical Congressional intent to a consideration of the need for the private remedy, or its role in effectuating Congress' purpose in enacting the provision. Although the Court agreed that the statute was designed for the express purpose of protecting adviser's clients, and those clients offered to show both that the law was violated and that they suffered monetary loss as a result, the Court would not imply a private cause of action for damages on their behalf
These are essentially the tests enunciated by the Court in Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975)
See Tannenbaum v. Zeller, 552 F.2d 402, 416-17 (2d Cir. 1976), cert. denied, 434 U.S. 934, 98 S. Ct. 421, 54 L. Ed. 2d 293 (1977); Moses v. Burgin, 445 F.2d 369, 373 (1st Cir.), cert. denied, 404 U.S. 994, 92 S. Ct. 532, 30 L. Ed. 2d 547 (1971); H.R.Rep. No. 1382, 91st Cong., 2d Sess. 38 (1970)