Opinion ID: 216284
Heading Depth: 1
Heading Rank: 1

Heading: BACKGROUND Halebian's Complaint

Text: On May 30, 2006, John Halebian, a holder of shares in one of six separate investment funds (the Funds) within CitiFunds Trust III (the Trust), a Massachusetts business trust, filed a complaint raising three claims in the United States District Court for the Southern District of New York against members of the Trust's board of trustees (the Board). The suit arose in connection with the June 23, 2005 corporate sale (the Transaction) of investment-adviser subsidiary companies that advised the six Funds. Pursuant to the Transaction, Citigroup, Inc., which owned the adviser subsidiaries, sold substantially all of its asset-management business to Legg Mason, Inc., automatically terminating, under federal law, the Funds' existing investment-advisory contracts. Following the sale and contract termination, the Trust's Board approved new investment-advisory agreements (the New Agreements) between the Trust and Legg Mason and then issued a proxy statement to Trust shareholders recommending that they vote to approve the New Agreements. In his complaint, Halebian challenges two principal aspects of the Transaction. First, he questions the New Agreements' authorization of the payment of soft dollars, which permitted Legg Mason to hire broker-dealers that also perform research servicesa combination that often results in higher commissions for the chosen broker-dealer than those paid to standard broker-dealers. Second, he challenges shareholder voting procedures permitting echo voting, which in this case allows Citigroup-affiliated service agents, as record holders of certain shares of the Funds, to vote their total number of shares in proportion to the votes they received from the shares' beneficial owners, even if the service agents had not received voting instructions from all of their customers. Halebian asserts, in sum, that the defendants... failed to avail themselves of the opportunity to negotiate lower fees or seek competing bids from other qualified investment advisers and utterly ignored their obligations of loyalty and good faith to CitiTrust and its beneficiaries. Complaint ¶¶ 35, 40, Halebian I , No. 06 Cv 4099 (S.D.N.Y. May 30, 2006). Halebian's Claim One, presented as a derivative claim on behalf of the Trust, alleges that the defendants breached their fiduciary duties to the Trust in considering the . . . [T]ransaction and in recommending the new advisory agreements. Id. ¶ 54. Claims Two and Three, styled as direct claims, allege that the defendants violated federal and state law by issuing materially false and misleading statements and by omitting material information from the proxy statement as part of an effort to induce their shareholders to approve the Trust's New Agreements with Legg Mason. Id. ¶¶ 60-61, 64-65.