Court Opinion

ID: 6921748
Source: CourtListenerOpinion
Date Created: 2022-07-23 23:04:20.585693+00
Date Added: 2024-06-11T16:06:49.189084
License: Public Domain

LEONARD P. MOORE, Circuit Judge
(dissenting).
Plaintiffs claim Federal court jurisdiction under the Investment Company Act of 1940, 15 U.S.C.A. § 80a-l et seq. and under principles of pendent jurisdiction, Passing by the stereotype allegations of interlocking managements and directorates, domination and control always present in stockholders’suits, the amended complaint sets forth a series of alleged wrongs which can be condensed and summarized:
1. The Management Company charged te Fund a larger amount for investment advisory services than it charged two other investment companies.
2. Fees charged based on a fixed percentage of net assets were grossly unfair because as the Fund’s assets increased, the fee increased.
„ , , , .. 3. The fee contracts weie no e result of arm’s length bargaining but were adopted as a result of arbitrary action, collusion, gross negligence or reckless disregard of duty and the fees were excessive.
4. No efforts were made elsewhere to secure advisory services on more favorable terms or to persuade the Management Company to supply its services on such terms.
5. The Management Company as principal underwriter and sole distributor charged purchasers of shares an excessive sales load.1
These acts, it is alleged, constituted an unlawful and willful conversion by defendants of assets of the Fund to the use of the Management Company in violation of Section 37 of the Act. Gross abuse of trust, willful malfeasance and bad faith in violation of Sections 1(b) (2), 10, 15, 17(h, i) and 36 are also charged as well as waste of assets in violation of New York and Maryland laws, Allegedly untrue proxy statements in violation of Sections 20(a) and 34(b) of the Act and S.E.C. Rules are claimed to vitiate the directors’ elections and, hence, render the advisory contracts void. Because of such misrepresentations, it is also claimed that the shareholders failed to exercise their right to terminate the contract or to seek renegotiation.
The only issue presented on the motion to dismiss is: does the amended corn-plaint state a cause of action and, if so, has a federal court jurisdiction? “The plaintiffs do not contend that, where there are grounds for a derivative stockholders’ action, the case involves a ‘federquestion simply because the corporation is a registered investment company.” fuet, they recognize that a stockholder s derivative action, even though other™se f°unded’ bought in the federal court merely because the corporation is a registered investment company. Such a company may have a non-federal claim, e. g., for breach of contract, mismanagement or simple neg¡igence_ It ifl undigputed that; under guch circumstanceSj neither the company itae]f nor a stockholder on its behalf can take ^ daim into the federal forum„ (194 F.Supp. 207, 220).2 To sustain jurisdiction, the majority hold that “violations of two sections of the Investment Company Act are sufficiently alleged,” b Sections 37 and 15(a) and (b).
Section 37 definitely relates to crime. He who “steals, unlawfully abstracts, unlawfully and willfully converts to his own use or to the use of another, or embezzles any of the moneys, funds, * * of any registered investment company shall be deemed guilty of a crime, * * ” Sandwiched in between stealing and embezzlement the conversion obviously intended has attributes far different from that type of conversion found on the civil side of court. Certainly ejusdem generis brings it into the criminal fold. To me it is significant that the complaint alleges no facts which might support its eonelusions of “excessive,” “unlawful” and “illegal.” Even the majority concede that there would be no violation of § 37 *424“unless its [the complaint’s] substance would support an indictment.” If this be the test, what is alleged ? Surely the making of a contract which fixes the fee on the basis of a percentage of fixed assets is not a criminal act. Congress itself in the Investment Advisers Act of 1940 (Aug. 22, 1940, c. 686, Title II, § 205, 54 Stat. 852) recognized this very method as lawful and provided that “Paragraph (1) of this section shall not be construed to prohibit an investment advisory contract which provides for compensation based upon the total value of a fund averaged over a definite period, or as of definite dates, or taken as of a definite date” (15 U.S.C.A. § 80b-5). Were it otherwise, a trial court might be burdened with days of testimony from witnesses who will testify that it costs no more in research effort to buy 100 shares of stock than 1,000. The chief executive of a hundred million dollar corporation may receive compensation ten times that of a similar executive in a million dollar corporation but is he thereby indictable for so receiving it ? To establish its claim that defendants failed to shop around for cheaper advisory services and could have obtained lower rates, no great imagination is required to prophesy that plaintiffs will be able to call dozens -of witnesses each of whom will say that they would gladly have given their investment advice at much lower rates. And with the advantage of hindsight, they will probably add that their advice would have been much better. Illustrative of how remote the allegations are from the requisites of a crime is the majority’s example of a director acquiescing in the payment of an executive’s salary to someone he knows is acting only as an office boy. This they hold would be criminal. This very example, in my opinion, is equally illustrative of the defects of the complaint. To sustain such an allegation, plaintiffs would have to call witnesses who would testify that they saw the company’s president enter his president’s office in the morning and, thereafter, during the day had observed him filling inkwells, delivering messages, running errands and stamping mail. Or possibly in reverse order, the cashier would testify that Johnny Jones, the office boy, received a salary of $100,000. If such situations were alleged, it is very likely that defendants would be able to plead some defense against these charges. If plaintiffs assume the risk of supporting their jurisdiction on § 37, they should also have to assume the burden of alleging and proving acts which come within § 37. In my opinion, there is not a single allegation as to waste and mismanagement which is not standard “boiler plate” in the ordinary State stockholders’ derivative action and no allegation which would qualify as sufficient under § 37.
In all likelihood, years later this case will be returned to us vastly increased by thousands of pages of record.’ It can only be hoped that some wise and discerning trial judge by pre-trial or trial rulings will winnow the evidentiary wheat from the chaff, the office boys from the presidents, and the we-would-like-to-get-the-account seekers from those in possession of the business. Carried to its logical conclusion, investment trust managers would have to seek declaratory judgments in advance of concluding contractual arrangements with any advisory service and with their officers and to ask the courts to fix the proper amount of the sales load of the shares. Otherwise the federal courts at the behest of any stockholder whose views differed from those of the management would be called upon to express their own judgments as to how the businesses should have been operated.
Nor can I join the majority in characterizing as “serious claims” allegations that the directors have been “selected and nominated” by certain defendants; that they receive compensation; and serve on other boards. Directors are usually selected by and known to management; they are not self-appointed strangers. There is no charge that such a method of selection is illegal. Director compensation surely is not a basis for a cause of action and there is no claim that inter*425locking directorates are proscribed. The words “beholden,” “dominate” and “control” are meaningless unless buttressed by actionable facts which are completely lacking.
Furthermore, I would not wish to place a stamp of approval on permitting litigants to use the federal courts absent a federal case on the theory that as long as the litigants are there they might as well try their State court action. If there is to be “pendent” jurisdiction, it ought to be pendent from a case more tangible than one which has no federal basis.
The trial court also found jurisdictional support in the “preamble” section of the Act (15 U.S.C.A. § 80a-l). 194 F. Supp. 207, 218. Law by preamble is risky business. The phrases are usually most eloquent and Utopian in character. If this were the law, no sections beyond the preamble would ever be required and every case could be decided on an ad hoc basis, resting firmly upon some praiseworthy concept of justice. Experience, however, teaches that it is the sections that follow that create the rights, duties and liabilities imposed by the legislation upon the persons acting and relying thereon. Were it sufficient to state a claim merely to allege stock ownership in an investment trust and that there are conditions to be eliminated “which adversely affect the national public interest and the interest of investors,” then much of the complaint is surplusage.
The other sections which the majority hold to be sufficient are § 15(a) and (b) (15 U.S.C.A. § 80a-15(a) and (b)), which in substance provide for annual renewal approved “by the board of directors or by vote of a majority of the outstanding voting securities.” The majority say that Congress “must have been concerned with the substance and not simply with the form.” But these words are merely abstractions without some standard by which to test for substance or form. Is a corporate resolution reading in substance that “the services having been found to have been satisfactory, be it resolved that the contract be renewed for another year,” legal or illegal? Must the state of mind of each director be explored by examination and cross-examination to ascertain as to each decision made whether “approval was given without any real consideration of the merits.” If, as suggested by the office boy illustration, there be facts alleged which show fraudulent and illegal conduct, a different situation would be presented but such facts are noticeably lacking. There is no allegation that the fees for advisory services violated any provision of law as to percent or amount. The fact that the Management Company made slightly different charges to other clients establishes no illegality. This is not a Robinson-Patman case. Nor is there any requirement that the contract be put up for public bidding. In short, adding up all the adjectives and adverbs of the complaint wherein is there any violation of law alleged?
By the decision of the majority, this case will have to go to trial. If the life spans of the case and the court happily coincide we may be able to see the beneficial effects upon society of striking “fear of personal liability” into the minds of “potential wrongdoers,” thus compelling them “to walk in the paths of rectitude”3 — paths to be sure which neither Congress nor the courts have laid out with such markers as may be easily discernible by the pedestrian director. There should be more constitutional methods of permitting every stockholder to be a Sir Galahad than this in terrorem approach.
I would grant the motion to dismiss with leave to serve an amended complaint alleging facts showing federal jurisdiction and violations of the Act.

. Such a daim would scarcely be within the scope of this derivative or representative action.

. Brown et al. v. Bullock et al.

. Brown et al. v. Bullock et al., 194 F.Supp. 207, 246.