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ACKERT v. AUSMAN

October 16, 1961

Harold C. ACKERT, as Trustee for the benefit of Laura B. Smith, Plaintiff,
v.
Evan L. AUSMAN, Joseph M. Fitzsimmons, Harold K. Bradford, Allan P. Kirby,Jr., Robert J. Bulkley, Clarence W. Meadows, James H. Clark, Harlan K. Nygaard, John C. Cornelius, Robert W. Purcell, William E. Eppler, Robert C. Reed, Robert J. Stallman, Investors Diversified Services, Inc., and Investors Mutual, Inc., Defendants



The opinion of the court was delivered by: BRYAN

The plaintiff in this action, a citizen of Missouri, is the trustee of a trust, for the benefit of one Laura B. Smith, which is alleged to be a stockholder of defendant Investors Mutual, Inc. The amended complaint states that he brings this action 'derivatively on behalf of Investors Mutual and representatively on behalf of himself and the other stockholders of Investors Mutual.'

Investors Mutual (Mutual) is a Nevada corporation with its principal place of business in Minneapolis, Minnesota. Defendant Investors Diversified Services, Inc. (Diversified) is a Minnesota corporation with its principal place of business in Minneapolis.

The thirteen individual defendants named in the complaint are or have been directors of Mutual and six of them were directors of Diversified as well. Only four of the individuals named as defendants have been served with process. The action was dismissed by consent as to two of the individual defendants served. Defendants Purcell and Kirby remain as the only individual defendants who have been brought into the action. It is alleged that they were and now are directors of both defendants Mutual and Diversified.

 None of the defendants have as yet answered.

 Defendants Diversified and Mutual now move, pursuant to 28 U.S.C. 1404(a), *fn1" to transfer the action to the United States District Court for the District of Minnesota, Fourth Division, at Minneapolis, for the convenience of parties and witnesses and in the interests of justice. Mutual also moves under 28 U.S.C. 1406 for dismissal, or, in the alternative, for transfer to the District of Minnesota on the ground that venue as to it is improperly laid in this district. The motions are made on the amended complaint and on voluminous affidavits. The individual defendants, Purcell and Kirby, have not joined in the motions but do not oppose them.

 The allegations of the amended complaint may be summarized as follows:

 Jurisdiction is based both upon the Investment Company Act of 1940, 15 U.S.C.A. 80a -- 1 et seq., and upon diversity of citizenship.

 Mutual is registered under the Investment Company Act of 1940 as a diversified open-end management investment company with net assets of some $ 1,400,000,000. Diversified acts under contract as investment advisor for Mutual and four other mutual funds. In this capacity Diversified supervises the operations of Mutual and the other funds, reviews their investment portfolios, recommends changes in the portfolios and pays certain of their expenses. For these services Diversified receives annual fees amounting to 1/2 of 1% Of the net assets of each of the mutual funds. For the fiscal years 1955 to 1959 Diversified received in investment advisory fees from Mutual alone more than $ 26,600,000. The estimated fee for the fiscal year 1960 is some $ 8,000,000.

 Diversified also acts as principal underwriter and exclusive distributor for the shares of Mutual and the other mutual funds which it services. In this capacity it has received in excess of $ 16,000,000 in net commissions on the sale of Mutual shares for the fiscal years 1955 through 1960, and also large commissions on the sales of the shares of other mutual funds.

 It is charged that the individual defendants and Diversified dominate and control Mutual, and the individual defendants as directors of Mutual are subservient to the wishes of Diversified without regard to Mutual's best interests; that the fees payable to Diversified were established arbitrarily and collusively to benefit the defendants and not Mutual; that the fees are grossly excessive and unfair and will become increasingly so under the same fixed percentage arrangement as Mutual's assets increase; that Diversified gives the same advice to Mutual which it gives to all five mutual funds it services and thereby multiplies its fees; and the Diversified and the individual defendants used the advice paid for by Mutual and obtained by them for nothing to build their own portfolios of securities and thus appropriated a valuable asset of Mutual for their own use and benefit.

 The acts of the individual defendants are said to be 'in violation of their fiduciary duties under the Investment Company Act of 1940 and other applicable law,' and part of a conspiracy to benefit Diversified at the expense of Mutual. All of this is said to constitute a waste of Mutual's assets for the benefit of the defendants.

 The complaint concludes with allegations as to the futility of demand on the board of directors and the lack of necessity and futility of demand upon the Mutual stockholders.

 Judgment is sought requiring the defendants to account to Mutual for their profits and for damages, for a declaration of the rights of the parties, and for costs and expenses of the action, including counsel and accountant's fees.

 A party seeking a transfer under 28 U.S.C. 1404(a) must show that the balance of convenience of parties and witnesses markedly favors a transfer in the interests of justice. He must also show that in the first instance the action might have been brought in the district to which it is sought to be transferred. ...


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