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KERNER v. CROSSMAN

May 31, 1962

Lawrence KERNER, Plaintiff,
v.
Jerome F. CROSSMAN, E. W. Axe, Ruth H. Axe, Donald W. Ellsworth, Kenneth O. Mott-Smith, Henry Logan, J. Keith Torbert, E. W. Axe & Co., Inc., the Huntington Corporation, Axe Securities Corporation and Axe-Houghton Fund B, Inc., Defendants



The opinion of the court was delivered by: BONSAL

On the motion of the plaintiff, this Court issued an order on April 5, 1962 ordering a hearing for the purpose of:

(1) Determining whether the settlement of this action as proposed in the stipulation of settlement between the parties dated April 4, 1962 should be approved by this Court and whether the complaint should be dismissed with prejudice;

 (2) In the event of the approval of the aforesaid settlement, determining the Court's allowance to plaintiff's attorneys for counsel fees and disbursements for services rendered in the prosecution of this action, said allowance under the terms of the settlement to be paid by Axe-Houghton Fund B, Inc.; and

 (3) Directing a hearing to be held on May 9, 1962, at which any stockholder of Axe-Houghton Fund B, Inc. could appear in person or by attorney and show cause, if any, why the settlement should not be approved and why the complaint should not be dismissed with prejudice, and if the settlement is approved, why an allowance of counsel fees and disbursements should not be made to plaintiff's attorneys in the discretion of the Court.

 Said order directed that notice of the hearing fixed for May 9, 1962 be mailed on or before April 16, 1962 to each stockholder of record of Axe-Houghton Fund B, Inc. at the close of business on April 6, 1962, at their addresses appearing on the books of Fund B. The notice contained a concise summary of the litigation, the details of the stipulation of settlement and the provision contained in the stipulation that the Court may allow plaintiff's counsel fees and disbursements, including reasonable accounting fees in such amount as determined by the Court but not to exceed the sum of $ 75,000., to be paid by Fund B in three annual installments. An affidavit has been supplied to the Court to the effect that the notice to the stockholders of Fund B was mailed by the First National City Bank, transfer agent of Fund B, on April 16, 1962, to each stockholder of record of Fund B as of the close of business on April 6, 1962.

 The hearing was duly held in open court on May 9, 1962. At the hearing the Court heard, in support of the proposed settlement, counsel for the plaintiff and counsel for the several defendants. The Court also heard special counsel for Fund B, who stated they had been retained as independent counsel to represent the interests of the Fund and its stockholders. After due consideration, the independent counsel reported that they found that the proposed settlement had been negotiated at arms length and had recommended to the Board of Directors of Fund B that the settlement provided in the stipulation is in the best interests of Fund B and its stockholders.

 At the hearing on May 9, all stockholders of Fund B present in person or represented by counsel were given the opportunity to make statements either in support of or against the proposed settlement. Letters received by the Court from stockholders of Fund B prior to the hearing were incorporated in the record of the proceedings. All parties who appeared in person or by attorney at the hearing on May 9 were allowed five days by the Court to furnish any additional statements which they desired with respect to the proposed settlement.

 The action here involved is a derivative action instituted by plaintiff as a holder of approximately 607 shares of Fund B, on behalf of himself and all other stockholders of Fund B similarly situated. In his complaint, filed on March 21, 1961, plaintiff alleges that the investment advisory fees and distribution fees paid since December 1, 1955 by Fund B to E. W. Axe & Co., Inc. and Axe Securities Corporation, respectively, have been excessive and were not negotiated at arms length; that defendants have solicited proxies by means of false and misleading proxy statements; that defendants have conspired to misappropriate the assets of Fund B for their personal enrichment; and that the individual defendants have wrongfully availed themselves of confidential investment information paid for by Fund B and have bought securities for themselves in competition with, and on more favorable terms than Fund B; and that these acts were in violation of the Investment Company Act of 1940 and the rules thereunder and the rules under the Securities Exchange Act of 1934. The complaint seeks to have the defendants account for and pay to Fund B their profits and Fund B's damages.

 The defendants, E. W. Axe, Ruth H. Axe, E. W. Axe & Co., Inc. and Axe Securities Corporation, by answer denied all the material allegations of the complaint and have asserted that plaintiff's suit is wholly without merit.

 The litigation was pressed actively by the plaintiff, who made application for a Receiver before this Court, which application was denied by Judge Murphy, who found no evidence of wrongdoing by the defendants sufficient to justify the drastic remedy of the appointment of a Receiver.

 The crux of the controversy appears to be the rate of the investment advisory fees charged Fund B by the investment adviser, E. W. Axe & Co., Inc., and the rate of distribution fee paid by Fund B to Axe Securities Corporation.

 The investment advisory fee is the fee paid by Fund B to the investment adviser, E. W. Axe & Co., Inc., for services consisting of systematic review by its research department of securities of some 1,000 companies which may qualify for Fund B's portfolio (Fund B's portfolio includes securities of some 300 companies in some 29 industries); preparation of monthly economic surveys and detailed surveys of particular industries; payment of or reimbursement to Fund B for salaries of officers and directors' fees of Fund B; and the furnishing of office space, telephone services and other office facilities to Fund B.

 The distribution fee (sometimes referred to as the continuing fee) is the fee paid by Fund B to Axe Securities Corporation for services in connection with the sale of Fund B's stock to the public. Part of the fee is reallowed to dealers who have sold shares of Fund B stock which remain outstanding for a six months' period, and part is used to pay the costs of (a) quoting prices of shares of Fund B, (b) printing and distributing statistical information and other material for the stockholders (other than regular reports to stockholders), (c) qualifying and maintaining the qualification of the shares of Fund B for sale under the Securities Act of 1933 and applicable Blue Sky laws, and (d) all expenses in connection with the redemption of shares.

 In addition to the distribution fee received from Fund B, Axe Securities Corporation charges a selling commission on sales of Fund B ...


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