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GREEN v. BROWN

July 7, 1967

Green, Plaintiff
v.
Brown, et al. and Narragansett Capital Corporation, Defendant


McLean, District Judge.


The opinion of the court was delivered by: MCLEAN

MCLEAN, District Judge:

This is a derivative action by a stockholder of Narragansett Capital Corporation, a closed-end, non-diversified investment company, against directors of that corporation. Plaintiff charges that defendants violated the Investment Company Act of 1940 by causing Narragansett, without prior approval of its stockholders, to invest more than 20 per cent of its combined capital and surplus in securities of Bevis Industries, Inc. and Blackstone Industries, Inc., contrary to Narragansett's investment policy as stated in the registration statement which it filed with the Securities and Exchange Commission pursuant to the Act. *fn1" Both sides move for summary judgment. *fn2"

 The motions raise two questions of construction of the Investment Company Act upon which there is apparently no direct authority. The relevant facts are undisputed. The questions are (1) did the investments violate the Act? (2) if so, is plaintiff barred by the fact that subsequent to the making of the investments and after this action was begun, the stockholders of Narragansett ratified them?

 As to the first question, there is no doubt that Narragansett's registration statement contained the following language:

 
"Item 3. Policies with Respect to Security Investments.
 
None of the investment policies set forth below may be changed without the approval of the holders of a majority of the stock of Registrant:
 
* * *
 
(b) At no time will the Registrant invest more than 20% of its combined capital and surplus in the securities of any one issuer (other than the United States Government)."

 There is also no doubt that, contrary to this statement of policy, Narragansett did in fact invest more than 20 per cent of its combined capital and surplus in securities of each of the two companies mentioned in the complaint, Bevis Industries, Inc. and Blackstone Industries, Inc., without obtaining prior authorization from Narragansett's stockholders. Nevertheless, defendants contend that these investments did not violate the Act. Their argument rests upon the following provisions of the statute.

 Section 8(b) of the Act (15 U.S.C. ยง 80a-8(b)) provides:

 
"(b) Every registered investment company shall file with the Commission . . . an original and such copies of a registration statement, in such form and containing such of the following information and documents as the Commission shall by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors:
 
(1) a recital of the policy of the registrant in respect of each of the following types of activities . . . [There follows an itemization of various activities, such as borrowing money, etc., none of which is relevant here.]
 
(2) a recital of the policy of the registrant in respect of matters, not enumerated in paragraph (1) of this subsection, which the registrant deems matters of ...

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