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SCHLUSSELBERG v. WERLY

October 30, 1967

Claire Schlusselberg, Plaintiff,
v.
Werly, et al., Defendant


Wyatt, District Judge.


The opinion of the court was delivered by: WYATT

WYATT, District Judge:

This is a motion by certain of the defendants for an order dismissing the action for improper venue (28 U.S.C. § 1406(a), Fed. R. Civ. P. 12(b) (3)). There is a motion in the alternative by these same defendants for an order transferring the action to the District of Massachusetts "for the convenience of parties and witnesses, in the interest of justice" (28 U.S.C. § 1404(a)). Two other defendants move to transfer the action to the District of Massachusetts for the same reason.

 The action was commenced on January 10, 1967. There is one claim in the complaint, made by plaintiff as a stockholder of Putnam Investors Fund, Inc. (Fund) on behalf of that corporation.

 The motion to dismiss for improper venue is made by defendants Putnam Management Company, Inc. (Adviser), Mutual Fund Associates Incorporated (Underwriter), Werly, Devens, and Johnson. Each such movant contends that he (or it) is not an "inhabitant" of this District, that this District is not one in which he (or it) "transacts business" and that no "act or transaction constituting the violation" occurred in this District, these being the venue requirements of the SEC Acts (15 U.S.C. §§ 78aa, 80a-43, and 80b-14. In the alternative, these defendants move to transfer the action to the District of Massachusetts for the "convenience of parties and witnesses, in the interest of justice" (28 U.S.C. § 1404(a)).

 Fund, for whose benefit the action is brought, and Putnam Fund Distributors, Inc. (Distributor) move to transfer the action to the District of Massachusetts for the "convenience of parties and witnesses, in the interest of justice" (28 U.S.C. § 1404(a)).

 Fund is represented by counsel independent of those counsel representing other defendants; so also defendant Johnson is represented by counsel independent of those counsel representing other defendants.

 It is not necessary to determine whether venue is proper in this District or not. If the venue is not proper, a transfer rather than dismissal would be "in the interest of justice" (28 U.S.C. § 1406 (a)). See 1 Moore's Federal Practice (2d ed.) 1907-09.

 But assuming the venue to be proper, the action ought to be transferred to the District of Massachusetts and the motion to transfer is granted.

 The Complaint

 The complaint is lengthy but its averments may be put in summary fashion.

 Fund is a Massachusetts corporation registered under the Investment Company Act of 1940 (15 U.S.C. § 80a-1 and following). It is an "open-end" "diversified" "management" "investment company" (15 U.S.C. §§ 80a-3, 80a-4, 80a-5).

 Adviser is a Massachusetts corporation and is controlled by certain of the individual defendants who are also officers or directors, or both, of Fund. There is a Management Contract under which, for a fee, Adviser supplies investment research, advisory and other services to Fund. Adviser also acts in a similar fashion for three other funds, "the management of which is substantially identical."

 Distributor is a New York corporation, wholly owned by Adviser; the officers and directors of Distributor hold similar positions with Adviser. Distributor under a contract sells, for a commission, the shares of Fund and "controls and directs the placement of brokerage business" for Fund.

 Underwriter is a California corporation, wholly owned by Distributor; the officers and directors of Underwriter hold similar positions with Fund, Adviser and Distributor. Underwriter sells shares of Fund for commissions.

 Adviser, Distributor and Underwriter and their officers and directors dominate and control Fund and the officers and directors of Fund.

 Adviser has exercised control over Fund. By reason of its portfolio buying and selling, Fund generates huge "business and brokerage commissions for brokers" on various stock markets. Adviser has "exploited" the investment policies of the Fund for the benefit of Adviser, Distributor and Underwriter and their officers, directors and stockholders. Adviser could have made savings for Fund on its brokerage commissions but instead has caused Fund to pay the highest possible amount of commissions so that Adviser can "requisition" a part of the commissions and divert this part to brokers and dealers who sell Fund shares for Distributor or who supply "services and materials" to Adviser, Distributor and Underwriter. The dealers who sell Fund shares and to which commissions are diverted by Adviser, also sell shares "of other Funds for which the Adviser acts as investment adviser or the General Distributor acts as distributor, in which other Funds the Fund has no interest or investment and from which sales the Fund derives no financial advantage; and out of the balance of 40%, a portion was allocated to other dealers who furnished statistical, quotation and other information to the Adviser." The commissions diverted to such dealers are called "give-ups" or "reciprocals."

 Fund could have executed its portfolio transactions more cheaply by using more efficient brokers, by paying lower commissions through elimination of "give-ups" and "reciprocals," and by using the so-called "third market." The practice followed in executing portfolio transactions of Fund was according to a ...


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