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VERREY v. ELLSWORTH

July 31, 1969

Verrey Plaintiff
v.
Ellsworth et al. Defendants.


Tenney, District Judge.


The opinion of the court was delivered by: TENNEY

TENNEY, District Judge:

This is a motion by defendants, pursuant to Rules 9(a), 11, 12(f) and 41(b) of the Federal Rules of Civil Procedure, for an order striking the complaint herein and dismissing the cause of action.

 Plaintiff claims to be a stockholder of the Axe Science Corporation (hereinafter referred to as "Science"), an open-end investment company of the management type registered with the Securities and Exchange Commission pursuant to the Investment Company Act (hereinafter referred to as "the Act"), 15 U.S.C. § 80a-1 et seq. Science is one of four mutual funds in the Axe-Houghton family distributed by defendant Axe Securities Corporation, the other three being defendants Axe-Houghton Fund A, Inc., Axe-Houghton Fund B, Inc. and Axe-Houghton Stock Fund, Inc. (hereafter referred to as "Fund A", "Fund B", and "Stock Fund", respectively). The remaining defendants are the investment adviser of Science, Axe Science Management Company, Inc., and the adviser of the other three Axe-Houghton Funds, E.W. Axe & Company, Inc., as well as the present and former directors of the four funds.

 The gravamen of the complaint is its allegation that the defendants have, from 1963 to the present date, overvalued certain "restricted securities", i.e., securities which may not be sold to the public in the absence of registration under the Securities Act of 1933, 15 U.S.C. § 77a et seq., in computing the net asset value of each of the four funds by valuing such securities at the market price for securities of the same class issued by the same corporation. Plaintiff claims that as a result of this alleged overvaluation, the defendants have caused:

 
(a) the four funds to pay excessive investment advisory fees to their respective investment advisers (First Cause of Action);
 
(b) the four funds to pay excessive amounts upon redemption of their shares, thereby diluting the value of the remaining outstanding shares of those funds (Second Cause of Action);
 
(c) the purchasers of the shares of the four funds to pay excessive purchase prices for such shares and/or receive an inadequate number of shares (Third Cause of Action);
 
(d) the purchasers of the shares of the funds to pay excessive distribution charges to Axe Securities Corporation at time of purchase (Fourth Cause of Action);
 
(e) Fund B, Stock Fund and Fund A to pay excessive compensation to Axe Securities Corporation in the form of continuing compensation paid by those three funds under their distributing agreements (Fifth Cause of Action); and
 
(f) the liquidity of the assets of the four funds to be limited, thereby restricting the redemption right of the funds' shareholders without disclosure in violation of the Investment Company Act; and the defendants, by using unsound methods in computing the asset value of the funds' shares, have caused the funds to violate duties imposed by said Act (Sixth Cause of Action).

 Plaintiff instituted this action individually, derivatively and representatively on behalf of all four Axe Houghton Funds and their shareholders on two basic theories:

 
1. that she was a shareholder of Science; and as a result thereof,
 
2. she owned a "beneficial interest" in the other three Axe-Houghton Funds.

 Briefly, it should be explained at this time that any stockholder of Science is entitled to take advantage of what is commonly called "the transfer privilege," which is defined in the Prospectus of Axe Science Corporation (Affid. of ...


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