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RUSKAY v. JENSEN

March 25, 1972

Sophie RUSKAY, Plaintiff,
v.
Julius JENSEN, III et al., Defendants (and three other consolidated actions)



The opinion of the court was delivered by: METZNER

METZNER, District Judge:

 The defendants move pursuant to Rule 56(b), Fed. R. Civ. P., for summary judgment on the ground that all of the claims asserted in these four consolidated stockholders' derivative suits are barred by a judgment of this court entered on June 25, 1970 in an earlier stockholders' derivative suit.

 The named plaintiffs in each of the four present actions are shareholders of United Funds, Inc. [United], and were shareholders during the time of the transactions complained of. They sue on behalf of United and all United shareholders.

 United is a mutual fund registered under the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. [the Act], as an open-end management investment company. As of June 1969, it had assets in excess of $2 billion and more than 500,000 shareholders holding more than 275 million shares of stock.

 Defendant Waddell & Reed, Inc. [W & R] was the investment adviser for United in 1969 and for many years prior thereto. During this same period of time W & R also acted as the principal underwriter for United's shares. Defendants Roach, Waddell, Merriman and Valicenti were directors and officers of W & R during this time.

 Defendant Continental Investment Corporation [CIC] is a Massachusetts corporation. CWR Corporation, also a Massachusetts corporation, is a whollyowned subsidiary of CIC. CIC acquired over 97% of the outstanding shares of W & R, merged W & R into its subsidiary, CWR, and changed the latter's name to Waddell & Reed, Inc. [W & R/Mass.]. Defendants Jensen, M.J. Wallace and N.W. Wallace are directors and officers of CIC.

 All four complaints, with some exceptions to be mentioned later, are basically the same and seek, in essence, to recover profits made by W & R shareholders when they sold their stock to CIC.

 CIC's acquisition of W & R had its origins in a contract executed in early 1969 between CIC and the holders of 61.69% of W & R's voting stock, including defendants Waddell, Merriman and Roach. Pursuant to that contract, CIC agreed to purchase this block of stock at a price of $80 per share and to make a tender offer for the remaining outstanding shares of W & R at the same price. At the time the contract was executed, W & R stock had a par value of $1 per share and a net asset value of approximately $18 per share.

 The parties to the contract understood that under the Act the advisory and underwriting agreements between United and W & R would automatically terminate upon acquisition of W & R by CIC. Therefore, CIC's obligations were expressly conditioned upon reinstatement by United's shareholders of the advisory agreement and reinstatement by United's directors of the underwriting agreement.

 On April 18, 1969, United's management called a shareholders' meeting for June 3, 1969, and sent to all fund shareholders a proxy statement describing the arrangement with CIC, seeking approval for reinstatement of the advisory agreement upon consummation of the deal, and soliciting votes for re-election of the 15 incumbent directors of United. On June 3rd, the shareholders approved reinstatement of the advisory agreement and re-elected the 15 incumbent directors.

 The complaints charge that the excess of purchase price over net asset value of the W & R shares constitutes payment for W & R's fiduciary positions as investment adviser and principal underwriter for United. It is claimed that this sale of fiduciary offices is illegal and that the excess, amounting to $62 per share, should have been paid to United rather than to the stockholders of W & R.

 It is further alleged that the April 18th proxy statement was materially false and misleading in that it failed to reveal that United and its shareholders were entitled to the profits to be made upon the sale of W & R shares and by representing that CIC contemplated no changes in the board of directors of United or in the management of W & R upon consummation of the acquisition. The complaints charge that because of these defects in the proxy statement the reinstatement of the advisory and underwriting agreements was void and the defendants must account to United for all fees received under the reinstated agreements.

 One of the plaintiffs makes an additional claim based on alleged misrepresentations in proxy material sent to United's shareholders on April 30, 1971. This proxy material sought approval of an amendment to the advisory contract to increase advisory fees paid by United to the investment adviser. The complaint charges that the stockholders' subsequent approval of the amendment was void because it was based on misrepresentations in the proxy material.

 The defendants claim that a judgment of this court entered on June 25, 1970 in two earlier stockholders' derivative suits is res judicata on all the issues raised by the present plaintiffs.

 The first of these two actions, Horenstein v. Waddell & Reed, Inc., 67 Civ. 4175, was commenced on October 26, 1967, and the second, Ruskay v. Merriman, 69 Civ. 276, on January 23, 1969. The initial complaints in both suits were largely identical and charged that W & R had breached its fiduciary duty to United by channeling portfolio transactions through a wholly-owned subsidiary which acted as broker for United without reducing the management fee charged United. Allegations were also made that transactions for United were used by W & R to gain reciprocal trade and give-up agreements for W & R with other brokers.

 In May 1969 plaintiffs in the Horenstein/Ruskay actions, having learned of CIC's acquisition offer, moved and were granted leave to file supplemental complaints alleging that the W & R shareholders were going to receive an excessive price for their shares. It was alleged that the price was largely a result of the ability of the investment adviser of United to earn substantial illegal profits in its management of the fund, as alleged in the principal complaint. It was claimed that these illegal ...


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