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GORDON v. FUNDAMENTAL INVESTORS

June 7, 1973

Joseph GORDON, Plaintiff,
v.
FUNDAMENTAL INVESTORS, INC., et al., Defendants


Gurfein, District Judge.


The opinion of the court was delivered by: GURFEIN

GURFEIN, District Judge.

This is a motion to dismiss a class action complaint, pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted, on the ground that the plaintiff lacks standing to assert the claim alleged, since the claim belongs to Fundamental Investors, Inc. ("Fundamental"). Fundamental is an open-end mutual fund. It is registered as an investment company under the 1940 Act. 15 U.S.C. §§ 80a -- 1 et seq.

 The complaint is brought as a class action by Joseph Gordon, owner of sixty shares of Fundamental stock from 1965 up to June 1972. The action was brought July 11, 1972 after the plaintiff had sold his stock. The defendants are Fundamental, its directors in June 1969, Anchor Corporation (the investment advisor of Fundamental) and its directors in July 1969, and Washington National Corporation ("Washington") which subsequent to July 1969 became the advisor to Fundamental.

 Jurisdiction is invoked under the Investment Company Act of 1940, 15 U.S.C. §§ 80a -- 1 et seq., the Rules and Regulations of the Securities and Exchange Commission and upon the principle of pendent jurisdiction.

 The complaint alleges substantially the following.

 In about March 1969, Washington and Anchor entered into an agreement (for merger) pursuant to which Washington obtained 95% of Anchor's voting stock in exchange for Washington's securities having a fair value of approximately 60 million dollars. The consummation of the agreement was conditioned upon the approval of Fundamental shareholders "of management and distributors contracts between Anchor and Fundamental, as required by the Investment Company Act of 1940."

 Anchor used its control of Fundamental's proxy machinery to secure the approval of Fundamental's shareholders of the investment advisor's contract, which was approved by its shareholders on July 29, 1969. The transaction was, in effect, a sale by Anchor of its advisory contract with Fundamental and of its preferred capacity as a distributor of Fundamental shares in breach of Anchor's fiduciary obligation to Fundamental and its shareholders. Washington and the individual defendants knew or should have known of the impropriety of the transactions, and aided and abetted Anchor "in its breach of its fiduciary obligation to Fundamental " (Compl. P17; emphasis supplied). "Those defendants who were shareholders of Anchor prior to its transactions with Washington wrongfully profited at the expense of Fundamental " (Compl. P18; emphasis supplied).

 The proxy statement submitted to Fundamental stockholders on the basis of which their shares were solicited for approval of the contract between Anchor and Fundamental, which approval was obtained on July 29, 1969 was false and misleading and operated as a fraud and deceit upon Fundamental and its shareholders in that: (a) the proxy material omitted to state that the premium of approximately 60 million dollars was unlawfully paid in violation of Anchor's fiduciary obligation to Fundamental; (b) it omitted to state that the premium was paid to induce Anchor to use its control of Fundamental's proxy machinery to obtain approval of the transaction; (c) it omitted to state that the directors of Fundamental were dominated and controlled by Anchor and served its interests; (d) it omitted to state that Fundamental's advisory contract had special value because of Anchor's illegal practices including "give ups," "reciprocals" and "interposition" all of which conferred no benefits on Fundamental, but created a substantial profit for its advisor; (e) it omitted to state that a corporate opportunity belonging to Fundamental had been usurped; and (f) it omitted to state that the defendants conspired to cause Fundamental and its shareholders to approve the contract with Anchor (sic).

 The class allegedly represented consists of "all those persons (other than defendants and those in privity with them) who held stock in Fundamental on July 29, 1969 at which time approval of a new advisory contract between Washington and Fundamental was obtained. *fn1"

 Judgment is demanded, on behalf of the plaintiff and of the class, against the defendants other than Fundamental jointly and severally in the total amount of the actual damages proved by members of the class, which damages shall be the amount of all profits derived by Anchor and its shareholders by virtue of the transaction complained of.

 The plaintiff's position is not only that the gravamen of the complaint is the alleged violation of the proxy rules of the SEC but also that the claim belongs to the holders of Fundamental stock on July 29, 1969.

 The question is posed whether a succession fee claim may be brought only as a derivative action or whether it may be brought as a class action on behalf of those who were shareholders at the time of the wrong.

 The plaintiff contends that the proxy violations form an entirely separate basis for jurisdiction of a class action, and it is true that the Court of Appeals in Rosenfeld v. Black, 445 F.2d at 1349-1350 did treat the alleged proxy rule violation as distinct from the substantive violation of fiduciary duty under the Investment Company Act. Assuming that a proxy violation may, indeed, present an independent right, the nature of the right can only be determined from the nature of the wrong. A plaintiff in a class action must show standing, and standing generally derives from injury to the plaintiff or the conversion of a right belonging to the plaintiff for which the defendants are accountable.

 Thus, while a shareholder may sue for violation of a proxy rule, J.I. Case v. Borak, 377 U.S. 426, 84 S. Ct. 1555, 12 L. Ed. 2d 423 (1964); Mills v. Electric Auto-Lite Company, 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970), he must, like any other plaintiff, have been affected in his own interest by the material omission or misstatement to ...


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