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INDEX FUND, INC. v. HAGOPIAN

July 2, 1976

Index Fund, Inc.
v.
Hagopian, et al.


Tenney, District Judge.


The opinion of the court was delivered by: TENNEY

TENNEY, District Judge:

This is a motion pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure on behalf of two of the third-party defendants, Frank P. Adams ("Adams") and Ralph S. Henry ("Henry"), for dismissal of the third-party complaint on the ground that said complaint fails to state a claim upon which relief can be granted.

 Essentially, the complaint alleges a broad-based scheme to defraud the plaintiff with respect to the purchase by plaintiff of worthless securities from a newly organized "off-shore" mutual fund composed of several of the individual defendants in this action and collectively referred to as the "Armstrong Fund." The complaint charges violations of Section 17(a) of the Securities Act of 1933 ("the Act"), 15 U.S.C. § 77 (q)(a); Sections 10 and 15 of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. §§ 78 (j), (o); Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; Sections 17(e)(1) and 36 of the Investment Company Act ("the Investment Company Act"), 15 U.S.C. §§ 80a-17(e)(1), 80a-36; Section 206 of the Investment Advisers Act ("the Advisers Act"), 15 U.S.C. § 80b-6; and the commission of acts of common law fraud on the part of defendants.

 Plaintiff Index Fund, Inc. ("Index Fund"), a Massachusetts corporation, was an open-end investment company registered under Section 8 of the Investment Company Act, 15 U.S.C. § 80(a)-8. Index Fund commenced its lawsuit on or about June 13, 1973 against First National City Bank ("FNCB"), the latter's subsidiary, First National City Trust Company (Bahamas) Limited ("FNCT"), and others, claiming damages in the amount of $1,010,151.00.

 According to the allegations of the complaint, defendant Robert R. Hagopian ("Hagopian") was at all times relevant president of Index Fund and president and chairman of Index Fund's investment adviser. (Complaint, [*] 4). Defendants Everest Management Co. ("Everest"), John Peter Galanis ("Galanis") and Akiyoshi Yamada ("Yamada") in concert with or aided and abetted by defendants Hagopian, Takara Partners, Louise Yamada, Inc., Louise Yamada, Provident Securities, Inc., Pericle Constantinou and others entered into a conspiracy to defraud the Armstrong Fund and its shareholders by depleting the assets of the Armstrong Fund for the personal gain of the conspirators. *fn1" (Id., [*] 21). Galanis and Yamada entered into an arrangement with Hagopian whereby Hagopian, in consideration of monetary payments and other inducements paid to him by Galanis and Yamada, caused Index Fund to purchase securities at an aggregate cost to Index Fund of $1,736,505.00, which securities were either worthless or purchased at inflated prices. (Id., [*] 23). Index Fund alleges that these securities were purchased from several sources, including the Armstrong Fund. (Id., [*] 22). Index Fund further alleges that these securities were sold or otherwise disposed of by Index Fund for $726,354.00, resulting in an aggregate loss to Index Fund of $1,010,151.00. (Id., [*] 24). FNCT agreed to be transfer agent, registrar and corporate domiciliary for Armstrong Fund and agreed to provide all the officers and directors (but one) for defendants Armstrong Investors and Armstrong Capital, which corporations administered the Armstrong Fund. (Id., [*]19). *fn2" According to the complaint, the basis for the inclusion of FNCB and FNCT in the complaint appears to be that FNCB, FNCT and the officers and directors provided by them, failed to exercise proper influence and control over the activities of the Armstrong Fund, thereby permitting the transactions entered into by Index Fund, which allegedly were negotiated by Galanis and Yamada and by Hagopian on behalf of Index Fund. (Id., [*] 28).

 On or about September 21, 1973 FNCB and FNCT filed an answer including crossclaims against all other co-defendants other than Armstrong Investors and Armstrong Capital. In their answer, FNCB and FNCT allege therein that whatever damages were sustained by Index Fund were caused in whole or in part or were contributed to by reason of the carelessness, negligence or wrongdoing of Index Fund, its officers and directors and agents. (Answer, [*] 78). FNCB and FNCT also allege that Index Fund may not assert the claims alleged in the complaint against FNCB and FNCT because Index Fund, its officers and directors and agents, participated in or knew or in the exercise of reasonable diligence should have known of the alleged wrongdoing and made no attempt to terminate the alleged wrongdoing. (Id., [*] 79). FNCB and FNCT also allege that Index Fund may not assert the claims alleged in the complaint against FNCB and FNCT because Index Fund, its officer and directors, had a duty to supervise the activities of Hagopian and of Index Fund's investment adviser, and failed to do so, which caused the alleged damages to Index Fund. (Id., [*] 81). FNCB and FNCT also allege that the acts of Hagopian are, or by attribution should be deemed to be, the acts of Index Fund and Index Fund is responsible for and bound by the acts of Hagopian alleged in the complaint. (Id., [*] 82).

 In the four cross-claims filed with the answer FNCB and FNCT allege that the co-defendants other than the Armstrong Fund were primarily responsible for the fraud committed on the Armstrong Fund and any consequences thereof would be their responsibility and their liability. (Cross Complaints, [*] 94-131, incl.).

 On or about October 1, 1973 FNCB and FNCT commenced a third-party action against inter alia those officers and directors of Index Fund who were not named defendants in the original action. The three causes of action alleged in the third-party complaint are all for indemnification and contribution with respect to any possible liability of FNCB and FNCT to Index Fund.

 The third-party complaint (hereinafter cited as "T.P.C.") assumes the allegations of the complaint and alleges that, to the extent the violations described therein occurred, the third-party defendants are primarily liable for the liability which may have resulted. (T.P.C., [*] [*] 30, 31, 34, 38). It alleges that third-party defendants Adams and Henry were directors of the plaintiff at the time Hagopian was selected to assume his position of trust and responsibility as president and a director, and continued as directors during the period that Hagopian was performing the acts and misdeeds referred to in the complaint which are alleged to be in violation of various provisions of the Securities Act, the Exchange Act, the Investment Company Act and the Advisers Act and common law principles. It further alleges that as directors of Index Fund, Adams and Henry had a responsibility to supervise the activities of Hagopian and to be familiar with the investments of Index. (T.P.C., [*] [*] 23, 25, 27); and that Adams and Henry had positions of responsibility and trust as directors which imposed upon them a primary responsibility with respect to the allegations of fraud in connection with the securities transactions of Index Fund. (T.P.C., [*] [*] 27, 28, 29, 31). The third-party complaint requests judgment against all third-party defendants jointly and severally, for all sums that may be adjudged against FNCB and FNCT. In essence, FNCB and FNCT seek to exculpate themselves by arguing that the directors were responsible for the loss to Index Fund. As a defense to the complaint they urge that the directors' wrongdoing is attributable to the corporation under agency theory; and as a charge in the third-party complaint they urge that the directors, individually, are responsible for Index Fund's loss.

 Turning to the complaint we see depicted the creation of a so-called "off-shore" fund, the Armstrong Fund, formed in Panama by a group of conspirators in 1969 to attract foreign investors. This fund had an "investment adviser," Everest Management Corporation, officered, among others, by defendants Galanis and Yamada who were also the principal promoters of Armstrong Fund. In November or December 1969 FNCT agreed to be the transfer agent, registrar and corporate domiciliary for the Armstrong Fund and agreed to and did provide all but one of the officers and directors for Armstrong Fund. There is no claim that FNCB or FNCT were parties to any conspiracy although it is alleged that their names and reputations were used by the conspirators to induce foreign investors to invest in the Armstrong Fund. Beginning in February 1970, 190,000 shares of Armstrong Fund were sold to foreign investors at an initial offering price of $20 per share and the proceeds placed in Armstrong Fund's account with FNCB and thereafter invested for the account of Armstrong Fund by Galanis and Yamada in worthless, overpriced or otherwise improper securities. The stage was now set for the transactions which form the basis for the instant suit. In June 1970, as part of the conspiracy, Galanis and Yamada arranged with Hagopian, president of plaintiff Index Fund, and who controlled its investment activities, to purchase from Armstrong Fund and others worthless, overpriced or otherwise improper securities, which were ultimately resold or disposed of by Index Fund at a loss in excess of one million dollars.

 The first claim asserted in the complaint which is limited to defendants FNCB and FNCT essentially charges them with acts and omissions which assisted, facilitated or permitted the wrongdoers to effectuate their fraudulent scheme. The complaint specifies that FNCT disseminated certain material dated January 15, 1970 relating to the organization and operation of the Armstrong Fund, its investment policies, its management and that of its investment adviser, the relationship of the Armstrong Fund with FNCB and FNCT and the method to be employed for reporting on share values of the fund. It is charged that:

 
"At all relevant times, the officers and the directors of defendants Armstrong Capital and Armstrong Investors provided by defendants FNCB and FNCT exercised no influence or control over the activities of defendants Galanis and Yamada or over Everest or Zachary [a director of Everest] and permitted and authorized said persons and others to deal in and dispose of the securities and funds of the Armstrong Fund without proper supervision or direction." (Complaint, [*] 28).

 It is further charged that the material disseminated by FNCT dated January 15, 1970 relating to the Armstrong Fund contained representations that were false and misleading, that therefore the shareholders of Armstrong Fund asserted claims against FNCB and FNCT for the losses sustained by them, and that FNCB has compromised certain of these claims for $1,700,000. The nexus between the loss to the stockholders of Armstrong Fund occasioned by the company's purchase of worthless or undervalued securities from undisclosed sources and the loss suffered by Index Fund and its shareholders resulting from the purchase of worthless or undervalued securities from Armstrong Fund is somewhat hazy. The gravamen of the first claim, however, would appear to be that as a result of the acts and omissions of FNCB and FNCT and the officers and directors supplied by them for the Armstrong Fund, plaintiff Index Fund has suffered losses through the acts and transactions of the scheme.

 The second, third, fourth, fifth, sixth, seventh and eighth claims, asserted against all defendants, including FNCB and FNCT, arise under the Securities Act, the Exchange Act, the Investment Company Act, the Advisers Act, or in the commission of acts of common law fraud. The third claim asserts a Rule 10b-5 violation in that certain defendants "with the approval and acquiescence of defendants FNCB, FNCT and the Armstrong Fund," made certain misrepresentations or omitted material facts in connection with the sale of securities by Armstrong Fund to Index Fund. (Complaint, [*] 39). The fifth claim, arising under the Investment Company Act, alleges that Hagopian, the president of Index Fund, accepted compensation for the purchase of the securities by Index Fund from Armstrong Fund "with the approval or acquiescence of the other defendants." (Complaint, [*] 52). Again, in the seventh and eighth claims, the acts forming the gravamen of the cause of action were allegedly approved or acquiesced in by the other defendants, including FNCB and FNCT. Finally, the ninth and tenth claims, asserted only against FNCB and FNCT, charge that FNCB and FNCT and the Armstrong Fund directors and officers whom they ...


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