The opinion of the court was delivered by: NEAHER
This action, brought derivatively on behalf of INA Investment Securities, Inc. (the "Fund"), charges defendants INA Capital Management Corporation (the "Manager") and thirteen past and present employees, officers and directors of the Fund and the Manager with various violations of the Investment Company Act of 1940, 15 U.S.C. § 80a-1, Et seq. (the "Act"), and the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1, Et seq. (the "Advisers Act"). All defendants have moved, pursuant to Rule 12(b)(3), F.R.Civ.P., for an order dismissing the action for improper venue. Alternatively, they move, pursuant to Title 28, U.S.C. § 1404(a), for an order transferring the action to the United States District Court for the Eastern District of Pennsylvania. Thus our inquiry is twofold. First, it must be determined whether venue has been properly laid in this district. The resolution of this question in turn determines whether the second inquiry whether a discretionary transfer is warranted should be analyzed under the provisions of 28 U.S.C. § 1404(a) or under § 1406(a).
The facts which bear on the question of venue are briefly summarized. Plaintiff alleges essentially that the defendants have violated the above-mentioned Acts because (1) there was a lack of statutorily-required "disinterest" on the part of certain directors (Complaint PP 11, 12, 15 & 17); (2) the directors failed to "request and evaluate" and the Manager failed to provide certain information before the advisory agreements here in issue were approved (Compl. P 16); (3) the management fees were excessive (Compl. PP 18, 19).
Plaintiff claims that "(t)he transactions complained of were accomplished directly or indirectly by the use of the United States mails and other instrumentalities of interstate commerce, many of which were in the Eastern District of New York." (Compl. P 6.) She affirms in a supporting affidavit that she has resided in the Eastern District of New York continuously since her initial purchase of Fund shares in 1973. She further states that she has received and continues to receive Fund solicitations, proxy materials and other Fund mailings in this district on a regular basis (Abramson Affidavit). These facts, she contends, support her choice of venue.
Defendants move to dismiss for improper venue alleging that (1) the corporate defendants do not have their principal places of business, and do not transact business, in this district; (2) no act or transaction alleged to constitute a violation of the Act or the Advisers Act occurred in this district; and (3) none of the individual defendants is an inhabitant of, or transacts business in, this district. Defendants contend in substance that All the acts complained of the negotiation, execution and consummation of the agreements and the statutory violations occurred outside the district, and All the individual defendants reside and work outside the district. We assume for purposes of this motion that the above allegations are true.
Venue Under the Investment Company and Advisers Act
The propriety of plaintiff's choice of venue must be determined by reference to the venue provisions in § 44 of the Act, 15 U.S.C. § 80a-43 and § 214 of the Advisers Act, 15 U.S.C. § 80b-14. These sections provide that venue is proper in a civil suit in the district where (1) any act or transaction constituting the violation occurred; (2) the defendant is an inhabitant; or (3) a defendant transacts business.
It is undisputed that venue here is predicated on the first of these provisions.
Plaintiff argues she need only show that an act of material importance to the consummation of the alleged scheme took place within the district to lay venue under the Acts. For this proposition, she cites a number of cases generally decided under the Securities Exchange Act and involving various species of securities fraud. See, E. g., Zorn v. Anderson, 263 F. Supp. 745 (S.D.N.Y.1966); Schneider v. Sears, 265 F. Supp. 257 (S.D.N.Y.1967); Hooper v. Mountain States Securities Corp., 282 F.2d 195 (5 Cir. 1960). She also suggests that venue is proper even if the majority of acts constituting the violation occurred outside the district as long as one act in furtherance of the scheme is committed within (Plaintiff's Reply Memorandum at 5). In essence, she contends that the proxy solicitations in this district constituted an integral part of the violations complained of and satisfy the requirements for venue under the Acts.
Defendants argue that plaintiff's position suffers from a fatal flaw. The proxy solicitation aimed at obtaining shareholder approval for the challenged advisory agreements cannot be a material act, they contend, because there is no allegation in the complaint that the proxy statements or any other documents were false or misleading, and the complaint itself does not allege fraud, misrepresentation or dishonest scheme. Defendants argue that the complaint is utterly devoid of any reference to a fraudulent scheme, and in fact none of the acts complained of was fraudulent or misleading. Rather, it is suggested that any wrongful act would have occurred before the proxy material would have been distributed. For these reasons, defendants urge that plaintiff's reliance on cases alleging fraud is misplaced.
While the issue is not free from doubt, we conclude that in the specific circumstances of the case plaintiff's position is the more meritorious. We reach this result on the basis of our application of the "materiality test," employed in situations where, as here, the venue conferring act is not itself alleged to be illegal, but is on its face a neutral act or transaction. See Hooper v. Mountain Securities Corp., supra; Mariash v. Morrill, 496 F.2d 1138, 1144 (2 Cir. 1974); Kogok v. Fields, 448 F. Supp. 197, 199-200 (E.D.Pa.1978); Mayer v. Development Corp. of America, 396 F. Supp. 917, 928-30 (D.Del.1975). In applying this test, a court must examine the relationship between the venue conferring act and the offenses alleged in the complaint. See Kogok v. Fields, supra at 199-200.
The relationship of the proxy solicitation to the offenses alleged in this complaint is so intimate as virtually to mandate a finding of the proxies' materiality. The language of the Investment Company Act, 15 U.S.C. § 80a-15, sets this forth:
"It shall be unlawful for any person to serve or act as investment adviser of a registered investment company, except pursuant to a written contract, which contract, whether with such registered company or with an investment adviser of such registered company, has been approved by the vote of a majority of the outstanding voting securities of such registered company . . . ."
Consequently, it is beyond peradventure that the proxy solicitations were a material part of the alleged violations. Without shareholder approval, the agreements could apparently never have gone into effect.
We find this relationship sufficiently close to satisfy the most stringent application of the materiality test.
Nor is it incongruous that the alleged wrongful acts might have preceded the actual mailing of the proxy material into the district. The success of these acts depended upon the ultimate approval by the shareholders. Where the validity of the advisory agreement contracts rests upon such approval, the mailing of proxies into the district is sufficient to establish proper venue even where the venue conferring mailing is merely a statutory requirement under the Acts. A contrary conclusion would not conform to the apparently liberal venue provisions of the Acts and would ...