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BLOOM v. BRADFORD

November 8, 1979

ROSE BLOOM, Plaintiff, against HAROLD K. BRADFORD, et al., Defendants.


The opinion of the court was delivered by: NICKERSON

MEMORANDUM AND ORDER

Background

 Defendants move for summary judgment in this action brought by plaintiff on behalf of defendant Investors Mutual, Inc. ("Mutual"), an open-end investment company registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 (the "Investment Company Act"), 15 U.S.C. § 80a-1, Et seq.

 The amended complaint also names as defendants Investors Diversified Services, Inc. ("IDS"), Investors Variable Payment Fund, Inc. ("Variable"), Investors Stock Fund, Inc. ("Stock Fund"), ten individuals who were directors of Mutual, almost all of whom were simultaneously directors of Variable or Stock Fund or both, and Fred M. Kirby, II, the Chairman of IDS's Board of Directors. IDS, registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1, Et seq., acted as investment adviser for Mutual, Variable and Stock Fund during the period in question.

 The amended complaint asserts four claims, all of which basically arise out of a series of purchases and sales of Penn Central Company ("Penn Central") stock from 1967 to 1970. Although each fund acquired Penn Central stock, Mutual bought at the highest prices and sold at the lowest, thus incurring the heaviest losses. All of the transactions were on the open market and at current trading prices.

 Plaintiff has disclaimed all reliance on state law and therefore the court has before it only claims based on federal law. Plaintiff first alleges that on the advice of IDS the common directors of the three funds caused them to purchase stock of Penn Central as follows:

 TABLE

 Plaintiff claims that by causing Mutual to purchase later and at higher prices these directors and IDS gave "priority" to Variable and Stock Fund and violated an asserted duty, both statutory and contractual, to obtain for Mutual the same average price per share for Penn Central stock as the other two funds paid.

 The second claim makes a similar allegation with respect to sales of Penn Central stock in 1969 and 1970. Plaintiff states that the following sales were made:

 TABLE

 Plaintiff asserts that by causing Mutual to defer selling until later than the other two funds and then selling at lower prices the directors and IDS violated their alleged duty to obtain equality of treatment for Mutual.

 On the first two claims plaintiff asks that Mutual's directors, IDS, Variable and Stock Fund pay over to Mutual sums sufficient to put it in the same position as if the purchase and sale prices for the Penn Central shares had been averaged between all three funds. Plaintiff also asks that these defendants account to Mutual for their "profits" and its damages.

 The third claim alleges that by maintaining interlocking boards of directors IDS and the defendant directors deprived Mutual of independent investment advice, in violation of Section 8 of the Clayton Act, 15 U.S.C. § 19. Plaintiff asks that Mutual be required to take steps to insure that no member of its board is a member of the board of Variable or Stock Fund and to obtain an investment adviser independent of the adviser for the other two funds.

 The fourth claim seeks relief solely against defendant Kirby and is not at issue on the present motion.

 Defendants claim that while all three funds were advised by IDS, each fund traded in accordance with different investment objectives. Mutual, a so-called "balanced fund", described its objectives in its prospectuses as follows: "(1) to provide a reasonable return on its shareholders' investments; (2) to preserve the value of these investments; (3) to aim at long term appreciation possibilities on an investment rather than a speculative basis."

 Stock Fund stated its primary objectives as "(1) capital appreciation on an investment basis over a long term and (2) a reasonable income consistent with the investment policies of the company."

 Finally, Variable, a so-called "growth appreciation fund", stated that its objective is "to achieve capital appreciation" and that any "realization" of current income is "only incidental". Variable's prospectuses therefore stated that investments might be made in securities selling at prices "high in relation to earnings and dividends" or involving "a greater than average risk." Mutual's policies were said to be the most conservative, Stock Fund's less so, and Variable's the most speculative.

 The proxy statements sent by Mutual (as well as by the other two funds) showed that IDS acted as investment adviser not only for all three funds but also for many other funds and entities. The proposed advisory agreement between IDS and Mutual was set forth in the proxy statements and recited that IDS advised others and would continue to have the right to do so. The agreements were approved annually by Mutual's shareholders. Mutual's prospectuses contained similar revelations, stating that the three funds had different investment policies and purposes, and advising that the shareholders of all three had the privilege of transferring without sales charge their investment in one fund into an investment in another at respective net asset values. The interlocking directorates were also revealed.

 Jack Nienaber, Vice President of Fund Operations for IDS from April 1965 until January 1968, testified in his deposition to the considerations that led to the purchase and sale of Penn Central stock by each of the three funds. Mr. Nienaber stated that Variable purchased the stock beginning in January 1967, before the merger between the Pennsylvania Railroad and the New York Central had received the necessary administrative approval and judicial scrutiny. Although there was some risk in making the purchase in the event the merger was not consummated, he believed that taking such a risk was consistent with Variable's investment objective, which was exclusively capital appreciation.

 Stock Fund began to purchase the stock several months later, when the merger was closer to being accomplished. Mr. Nienaber testified that because Mutual was the most "conservative" of the three funds it waited to begin until the merger was "almost an accomplished fact." He also said that Mutual's purchase was part of a "package of similar types of securities" which Mutual was then acquiring in order to improve the appreciation potential of its portfolio.

 Mr. Nienaber also explained how the differing objectives of the three funds affected their respective decisions to sell the Penn Central stock.

 In March 1969, it appeared that the Penn Central stock would not make a sufficiently substantial contribution to Variable's only objective, capital appreciation, and it was therefore eliminated from that portfolio.

 The analysis of Penn Central made for Stock Fund in March 1969, showed that it would be "a nonperformer over the intermediate future" as to price. Thus, because the stock was no longer expected to appreciate faster than the market, it was eliminated from Stock Fund's portfolio.

 Mr. Nienaber testified that the same facts led to a different conclusion for Mutual in light of its different investment objectives. In March 1969, when the decision to sell the other funds' holdings was made, a dividend of approximately $ 2.40 was being paid, a good return on the then-current market price, and there was a continued expectation of good, although long-term, appreciation. In light of Mutual's different investment objectives reasonable return, preservation of capital and long-term appreciation it seemed to him sensible to retain the stock in Mutual's portfolio.

 Plaintiff disputes defendants' contention that the transactions accorded with the fund's stated investment objectives. Moreover, she alleges that IDS acted in order to further its own interests and those of its chairman, Fred M. Kirby, II, rather than those of Mutual. Plaintiff alleges that the Kirby family's holdings of Penn Central stock amounted to 586,325 shares, approximately one half of which were held by the Alleghany Corporation, in which the Kirby family had a controlling interest. Thus, plaintiff claims that Kirby used his influence as chairman of the board of ...


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