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KROUNER v. AMERICAN HERITAGE FUND

September 11, 1995

TODD J. KROUNER, Plaintiff, against THE AMERICAN HERITAGE FUND, INC., AMERICAN HERITAGE MANAGEMENT CORPORATION, HEIKO H. THIEME and RICHARD K. PARKER, Defendants.


The opinion of the court was delivered by: WHITMAN KNAPP

 WHITMAN KNAPP, SENIOR D.J.

 This is a proposed class action brought by a former shareholder of defendant American Heritage Fund, Inc., which alleges the commission of numerous violations of the federal securities statutes and the breach of fiduciary duties to the Fund's shareholders. Defendants move to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6). Plaintiff moves to amend the complaint pursuant to Fed. R. Civ. P. 15. For the reasons which follow, we grant defendants' motion.

 BACKGROUND

 In February 1994, plaintiff purchased $ 5,000 worth of shares in defendant American Heritage Fund (hereinafter "the Fund"). Five months later he sold all but one of those shares for $ 3,792, thereby losing $ 1,206.55 or nearly 25% of his investment. He filed this action in October 1994.

 The Fund is a mutual fund "designed for investors who desire to participate in a carefully supervised program of seeking maximum capital growth." American Heritage Fund, Inc. Prospectus, Oct. 1, 1993 at 1. Defendant American Heritage Fund Management Corporation (hereinafter "the Management Corporation") provides investment advice to the Fund. Defendants Heiko H. Thieme and Richard K. Parker are officers of the Management Corporation and in such capacity advise the Fund with regard to investments.

 The complaint further alleges that the Fund engaged in other similarly risky investment strategies such as purchasing stock from companies "lacking any significant operating history or products with any established market whatsoever," Complaint at P 24(c), and "investing significant amounts of money in companies otherwise unable to obtain financing, based merely on an interview between the company's executives and [defendant] Thieme and a review of the company's financial statements or product," Complaint at P 24(c). These practices, plaintiff contends, were disclosed neither in the Registration Statement nor in the Prospectus, and resulted in a 30% decline in the Fund's value.

 Plaintiff contends that the above-discussed omissions violate section 11 of the 1933 Securities Act, 15 U.S.C. § 77(k), which prohibits omissions of material fact from registration statements; section 12(2) of the 1933 Securities Act, 15 U.S.C. § 771(2), which does likewise with regard to prospectuses; and section 8(b) of the Investment Company Act, 15 U.S.C. § 80a-8(b), which requires that all SEC-registered investment companies file a registration statement containing "a recital of all policies of the registrant * * * in respect of matters which the registrant deems of fundamental policy," (8(b)(3)) and

 
the information and documents which would be required to be filed in order to register under the Securities Act of 1933 and the Securities Exchange Act of 1934 all securities * * * which the registrant has outstanding or proposes to issue.

 (8(b)(5)).

 The complaint also asserts that defendants overvalued the worth of the restricted and small-cap securities held by the Fund, consequently inflating the Fund's asset value. Complaint at P 26. However, the complaint fails to relate this allegation to a particular cause of action.

 Plaintiff further asserts that defendants, without having obtained necessary authorization from the shareholders, deviated from the Fund's established investment policies by starting to invest in "companies with no operating history or proven product whatsoever, and companies who could obtain financing from no other source whatsoever," in violation of § 13(a)(3) of the Investment Company Act. Complaint at P 53.

 Finally, the complaint alleges that the Management Corporation, Thieme and Parker, by participating in the above-described activity, breached their fiduciary duties to plaintiff under § 36(b) of the Investment Company Act; and that all defendants, in so participating, breached such duties under the common law.

 The October 1993 Prospectus

 The introduction to the Fund's October 1993 Prospectus states in pertinent part (emphasis added):

 
The Fund is designed for investors who desire to participate in a carefully supervised program of seeking maximum capital growth. The Fund may utilize the investment techniques of short-term trading, hedging, leveraging, the purchase and sale of put and call options and warrants, the writing of listed put and call options and the purchase of foreign securities. Through the use of these and other investment techniques described herein, management hopes to take advantage of investment opportunities in both rising and declining markets. These techniques involve greater than normal risk and attainment of the Fund's objection cannot, of course, be assured. Common stocks and securities convertible or exchangeable thereto, including securities, issued by smaller and lesser known companies, will normally constitute all or substantially all of the Fund's portfolio.
 
* * *

 Prospectus at 1.

 The Prospectus contains the following discussion of special risks associated with the Fund's investment strategies:

 
SPECIAL RISK CONSIDERATIONS
 
In contrast to most mutual funds, the Fund, in addition to the usual investment practices, may seek to obtain its investment objective through the use of certain speculative investment techniques which entail greater than average risks. For example, the Fund may increase its security holdings through the use of money borrowed from banks ("leveraging"), it may engage in short selling to profit from in a decline in price of particular securities or to protect against downward movement in the market, the Fund may purchase ...

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