The opinion of the court was delivered by: LEISURE
This proposed class action arises out of plaintiffs' purchase of shares in TCW/DW North American Government Income Trust (the "Fund"). Plaintiffs claim that through various registration statements, prospectuses, sales materials, annual and semiannual reports, as well as oral statements of brokers and representatives of defendant Dean Witter Reynolds, Inc. ("DWR"), all defendants misrepresented the risks inherent in the Fund, in violation of Sections 11 and 12(2) and of the Securities Act of 1933 (the "Securities Act"). See 15 U.S.C. §§ 77k and 771(2). In addition, plaintiffs assert that all defendants except the Fund, by virtue of these misrepresentations, violated § 15 of the Securities Act. See 15 U.S.C. § 77o. Finally, Count IV of the Consolidated Class Action Complaint (the "Complaint") alleges that three of the eleven named defendants breached their fiduciary duty by charging excessive management and advisement fees in violation of § 36(b) of the Investment Company Act of 1940 (the "ICA"). See 15 U.S.C. § 80a-35(b). Pursuant to Fed. R. Civ. P. 12(b)(6), defendants move to dismiss the complaint for failure to state a claim upon which relief can be granted. For the reasons stated below, defendants' motion is denied.
Plaintiffs, individuals who purchased shares of the Fund during the class period of between July 31, 1992, the closing date of the initial offering of shares, and December 29, 1994, bring this proposed class action on behalf of themselves and all others who purchased shares in the Fund during the class period. Defendant the Fund is an "open-end," non-diversified management investment company (i.e. mutual fund) registered pursuant to the Investment Company Act of 1940. See 15 U.S.C. § 80a-8(a). According to the complaint, other defendants are: (1) DWR, a securities broker-dealer and the principal underwriter and distributor for the initial offering of the Fund; (2) Dean Witter Distributors, Inc. ("DW Distributors"), which succeeded DWR in January 1993 as principal underwriter and distributor for the continuous offering of the Fund's shares; (3) Dean Witter Intercapital, Inc., a wholly owned subsidiary of DWR, and the Manager of the Fund from January 1993 until January 1, 1994; (4) Dean Witter Services Company, Inc. ("DW Services"), a wholly owned subsidiary of Dean Witter Intercapital, which it succeeded on January 1, 1994 as Manager of the Fund; (5) TCW Funds Management, Inc. ("TCW Funds"), a California corporation which served at all relevant times as the Fund's Investment Adviser; and (6) individual defendants who were all officers and/or trustees of the Fund.
As an open-end mutual fund, the Fund conducts a continuous offering of shares, made pursuant to registration statements and prospectuses which are amended periodically. The initial prospectus was filed with the Securities and Exchange Commission on June 2, 1992, and was amended without material change two times during the class period, first on January 8, 1993, later on December 9, 1993.
The Fund's prospectus (the "prospectus"), which purported to set forth all the information an investor should know before deciding to invest, stated that "the investment objective of the Fund is to earn a high level of current income while maintaining relatively low volatility of principal." Affidavit of Richard A. Rosen, Esq., in Support of Defendants' Motion to Dismiss Ex. A at 2.
According to the prospectus, the Fund intended to achieve its investment objective by investing in fixed-income securities, the value of which "generally increase during periods of declining interest rates and decrease during periods of increasing interest rates." Id. at 6. Under normal circumstances, at least 65% of the total assets of the Fund were to be invested in investment grade fixed-income securities issued or guaranteed by the United States, Canadian, or Mexico governments. It was expected that "under normal circumstances, the market value dollar weighted average life . . . of the Fund's portfolio securities will be no greater than three years." Id. Disclosure of the expected short average life of the securities in the Fund was worthy of inclusion in the prospectus because of the fact that fluctuations in the values of fixed income securities "has historically been smaller for short term securities than for securities with longer maturities." Id.
A substantial portion of the 65% of the total assets of the Fund invested in investment grade fixed income securities was to be invested in United States and Canadian mortgage-backed securities. Mortgage-backed securities "are securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans secured by real property." Id. at 9. While the value of mortgage-backed securities, like that of traditional debt securities, typically increases when interest rates fall and decreases when interest rates rise, they are different from traditional debt securities in several ways, including the notable exception that the principle of the mortgages underlying the securities may be prepaid at any time. See id. at 13. Normally, "prepayments on fixed rate mortgage loans will increase during a period of falling interest rates and decrease during a period of rising interest rates." Id. at 14.
Mortgage-backed securities have become increasingly complicated financial products, and now include among their number several mortgage derivative securities. One such product, which the Fund heavily invested in, is the collateralized mortgage obligation ("CMO"). CMOs are "debt obligations collateralized by mortgage loans or mortgage pass-through securities." Id. at 10. The average life of mortgage derivative securities, such as CMOs, is determined by "using mathematical models that incorporate prepayment assumptions and other factors that involve estimates of future economic and market conditions." See Affidavit of Robert C. Finkel, Esq., in Opposition to Defendants' Motion to Dismiss Ex. A at 13.
I. General Standard for a Rule 12(b)(6) Motion to Dismiss
In deciding defendants' Rule 12(b)(6) motion to dismiss, the Court accepts as true the material facts alleged in the complaint and draws all reasonable inferences in plaintiffs' favor. See Kaluczky v. City of White Plains, 57 F.3d 202, 206 (2d Cir. 1995) (citing Hill v. City of New York, 45 F.3d 653, 657 (2d Cir. 1995)). A motion to dismiss must be denied "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)). Merely because recovery appears remote and unlikely on the face of a complaint is not reason for dismissal, because "'"the issue is not whether a plaintiff will ultimately prevail but whether the claimant is ...