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IN RE TCW/DW NORTH AMERICAN GOV'T INCOME TRUST SEC

August 27, 1996

IN RE TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST SECURITIES LITIGATION


The opinion of the court was delivered by: LEISURE

OPINION AND ORDER

 LEISURE, District Judge :

 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 §§ 11 and 12(2) and of the Securities Act of 1933 (the "Securities Act"). See 15 U.S.C. §§ 77k(a) 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. § 770. 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).

 Defendants moved to dismiss the complaint for failure to state a claim upon which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6). In an Opinion and Order dated May 8, 1996 (the "May 8 Order"), the Court denied defendants' motions, but granted several defendants' request to argue further whether or not the ICA applied to them. Currently before the Court are: (1) all defendants' motion for reconsideration of the May 8 Order; (2) plaintiffs' motion, brought pursuant to Fed. R. Civ. P. 23, for certification of this action as a class action; and (3) defendants Dean Witter Distributors, Inc.'s ("DW Distributors") and Dean Witter Services, Inc.'s ("DW Services") motion to dismiss plaintiffs' ICA cause of action. For the reasons stated below, DW Distributors' and DW Services' motion to dismiss the ICA cause of action is granted, and plaintiffs' motion for class certification is granted. Defendants' motion for reconsideration is denied insofar as it challenges the merits of the Court's May 8 Order. However, the Court, pursuant to defendants' request, amends the May 8 Order to clarify its decision. Finally, the Court addresses the remainder of plaintiffs' §§ 11, 12(2) and 15 claims not considered in the May 8 Order, and decides that while one states a claim upon which relief can be granted, the others are necessarily dismissed pursuant to Fed. R. Civ. P. 12(b)(6).

 BACKGROUND

 Because the Court addresses defendants' reconsideration motion with respect to the May 8 Order, the following background section includes facts relevant to the original motion to dismiss, and relies on documents filed in support of and in opposition to that motion. This version of the facts, however, is an abbreviated one, as the Court assumes familiarity with its prior Order. Named plaintiffs in this lawsuit are 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. Nine of the twelve named plaintiffs seek to represent the class, and their names are Harry Flanagan, Steven French, Lillian Ginsberg, Phyllis Glabman, Joseph A. Gualdoni, John McCullough, John Steven McCullough, Melissa Schwartz and Bruce Stauderman.

 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). Other defendants are: (1) DWR, a securities broker-dealer and the principal underwriter and distributor for the initial offering of the Fund; (2) 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) 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., 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, and later on December 9, 1993. *fn1"

 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., Sworn to on July 20, 1995, in Support of Defendants' Motion to Dismiss Ex. A at 2. *fn2" 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 Mexican governments. It was expected that "under normal circumstances, the market value dollar weighted average life . . . of the Fund's portfolio securities [would] 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. One kind of mortgage-backed security in which the Fund invested is the collateralized mortgage obligation ("CMO"). The prospectus stated that the Fund's investment in Mexican government issued debt would be limited to four different types of securities, all of which are traded on the Mexican Stock Exchange. See id. at 8.

 To compensate for the services and facilities furnished to the Fund and for expenses of the Fund assumed by the Manager, the Fund pays the Manager DW Services a monthly fee calculated daily by applying the annual rate of 0.39% to the Fund's net assets. See id. at 5. In addition, as compensation for its investment advisory services, the Funds pays the Adviser TCW Funds a monthly fee calculated daily by applying an annual rate of 0.26% to the Fund's net assets. Finally, pursuant to a Plan of Distribution, the Fund pays the distributor DW Distributors for its services a monthly fee calculated daily by applying the annual rate of 0.75% to the Fund's net assets.

 DISCUSSION

 I. Reconsideration

 The standard for granting a motion for reconsideration is strict, and such a motion will "generally be denied unless the moving party can point to controlling decisions or data that the court overlooked -- matters, in other words, that might reasonably be expected to alter the conclusion reached by the court." Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir. 1995).

 Defendants first basis for seeking reconsideration of the May 8 Order is that the Court failed to refer to, let alone adhere to, an earlier decision of this Court. See In re Hyperion Sec. Litigation, 1995 U.S. Dist. LEXIS 10020, 1995 WL 422480 (S.D.N.Y. July 14, 1995) (Mukasey, J.). First, the Court notes that the Hyperion decision is not a controlling decision, and therefore cannot properly support a motion for reconsideration. Moreover, the Court did in fact give careful consideration to Judge Mukasey's decision in the Hyperion case, but found the instant case distinguishable. It is true that Judge Mukasey granted a motion to dismiss for failure to state a claim where the prospectus at issue, like the Fund's prospectus in this case, made no mention of maturity extension risk when disclosing risks associated with mortgage-backed securities such as CMOs. However, considering that there is no mention of the concept of maturity extension risk in the Hyperion decision, it does not necessarily follow that Judge Mukasey considered the failure to disclose such risk immaterial. It is equally plausible to conclude that maturity extension risk was never raised by the parties in the Hyperion case, and therefore never considered by the Hyperion Court. Regardless, even if maturity extension risk were considered by the Hyperion Court, because this Court is not bound by that decision, it maintains its earlier position that failure to disclose such risk is not immaterial as a matter of law.

 In the earlier Order, the Court addressed only a single group of statements which the Fund's prospectus failed to disclose -- statements concerning maturity extension risk. Upon finding that adequate disclosure of this risk was not immaterial as a matter of law, the Court denied defendants' Rule 12(b)(6) motion to dismiss plaintiffs' causes of actions based upon §§ 11, 12(2), and 15 of the Securities Act. In their memorandum of law in support of their motion for reargument, defendants correctly state that plaintiffs' complaint identifies other allegedly material misrepresentations and omissions in the prospectus. *fn3" While aware that the May 8 Order expressly declined to consider these other alleged misrepresentations and omissions, see May 8 Order at 7 n.5, observing that the Court may grant a Rule 12(b)(6) motion in part and deny it in part, defendants now asks the Court to analyze plaintiffs' other allegations. Defendants argue that a decision as to whether the other allegations state a claim would not be a mere academic exercise because dismissal of any of these claims would limit the scope of discovery.

 The Court agrees that, if possible, reducing the number of claims alleged would provide efficiency benefits for the parties to this litigation, and therefore grants defendants' request. Based on its reading of the complaint, the Court finds that plaintiffs' assert three other claims resulting from disclosures in or omissions from the prospectus. Specifically, plaintiffs allege that disclosures about (1) investments in Mexican government debt securities and (2) the Fund's stated investment objective to earn a high level of current income while maintaining a relatively low volatility of principle, constitute material misstatements in violation of §§ 11, 12(2) and 15 of the Securities Act. In addition, the ...


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