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May 6, 1997

ROBERT STROUGO, on behalf of The Brazil Fund, Inc., Plaintiff, against SCUDDER, STEVENS & CLARK, INC., Defendant. - and - THE BRAZIL FUND, INC., Nominal Defendant. ROBERT STROUGO, on behalf of himself and all others similarly situated, Plaintiff, - against - JURIS PADEGS, NICHOLAS BRATT, EDGAR R. FIEDLER, ROBERTO TEIXEIRA DA COSTS, RONALDO A. DA FROTA NOGUEIRA, WILSON NOLEN, EDMOND D. VILLANI, and SCUDDER, STEVENS & CLARK, INC., Defendants.

The opinion of the court was delivered by: SWEET

 Sweet, D.J.

 In this action alleging violations of the Investment Company Act of 1940, as amended (the "ICA"), 15 U.S.C. §§ 80a-1 et seq., and breach of fiduciary duty under the common law, defendants Scudder, Stevens & Clark, Inc. ("Scudder"), Juris Padegs ("Padegs"), Nicholas Bratt ("Bratt"), Edmond Villani ("Villani"), Edgar Fiedler ("Fiedler"), Wilson Nolen ("Nolen"), Roberto Teixeira Da Costa ("Da Costa"), Ronaldo A. Da Frota Nogueira ("Nogueira"), and nominal defendant the Brazil Fund ("the Fund"), have moved to dismiss the complaint of Robert Strougo ("Strougo") for failure to state a claim, pursuant to Fed. R. Civ. P. 12(b)(6), for failure to make pre-suit demand, pursuant to Fed. R. Civ. P. 23.1, and for failure to plead with particularity, pursuant to Fed. R. Civ. P. 9(b).

 For the reasons set forth below, the motions will be granted in part and denied in part.


 Strougo purchased 1,000 shares of the Fund on January 11, 1993, and has held shares continuously thereafter.

 The Fund, a nominal defendant in this action, is a Maryland corporation whose principal executive office is located in New York, New York. The Fund is a non-diversified, closed-end investment company that invests in the securities of Brazilian companies. Shares in the Fund trade on the New York Stock Exchange.

 Scudder is a Delaware corporation whose principal offices are located in New York, New York. Scudder serves as investment advisor to and manager of the Fund. It is a registered investment advisor under the Investment Advisers Act of 1940, as amended, 15 U.S.C. 80b-1 et seq.

 Padegs is chairman of the board and a director of the Fund. He is also a managing director of Scudder and serves on both Scudder's board and the boards of other funds managed by Scudder.

 Bratt is president and a director of the Fund. Bratt is also a managing director of Scudder and serves on the boards of other funds managed by Scudder.

 Villani is a director of the Fund. He is also president and managing director of Scudder and serves on both Scudder's board and the boards of other funds managed by Scudder.

 Scudder, Padegs, Bratt and Villani will be referred to as the "Scudder Defendants."

 Fiedler is a director of the Fund and serves on the boards of seven other funds managed by Scudder. He received $ 30,003 in compensation for serving on boards of funds managed by Scudder and accrued $ 366,075 in deferred compensation for service on two Scudder funds.

 Nolen is a director of the Fund. He also serves on the boards of fourteen other funds managed by Scudder. Nolen's aggregate compensation for service on these boards was $ 132,023 in 1994.

 Da Costa is a director and resident Brazilian director of the Fund. Da Costa was compensated $ 13,868 for serving on the Fund's board in 1994.

 Prior Proceedings

 Strougo filed his initial complaint on March 22, 1996. He filed the first amended class action and verified shareholder derivative complaint (the "Complaint") on June 17, 1996. Defendants filed the instant motions on July 29 and July 30, 1996. Oral argument was heard on January 15, 1997, at which time the motions were deemed fully submitted.

 The Facts

 On a motion to dismiss under rule 12(b)(6), the facts alleged in the complaint are presumed to be true, and all factual inferences are drawn in the plaintiff's favor. Mills v. Polar Molecular Corporation, 12 F.3d 1170, 1174 (2d Cir. 1993). Accordingly, the facts presented here are drawn from the allegations of the Complaint and do not constitute findings of fact by the Court.

 This action arises from the 1995 decision by the board of directors of the Brazil Fund, a closed-end investment company incorporated under Maryland law and traded on the New York Stock Exchange, to increase the Fund's capital by offering the Fund's existing shareholders rights to purchase additional shares of newly issued stock (the "Rights Offering"). Strougo asserts that Scudder and each of the directors of the Fund breached their respective fiduciary duties of loyalty and due care as a result of the development and implementation of the Rights Offering.

 Scudder created the Brazil Fund in 1988. The Fund is a non-diversified, closed-end investment company registered under the Investment Company Act of 1940 (the "ICA") that invests almost exclusively in securities of Brazilian companies. Certain of the Fund's directors serve as executive officers of Scudder and receive substantial compensation from Scudder. A majority of the remaining directors of the Fund serve as directors of other closed-end funds affiliated with Scudder. Defendant Fiedler serves on the boards of eight funds managed by Scudder and received or accrued approximately $ 400,000 as a result of such directorships during 1994. Defendant Nolen serves on the boards of fifteen funds managed by Scudder and received $ 132,023 in 1994 as a result thereof. Defendant Nogueira serves on the boards of four funds managed by Scudder and received $ 54,997 in 1994 as a result thereof.

 Unlike a traditional mutual fund in which investors purchase and redeem shares directly from and with the mutual fund, a closed-end fund has a fixed number of shares and (after the initial public offering) investors may only purchase shares from an existing shareholder through a stock exchange on which such shares are listed. Thus, shares in a closed-end fund are traded exactly like the shares of any other publicly-owned corporation. By contrast with an "open-end" mutual fund, in which the number of shares is not fixed and investors can purchase or redeem shares at current net asset value ("NAV") (calculated by dividing the fund's total assets by the number of shares outstanding), a closed-end fund has a fixed number of shares that originally were sold in a public offering. Per-share trading prices may be at either a premium or a discount to NAV, but more often are at a discount.

 Because closed-end funds operate with a fixed number of shares, they have limited options for obtaining capital to make new investments. Once a fund's initial capital has been fully invested, new investments generally can be made only if the fund sells existing portfolio holdings. Other options for raising capital include secondary public offerings at net asset value, or rights offerings to current investors at or below NAV.

 Scudder is paid a fee equal to a percentage of the Fund's net assets. From December 1994 through November 1995, the Fund's net assets declined significantly, dropping to $ 271 million on November 16, 1995, from $ 377 million on December 31, 1994. As the Fund's net assets materially declined, so did Scudder's fee.

 The Subscription Price was 30.19% below the Fund's NAV and resulted in per share NAV being reduced by $ 1.88. This $ 1.88 per share dilution was accompanied by a contemporaneous decline in the market price of the Fund's shares. The price of the Fund's stock declined, dropping $ 2.125 per share from $ 25.125 the day before the Rights Offering was announced to $ 23.25 one week later. Strougo alleges that as a result of the "coercive" Rights Offering, plaintiff and the other shareholders of the Fund, as well as the Fund itself, suffered harm in the form of market and dilution damages. The Complaint alleges that Rights Offerings "cause a loss to existing shareholders" because they "dilute the pro rata holdings of . . . stock held by the fund allocable to existing shares [, and] because investment banking fees and other transactional costs are incurred by the closed-end fund." Moreover, Strougo alleges that the market value of the Fund's shares was depressed below what it would have been had the Rights Offering not been made.

 The Complaint alleges six separate claims. Claim I, which is brought derivatively pursuant to ICA Section 36(b) on behalf of the Fund and against Scudder only, seeks the recovery of excessive fees. Claims V and VI, also brought derivatively on behalf of the Fund, but pursuant to Fed. R. Civ. P. 23.1, and against all defendants except the fund, allege breaches of fiduciary duty owed to the Fund. Claim V is brought pursuant to ICA Section 36(a) and Claim VI is brought pursuant to the common law.

 Claims II, III, and IV are brought as direct class claims pursuant to Fed. R. Civ. P. 23, on behalf of a putative class consisting of Fund shareholders during the period October 13, 1995, to December 15, 1995. Claim II is brought against all defendants (except nominal defendant the Fund) for breaches of their ICA Section 36(a) fiduciary duties owed to the fund's shareholders. Claim IV is brought against all defendants (except nominal defendant the Fund) for breaches of their common law fiduciary duties owed to the Fund's shareholders. Claim III is brought against the Scudder defendants and alleges control person liability pursuant to ICA Section 48.

 With respect to Claims V and VI, which are derivative in nature, *fn1" the Complaint alleges that demand would be futile for the following reasons: (1) the board participated or acquiesced in the alleged wrongful acts or intentionally or recklessly failed to inform themselves of the harms and benefits associated with the Rights Offering; (2) a majority of board members are "controlled by or financially dependent" on Scudder, by virtue of their compensation for sitting on the boards of other Scudder funds; (3) because the entire board was responsible for the wrongful acts, the directors cannot independently determine whether a suit should be brought against themselves; (4) the wrongful acts constituted a waste of the Fund's assets, which is unprotected by the business judgment rule; (5) the wrongful acts constituted violations of federal securities law and fiduciary duties, which are not protected by the business judgment rule; and (6) the Fund's directors' and officers' insurance coverage would be voided if the Fund commenced proceedings against the directors.

 I. Legal standards Under Rule 12(b)(6)

 Rule 12(b)(6) imposes a substantial burden upon the moving party. A court may not dismiss a complaint unless the movant demonstrates "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." H. J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249-50, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989); Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984); Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). The court must accept a complaint's factual allegations as true, drawing all reasonable inferences in the plaintiff's favor. 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)). See also Scheuer v. Rhodes, 416 U.S. 232, 237, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Walker v. City of New York, 974 F.2d 293, 298 (2d Cir. 1992).

 The appropriate inquiry is not "whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. at 236; see also Ricciuti v. New York City Transit Auth., 941 F.2d 119, 124 (2d Cir. 1991) (plaintiff is not compelled to prove his case at the pleading stage); Russell v. Northrop Grumman Corp., 921 F. Supp. 143, 146 (E.D.N.Y. 1996).

 II. The Class Claims Will Be Dismissed As Derivative

 Claim II purports to assert a direct class action claim for breach of fiduciary duty pursuant to Section 36(a), while Claim IV directly asserts breach of fiduciary duty under Maryland common law. However, these claims cannot be maintained by Strougo as direct claims because they allege injury to the Fund, and any harm to Strougo is derivative in nature. Therefore, these claims may be brought only by the corporation, or on its behalf in a shareholder derivative claim.

 To determine whether a claim brought under the ICA is direct or derivative, a court must look to the law of the state in which the fund was incorporated. Kamen v. Kemper Fin. Servs., 500 U.S. 90, 97-99, 114 L. Ed. 2d 152, 111 S. Ct. 1711 (1991) (holding that non-conflicting state law governs federal rules of decision under the ICA). As the Fund is a Maryland corporation, Maryland law governs the rules of decision. Maryland law directs courts to look to the nature of the wrongs alleged in the complaint to determine whether a complaint states a direct or an individual cause of action. James J. Hanks, Jr., Maryland Corporation Law § 7.21(b) (1990 & 1995-1 Suppl.) (collecting cases).

 Under Maryland law,

it is a general rule that an action at law to recover damages to a corporation can be brought only in the name of the corporation itself acting through its directors, and not by an individual stockholder, though the injury may incidentally result in diminishing or destroying the value of the stock. ... Generally, therefore, a stockholder cannot maintain an action at law against an officer or director of the corporation to recover damages for fraud, embezzlement, or other breach of trust which depreciated the capital stock. ... Where directors commit a breach of trust, they are liable to the corporation, not to its creditors or stockholders ..."

 Waller v. Waller, 187 Md. 185, 189-90, 49 A.2d 449, 452 (Md. 1946).

 Where the injury falls equally on all shareholders and no special relationship between the plaintiff and the defendant might create a duty other than that owed to the corporation, there is no direct cause of action in a shareholder. Olesh v. Dreyfus Corp., 1995 U.S. Dist. LEXIS 21421, No. CV 94-164, 1995 WL 500491, *7 (E.D.N.Y. Aug. 8, 1995).

 The Complaint here alleges an undifferentiated harm suffered by all shareholders deriving from asserted harm to the Fund. The purported class consists of:

all persons who owned shares in the Fund at any time between October 13, 1995 (the date the Fund first publicly announced the rights offering) and December 15, 1995 (the date the rights expired), and who sustained damages as a result thereby.

 The assertion that plaintiffs were injured as a result of the increased transaction costs and increased management fees that the Rights Offering brought about for the Fund is, on its face, a claim that all shareholders suffered because the Fund suffered by paying costs that it should not have had to pay. This claim too, is derivative. See Olesh, 1995 U.S. Dist. LEXIS 21421, 1995 WL 500491 at *7 (claim of injuries from increased fees derivative because fees imposed on funds, not shareholders directly).

 Plaintiff's claims of dilution and of loss of share value similarly spring from a single course of conduct by the defendants toward all shareholders, which is asserted to have adversely affected the Fund's overall capitalization. These claims accordingly are derivative in nature as well, and consequently can only be brought by the Fund on behalf of all shareholders. See, e.g., Waller, 49 A.2d at 452 ("A cause of action for injury to the property of a corporation or for impairment or destruction of its business is in the corporation, and such an injury, although it may diminish the value of the capital stock, is not primarily or necessarily a damage to the stockholder, and hence the stockholder's derivative right can be asserted only through the corporation.") (emphasis added); accord Kramer v. Western Pac. Indus., Inc., 546 A.2d 348, 353 (Del. 1988) ("Where a plaintiff shareholder claims that the value of his stock will deteriorate and that the value of his proportionate share of stock will be decreased as a result of alleged director mismanagement, his cause of action is derivative in nature") (citations omitted).

 A complaint that, like this one, alleges no injury to shareholders distinct from diminution of share value does not state a cause of action that can be brought directly in a class action. See Olesh, 1995 U.S. Dist. LEXIS 21421, 1995 WL 500491 at *6 (limiting plaintiffs to derivative action under § 36(a)); Waller, 49 A.2d at 452-53; see also Hanks, Maryland Corporation Law, § 7.21[c], at 264; accord Arent v. Distribution Sciences, Inc., 975 F.2d 1370, 1374 (8th Cir. 1992).

 Moreover, Strougo's allegations in this case are expressly based on asserted breaches of fiduciary duty. Such claims of breach of duty by directors and other fiduciaries of a corporation generally are regarded as derivative rather than direct, since the duty is owed to the corporation and its shareholders as a whole, and the impact of a breach is felt by the corporation. See, e.g., O'Donnell v. Sardegna, 336 Md. 18, 646 A.2d 398, 402-03 (Md. 1994) (plaintiffs whose claims included breach of fiduciary duty held limited to derivative action); Olesh, 1995 U.S. Dist. LEXIS 21421, 1995 WL 500491 at *7 (actions for breach of fiduciary duty generally derivative in nature), citing Robert C. Clark, Corporate Law § 15.9 (1986) ("The kinds of suits that are derivative in nature include most cases based on breach of the fiduciary duties of care and loyalty. These include, for example, suits based on . . . gross negligence [and] basic self-dealing"); see also Litman v. Prudential-Bache Properties, Inc., 611 A.2d 12, 15-16 (Del. Ch. 1992); Lochhead v. Alacano, 662 F. Supp. 230, 231-32 (D. Utah 1987) (Lochhead I) (under majority rule, fiduciary duties run only from directors to corporation, not to individual shareholders).

 Two recent cases considering efforts to assert direct class action claims for breach of fiduciary duty under Section 36(a) and the common law with respect to rights offerings are instructive. In In re Nuveen Fund Litig., 855 F. Supp. 950 (N.D. Ill. 1994) (Nuveen I), the Court dismissed direct claims challenging rights offerings by two closed-end funds (the "Nuveen Funds") and declared that the suit would have to be pursued as a derivative one. Applying Minnesota law, the Court explained:

Plaintiffs' alleged injuries are not distinct from the alleged injuries to all the Nuveen funds' shareholders. The defendants' actions were the same with respect to all the shareholders. Plaintiffs allege that all the ... shareholders were harmed because the offerings caused the Nuveen funds' per-share value to decline and the fees paid by the ... funds to cover the costs of the offerings (underwriting and advisory services) have siphoned money out of the ... funds to defendants. An injury shared by all the shareholders of a corporation cannot be personal to each shareholder.

 Id. at 954.

 Similarly, in King v. Douglas, Civ.No. H-96-1033, slip op. (S.D. Tx. Dec. 23, 1996), the Court dismissed the plaintiffs' direct claims challenging a rights offering under Section 36(a). The Court reasoned that allegations of reduced NAV and market value and dilution in the value of existing shareholders' interests did not state a direct claim because the alleged actions "affect all shareholders equally, proportionate to each shareholder's ownership interest." Slip op. at 41.

 Strougo, however, contends that his injury is separate and distinct from any injury to the Fund. If the injury to the shareholder is separate and distinct from any injury suffered either directly by the corporation or derivatively by the stockholder because of the injury to the corporation, a shareholder will have a direct cause of action. Hanks, Maryland Corporation Law, § 7.21[b] at 263-64. This will be the case, for example, where the corporation or the board violates a duty owed directly to a shareholder as an individual, rather than as a shareholder. See Olesh, 1995 U.S. Dist. LEXIS 21421, 1995 WL 500491 at *7 (action is derivative unless "special relationship" exists between shareholder and defendant that might create duty other than that owed to corporation); Empire Life Ins. Co. v. Valdak Corp., 468 F.2d 330, 334-36 (5th Cir. 1972) (shareholder who pledged securities to defendant and then acted to diminish the value of the securities permitted to sue directly because defendant pledgee owed direct legal duty to plaintiff as pledgor not to diminish collateral); Chase Nat'l Bank v. Sayles, 30 F.2d 178, 183 (D.R.I. 1927) (direct suit permitted where "independent fiduciary relation" existed between plaintiff shareholder and defendant officer, because defendant was plaintiff's agent).

 Strougo here has made no allegation that he or the class of shareholders he purports to represent has any independent or special relationship to the defendants other than that of shareholder of the Fund. As a result, there is no direct cause of action resulting from the breach of a special relationship.

 Strougo, however, contends that the Complaint demonstrates that although all shareholders were affected by the Rights Offering, they were not all affected equally, and thus there is a special injury permitting a direct action. For example, Strougo contends that those who did not exercise their rights were affected differently from those who did. Thus, he contends, the injury to shareholders is distinct from the injury to the corporation.

 However, the fact that a shareholder might be differently affected by a rights offering based on his own election whether or not to exercise rights given equally to all shareholders does not make his injury distinct from injury to the corporation. So long as the defendants' action toward all shareholders was the same, and any disproportionate effect was the result of the various shareholders' responses to the action, the shareholders have no direct action. See Nuveen I, 855 F. Supp. at 955 (dilution in shareholders' proportionate voting rights not basis for direct action, where proportionate rights changed because some shareholders exercised rights where others did not; defendants' actions were same as to all); King, slip op. at 41 ("Plaintiffs' allegations that the effect on shareholders' voting rights will be disproportional because some will exercise their rights and purchase new additional stock while others [will not] must . . . fail as a basis for a direct claim. . . . Defendants' actions were the same as to all shareholders and did not disproportionately create the change in ownership or ultimately in voting rights; the shareholders chose whether to participate or not.")

 Strougo cites a number of cases that purportedly support the proposition that dilution of share value creates a direct cause of action in the shareholder. However, the cases cited involved situations in which one class or group of stockholders benefitted at the expense of another class of shareholders, who were then permitted to sue directly. In Alleghany Corp. v. Breswick & Co., 353 U.S. 151, 160, 1 L. Ed. 2d 726, 77 S. Ct. 763 (1957), for example, minority common stockholders had standing to bring a direct suit when the corporation issued preferred stock that would be convertible into common stock, which would effectively dilute the minority common stockholders' equity, but not the equity of the existing preferred stockholders, who could increase their common stock ownership, while the common stockholders could not.

 A number of the other cases cited by Strougo involved similar circumstances in which majority or otherwise controlling shareholders inflicted special injuries that fell only on minority shareholders. For example, in Lochhead v. Alacano, 697 F. Supp. 406, 411-13 (D. Utah 1988) (Lochhead II), minority shareholders had standing to bring a direct suit when the directors and majority shareholders approved a stock option plan that disproportionately benefitted them, at the expense of minority shareholders. See also Swanson v. American Consumer Indus., Inc., 415 F.2d 1326, 1332 (7th Cir. 1969) (permitting minority shareholders fraudulently induced to forego appraisal rights to sue directly, because principal shareholder wasted assets of company for own benefit); Bennett v. Breuil Petroleum Corp., 34 Del. Ch. 6, 99 A.2d 236, 239 (Del Ch. ...

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