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STROUGO v. PADEGS

April 6, 1998

ROBERT STROUGO, on behalf of The Brazil Fund, Inc., Plaintiff, against JURIS PADEGS, NICHOLAS BRATT, EDGAR R. FIEDLER, ROBERTO TEIXEIRA DA COSTA, RONALDO A. DA FROTA NOGUEIRA, WILSON NOLEN, EDMOND D. VILLANI, and SCUDDER, STEVENS & CLARK, INC., Defendants. - 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 COSTA, RONALDO A. DA FROTA NOGUEIRA, WILSON NOLEN, EDMOND D. VILLANI, and SCUDDER, STEVENS & CLARK, INC., Defendants.

ROBERT W. SWEET, U.S.D.J.


The opinion of the court was delivered by: SWEET

OPINION

Sweet, D.J.

 Nominal Defendant The Brazil Fund, Inc. (the "Fund") has moved to dismiss the shareholder derivative complaint of plaintiff Robert Strougo ("Strougo") under Rule 12(b)(6), Fed. R. Civ. P., or, in the alternative, for summary judgment pursuant to Rule 56, Fed. R. Civ. P., based upon the determination of a special litigation committee of its Board of Directors (the "SLC") that the continued prosecution of this action is not in the best interests of the Fund and its shareholders.

 For the reasons set forth below, the motions will be adjourned pending further discovery by Strougo.

 Prior Proceedings

 The background of this action has been set forth in the prior opinions of this Court, familiarity with which is assumed.

 The procedural and factual background of this action is set forth in the prior opinions of the Court, familiarity with which is assumed. See Strougo v. Padegs, 986 F. Supp. 812 (S.D.N.Y. 1997); Strougo v. Padegs, 1997 U.S. Dist. LEXIS 12243, No. 96 Civ. 2136, 1997 WL 473566 (S.D.N.Y. Aug. 18, 1997); Strougo v. Padegs, 964 F. Supp. 783 (S.D.N.Y. 1997). Prior proceedings and facts relevant to this motion are set forth below.

 Without making a prior demand on the Board, Strougo filed his initial complaint in this Court on March 22, 1996. He filed the first amended class action and verified shareholder derivative complaint (the "Complaint") on June 17, 1996, alleging improprieties arising out of a rights offering by the Fund on November 20, 1995 (the "Rights Offering").

 The defendants Scudder, Stevens & Clark, Inc. ("Scudder") and the Directors of the Fund moved to dismiss the Complaint for, among other things, (I) failure to state a claim, and (ii) with respect to Strougo's derivative claims, failure to make a prior demand on the Fund's Board of Directors. By opinion and order dated May 6, 1997 (the "Order"), Strougo's direct class action claims alleging breach of fiduciary duty under section 36(a) of the Investment Company Act of 1940, as amended (the "ICA"), and under Maryland law, were dismissed as was the excessive compensation claim against Scudder and the directors who were employed by Scudder under ICA Section 36(b).

 The motions to dismiss the derivative claims alleging breach of fiduciary duty under ICA Section 36(a) and Maryland law were denied except with respect to Roberto Teixeira da Costa ("Da Costa"), an outside director and a resident Brazilian director of the Fund, as was the motion by Scudder and the directors who were employed by Scudder to dismiss Strougo's ICA section 48(a) control person claim. Pre-suit demand on the Directors was excused because six of the Fund's seven directors were "interested" in the Rights Offering.

 The defendants moved for reargument or, in the alternative, for certification of the order for interlocutory appeal pursuant to 28 U.S.C. § 1292(b) which motion was denied by opinion and order dated August 15, 1997. On September 10, 1997, the Fund moved to stay all proceedings for three months to permit the SLC to investigate the allegations of the lawsuit and to act in accordance with the findings of that investigation. The motion was granted by opinion and order dated December 1, 1997.

 The instant motion under Rules 12(b)(6) and 56, Fed. R. Civ. P., to terminate and dismiss the action based upon the report of the SLC was heard and considered fully submitted on January 7, 1998.

 The Facts

 The Fund is a non-diversified, closed-end investment company registered under the ICA, and incorporated under the laws of Maryland. The fund invests almost exclusively in securities of Brazilian companies and commenced operations in 1988 with an issuance of common stock in an initial public offering. The Fund is managed by its investment advisor, Scudder. Scudder is paid a fee equal to a percentage of the Fund's average weekly net assets.

 In October 1995, the Fund's Board of Directors raised additional capital -- approximately $ 61 million -- through the Rights Offering. The Rights Offering provided that each Fund shareholder would receive one right for each share held and that three rights would entitle the holder to buy an additional Fund share at a discount to the current trading price of the stock. Shareholders who did not wish to exercise their rights could sell the rights on the New York Stock Exchange, where the rights were listed, or on the Chicago Stock Exchange. The prospectus for the Rights Offering (the "Prospectus") stated that its purpose was to raise new capital in order to take advantage of investment opportunities in Brazil without having to sell existing portfolio holdings thereby triggering capital gains. Strougo's complaint alleges, however, that "though purporting to raise money to take advantage of future investment opportunities in Brazilian securities, defendants' desire to conduct the Rights Offering was motivated by the desire to increase [Scudder's] fees." Complaint P 79.

 By resolutions dated May 28, 1997 (the "Resolutions"), following the resolution of certain of the matters described above, the Board of Directors of the Fund (I) created the SLC and delegated to that committee the powers of the Board to investigate Strougo's allegations and determine whether this litigation is in the Fund's best interests, and (ii) appointed Da Costa as a member of the SLC. Thereafter, De Costa, pursuant to the Resolutions, nominated Kenneth C. Froewiss ("Froewiss") as a new member of the Board of Directors, and Da Costa appointed Froewiss as an additional member of the SLC.

 Da Costa is the founder of the Comissao de Valores Mobiliarios, the Brazilian equivalent of the United States Securities and Exchange Commission. He served as its first president for three years and currently is the vice-chairman of Sul America, a Brazilian investment bank that is owned by the largest insurance company in Brazil of the same name and is also a member of the board of directors of several Brazilian companies. From 1988 through 1993, Da Costa served as a member of the Advisory Board of the Fund. In 1993, the Fund eliminated the Advisory Board. Shortly thereafter, Da Costa became a member of ...


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