The opinion of the court was delivered by: SWEET
Defendants BEA Associates ("BEA"), the investment adviser to the Brazilian Equity Fund, Inc. (the "Fund") and Emilio Bassini, Richard Watt and Daniel Sigg, at all relevant times directors of the Fund and employees of BEA (together with BEA, the "BEA Defendants") have moved to dismiss the complaint of plaintiff Robert Strougo ("Strougo") pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim and Fed. R. Civ. P. 23.1 for failure to make a pre-litigation demand upon the Fund's board of directors prior to commencing this derivative action; or, in the alternative, to certify a question to the Maryland Court of Appeals pursuant to Maryland Courts and Judicial proceedings § 12-603. Defendants Enrique R. Arzac, James J. Cattano, Peter A. Gordon, George W. Landau, and Martin M. Torino (the "Outside Director Defendants"), at all relevant times directors of the Fund who are not employees of BEA, have filed a similar motion. For the reasons set forth below, the motions to dismiss will be granted as to the class action claims and denied as to all other claims.
Strougo filed the complaint in this action on May 16, 1997, repeating similar allegations to those he set forth in an action involving a rights offering against a different fund that invested in Brazilian securities. See Strougo v. Scudder, Stevens & Clark, Inc., 96 Civ. 2136 (RWS) (the "Scudder Action").
This action arises from a 1996 rights offering (the "Rights Offering") by the Fund, a closed-end investment company, under which the Fund's existing shareholders were given the opportunity to purchase additional shares of newly issued Fund stock at a discount from market value. Strougo, a shareholder of the Fund, alleges that the Rights Offering constituted a breach of duty by BEA (the Fund adviser) and the Fund's directors because the offering purportedly diluted the shareholders' investments, imposed transaction costs on the Fund (such as investment banking fees), and was allegedly motivated by a desire to increase BEA's investment advisory fee. Strougo does not allege making a demand on the Fund's board of directors prior to initiating this derivative action.
The complaint contains the same six causes of action alleged in the Scudder Action; (1) a claim under the section 36(b) of the Investment Company Act of 1940, as amended (the "ICA"), for excessive fees;
(2) a "control person" claim under section 48(a) of the ICA; (3) two derivative claims alleging breach of fiduciary duty under section 36(a) of the ICA and under Maryland law; and (4) two direct class action claims alleging breach of duty under section 36(a) of the ICA and under Maryland law. The futility of demand upon the Board is alleged based upon the interest of the directors.
The instant motion by the Outside Director Defendants was filed on September 15, 1997, and the motion by the BEA Defendants was filed on September 16, 1997. The motions seek (1) dismissal of the derivative claims for failure to make a demand upon the board of directors of the Fund (the "Board"); (2) certification of the futility question to the Maryland Court of Appeals; and (3) dismissal of the class action claims. The motions were considered fully submitted after argument on December 17, 1997.
On a motion to dismiss under rule 12(b)(6), the facts alleged I the complaint are presumed to be true, and all factual inferences are drawn in the plaintiff's favor. Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993). Accordingly, the facts p-resented here are primarily from the allegations of the Complaint and do not constitute findings of fact by the Court.
Strougo has alleged that he purchases 1,000 shares of the Fund on January 11, 1993 and has held shares ever since.
The Fund is a non-diversified, publicly traded, closed-end investment company registered under the ICA and incorporated under the laws of Maryland that invests primarily in the securities of Brazilian companies. The Fund's shares are traded on the New York Stock Exchange.
BEA is the investment adviser of the Fund and manages the Fund's operations and investments subject to the governance of an eight member board of directors, made up of Emilio Bassini, Richard Watt and Daniel Sigg who, at all relevant times, were also BEA employees and Dr. Enrique R. Arzac, James J. Cattano, Peter A. Gordon, George W. Landau and Martin M. Torino, who are not employed by BEA but serve on the boards of BEA advised funds as follows:
Director Number of BEA Funds All Bea Funds
Dr. Enrique Arzac 9 No figure in complaint
James J. Cattano 6 $ ...