The opinion of the court was delivered by: Sweet, District Judge.
Defendant Credit Suisse Asset Management LLC ("CSAM"), formerly known
as BEA Associates, the investment adviser for the Brazilian Equity Fund,
Inc. (the "Fund"), has moved under Rule 56, Fed. R. Civ. P., to dismiss
the Second Amended
Complaint (the "Complaint") of plaintiff Robert Strougo ("Strougo"), a
shareholder in the Fund, which alleged violations of Section 36(a) and
36(b) of the Investment Company Act of 1940 ("ICA"), as amended,
15 U.S.C. § 80a-35 (a), (b). For the reasons set forth below,
the motion is granted.
Strougo has been a determined litigant, attacking various practices of
the Fund and related entities in an effort to remedy what he perceives as
the "abysmal" performance of the Fund and its continued existence despite
a market value consistently below its net asset value ("NAV"), sometimes
referred to as its discount. These efforts have included, in addition to
the instant action, a shareholder derivative claim against BEA Associates
and the Fund's directors for alleged violations of the ICA in the Fund's
1996 rights offering, see Strougo v. Bassini, 112 F. Supp.2d 355
(S.D.N.Y. 2000), and a similar action challenging a 1995 rights offering
by the Brazil Fund, a separate closed-end fund, see Strougo v. Padegs,
27 F. Supp.2d 442 (S.D.N.Y. 1998).
Despite a preliminary success in the Padegs action, see Strougo v.
Padegs, 964 F. Supp. 783 (S.D.N.Y. 1997) (denying motion to dismiss
fiduciary duty and ICA "control person" claims, except with regard to
certain defendants), the decisions have not been favorable to the
investor against whom the authorities are currently stacked. While the
current revelations concerning the Enron Corporation challenge the
validity of many of the precepts of corporate governance, the precedents
remain in favor of the board of directors and the adviser.
The original complaint was filed on May 21, 1998. It alleged violation
of ICA Section 36(b) based upon the non-employee directors' lack of
independence. The complaint was dismissed with leave to replead. Strougo
v. BEA Assoc., No. 98 Civ. 3725 (RWS), 1999 WL 147737, at *2 (S.D.N.Y.
Mar. 18, 1999)
On April 2, 1999, Strougo filed his first amended complaint. This
complaint restated the sole claim in the original complaint, i.e., that
the agreement between the Fund and CSAM is void because the Fund failed
to maintain the requisite number of independent directors, but pursuant
to ICA Section 36(a), rather than ICA Section 36(b). Strougo's claim
was based on the lack of independence of the directors as a result of
their multiple directorships, their substantial compensation, and their
conduct in seeking to prevent the Fund's shareholders from voting to
remove CSAM as the Fund's investment adviser. The first amended complaint
contained allegations describing: (i) the duties borne by independent
directors of a registered investment company; (ii) industry and
professional literature cautioning against multiple directorships; (iii)
the resulting practical inability of directors serving on multiple boards
to fulfill their roles as "watchdogs"; (iv) structural reasons why the
"independent" directors serve at the pleasure of the defendant, rather
than the Fund's shareholders; and (v) specific examples of these
directors' docility in the face of CSAM's overreaching. It added a second
claim under ICA Section 36(b), alleging "excessive or inappropriate
Following CSAM's second motion to dismiss, this Court sustained the
first amended complaint, subject to Strougo adding the Fund as a nominal
defendant. Strougo v. BEA Assoc., No. 98 Civ. 3725 (RWS), 2000 WL 45714
(S.D.N.Y. Jan. 19, 2000), and the Second Amended Complaint was filed on
February 3, 2000, which added the Fund as a nominal defendant.
Discovery commenced and certain disputes were resolved. Strougo v. BEA
Assoc., 199 F.R.D. 515 (S.D.N.Y. 2001). The instant motion for summary
judgment was heard on November 7, 2001, and marked fully submitted at
The facts are taken from CSAM's Statement of Undisputed Facts pursuant
to Rule 56.1 of the Local Rules, Strougo's Statement of Disputed Issues,
and the affidavits, depositions, and exhibits submitted by the parties.
These facts are undisputed except as noted.
CSAM, then known as BEA Associates, established the Fund as a
non-diversified, closed-end investment company, organized under the laws
of the State of Maryland. It is a registered investment company under the
Investment. Company Act of 1940 ("ICA"), 15 U.S.C. § 80a-1 et seq.,
with an investment objective of long-term capital appreciation, and its
investment mandate requires it to invest primarily in Brazilian
securities. The Fund's shares trade on the New York Stock Exchange.
Although the Fund is "non-diversified," it is subject to Brazilian
regulations limiting investments in any single issuer, and the Internal
Revenue Code, which prohibits the Fund from investing, with respect to
fifty percent of its assets, any more than five percent in any one
issuer. Brazilian regulations require that the Fund retain a local
administrator, and impose certain taxes on the Fund.
The Fund's performance has largely moved with the Brazilian stock
market. During 1998, the main Brazilian exchange, the Sao Paulo
Exchange, had its worst performance in over twenty-five years, with a
loss of 33.5 percent. For the six months ending September 30, 1998, the
Morgan Stanley Capital International Brazil Index fell 44.3 percent.
CSAM serves as the Fund's investment adviser under a contract between
the Fund and CSAM known as the Investment Advisory Agreement (the
"Agreement"). CSAM manages assets of over $300 billion and serves as
adviser to fifty-four open-end and eight closed-end funds, including the
Fund. Pursuant to the Agreement, CSAM, among other things, manages the
Fund's assets in accordance with the Fund's investment mandate and all
applicable laws and regulations, provides research, makes investment
decisions, and exercises voting rights with respect to securities held by
Previously, CSAM and Garantia Adminisdracao de Recursos ("Garantia"),
the Fund's subadviser, were paid a fee equivalent to 1.35 percent of the
first $100 million of the Fund's net assets. Garantia resigned as the
Fund's subadviser in 1994, and CSAM assumed Garantia's responsibilities
but declined to charge the portion of the fees that would have been
otherwise payable to Garantia. The fee of one percent of the first one
hundred million of Fund assets, which CSAM continued to receive under
that structure, is within the median of fees received by managers of
world equity funds.
As of 2000, under a new fee structure, CSAM's fee is based on the
lesser of the Fund's average net assets or the market value of the Fund's
shares. CSAM charges lower fees to institutional clients. These fees are
negotiated at arm's length.
For the fiscal years ending March 31, 1997, 1998, 1999, 2000, and
2001, CSAM earned $914,200, $1,020,507, $420,08, $364,721, and $341,921,
respectively, in fees. CSAM's profit margin for the years 1996, 1997,
1998, 1999 and 2000 was 18 percent, 57 percent, 11 percent, negative 102
percent, and negative 24 percent, respectively.
The Fund's operating expenses include expenses associated with
investments in Brazil. The Fund's expense ratio is affected by the small
size of the Fund and certain expenses associated with its closed-end
structure, such as exchange listing fees and fees associated with the
annual proxy solicitation, and the significant fees associated with the
present litigation, as well as expenses related to Brazilian investment
including higher custodian, accounting, and audit fees, the mandatory
retention of a Brazilian administrator, and a Brazilian transaction fee
of up to .38 percent. For the Fund's fiscal years 1996, 1997, 1998,
1999, 2000 and 2001, its expense ratios were 1.76%, 1.76%, 2.07%, 5.17%,
3.80% and 2.38%. Strougo's litigation has attributed 0.09%, 2.34%, 0.87%
and 0.28% respectively to those amounts. CSAM also provides, at cost,
administrative services to the Fund under an Administrative Services
Agreement, including internal executive and administrative services,
responds to shareholder inquiries, a closed-end fund website, and
corporate secretarial services.
During the relevant time period, the Fund's board of directors was
composed of eight directors. The six outside directors have been Dr.
Enrique Arzac ("Arzac"), James J. Cattano ("Cattano"), George W. Landau
("Landau"), Robert J. McGuire ("McGuire"), Martin M. Torino ("Torino")
and Miklos A. Vasarhelyi ("Vasarhelyi"). None of the outside directors
are disqualified from being a non-interested director under Section 2(a)
(9)(b) of the ICA by virtue of family relationship, having an interest
in any security issued by CSAM, acting as legal counsel to CSAM, or
having been determined by the SEC to be an interested person.
Arzac is a professor of finance and economics at the Graduate School of
Business of Columbia University. Landau is a senior adviser to the
President of the Latin American Group of the Coca-Cola Corporation, and a
former U.S. Ambassador to Venezuela, Chili and Paraguay. Torino is the
chairman of the board of directors of Ingenio y Refineria San Martin Del
Tabacal S.A., an Argentine sugar refinery, and an executive director of
TAU S.A., an Argentine commodities trading firm. Cattano is the president
of Primary Resources Inc., a trading firm that specializes in Latin
American agricultural commodities. Cattano and Torino were formerly
colleagues at Marc Rich & Co., along with Michael Pignataro, Chief
Financial Officer and Secretary of the Fund, and Bassini, a former member
of the board and current Chief Executive Officer of the Fund.
The Fund utilizes a staggered board divided into three classes, each
class having a term of no more than three years. Except for the addition
of McGuire and Vasarhelyi, who constituted the Litigation Committee, the
membership has been constant.
Arzac, Landau, Cattano, and Torino currently serve as directors of
eight, five, four, and three CSAM-affiliated funds, respectively. The
board meetings as a rule take two to three hours and are held jointly
with the other CSAM affiliated ...