United States District Court, Southern District of New York
March 6, 2003
MEVC DRAPER FISHER JURVETSON FUND I, INC., D/B/A MVC CAPITAL, PLAINTIFF,
MILLENNIUM PARTNERS, L.P., MILLENCO, L.P., AND KARPUS MANAGEMENT, INC., DEFENDANTS.
The opinion of the court was delivered by: Leonard B. Sand, United States District Judge
In the midst of a hard-fought proxy battle and just days before a shareholder vote scheduled for February 28, 2003, Plaintiff meVC Draper Fisher Jurvetson Fund I, Inc. ("MVC"), whose entire board of directors is up for election, brings this suit against Defendants Millennium Partners, L.P. ("MP"), MillenCo, L.P. ("Millenco"), and Karpus Management, Inc. ("Karpus"), alleging violation of § 12(d)(1)(A)(i) of the Investment Company Act of 1940 (the "ICA") (15 U.S.C. § 80a-12 (d)(1)(A)(i)) and §§ 13(d), 14(a), and 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. § 78m(d), 78n(a), and 78p(b)), and seeking preliminary injunctive relief.*fn1 Plaintiff claims that Defendants have violated the ICA's prohibition on ownership by one investment company of more than three percent of another investment company's voting stock, and violated the Exchange Act by forming a group for the purpose of buying and voting MVC shares without making the necessary disclosures, and by seeking proxies by means of false or misleading solicitations. Plaintiff requests that Millenco and its affiliates be prevented from voting more than 3% of MVC's stock at the upcoming election, and that Millenco and Karpus be required to correct their proxy materials by making the necessary disclosures.
After an expedited discovery and briefing schedule (extended slightly by the blizzard of February 17-18, 2003), the Court heard oral argument on February 19, 2003, and on February 24, 2003, issued an Order denying any injunction. In that Order, the Court stated, "Some of the questions raised in this proceeding are novel and complex and warrant the preparation and filing of an opinion stating in some detail the issues and the bases upon which the Court has reached its conclusions. This Court will issue such an Opinion in the near future." This is that Opinion.*fn2
Plaintiff MVC is a closed-end investment company specializing in new-technology venture capital investments, and has elected to be treated as a business development company pursuant to § 54 of the ICA. See 15 U.S.C. § 80a-53. MVC's original five-member board included two "interested persons," Peter Freudenthal and John Grillos. Freudenthal served as CEO and chairman of MVC's investment adviser, meVC Advisers, and Grillos was a principal of MVC's sub-adviser, Draper Advisers. The remaining three directors were required by § 56(a) of the ICA to be independent. See 15 U.S.C. § 80a-55 (a).
The Millennium entities, of which only MP and Millenco are defendants in this matter, are a multibillion dollar complex of companies, each serving different investment functions. Taken together, the Millennium entities constitute MVC's largest shareholder and own roughly 6.7% of its 16,296,800 outstanding shares. Only four of the Millennium entities own MVC stock, however: Millenco, which owns 184,300 shares, or 1.13%; Millennium USA, L.P. ("Millennium USA"), which owns 434,771 shares, or 2.67%; Millennium International, Ltd. ("Millennium International"), which owns 334,729 shares, or 2.05%; and Millennium Global Estate, L.P., which owns 145,700 shares, or 0.89%.*fn3 (These four entities will henceforth be referred to collectively as the "stockholding Millennium entities." The entire complex, including non-stockholding entities, will be referred to simply as the "Millennium entities." The organization of the Millennium entities will be described in further detail in Part III.C of this Opinion.) Defendant Karpus is a registered investment adviser, and owns 3.9% of MVC's outstanding shares.
MVC's initial public offering raised over $300 million, but many of its initial investments were not successful, and by the end of fiscal year 2002 it had written off over $100 million. For much of the past year, MVC's stock has traded in the neighborhood of $8.00 per share, while its net asset value has declined to around $12.00 per share. This disparity between trading price and net asset value per share attracted the attention of MVC's large shareholders and, in some respects, fomented the present dispute.
At the annual meeting on March 27, 2002, the independent directors of MVC proposed renewing the investment advisory agreements with meVC Advisers and Draper Advisers, as well as empowering the board to renew subsequent agreements without shareholder approval. Millenco opposed the proposal, and after a contentious shareholder vote and litigation in Delaware Chancery Court, the contracts were not renewed. Instead, upon the resignation of the non-renewed advisers, MVC converted to an internal management structure, and retained various Draper Advisers personnel as MVC employees.
In August 2002, Millenco returned to Delaware Chancery Court and sued to void the results of MVC's 2001 and 2002 director elections. Millenco alleged that MVC's proxy materials had been misleading because they had failed to disclose that Grillos and two of the nominally independent directors had actually been involved in a second company in which MVC had invested. The Chancery Court granted summary judgment to Millenco, and ordered that new elections be held no later than February 28, 2003. See Millenco L.P. v. meVC Draper Fisher Jurvetson Fund I. Inc., C.A. No. 19523, 2002 Del. Ch. LEXIS 140 (Del. Ch. Dec. 19, 2002) (revised Dec. 30, 2002) (name corrected Jan. 17, 2002); Millenco L.P. v. meVC Draper Fisher Jurvetson Fund I. Inc., C.A. No. 19523 (Del. Ch. Jan. 10, 2003). On January 16, 2003, all of the directors except Grillos resigned, and the board was enlarged to seven members. Because of the combination of the new board seats, resignations, term expirations, and Delaware judgment, all seven board seats are now up for election. Both MVC and Millenco have nominated slates of directors for these positions. Millenco filed its definitive proxy materials on January 31, 2003. MVC initiated this action by Order To Show Cause on February 6, 2003.
II. Standard for a Preliminary Injunction
In order to merit preliminary injunctive relief, a party must establish "(1) that it will be irreparably harmed in the absence of an injunction, and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits of the case to make them a fair ground for litigation, and a balance of hardships tipping decidedly in its favor." Forest City Daly Hous., Inc. v. Town of North Hempstead, 175 F.3d 144, 149 (2d Cir. 1999) (citing Genesee Brewing Co. v. Stroh Brewing Co., 124 F.3d 137, 142 (2d Cir. 1997)). Where the requested injunction will "alter, rather than maintain, the status quo," however, the movant must meet a "more rigorous standard" and evidence a "clear or substantial showing of likelihood of success." Id. at 149-50 (quoting Tom Doherty Assocs. v. Saban Entm't. Inc., 60 F.3d 27, 33-34 (2d Cir. 1995)) (internal quotation marks omitted). There can be little doubt that the relief requested here — denying Defendants the opportunity to vote a substantial proportion of their shares in the upcoming election — would alter, rather than maintain, the status quo. As will be explained below, the Court finds that Plaintiff has failed to meet its burden of a clear or substantial showing of likelihood of success on any of its claims.
III. Claims Under the Investment Company Act of 1940
A. The Antipyramiding Provision
In 1940, Congress passed the original version of the ICA in order to "protect investors who entrusted their savings to others for expert management and diversification of investments." Rohrbaugh v. Inv. Co. Inst., 2002 U.S. Dist. LEXIS 13401, *3 (D.D.C. July 2, 2002).*fn4 A key element of the ICA's plan was the so-called antipyramiding provision, which forbade any one investment company from owning more than a certain portion of another investment company. As currently in force and in relevant part, the antipyramiding provision provides:
(d) Limitations on acquisition by investment companies
of securities of other specific businesses.
(1)(A) It shall be unlawful for any registered
investment company (the "acquiring company") and any
company or companies controlled by such acquiring
company to purchase or otherwise acquire any security
issued by any other investment company (the "acquired
company"), and for any investment company (the
"acquiring company") and any company or companies
controlled by such acquiring company to purchase or
otherwise acquire any security issued by any
registered investment company (the "acquired
company"), if the acquiring company and any company or
companies controlled by it immediately after such
purchase or acquisition own in the aggregate —
(i) more than 3 per centum of the total
outstanding voting stock of the acquired company;
(ii) securities issued by the acquired company
having an aggregate value in excess of 5 per centum of
the value of the total assets of the acquiring
(iii) securities issued by the acquired company
and all other investment companies (other than
treasury stock of the acquiring company) having an
aggregate value in excess of 10 per centum of the
value of the total assets of the acquiring company.
15 U.S.C. § 80a-12 (d).
The original purpose of the antipyramiding provision was "to prevent a registered investment company from controlling other investment companies and creating complicated pyramid structures." S. Asia Portfolio, SEC No-Action Letter, 1997 SEC No-Act. LEXIS 419, *7 (Mar. 12, 1997). According to one commentator:
Section 12(d)(1) is intended to eliminate four
potential abuses: (i) the acquisition of voting
control of one investment company by another, thereby
subverting the investment policies of one company to
suit those of another; (ii) the layering of sales
charges, advisory fees, and administrative costs;
(iii) undue influence over portfolio management
through the threat of large-scale redemptions and the
disruption of the orderly management of the investment
company through the maintenance of large cash balances
to meet potential redemptions; and (iv) inefficient or
overly complex fund holding companies as investment
vehicles, thereby resulting in investor confusion.
Joseph R. Fleming, Regulation of Series Investment Companies Under the Investment Company Act of 1940, 44 Bus. Law. 1179, 1200-01 (1989) (citing SEC, Public Policy Implications of Investment Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d Sess. 316, 318-20 (1966)).*fn5
It is undisputed that MVC is a business development company, and thus a registered investment company for the purposes of § 12 of the ICA. See 15 U.S.C. § 80a-59. It is also undisputed that the four stockholding Millennium entities — Millenco, Millennium USA, Millennium International, and Millennium Global Estate — would each be investment companies within the definition of § 3(a) of the ICA,*fn6 but that they are exempted therefrom by § 3(c)(7). § 3(c)(7) provides that a company is not an investment company as long as its outstanding securities "are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and [the company] is not making and does not at that time propose to make a public offering of such securities." 15 U.S.C. § 80a-3 (c)(7)(A). Yet § 3(c)(7) also provides that "[a]n issuer that is excepted under this paragraph shall nonetheless be deemed to be an investment company for purposes of the limitations set forth in subparagraphs (A)(i) and (B)(i) of section 12(d)(1)." 15 U.S.C. § 80a-3 (c)(7)(D).*fn7 Both MVC and the stockholding Millennium entities are thus subject to § 12(d)(1)(A)(i).
Finally, it is undisputed that the four stockholding Millennium entities together own more than 6.7% of the voting stock of MVC, but that no one of those entities by itself owns more than 3%, and that none of the other Millennium entities — including MP and Millennium Management — own any MVC stock at all.
B. Private Right of Action
As a preliminary matter, Defendants assert that there is no private right of action under § 12(d)(1)(A), and that Plaintiff thus lacks standing to press its claim. This question has previously been addressed by several courts, each of which has found the existence of a private right of action. See, e.g., Bancroft Convertible Fund. Inc. v. Zico Inv. Holdings, Inc., 825 F.2d 731 (3d Cir. 1987); Clemente Global Growth Fund, Inc. v. Pickens, 705 F. Supp. 958 (S.D.N.Y. 1989). Defendants, relying on Olmsted v. Pruco Life Ins. Co. of New Jersey, 283 F.3d 429 (2d Cir. 2002), counter that these cases belong to an "ancien regime," id. at 434 (quoting Alexander v. Sandoval, 532 U.S. 275, 287 (2001)), whose overthrow is apparent in more recent jurisprudence.
In Olmsted, the Second Circuit was faced with the question whether there existed a private right of action under §§ 26(f) and 27(i) of the ICA (15 U.S.C. § 80a-26 (f) and 27(i)), provisions added to the ICA in 1996 and not otherwise at issue in this case. Beginning with the observation that "[d]etermining congressional intent to create a right of action is . . . a matter of statutory interpretation," the court found that the absence of an express private right of action established a "presum[ption] that Congress did not intend one." Id. at 432. Next, the court found that this presumption was strengthened by three additional factors: "First, § § 26(f) and 27(i) do not contain rights-creating language." Id. Rather, both sections begin with the phrase "It shall be unlawful. . . ." Here the court quoted Sandoval to the effect that "[s]tatutes that focus on the person regulated rather than the individuals protected create no implication of an intent to confer rights on a particular class of persons." Id. at 433 (quoting Sandoval, 532 U.S. at 289) (internal quotation marks omitted). Second, the court noted that § 42 of the ICA (15 U.S.C. § 80a-41) provides for enforcement by the SEC, and added that "[t]he express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others." Id. at 433 (quoting Sandoval, 532 U.S. at 290). Third, the court observed that in 1970 Congress added § 36(b) (15 U.S.C. § 80a-35(b)) to the ICA, providing an express private right of action for investors to sue advisers for breach of fiduciary duties. "Congress's explicit provision of a private right of action to enforce one section of a statute suggests that omission of an explicit private right to enforce other sections was intentional." Id.
Application of this inquiry to § 12(d)(1)(A) leads to results on all fours with the results obtained in Olmsted. First, § 12(d)(1)(A) does not provide an express private right of action, leading to a presumption that Congress did not intend one. Second, § 12(d)(1)(A) does not contain any rights-creating language, but, like §§ 26(f) and 27(i), begins with the phrase "It shall be unlawful. . . ." Third, § 42 authorizes the SEC to enforce § 12(d)(1)(A) just as it authorizes the SEC to enforce the rest of the ICA. Finally, Congress's provision of an express private right of action in § 36(b) compels a negative inference in this case similar to the one it compelled in Olmsted. Following Olmsted, then, the Court finds a strong presumption that Congress did not intend to provide a private right of action under § 12(d)(1)(A).
Plaintiff raises various arguments in an attempt to overcome this presumption. First, Plaintiff notes that numerous federal court decisions have found implied private rights of action under the ICA, including numerous decisions after the Supreme Court's doctrinal shift on implied rights began in the late 1970's. The plaintiffs in Olmsted raised the same argument and relied on the same cases, provoking the Second Circuit's declaration that "[p]ast decisions reflecting judicial willingness to make effective statutory purpose in the context of implied rights of action belong to an ancien regime." Olmsted, 283 F.3d at 434 (quoting Sandoval, 532 U.S. at 287) (internal quotation marks omitted); see also id. at 434 n. 4 (collecting cases).
Next, Plaintiff attempts to undercut the second prong of Olmsted's inquiry by pointing out that because "[t]he express effect of Section 12(d) is to protect investment companies such as MVC," Pl. Trial Mem. at 10 (emphasis in original) (citing 15 U.S.C. § 80a-1(b)(4)), the statute does indeed focus on the protected party. Yet the very fact that Plaintiff is compelled to widen its search to encompass the first, preambulary section of the ICA is alone enough to undermine the point: once one takes into account § 1, it is largely impossible to distinguish one operative section of the Act from another for the purposes of the "focus" inquiry envisioned in Olmsted and Sandoval.*fn8
Next, Plaintiff focuses on the last prong of the Olmsted court's inquiry, asserting that the express private remedy in § 36(b) of the ICA ought not connote a lack of congressional intent to provide an implied private remedy in other sections. In support of this argument, Plaintiff relies on Fogel v. Chestnutt, 668 F.2d 100 (2d Cir. 1981), which permitted a private suit under the ICA. Judge Friendly's opinion in Fogel declined to draw any negative inference from the presence of § 36(b) on the basis that the section had been added to the ICA in 1970 as a result of an SEC proposal, and that "[s]urely the last thing the SEC intended was the abolition of implied causes of action which the courts had recognized under other sections of the ICA." Id. at 111. Notably, this same argument was raised in Olmsted, where the court distinguished Fogel on the basis that "in this case we interpret sections added [to the ICA] after Congress created the private right of action." Olmsted, 283 F.3d at 433 n. 3 (emphasis added). Thus, even assuming along with Fogel that "when Congress added § 36(b) to the ICA in 1970 it did not intend to overrule previous decisions recognizing implied rights of action in the statute," the court found that such an intent could have no bearing on §§ 26(f) and 26(i), which were only added to the ICA in 1996. Id.
Plaintiff asserts that this case falls closer to Fogel than to Olmsted because the antipyramiding provisions of § 12(d)(1) were present in the original 1940 version of the ICA. The Court thinks this assertion overstates the current force of Fogel: the Second Circuit characterized Fogel as merely assuming that § 36(b) did not overrule the various pre-1970 decisions recognizing implied rights of action under the ICA. But the first decision recognizing a right of action under § 12(d)(1) of the ICA — the district court decision affirmed by the Third Circuit's opinion in Bancroft — did not appear until 1987, seventeen years after Congress added § 36(b). This Court may thus continue to assume, along with Fogel and Olmsted, that "when Congress added § 36(b) to the ICA in 1970 it did not intend to overrule previous decisions recognizing implied rights of action in the statute," and still make the same negative inference with regard to § 12(d)(1).*fn9
Finally, Plaintiff points to the legislative history accompanying the Small Business Investment Incentive Act of 1980 (the "1980 Act"), which amended the ICA by, inter alia, subjecting business development companies such as MVC to § 12. The House Committee Report accompanying the Act reads:
The Committee wishes to make plain that it expects the
courts to imply private rights of action under this
legislation, where the plaintiff falls within the
class of persons protected by the statutory provision
in question. Such a right would be consistent with and
further Congress' intent in enacting that provision,
and where such actions would not improperly occupy an
area traditionally the concern of state law. In
appropriate instances, for example, breaches of
fiduciary duty involving personal misconduct should be
remedied under Section 36(a).
H.R. Rep. No. 96-1341, at 29 (1980), reprinted in 1980 U.S.C.C.A.N. 4800, 4811. This legislative history was brought to the attention of the Olmsted court, which stated that "[w]here the text of a statute is unambiguous, judicial inquiry is complete except in rare and exceptional circumstances, and legislative history instructive only upon the most extraordinary showing of contrary intentions" Olmsted, 283 F.3d at 435 (quoting Garcia v. United States, 469 U.S. 70
, 75 (1985)) (internal quotation marks and alteration omitted). Given that the Report was prepared by a single House committee, and that the relevant statutory provisions were added sixteen years later, the court found no such "extraordinary showing."
Plaintiff asserts that the Report is more relevant to § 12(d)(1) "since the provisions at issue here are among the very ones that the quoted language explicitly addressed." Pl. Trial Mem. at 12. But Plaintiff's assertion is strictly accurate only in the sense that the Report addressed the question of private rights under the ICA as a whole. Whereas the Report took as its example § 36(a) of the ICA, it never specifically mentioned the question of implied rights under § 12. Cf. Young v. Nationwide Life Ins. Co., 2 F. Supp.2d 914, 926 (S.D. Tex. 1998) (finding an implied right of action under § 36(a), in part on the basis of the 1980 Report). Moreover, the 1980 Act neither created nor altered the substantive provisions of § 12(d)(1). Rather, it carved out a group of investment companies, labeled them "business development companies," and excepted them from much of the ICA — while specifically leaving them subject to § 12(d)(1). See Pub. L. 96-477, 94 Stat. 2275, 2285.*fn10
For Plaintiff's argument to carry the day, then, the Court would have to give decisive weight to one committee's interpretation of earlier provisions of the ICA — provisions the 1980 amendments essentially left unaltered, and provisions which had never previously been found by any court to give rise to a private right of action — over the strong, textually-derived presumption against any implied private right of action. This the Court declines to do. See Cent. Bank of Denver. N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 185 (1994) ("[W]e have observed on more than one occasion that the interpretation given by one Congress (or a committee or Member thereof) to an earlier statute is of little assistance in discerning the meaning of that statute.") (quoting Public Employees Ret. Sys. of Ohio v. Betts, 492 U.S. 158, 168 (1989)) (internal quotation marks omitted).*fn11
C. Substantive Claim
Because the Court finds that there is no private right of action under § 12(d)(1)(A), it is plain that Plaintiff cannot succeed on that count. Nonetheless, the Court finds it prudent to examine Plaintiff's claim on the merits as well. So doing, the Court finds that Plaintiff has not made a clear or substantial showing that it would likely succeed in proving Defendants in violation of the ICA.
Plaintiff claims that by virtue of their aggregate ownership of more than 3% of MVC's voting stock, the Millennium Defendants have violated § 12(d)(1)(A)(i) of the ICA, which, as previously noted, prohibits any investment company, together with "any company or companies controlled by it," from acquiring more than 3% of the voting stock of a registered investment company. The ICA defines control as "the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company." 15 U.S.C. § 80a-2(a)(9). Given the undisputed facts outlined in Part III.A above, the only remaining question is whether MP or Millenco, together with "any company or companies controlled by" them, own in the aggregate more than 3% of MVC's voting stock.
Defendants argue that the corporate organization of the Millennium entities compels a negative answer to this question. Because this structure is somewhat complex, the Court provides this brief description; the Court also appends to this Opinion an organizational chart provided by Defendants at the February 19 hearing. See Def. Ex. B.*fn12 In essence, the various entities are arrayed in a so-called master-feeder system.*fn13 The three feeder funds — Millennium USA, Millennium International, and Millennium Global Estate — serve as the portals of entry for investors, and each specializes in a distinct clientele: Millennium USA focuses on domestic investors; Millennium International focuses largely on off-shore investors; and Millennium Global Estate focuses on insurance company accounts. Each of the feeder funds owns a limited partnership stake in the master fund, MP, which typically holds investment securities on account for the feeders (and, in turn, their clients) in proportion to their partnership stakes. Notably, the MVC stock at issue in this case is not held by the master fund, but by each of the feeders themselves, as well as by Millenco. MP, in turn, holds a limited partnership stake in Millenco, a registered broker/dealer which typically performs most of the investment transactions on behalf of its upstream affiliates. None of the feeder funds controls MP, however, because a sixth company, Millennium Management, serves as MP's general partner;*fn14 similarly, MP does not control Millenco because Millennium Management also serves as Millenco's general partner. Millennium Management also serves as the general partner, either directly or indirectly, of each of the feeder funds. Finally, Millennium Management serves (directly or indirectly) as the managing partner or investment manager of each of the investment funds, which means that it alone — and in that capacity alone — has the authority to make stock purchase, sale, and voting decisions. See Deposition of Robert Knapp. Feb. 13, 2003 ("Knapp Dep."), at 15-16, 21.*fn15 Millennium Management itself is apparently controlled entirely by a single human being, the managing member Israel Englander. Knapp Dep. at 10; Deposition of Terry Feeny, Feb. 14, 2003 ("Feeny Dep."), at 28-29.*fn16 The upshot of this structure is that none of the four stockholding Millennium entities controls, directly or indirectly, any of the other stockholding entities, and therefore none can be said to own more than 3% of MVC's voting stock. On this basis, Defendants argue that § 12(d)(1)(A) does not apply of its own terms.
In support of this argument. Defendants point out that if the ICA were concerned with affiliated investment companies, investment companies under common control, or investment companies with the same adviser — into each of which categories the stockholding Millennium entities would likely fall — owning in the aggregate more than 3% of another investment company's stock, the ICA would have said so.
Section 12(d)(1)(F), for example, provides certain registered investment companies with an exemption from other antipyramiding provisions not at issue in this case, but only on the condition that, inter alia, "not more than 3 per centum of the total outstanding stock of [the acquired company] is owned by such registered investment company and all affiliated persons of such registered investment company." 15 U.S.C. § 80a-12(d)(1)(F)(i) (emphasis added).*fn17 "Affiliated person," in turn, is defined by the ICA as including "any person directly or indirectly controlling, controlled by, or under common control with, such other person." 15 U.S.C. § 80a-2 (a)(3)(C) (emphasis added). See, e.g., Lazard Freres Asset Mgmt., SEC No-Action Letter, 1997 SEC No-Act. LEXIS 48, at *2 (Jan. 10, 1997) ("Section 12(d)(1)(F) provides an exception from the limitations of Section 12(d)(1)(A) with respect to securities purchased or otherwise acquired by a registered investment company, provided that . . . the registered investment company and all its affiliated persons own no more than 3% of the total outstanding stock of the acquired investment company."); FundTrust, SEC No-Action Letter, 1987 SEC No-Act. LEXIS 2085, at *2-*3 (May 26, 1987) (noting in a discussion of§ 12(d)(1)(F) that "under common control" is a subset of "affiliated"); Olesh v. Dreyfus Corp., 1995 U.S. Dist. LEXIS 21421, *43-*45 (E.D.N.Y. Aug. 8, 1995) (observing that under the ICA the term "controlled" is significantly narrower than the term "affiliated").
Similarly, § 12(d)(1)(C) provides that no investment company may acquire stock in any registered closed-end investment company if by doing so it would exceed 10% ownership when aggregated not only with companies "controlled by it," but also with "investment companies having the same investment adviser, and companies controlled by such investment companies." 15 U.S.C. § 80a-12 (d)(1)(C) (emphasis added).*fn18 See Mutual Series Fund Inc., SEC No-Action Letter, 1995 SEC No-Act. LEXIS 838, *3-*5 (Nov. 7, 1995) (holding that each series of a series investment fund was the "functional equivalent of a separate investment company," and that the SEC would aggregate the individual series' ownership of stock in other investment companies only for the purposes of the 10% limit of§ 12(d)(1)(C), and not for the 3% limit of§ 12(d)(1)(A)); see also id. at *2 ("By its terms, Section 12(d)(1)(A) does not require the investments of one registered investment company to be aggregated with the investments of any other registered investment company, including another investment company in the same fund complex or advised by the same investment adviser or manager.").
The Court find this argument persuasive. Congress in enacting the ICA was clearly cognizant of the myriad relationships investment companies might bear to one another, and chose to apply the 3% restriction of § 12(d)(1)(A)(i) only to companies that controlled each other, and not to companies under common control.
Plaintiff makes several objections to this textual argument. First, Plaintiff relies on the fact that Defendants have stated publicly, at various points, that MP is Millenco's parent company. See, e.g., Knapp Dep. at 47-48; Feeny Dep. at 5. Similarly, Defendants' proxy filings and 13D filings have stated that Millenco "owns" and has "sole dispositive power" over all of the MVC stock held by the various Millennium entities. See, e.g., Millenco, L.P. Schedule 13D, Feb. 10, 2003, Knapp. Dep. Ex. 5. None of these "admissions" are particularly relevant to the antipyramiding provision, however, which is concerned neither with public statements nor public filings. Put simply, to the extent that the statements in question suggest that, within the meaning of the ICA, MP controls Millenco, or Millenco controls all 6.7% of MVC stock held by the four stockholding Millennium entities, the statements are incorrect.*fn19
Second, Plaintiff argues that MP in fact controls all of the MVC shares, through the person of Robert Knapp. Knapp testified at his deposition that his title is Managing Director of MP. Knapp Dep. at 3-5, 11. He also testified that he is likely the only human being to make voting, purchase, and sale decisions for all of the MVC stock held by the Millennium entities. Id. at 47-49. But the deposition evidence as a whole made clear that at the organizationally complex Millennium offices (where most of the entities share a single address) titles are of little practical importance, and that Knapp wears multiple hats on behalf of various entities at various times. Knapp Dep. at 5, 267; Feeny Dep. at 5, 9, 23.*fn20 Crucially, Knapp testified that whenever he makes voting or dispositional decisions regarding MVC stock, he does so on behalf of the investment manager or managing partner, Millennium Management, and not on behalf of MP or any of the stockholding Millennium entities. Knapp Dep. at 11, 40, 48-49; id. at 266 ("All of my investment decisions are made on behalf of the investment manager."); Feeny Dep. at 11. In fact, pursuant to their organic documents, the other entities (and their employees) are not authorized to make any such decisions on their own behalf.*fn21 Knapp's authority and title therefore do not establish that MP (or any of the other stockholding Millennium entities, for that matter) pulled any of the relevant strings.
Third, Plaintiff suggests that the result of Defendants' reading of the statute would be in clear contravention of the purposes of the antipyramiding provision, specifically the provision's goal of limiting "control of investment companies . . . unduly concentrated through pyramiding or inequitable methods of control." 15 U.S.C. § 80a-1(b)(4).*fn22 According to Plaintiff, the antipyramiding provision would be illusory if individuals like Englander could avoid it simply by allocating their shares among various controlled sub-corporations. Indeed, Terry Feeny freely acknowledged at his deposition that most of the MVC shares currently held by the stockholding Millennium entities were originally purchased by Millenco and then parceled out to the feeder funds, in part to keep each entity under the 3% limit. See Feeny Dep. at 34, 41-43.
This argument misses two important points, however. First, the ICA's effect is not as illusory as Plaintiff makes it out to be. Millennium Management's (and thus Englander's) control over the MVC stock at issue in this case derives not from its ownership of the stock, but from its role as managing partner or investment manager of the companies that own it. In this capacity, Millennium Management cannot simply dispose of MVC stock at one man's whim — it is bound by both contractual and fiduciary duties to the interests of the ultimate investors.*fn23 Moreover, the undisputed evidence indicated that the stockholding feeder entities are not merely empty shells for Englander's interests, but have discrete identities and investors with different objectives.*fn24 In short, each "operates, for investment purposes, as a separate investment company." Mutual Series Fund, 1995 SEC No-Act. LEXIS 838, at *3.
The SEC has permitted companies to surpass the 3% limit in an analogous situation, that of multiple series within one series investment company. See id. In Mutual Series Fund, the SEC determined that it would aggregate the various series' ownership of stock in other investment companies only for the purposes of the 10% limit of § 12(d)(1)(C) (applied to companies with the same adviser), and not for the purposes of the 3% limit of § 12(d)(1)(A). In essence, the SEC found, "a series is the functional equivalent of a separate investment company and . . . should be deemed a separate investment company in applying the various limitations and restrictions imposed by the 1940 Act." Id. at *3-*4.*fn25 At least one commentator has suggested that this policy is unwise, for essentially the reasons cited by Plaintiff today. See Fleming, 44 Bus. Law. at 1201-2.*fn26 But the SEC. which was certainly aware of this argument, chose not to aggregate ownership for the 3% limit in Mutual Series Fund. See Mutual Series Fund, 1995 SEC No-Act. LEXIS 838, at *3 n. 4 (citing Fleming's article but ignoring his recommendation). To the extent that aggregated control of this type is perfectly legitimate under the ICA, Plaintiff's policy argument has therefore already been implicitly rejected by the SEC and is inconsistent with the ICA.
Second, the argument proves too much. It has long been apparent that investment advisers essentially control their client funds. See, e.g., In the Matter of Steadman Security Corp., Exchange Act Release No. 13695; Investment Company Act Release No. 9830; Investment Advisors Act Release No. 593, 1977 SEC LEXIS 1388, *56 (June 29, 1977), rev'd in part on other grounds sub nom. Steadman v. SEC, 603 F.2d 1126 (5th Cir. 1979), aff'd 450 U.S. 91 (1981) ("[T]he term `investment adviser' is to some extent a misnomer. It is a time-honored misnomer enshrined in the Act which borrowed its vocabulary from that of the pre-1940 investment company industry. The so-called `adviser' is no mere consultant. He is the fund's manager. . . . Hence the investment adviser almost always controls the fund. Only in the very rare case where the adviser's role is simply that of advising others who may or may not elect to be guided by his advice . . . can the adviser realistically be deemed not in control."). Nevertheless, as has been seen, funds with common advisers are not subject to the 3% limit of § 12(d)(1)(A)(i). Rather, no matter how common their effective control, such funds are merely affiliates. See, e.g., id. at 919-20 ("Ameri-Fund was simply a portfolio of securities. To control that portfolio (and [the adviser] had sole investment discretion with respect to it) was to control Ameri-Fund. . . . That made Ameri-Fund an affiliated person of an affiliated person of [other companies advised by the same adviser]."); see also 15 U.S.C. § 80a-12(d)(1)(C) (limiting companies with the same investment adviser to 10% control over another investment company, in certain circumstances).*fn27
In sum, though Plaintiff's policy argument does have a superficial appeal, the Court finds that it cannot overcome the clear textual mandate of § 12(d)(1)(A)(i) of the ICA, or the interpretations of that provision offered by courts, commentators, and the SEC. By contrast, Plaintiff offers no independent support whatsoever for its interpretation of the antipyramiding provision.
IV. Claims Under the Securities Exchange Act of 1934
A. Section 13(d) and Rule 13d-5
MVC also seeks injunctive relief on its claim that Millenco and Karpus agreed to act together for the purpose of "acquiring, holding, or disposing of" their MVC stock, thus forming an undisclosed group in violation of§ 13(d) of the Exchange Act. 15 U.S.C. § 78m(d). Specifically, MVC alleges that a so-called pattern of alternating stock purchases by Millenco and Karpus indicates that the companies acted in concert to keep MVC's stock price artificially low while they were amassing their shares. MVC also alleges that Millenco's proxy materials, combined with various communications between Millenco and Karpus, reveal that the companies have agreed to pool their votes in the upcoming director elections. Although acting as a group is not prohibited per se, § 13(d) requires any group acquiring in excess of 5% of a corporation's stock to make certain public disclosures via Schedule 13D. It is undisputed that Millenco and Karpus each made the requisite public disclosures on individually filed 13D's; the only question at issue here is whether they were required to reveal in these filings that they were acting as a group.
Subsection 13(d)(3) states that "[w]hen two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a `person' for the purposes of this subsection." 15 U.S.C. § 78m(d)(3). To implement this subsection, the SEC promulgated Rule 13d-5, which defines beneficial ownership by a "group":
When two or more persons agree to act together for the
purpose of acquiring, holding, voting or disposing of
equity securities of an issuer, the group formed
thereby shall be deemed to have acquired beneficial
ownership, for purposes of sections 13(d) and (g) of
the Act, as of the date of such agreement, of all
equity securities of that issuer beneficially owned by
any such persons.
17 C.F.R. § 240.13d-5(b)(1).
The "key inquiry" for purposes of § 13(d) is "whether [Defendants] agree[d] to act together for the purpose of acquiring, holding, voting or disposing of [Plaintiffs] common stock." Morales v. Quintel Entm't, Inc., 249 F.3d 115, 122 (2d Cir. 2001) (internal quotation marks omitted). Morales further explained the standards governing this inquiry, which guide the Court's determination here:
Whether the requisite agreement exists is a question
of fact. The agreement may be formal or informal and
may be proved by direct or circumstantial evidence.
Moreover, the alleged group members need not be
committed to acquiring, holding, voting, or disposing
of equity securities on certain specified terms, but
rather they need only have combined to further a
common objective regarding one of the just-recited
activities. In short, we must examine the record to
determine whether sufficient evidence supports an
inference that such an agreement or understanding
Id. (internal citations and quotation marks omitted); see also Morales v. Freund, 163 F.3d 763
, 767 n. 5 (2d Cir. 1999); Wellman v. Dickinson, 682 F.2d 355
, 363 (2d Cir. 1982).
In support of its allegation that Defendants constituted a group, MVC relies on three general categories of circumstantial evidence. First, MVC points to sporadic email communications from March 2002 to January 2003, augmented by one phone call in October 2002, between Robert Knapp of the Millennium entities and Scott Nasca, a corporate vice president at Karpus. Second, MVC emphasizes Millenco's proxy materials, which included George Karpus himself as a directorial nominee on Millenco's slate, a so-called "Karpus Proposal" among Millenco's list of proposals, and certain other statements in the proxy materials which allegedly indicate that Millenco and Karpus agreed to vote their MVC shares in unison. Third, MVC cites the allegedly coordinated or "tag team" trading by Millenco and Karpus between April 8, 2002 and July 22, 2002. Plaintiff appended to its Complaint a chart depicting this trading pattern. See Compl. Ex. B.
After fully considering all three categories of evidence, the Court is not persuaded that Defendants acted as a group. The record of communications between Karpus and Millenco is sporadic at best — approximately six messages prior to January 2003 — and interrupted by large gaps of time between emails. Further, each communication followed a major public event that affected MVC shareholders. Moreover, the email messages themselves do not reveal any agreement to act together for the purpose of acquiring or voting MVC stock.*fn28
The proxy materials do nothing to alter this conclusion. As Defendants point out, George Karpus was only added to the slate of Millenco nominees after the board was expanded — by MVC — from five to seven members. Similarly, the rhetoric contained within the proxy materials entirely fails to support an inference that Millenco and Karpus have agreed to vote their MVC shares together.
Finally, Plaintiff's allegation of coordinated trading is not substantiated by its supporting chart. Although Millenco and Karpus did tend to purchase MVC shares at separate times between April 13 and June 12, 2002, at various other periods they purchased shares at the same time. Indeed, Plaintiff's chart depicting Defendants' trading activity appears arbitrarily cropped, omitting at least 18 months of Karpus's trading in MVC stock. The chart also fails to reflect each Defendant's initial holdings, the volume of the trading as a percentage of the market activity in MVC stock, and any stock sales by Defendants during the relevant period. In fact, the undisputed evidence showed that during April and May 2002 (the period in which the alleged staggering of purchases is most plausible) Karpus acquired a net of only 75 shares, or less than a fiftieth of a percent of its MVC holdings at the time. See Karpus Management, Inc. Schedule 13D, June 7, 2002, Deposition of Scott Nasca, Feb. 14, 2003, Ex. B. During the entire period in which the coordinated trading is alleged to have occurred, Karpus acquired a net total of 9609 shares, representing a mere 0.06% of MVC's outstanding stock.
Although the existence of an agreement is an issue of fact that depends on the circumstances of each case, Plaintiff fails to cite any cases finding the existence of a group on evidence as meager as that adduced here. In Morales, for example, the Second Circuit concluded that evidence of an explicit sales agreement with lock-up provisions between three shareholders of a closely held company (as well as the later depositing of their shares into identical trusts on the same day), supported a finding that the three shareholders constituted a group. Morales, 249 F.3d at 124-27. In the specific context of coordinated shareholder efforts to take control of a corporation, the Second Circuit has found group status satisfied on the basis of a presentation to potential buyers at which the defendants made their holdings available for sale as a block, supplemented by direct communications among the shareholders regarding the sale of the target corporation's securities. Wellman, 682 F.2d at 363-65. See Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613, 617-18 (2d Cir. 2002) (finding that no group existed despite evidence of meetings and other communications between defendants, a "burst of purchases" by certain defendants, and conversations recorded by a private investigator).
The Court is mindful that Plaintiff need not set forth direct evidence of an agreement between Millenco and Karpus with specified terms. See Morales, 249 F.3d at 122. At the same time, Plaintiff must set forth evidence that some agreement exists. Congress did not intend for § 13(d) to serve merely as an eleventh-hour bludgeon for management embroiled in proxy contests. See Rondeu v. Mosinee Paper Corp., 422 U.S. 49, 58-59 (1975); see also Pantry Pride, Inc. v. Rooney, 598 F. Supp. 891, 900 (S.D.N.Y. 1984) ("Section 13(d) allows individuals broad freedom to discuss the possibilities of future agreements without filing under securities laws."). In this context the Court cannot find that Plaintiff has made a clear or substantial showing of likelihood of success on the merits of its § 13(d) claim.
B. Section 16(b)
Plaintiff similarly alleges that Defendants acted as a group for the purposes of § 16(b) of the Exchange Act. 15 U.S.C. § 78p(b). Because § 16(b) and the rules promulgated thereunder incorporate the same "group" test as § 13(d), Plaintiff's failure successfully to press its § 13(d) claim spells defeat for its § 16(b) claim as well. See 17 C.F.R. § 240.16a-1 (providing that individual stockholders shall be considered a single owner of an issuer's stock if they would have been deemed a single owner under § 13(d) and the rules promulgated thereunder); see also Feder v. Frost, 220 F.3d 29, 33-34 (2d Cir. 2000).
C. Section 14(a) and Rule 14a-9
Finally, MVC alleges that Millenco violated § 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by omitting material facts from, and including material misstatements of fact in, its proxy materials. Section 14(a) subjects proxy solicitation materials to the rules prescribed by the SEC. 15 U.S.C. § 78n(a). Rule 14a-9(a), in turn, provides:
No solicitation subject to this regulation shall be
made by means of any proxy statement . . . containing
any statement which, at the time and in the light of
the circumstances under which it is made, is false or
misleading with respect to any material fact, or which
omits to state any material fact necessary in order to
make the statements therein not false or
17 C.F.R. § 240.14a-9(a).
A fact is material for purposes of Rule 14a-9 "if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). "[T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available" Id.; see also Koppel v. 4987 Corp., 167 F.3d 125, 131 (2d Cir. 1999). "It is not sufficient to allege that the investor might have considered the misrepresentation or omission important. On the other hand, it is not necessary to assert that the investor would have acted differently if an accurate disclosure was made." Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000). Negligence can suffice to establish a violation of Rule 14a-9. Wilson v. Great Am. Indus. Inc., 855 F.2d 987, 995 (2d Cir. 1988).
MVC's § 14(a) claim focuses on three alleged omissions or misstatements: Defendants' failure to disclosure their overall plans for the fund should they prevail in the proxy fight (including their investment strategy, alleged intent to liquidate the fund, and the identity of the investment adviser they would choose); Defendants' failure to identify their status as a group under § 13(d); and Millenco's failure to disclose that that its holdings of more than 3% of MVC's stock constituted a violation of § 12(d)(1)(A) of the ICA.*fn29
As an initial matter, the Court's previous findings resolve in Defendants' favor most of the issues raised by the second and third alleged omissions. Rule 14a-9 does not impose a duty to disclose unsupported allegations of illegality. See United States v. Matthews, 787 F.2d 38, 45 (2d Cir. 1986) ("Liability under Rule 14a-9 is predicated upon a showing that an allegedly omitted fact is true.") (internal quotation marks omitted); Ciresi v. Citicorp, 782 F. Supp. 819, 823 (S.D.N.Y. 1991) ("The law does not impose a duty to disclose uncharged, unadjudicated wrongdoing."); cf. Virginia Bankshares. Inc. v. Sandberg, 501 U.S. 1083, 1098 n. 7 (1991) ("Subjection to liability for misleading others does not raise a duty of self-accusation; [rather] it enforces a duty to refrain from misleading."). Disclosure of an untrue fact would be more misleading than its omission, thus defeating the purpose of the rule. See Matthews, 787 F.2d at 45. Rule 14a-9 therefore does not require the disclosure of a nonexistent agreement between Millenco and Karpus. Similarly, in light of the Court's disposition of the ICA claim, Millenco had no duty to disclose that its holding of MVC stock was unlawful. See Lewis v. Potlatch Corp., 716 F. Supp. 807, 810 (S.D.N.Y. 1989); see also Hahn v. Breed, 587 F. Supp. 1369 (S.D.N.Y. 1984) (holding that the defendants were not required to disclose their alleged attempt to defraud shareholders where that underlying claim remained unsupported by plaintiffs).*fn30
MVC's remaining § 14(a) claim is essentially a complaint that Defendants failed to reveal their "grand strategy" with regard to MVC should they win the proxy fight. Plaintiff has characterized statements in Defendants' proxy materials as vague or contradictory, and highlighted a veneer of certainty and unanimity surrounding Defendants' plans to increase shareholder value. MVC seeks a "clear explication from defendants, in one place, of their plans and strategy" and "a truthful and comprehensible explanation of [Defendants'] collective — or disparate-views." Pl. Trial Mem. at 34.
This grievance is not sufficient to establish liability under § 14(a). Provided that they have disclosed all material facts, Defendants are not required to disclose their motivations for waging the proxy contest or to recount the evolution of their strategy. See Mendell v. Greenberg, 927 F.2d 667, 674 (2d Cir. 1990) ("A proxy statement need not disclose the underlying motivations of a director or major shareholder so long as all objective material facts relating to the transaction are disclosed."); Rodman v. Grant Found., 608 F.2d 64, 71 (2d Cir. 1979) (holding that directors need not disclose their "obvious interest" in corporate control); Kaufman v. Cooper Cos., 719 F. Supp. 174, 183 (S.D.N.Y. 1989) (refusing to require a "round by round synopsis" of negotiations among the proxy contestants when the proxy materials significantly disclosed the insurgents' goals and intentions). Plaintiff would apparently require Defendants to include a detailed plan outlining their vision for MVC's future; other than the identity of the potential investment adviser, however, MVC does not suggest any specific information or facts that were omitted from the proxy materials. See Brayton v. Ostrau, 561 F. Supp. 156, 164 (S.D.N.Y. 1983) (dismissing a § 14(a) claim where "plaintiffs have alleged no other material facts that should have been disclosed and that would indicate that [defendant's] intentions were anything other than what they stated").
Indeed, an air of contradiction pervades Plaintiff's argument, which at some points decries the vagueness of Defendants' plans, and at other points criticizes them for appearing excessively certain. Pl. Trial Mem. at 40. Beyond mere speculation, however, MVC has yet to put forth evidence that Defendants' statements are not based on a good faith belief in a majority of the proposed directors' commitment to the course of action outlined in the proxy materials. Cf. In re Phillips Petroleum See. Litig., 881 F.2d 1236, 1245 (3d Cir. 1989) ("[A] statement of intent need only be true when made; a subsequent change of intention will not, by itself, give rise to a cause of action under Section 10(b) or Rule 10b-5.").
To the extent that Plaintiff argues that Defendants have already decided to liquidate MVC, certainly such information would be material. Potomac Capital Mkts. Corp. v. Prudential-Bache Corp. Dividend Fund, 726 F. Supp. 87, 91 (S.D.N.Y. 1989) ("Liquidation is an event of magnitude for both the company and for the investors."). Again, however, MVC has not put forth sufficient evidence of any concealed decision to do so. Id. (holding that defendant-directors were not required to disclose that liquidation of an investment fund was merely a possibility); see also Pantry Pride, 598 F. Supp. at 901 ("[T]o require defendants to `confirm' what are only speculative options would be as egregious as pretending that they do not exist.") (citing Elec. Specialty Co. v. Int'l Controls Corp., 409 F.2d 937, 948 (2d Cir. 1969) (Friendly, J.)); SEC v. May, 134 F. Supp. 247, 257 (S.D.N.Y. 1955) (concluding that the SEC had failed to show that defendants intended to liquidate the target fund).
Finally, although Millenco's selection of a specific investment adviser for MVC might also be a material fact,*fn31 Defendants emphatically denied that any agreement or memorandum of understanding had been reached with their first-choice to be the adviser, and the Court finds on the basis of the stipulated record that Plaintiff has not proven otherwise. See Knapp Dep. 63-67; Tr. Oral Argument, Feb. 19, 2003, at 62-63.*fn32
The Court therefore finds that Plaintiff has failed to carry its burden of showing the requisite likelihood of success on its § 14(a) claim as well.
For the reasons stated above, the Court concludes that Plaintiff has failed to demonstrate a clear or substantial showing of likelihood of success on the merits of any of the claims it presses for injunctive relief. Because the Court has not found the requisite likelihood of success, it need not decide whether Plaintiff has established a presumption of irreparable injury. Forest City Daly Housing, 175 F.3d at 153.*fn33
The application for a preliminary injunction is therefore denied.