The opinion of the court was delivered by: SHIRLEY KRAM, Senior District Judge
Twenty-nine named Plaintiffs filed a class action and
derivative suit against Alliance Capital Management, L.P.
("Alliance"), the investment adviser of the AllianceBernstein
mutual funds (the "Funds"). Plaintiffs accuse Alliance of
charging shareholders excessive advisory fees in breach of its
duty as a fiduciary. On April 14, 2005, Defendants moved to
dismiss for failure to state a claim upon which relief may be
Plaintiffs bring their Investment Company Act ("ICA") and
common law claims on behalf of "all persons or entities who held
shares or other ownership units of AllianceBernstein Funds"
during the class period. (Am. Compl. ¶¶ 1, 175.)*fn1
Plaintiffs bring their Investment Advisers Act of 1940 ("IAA")
claims derivatively, on behalf of fifty-one individual AllianceBernstein mutual funds, each of which were formed as
either Maryland corporations or Massachusetts business trusts.
Alliance is a registered investment adviser providing
diversified investment management services to a broad range of
individual investors, institutional investors, and private
clients. It operates in four business segments, which include
Institutional Investment Management Services, Private Client
Services, Retail Services, and Institutional Research Services.
In all, Alliance manages client accounts with assets totaling
approximately $426 billion.
The Amended Complaint also names Alliance's corporate
affiliates as co-defendants. Alliance Capital Management
Holdings, L.P. ("Alliance Capital") conducts its diversified
investment management services through Alliance. Defendant AXA
Financial Inc. ("AXA") is a Delaware corporation engaged in
financial protection and wealth management. Defendant Alliance
Capital Management Corporation ("ACMC"), an indirect wholly-owned
subsidiary of AXA, conducts a diversified investment management
services business. AllianceBernstein Investment Research
Management, Inc. ("ABIRM") is the distributor of the Funds.
Alliance, Alliance Capital, and ACMC are collectively referred to
as the "Advisers."
In addition, Plaintiffs name seven current or former directors
of the AllianceBernstein mutual funds as defendants. John D. Carifa, Ruth Block, David H. Dievler, John H. Dobkin,
William H. Foulk, Jr., Clifford L. Michel, and Donald J. Robinson
were directors or officers of the Funds during the class period
and are collectively referred to as the "Directors." Finally,
Plaintiffs name John Does 1-100 as defendants. These individuals
include any wrongdoers whose identities have yet to be
The Amended Complaint alleges that Alliance charged undisclosed
fees to investors and used the revenue to pay brokerages to steer
prospective clients toward AllianceBernstein mutual funds. This
practice, known as buying "shelf space," produced an
insurmountable conflict of interest for Alliance in its role as
an investment adviser. Because Alliance's management commission
was calculated as a percentage of the overall value of the Funds,
it had a strong incentive to stimulate additional investment.
Plaintiffs assert that this practice served to inflate Alliance's
management fees at the expense of investor holdings.
The Amended Complaint describes the methods used by Alliance to
purchase shelf space at various brokerages.*fn2 First, Alliance awarded its business to specific firms that agreed to
aggressively push AllianceBernstein funds, a practice known in
the industry as "directed brokerage." This arrangement
illegitimately directed sales transactions toward sympathetic
brokerages, regardless of whether they offered the most
competitive prices for transactions. Second, to encourage further
investment in AllianceBernstein funds, Alliance paid excessive
commissions to brokers in the form of "soft dollars."*fn3
Though the Securities Exchange Act requires investment advisers
to secure the lowest possible transaction price for trades,
Section 28(e) includes a "safe harbor" provision, permitting
higher commissions when an adviser has "determined in good faith
that the amount of the commission is reasonable in relation to
the value of the brokerage and research services provided."
15 U.S.C. § 78bb(e)(1) (2005). The Amended Complaint asserts that
Alliance routinely paid excessive soft dollar commissions that
violated the safe harbor provision of Section 28(e) so that the
brokerages could "fund sales contests and other undisclosed
financial incentives [to motivate brokers] to push
AllianceBernstein Funds." (Am. Compl. ¶ 152.) Alliance's payments to brokerages were in excess to the
customary 12b-1 fees that may be used to legally market mutual
funds. Section 12 of the ICA prohibits mutual funds from
marketing their own shares unless certain enumerated conditions,
set forth in Rule 12b-1, are met. These conditions include,
inter alia, a written plan, a vote by the majority of the
directors, and quarterly reports on the purpose of expenditures.
In addition, the Rule explicitly requires that there be "a
reasonable likelihood that the plan will benefit the company and
its shareholders." 15 U.S.C. § 80a-35(a), (b) (2005). Plaintiffs
maintain that Alliance failed to adhere to the requirements of
Rule 12b-1 when making excessive payments to various brokerage
Finally, the Amended Complaint alleges that these improper
payments were made without shareholder knowledge. It
characterizes the prospectuses of the Funds as "material[ly]
false and misleading" (Am. Compl. ¶ 156), allowing Defendants "to
systematically skim millions of dollars from the investors." (Am.
Compl. ¶ 164.) Moreover, Plaintiffs argue that Alliance's Annual
and Semi-Annual Reports did not reflect the illegitimate use of
shareholder capital. By failing to disclose its practices,
Plaintiffs assert that Alliance compromised its duty as a
fiduciary to generate excessive management fees. Plaintiffs organize the charges in the Amended Complaint as
follows: Count 1 accuses the Advisers and the Directors of
making untrue statements and material omissions in the Funds'
registration statements in violation of Section 34(b) of the ICA.
Count 2 accuses the Advisers, ABIRM, and the Directors of
breaching their fiduciary duties in violation of Section 36(a) of
the ICA. Count 3 accuses the Advisers, ABIRM, and the Directors
of receiving excessive compensation for managing the Funds in
violation of their fiduciary duties under Section 36(b) of the
ICA. Count 4 contends the Advisers are liable as "control
persons" of the Directors and ABIRM under Section 48(a) of the
ICA. Count 5 accuses the Advisers of committing fraud in
violation of Section 206 of the IAA, entitling the Funds to
rescind their advisory contracts with the Advisers under Section
215 of the IAA. Counts 6 and 7 accuse the Advisers and the
Directors of breaching their fiduciary duties to shareholders in
violation of common law. Count 8 accuses all Defendants of
aiding and abetting a breach of fiduciary duty under common law.
Finally, Count 9 accuses all Defendants of unjust enrichment
under common law.
Rule 12(b)(6) provides for the dismissal of a complaint for
"failure to state a claim upon which relief can be granted."
Fed.R.Civ.P. 12(b)(6) (2000). A complaint should be dismissed only if "it appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim which would entitle
him to relief." Valmonte v. Bane, 18 F.3d 992, 998 (2d Cir.
1994) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
The court "must accept as true all of the factual allegations set
out in the plaintiff's complaint, draw inferences from those
allegations in the light most favorable to the plaintiff, and
construe the complaint liberally." Tarshis v. Riese Org.,
211 F.3d 30, 35 (2d Cir. 2000). Consequently, "the issue is not
whether the plaintiff will ultimately prevail, ...