United States District Court, S.D. New York
October 19, 2005.
In re ALLIANCEBERNSTEIN MUTUAL FUND EXCESSIVE FEE LITIGATION.
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
A. The Parties
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
B. The Amended Complaint
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.
C. Standard of Review
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, but whether the
claimant is entitled to offer evidence to support the claims."
Wright v. Ernst & Young LLP, 152 F.3d 169, 173 (2d Cir. 1998)
(quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).
A. Derivative Injuries Cannot Support a Direct Action
Plaintiffs bring direct claims for relief under Section 36(a)
of the ICA, Section 34 (b) of the ICA, and the common law of
Maryland and Massachusetts. When deciding issues of "shareholder
standing," that is, whether claims should be brought directly or
derivatively, courts must look to the law of the fund's state of
incorporation. See Kamen v. Kemper Fin. Servs., Inc.,
500 U.S. 90, 108-09 (1991). Here, all of the Funds in question were formed as either Maryland corporations or
Massachusetts business trusts.
Maryland courts have clearly differentiated between claims that
may be brought directly and those that must be brought
derivatively. In describing Maryland law, the Second Circuit
[i]n deciding whether a shareholder may bring a
direct suit, the question the Maryland courts ask is
not whether the shareholder suffered injury; if a
corporation is injured those who own the corporation
are injured too. The inquiry, instead, is whether the
shareholders' injury is "distinct" from that suffered
by the corporation.
Strougo v. Bassini, 282 F.3d 162
, 170 (2d Cir. 2002). In
Strougo, the court drew a logical distinction between the
plaintiffs' two major claims for relief. First, the plaintiffs
asserted that a recent equity offering was unfairly coercive
because it disproportionately harmed shareholders who declined to
participate in the offering. The Court permitted these direct
claims because "the reduced value of [non-participating
shareholder] equity did not derive from a reduction in the value
of the Fund's assets, but rather from a reallocation of equity
value to those shareholders who did participate." Id. at 175.
But in addressing the plaintiffs' standard equity dilution
claims, the court held that "[u]nderwriter fees, advisory fees,
and other transaction costs incurred by a corporation decrease
share price primarily because they deplete the corporation's assets, precisely the type of injury to the corporation that can
be redressed under Maryland law only through a suit brought on
behalf of the corporation." Id. at 174.
Massachusetts takes a similar approach in determining whether a
shareholder may pursue a direct cause of action. Indirect harms,
suffered generally by all shareholders, must be brought
derivatively, on behalf of the corporation. See Jackson v.
Stuhlfire, 28 Mass. App. Ct. 924, 925 (1990); Bessette v.
Bessette, 385 Mass. 806, 809 (1982). For standard equity
dilution claims, it is "the corporation that is the injured
party, and it alone may sue the wrongdoer for the damage caused."
Hurley v. Federal Deposit Ins. Corp., 719 F. Supp. 27, 30 (D.
Mass. 1989). Accordingly, "[i]f a plaintiff alleges mismanagement
of funds, embezzlement or breach of fiduciary duty resulting in a
diminution of the value of the corporate stock or assets, the
claim is one held by the corporation itself, and is thus
derivative if brought by an investor." Blasberg v. Oxbow Power
Corp., 934 F. Supp. 21, 26 (D. Mass. 1996).
The laws of Maryland and Massachusetts require dismissal of
Plaintiffs' direct claims brought under Section 36(a) of the ICA,
Section 34(b) of the ICA, and the common law of Maryland and
Massachusetts. Any decrease in shareholder equity was simply the
predictable consequence of a reduction in the overall value of
the Funds. Also, the Amended Complaint contains no evidence demonstrating an unfair reallocation of shareholder
equity or any other type of distinct injury. Plaintiffs' losses,
therefore, cannot be redressed through a direct lawsuit and
Counts 1, 2, and 6-9 must be dismissed.
B. Section 36(b) Claim Against the Advisers May Proceed
Section 36(b) of the ICA grants private litigants an express
right of action to enforce the fiduciary duties of investment
advisers who charge excessive fees.*fn4 To prove a violation
of the statute, a plaintiff must establish that the fee is "so
disproportionately large that it bears no reasonable relationship
to the services rendered" and "could not have been the product of
`arm's length' bargaining." Gartenberg v. Merrill Lynch Asset
Mgmt., Inc., 694 F.2d 923, 928 (2d Cir. 1982), cert. denied,
461 U.S. 906 (1983). In making this determination, courts must
consider all relevant facts, including: (1) the nature and
quality of the services provided by the advisers to the
shareholders; (2) the profitability of the mutual fund to the adviser-manager; (3) "fall-out" benefits;
(4) the economies of scale achieved by the mutual fund and
whether such savings were passed on to the shareholders; (5)
comparative fee structures; and (6) the independence and
conscientiousness of the mutual fund's outside trustees. See
id. at 929-30.
At the dismissal stage, however, the Federal Rules of Civil
Procedure simply require notice pleading. A complaint need only
include "a short and plain statement of the claim showing that
the pleader is entitled to relief" giving "fair notice of what
the plaintiff claim is and the ground upon which it rests."
Fed.R.Civ.P. 8(a) (2000); see also Swierkiewicz v. Sorema
N.A., 534 U.S. 506, 513 (2002); Pfeiffer v. Bjurman, Barry &
Assocs., No. 03 Civ. 9741, 2004 U.S. Dist. LEXIS 16924, at *15
(S.D.N.Y. Aug. 26, 2004); Wicks v. Putnam Inv. Mgmt., LLP, No.
04 Civ. 10988, 2005 U.S. Dist. LEXIS 4892, at *13 (D. Mass. Mar.
28, 2005). Plaintiffs' allegations against the Advisers exceed
the baseline of specificity necessary to survive a motion to
The Amended Complaint provides concrete examples of fiduciary
misconduct by the Advisers with respect to management fees.
First, Plaintiffs illustrate that as the size of the Funds
increased, any savings generated by economies of scale were not passed on to shareholders. (Am. Compl. ¶¶
142-46.)*fn5 In essence, Plaintiffs state a claim by
demonstrating that they continued to pay escalating fees in
exchange for absolutely no additional services. In enacting
Section 36(b), Congress recognized "that as mutual funds [grow]
larger, it [becomes] less expensive for investment advisers to
provide additional services" and "wanted to ensure that
investment advisers passed onto fund investors the savings that
they realized from these economies of scale." Migdal v. Row
Price-Fleming Int'l, Inc., 248 F.3d 321, 326-27 (4th Cir. 2001)
(citing Fogel v. Chestnutt, 668 F.2d 100, 111 (2d Cir. 1981)).
The District Court of Massachusetts accepted this theory of
liability, upholding a Section 36(b) claim because "the nature
and quality of the services rendered by the defendants to the
Funds [had] not substantially changed," creating "benefits from
economies of scale which the defendants have failed to share with
the Funds." Wicks, 2005 U.S. Dist. LEXIS 4892, at *3.
Plaintiffs also plead with particularity facts suggesting
Alliance made recurring payments to brokers that were not in accordance with a valid Rule 12b-1 plan. The Amended Complaint
describes how $27,787,103 was taken from the AllianceBernstein
Premier Growth Fund and $41,391,766 was taken from the
AllianceBernstein Growth and Income Fund without regard to the
required conditions of Rule 12b-1. (Am. Compl. ¶ 143.) In
addition, it details the Adviser's system of diverting soft
dollars to brokers at the expense of shareholders. (Am. Compl. ¶¶
150-53.) The Second Circuit ruled that such claims of excessive
Rule 12b-1 fees are "cognizable," Meyer v. Oppenheimer Mgmt.
Corp., 764 F.2d 76, 82 (2d Cir. 1985), and this Court has
sustained similar allegations, reasoning that "excessive
promotion, distribution and servicing fees" meet the pleading
requirements of Section 36(b). Pfeiffer, 2004 U.S. Dist. LEXIS
16924, at *15.
Questions concerning the independence of the directors of the
Funds also militate against dismissal. See Gartenberg,
694 F.2d at 929-30. The Amended Complaint states that "key
AllianceBernstein Funds Directors were employees or former
employees of the [Advisers] and were beholden for their
positions, not to AllianceBernstein Funds investors, but rather,
to the [Advisers] they were supposed to oversee." (Am. Compl. ¶
124.) For example, Defendant Carifa served as the President,
Chief Operating Officer, and Director of ACMC while
simultaneously serving as a trustee or director of several of the Funds. (Am. Compl. ¶ 126.) Such practices create a reasonable
inference, especially at this stage of litigation, that the fee
arrangements between the Funds and their investment advisers
might not have been the result of rigorous arms-length
The Advisers respond that Plaintiffs' Section 36(b) claims are
conclusory, speculative, and must be dismissed. (Defs.' Resp.
15-16.) Relying on this Court's decision in Yampolsky v. Morgan
Stanley Inv. Advisers Inc., No. 03 Civ. 5710, 2004 U.S. Dist.
LEXIS 8573 (S.D.N.Y. May 12, 2004), they contend that Plaintiffs
do not allege any facts demonstrating that the advisory fees were
disproportionately large to the services rendered. Yet the
plaintiffs in Yampolsky relied "heavily on generalities about
deficiencies in the securities industry" and "statements made by
industry critics and insiders." Yampolsky, 2004 U.S. Dist.
LEXIS 8573, at *5. The Advisers also cite to In Re Eaton Vance
Mutual Funds Fee Litigation, No. 04 Civ. 1144, 2005 U.S. Dist.
LEXIS 15731 (S.D.N.Y. July 29, 2005) in support of dismissal. The
Court in Eaton Vance, however, determined that the plaintiff's
allegations "contain no specific facts that would demonstrate
that the compensation paid to the defendants was disproportionate
to the services rendered." Id. at *3. As previously indicated,
the Amended Complaint pleads far more than conclusions of fact,
making it premature at this stage to dismiss Plaintiffs' claim for relief against the Advisers under
C. Remaining Section 36(b) & 48(a) Claims Are Dismissed
Plaintiffs also pursue Section 36(b) claims against the
Directors and ABIRM. Section 36(b) authorizes a shareholder
action against an investment adviser "or any affiliated person of
such investment advisor" for "breach of fiduciary duty in respect
of . . . compensation." 15 U.S.C. § 80a-35(b). The statute
specifically lists directors and underwriters as the type of
"affiliates" that may be found liable. However, the statute also
mentions that "no such action shall be brought or maintained
against any person other than the recipient of such
compensation." Id. § 80a-35(b)(3). Therefore, the threshold
question is whether the Directors and ABIRM are alleged to have
received excessive compensation while functioning as "affiliate"
Plaintiffs' Section 36(b) claim against ABIRM must be dismissed
because Plaintiffs have not pled any facts demonstrating it was
the recipient of excessive advisory fees. See In re TCW/DW N.
Am. Govt. Income Trust Sec. Litig., 941 F. Supp. 326, 343
(S.D.N.Y. 1996) (dismissing claim for failure to plead facts showing that a distributor was the recipient of
excessive compensation for advisory services). The Amended
Complaint conflates vague charges against ABIRM with more
specific charges against the Advisers, who clearly received
advisory fees. (Am. Compl. ¶ 210.) Therefore, Plaintiffs'
allegations against ABIRM fail to reach the level of specificity
required to survive a motion to dismiss.
Plaintiffs' claims against the Directors fail for similar
reasons. The Amended Complaint alleges that the Directors
dishonestly acquiesced to paying excessive advisory fees while
receiving a director's salary "in very large amounts." (Am.
Compl. ¶ 209.) Yet Plaintiffs strain to describe the process by
which the Directors received excessive compensation for advisory
services. See Jerozal v. Cash Reserve Mgmt., Inc., No. 81
Civ. 1569, 1982 U.S. Dist. LEXIS 16566, at *18-19 (S.D.N.Y. Aug.
10, 1982) (dismissing claim against directors for failure to
demonstrate they received any portion of advisory fees); Tarlov
v. Paine Webber Cashfund, Inc., 559 F. Supp. 429, 436 (D. Conn.
1983) (holding that "only the recipient of allegedly excessive
compensation can be sued"). But see Halligan v. Standard &
Poor's/Intercapital, Inc., 434 F. Supp. 1082, 1084 (E.D.N.Y.
1977) (permitting claims against directors for the indirect
receipt of compensation). Along these lines, Plaintiffs'
pleadings fail to delineate how the basic compensation packages of the Directors can be accurately characterized as advisory
Though doctrinal guidance in this area of the law remains
inconsistent, the legislative history of Section 36(b) reinforces
the Court's decision to dismiss Plaintiff's actions against the
Directors and ABIRM. The Senate Report accompanying Section 36(b)
explains that the statute "affords a remedy if the investment
adviser should try to evade liability by arranging for payments
to be made not to the adviser itself but to an affiliated person
of the adviser." S. Rep. No. 91-184, at 16 (1969), reprinted in
1970 U.S.C.C.A.N. 4897, 4910-11. Thus, Congress intended that
Section 36(b) assist in the enforcement of the fiduciary duties
of investment advisors "by tracing compensation or payment for
advisory services to the ultimate beneficiary." Jerozal,
1982 U.S. Dist. LEXIS 16566, at *18-19. Here, the Amended Complaint
does not allege claims against the Directors and ABIRM as a
method of tracing advisory fees through the corporate apparatus
to enforce underlying claims against the Advisers. As a result,
Plaintiffs' Section 36(b) claims against ABIRM and the Directors
are properly dismissed.
Finally, Plaintiffs' claim against the Advisers, brought under
Section 48(a) of the ICA, is also dismissed. Without a surviving
violation of the ICA by the Directors or ABIRM, the Advisers
cannot be held secondarily liable as "control persons" of either of these two defendants. See In re Merrill Lynch &
Co. Research Reports Sec. Litig., 272 F. Supp. 2d 243, 264
D. Plaintiffs' Demand Failure Is Not Excused
Plaintiffs' contract rescission claim, brought under Section
215 of the IAA, is dismissed for failure to meet the exacting
demand futility requirements of the states of Maryland and
Massachusetts. In Section 215 cases, a plaintiff must allege a
separate underlying violation of the IAA.*fn7 Here,
Plaintiffs accuse the Advisers of engaging in fraudulent business
practices, in violation of Section 206 of the IAA.*fn8
Because this claim is pursued derivatively, Plaintiffs must
demonstrate that they have made direct appeals to the Funds'
directors, or, in the alternative, that such efforts would have
Federal Rule of Civil Procedure 23.1 sets forth the demand
requirements of derivative lawsuits. When pursuing a cause of
action on behalf of a corporation, a complaint must:
allege with particularity the efforts, if any, made
by the plaintiff to obtain the action the plaintiff
desires from the directors or comparable authority and, if necessary, from the shareholders or members,
and the reasons for the plaintiff's failure to obtain
the action for not making the effort.
Fed.R.Civ.P. 23.1 (2000). Because Plaintiffs concede that no
demands were made, they must demonstrate that such action would
have been futile. In making this determination, courts must apply
the law of the fund's state of incorporation. See Kamen v.
Kemper Fin. Servs., Inc., 500 U.S. 90
, 108-09 (1991).
The Maryland Court of Appeals has described the requisite
pleading standard to excuse demand. In Werbowsky v. Collomb,
362 Md. 581 (Md. 2001), the court indicated that excusal is
appropriate only in instances where "a majority of the directors
are so personally and directly conflicted or committed to the
decision in dispute that they cannot reasonably be expected to
respond to a demand in good faith and within the ambit of the
business judgment rule." Id. at 144. The court emphasized the
importance of the demand requirement, stressing that excusal is
appropriate "only when the allegations or evidence clearly
demonstrate" futility "in a very particular manner." Id.
Applying this doctrine, the court refused to excuse the
plaintiffs' demand failure "simply because a majority of the
directors . . . are conflicted or are controlled by other
conflicted persons, or because they are paid well for their
services as directors, were chosen as directors at the behest of
controlling stockholders, or would be hostile to the action." Id. at
The Second Circuit has applied the Werbowsky framework to
assess whether demand failure may be excused as futile. In
Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133 (2d Cir. 2004),
the plaintiffs based their futility arguments on the fact that
the directors of the Merrill Lynch Focus Twenty Fund, Inc. were
appointed by the fund's investment adviser and were therefore
beholden to it for their large salaries. Id. at 136-37. The
Second Circuit, however, would not excuse the plaintiffs' failure
to make a demand, noting "the importance of the demand
requirement even when a director `would be hostile to the
action.'" Id. at 141. The court's opinion underscored the
usefulness of the demand requirement in providing "directors
even interested, non-independent directors the opportunity to
consider, or reconsider, the issue in dispute." Id. at 141
(citing Werbowsky, 362 Md. at 144).
Plaintiffs' allegations do not satisfy the futility standards
of Maryland law. The Amended Complaint merely states that the
directors of the Funds in question were appointed by the Advisers
and were therefore beholden to them for their positions and
compensation packages. (Am. Compl. ¶ 182.) Scalisi, in applying
the Werbowsky standards of Maryland law, held that such
generalized accusations are insufficient. Scalisi, 380 F.3d at 141. While the directors of the Funds
might have been hostile to pre-suit demands, it is certainly
possible that making a demand would have triggered an honest
reconsideration of the existing fee arrangement. Consequently,
Plaintiffs' contract rescission claim is dismissed with respect
to the nine Funds incorporated in Maryland.
Plaintiffs also fail to meet the futility requirements of
Massachusetts. Excusal is appropriate when "a majority of
directors are alleged to have participated in wrongdoing, or are
otherwise interested." Harhen v. Brown, 431 Mass. 838,
730 N.E.2d 859, 865 (Mass. 2000). Though the Massachusetts Supreme
Court has employed the ALI Principles of Corporate Governance in
defining the term "interested," id. at 842-43, other courts
have utilized the ICA's definition section, as mandated by
statute.*fn9 E.g., In re Eaton Vance Mutual Funds Fee
Litig., 380 F. Supp. 2d 222, 239-40 (S.D.N.Y. 2005); In re Mut.
Funds Inv. Litig., No. 04 Civ. 15863, 2005 U.S. Dist. LEXIS
18082, at *15 (D. Md. August 25, 2005). Regardless of which
definition is employed, both approaches seek to ascertain whether
the directors in question were subject to improper control by their investment
Plaintiffs' pleadings fail to adequately describe how the
Advisers exerted such control over the Funds' directors as to
make a majority of them "interested" in the fee transactions at
issue. First, the Amended Complaint suggests that the directors
"were captive to and controlled by" the investment advisers
because the investment advisers appointed them. (Am. Compl. ¶
182.) Mere appointment by the "controlling" agent, however, has
been routinely rejected by both state and federal courts as
inadequate evidence of futility. See In re Eaton Vance,
380 F. Supp. 2d, at 239-40; Demoulas v. Demoulas Super Mkts., Inc.,
No. 03 Civ. 3741, 2004 Mass. Super. LEXIS 286, at *41
(Mass.Super.Ct. Aug. 2, 2004). Next, Plaintiffs maintain the directors
"approved" or "allowed" the undisclosed payments and are unlikely
to sue themselves on behalf of the corporation. (Am. Compl. ¶¶
184-85, 189.) But courts have also consistently rejected director
acquiescence as insufficient evidence of futility, see ING Principal Prot. Funds Derivative Litig.,
369 F. Supp. 2d 163, 172 (D. Mass. 2005); Grossman v. Johnson,
89 F.R.D. 656, 659 (D. Mass. 1981); In re Kauffman Mut. Fund
Actions, 479 F.2d 257, 265 (1st Cir. 1973), and have declined to
excuse demand failure based on an unlikelihood that a board of
directors will sue themselves on behalf of the corporation. See
In re Eaton Vance, 380 F. Supp. 2d at 239-40; Heit v. Baird,
567 F.2d 1157, 1162 (1st Cir. 1977); In re Kauffman,
479 F.2d at 265. Thus, Massachusetts law requires the dismissal of
Plaintiffs' remaining Section 215 claims for failure to make a
E. No Standing to Sue on Behalf of Non-Owned Funds
The named Plaintiffs do not have standing to sue on behalf of
forty-eight AllianceBernstein mutual funds in which they do not
own shares. Article III of the United States Constitution
requires that the plaintiff (1) have a personal injury; (2) that
is fairly traceable to the defendants' allegedly unlawful
conduct; and (3) is likely to be addressed by the requested
relief. Allen v. Wright, 468 U.S. 737, 751 (1984). The Supreme
Court has also indicated:
[t]hat a suit may be a class action . . . adds
nothing to the question of standing, for even named
plaintiffs who represent a class must allege and show
that they personally have been injured, not that
injury has been suffered by other, unidentified
members of the class to which they belong and which
they purport to represent. Lewis v. Casey, 518 U.S. 343, 357 (1996). Plaintiffs' only
claim surviving dismissal, the Section 36(b) claim against the
Advisers, has been properly brought on behalf of the thirteen
Funds in which they own shares. However, Plaintiffs also bring
claims against the Advisers of forty-eight Funds in which they do
not own shares.
Traditionally, district courts have resolved issues involving
Article III standing before addressing class certification. See
In re Eaton Vance Corp. Sec. Litig., 220 F.R.D. 162, 165-66 (D.
Mass. 2004). Appellate courts have generally approved of this
practice, underscoring justiciability as an "inherent
prerequisite to the class certification inquiry." See Rivera v.
Wyeth-Ayerst Labs., 283 F.3d 315, 319 n. 6 (5th Cir. 2002);
Easter v. Am. W. Fin., 381 F.3d 948, 962 (9th Cir. 2004)
(stating that the "district court correctly addressed the issue
of standing before it addressed the issue of class
certification"). But the Supreme Court has departed from this
general rule in the context of complex class action litigation.
See Ortiz v. Fibreboard Corp., 527 U.S. 815, 831 (1999). In
unique cases where class certification issues are "logically
antecedent" to standing issues and the result of a class
certification motion is "dispositive" of the case as a whole, it
may be appropriate to decide class certification first. See id. at 612-13. But in its decisions, the Court has
stressed that this exception should only applied when a court is
confronted with an extremely complex case defying customary
judicial administration. See id. at 823 (characterizing
Ortiz as a case brought in the context of an "asbestos
Based on this guidance, it would be inappropriate for the court
to proceed directly to a class certification inquiry before
resolving the issue of justiciability. As a straightforward
securities case, many of the concerns triggering the exception
mentioned by the Supreme Court in Ortiz are noticeably absent
here. In fact, in the arena of securities litigation, standing
requirements have been considered particularly important "in
order to curb the risks of vexatious litigation and abuse of
discovery." In re Bank of Boston Corp. Sec. Litig.,
762 F. Supp. 1525, 1531 (D. Mass. 1991). Moreover, because Plaintiffs
clearly have standing to sue on behalf of the thirteen Funds in
which they own shares, addressing class certification would not
be outcome determinative. See Pederson v. La. State Univ.,
213 F.3d 858, 866 n. 5 (5th Cir. 2000); Clark v. McDonald's
Corp., 213 F.R.D. 198, 204 (D.N.J. 2003). Thus, the Court will
table its class certification inquiry until that issue is fully
briefed by the parties. Turning to the issue of standing, Plaintiffs may not pursue
Section 36(b) claims on behalf of the Funds in which they do not
own shares. First, because the named Plaintiffs have not
purchased shares in the forty-eight Funds at issue, they cannot
establish injuries caused by the advisers of those Funds. See
In re Eaton Vance Corp. Sec. Litig., 219 F.R.D. 38, 41 (D.
Mass. 2003) (dismissing claims for lack of standing against two
mutual funds in which plaintiff did not own shares). Without the
requisite demonstration of an injury, "none [of the named
Plaintiffs] may seek relief on behalf of himself or any other
member of the class." O'Shea v. Littleton, 414 U.S. 488, 494
(1974). This conclusion is strengthened by a literal reading of
the text of Section 36(b), which states that an action may only
be brought by either the SEC "or by a security holder of such
registered investment company." 15 U.S.C. § 80a-35(b) (3)
Plaintiffs attempt to establish the existence of an injury by
alleging that they have an "ongoing financial interest" in the
forty-eight Funds in which they do not own shares. However, the
only relevant authority cited by Plaintiffs on behalf of this
proposition is Batra v. Investors Research Corp., No. 89 Civ.
0528, 1991 U.S. Dist. LEXIS 14773 (W.D. Mo. October 4, 1991). In
Batra, the court determined that the plaintiffs had standing to
sue the directors of funds in which they did not own shares, in large part, because management fees were assessed at
the investment company level, rather than the portfolio level.
See id. at *8 (distinguishing Verrey v. Ellsworth,
303 F. Supp. 497 (S.D.N.Y. 1969)). Though each of the Funds at issue
share a common investment adviser, they are incorporated
separately and management fees "are incurred at the portfolio
level." (Am. Compl. ¶ 65.) As a result, Plaintiffs do not have a
stake in the financial health of portfolios in which they do not
own shares and may not pursue Section 36(b) claims on their
Defendants' motion to dismiss is granted in part and denied in
part. Each of Plaintiffs' claims, except for those against the
Advisers under Section 36(b) of the ICA, are dismissed.
Plaintiffs, however, may pursue their Section 36(b) claims only
on behalf of the thirteen Funds in which they own shares. The
Court reserves judgment on Plaintiffs' request for leave to
amend. Plaintiffs should submit a letter to the Court by November
2, 2005 providing a more complete justification for why leave
should be granted. SO ORDERED.
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