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Mintz v. Baron

September 18, 2006

MEYER MINTZ AND MELR SPEAR, PLAINTIFFS
v.
RONALD BARON, ET AL. DEFENDANTS.



The opinion of the court was delivered by: Laura Taylor Swain, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs Meyer Mintz and Meir Spear (collectively, "Plaintiffs") bring this action on behalf of themselves and other present and former shareholders of the Baron Growth Fund (the "Growth Fund") and the Baron Small Cap Fund (the "Small Cup Fund") (collectively, the "Funds") against the advisor of the Funds, BAMCO, Inc. ("BAMCO" or the "Advisor"), the distributor of the Funds, Baron Capital, Inc. ("Baron Capital" or the "Distributor"), and the individual trustees of the Funds (the "trustees") (collectively, "Defendants"). Plaintiffs assert claims for breach of fiduciary duty under Section 36(b) of the Investment Company Act, 15 U.S.C. § 80a-35(b) ("ICA") and under state law in connection with the alleged overpayment of certain marketing and distribution expenses under Rule 12b- 1 promulgated pursuant to the Investment Company Act, 17 C.F.R. § 270.12b-1 ("Rule 12b-1 fees") from September 12,2003 (for the Growth Fund), and from April 22,2005 (for the Small Cap Fund), to the time of the filing of the Complaint. Defendants move to dismiss the Complaint in its entirety pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1. The Court has jurisdiction of Plaintiffs' federal claim pursuant to 15 U.S.C. 9 80a-35(b)(5) and supplemental jurisdiction of their state law fiduciary duty claim. For the following reasons, the Court grants in part and denies in part Defendants' motion to dismiss the Complaint.

BACKGROUND

The following facts alleged in the Complaint are taken as true for the purposes of the instant motion to dismiss the Complaint for failure to state a claim. Baron Capital is a registered broker-dealer, the distributor of the Funds and an affiliate of BAMCO. (Compl. ¶ 20.) BAMCO is a subsidiary of Baron Capital and at all relevant times was and continues to be the investment advisor to the Funds, is responsible for the making investment decisions and, together with the officers, administers the Funds' daily operations. (Id. ¶ 33.) Defendants Ronald Baron, Morty Schaja, and Linda S. Martinson are officers and trustees of the Funds and the remaining individual defendants are trustees of the Funds. (Id. ¶¶ 23-32.) The Growth Fund and Small Cap Fund are part of the same Massachusetts business trust and commenced trading on January 3, 1995, and October 1, 1997, respectively. (Id. ¶¶ 21-22.)

Shareholders have been assessed, on a monthly and pro rata basis, Rule 12b-I fees of 0.25% of the Funds' average daily assets. (Id. ¶ 34.) These fees have been paid directly to Baron Capital, the Funds' Distributor. (Id. ¶ 39.) These fees relate to the promotion, marketing and distribution of the Funds, and are "primarily intended to resu.lt in the sale of shares." (Id. 77 34, 39.) The relevant statutory section provides that Rule 12b-1 fees may be assessed through implementation of a distribution plan "only if the board of directors who vote to approve such implementation or continuation conclude in the exercise of reasonable business judgment, and in light of their fiduciary duties under state law and section 36(a) and (b) . . . that there is a reasonable likelihood that .the plan will benefit the company and its shareholders." (Id. ¶ 37.)

The Complaint alleges that Defendants have breached their fiduciary duties under relevant state and federal law by charging shareholders Rule 12b-1 fees "that lacked any reasonable relationship to the actual services provided to the Funds or actual expenses incurred on behalf of the Funds." (Id.77 57,61.) On September 12,2003, and April 22,2005, respectively, the Growth Fund and the Small Cap Fund closed to new investors.*fn1 (Id. 77 41,47.)

Despite the closing to new investors, both plans have continued to assess Rule 12b-1 fees at a rate of 0.25% and, because the Funds have increased, the total Rule 12b-1 fees have consequently increased. (Id. 77 43,47.) Plaintiffs allege that, because the Funds have been closed to new investors, Rule 12b-1 fees charged from these closure dates to the filing of the Complaint should have been substantially reduced or eliminated altogether because there would be less need for marketing and distribution and, accordingly, the fees charged subsequent to the closing of the Funds are unreasonable and excessive. (Id. yy 42-3,46-7, 53.) Plaintiffs further allege that, irrespective of the closure of the Funds and based simply on the growth of funds and the corresponding greater Rule 12b-1 fees, these fees are not related to expenses incurred for promotional activities. (Id. 45,47.)

Plaintiffs also allege that these 12b-1 fees would be substantially reduced if Defendants terminate certain distribution agreements with broker-dealers. (u y 48.) The Funds have entered into distribution agreements with Schwab and Fidelity (collectively, the "Fund Supermarkets") to list their shares on electronic distribution platforms. (Id. y 49.) The purpose of these lists is to sell more shares and presumably attract more investors to Funds. (kJ Plaintiffs contend that, because the Funds have closed to new investors, shareholders have received no benefits from being listed on these platforms and there is "no justification for maintaining these distribution agreements and assessing shareholders for [Rule 12b-11 expenses required thereunder." (Id. y 5 1 .)

Plaintiffs seek to recover the allegedly excessive Rule 12b-1 fees charged to shareholders and to enjoin the Defendants from continuing to overcharge the Funds' shareholders. (Id. ¶ 53.)

DISCUSSION

In evaluating a motion to dismiss a complaint pursuant to Rule 12(b)(6), the Court must take as true the facts alleged in the plaintiffs complaint and draw all reasonable inferences in his favor. W. Mohegan Tribe & Nation v. Orange County, 395 F.3d 18, 20 (2d Cir. 2004); Hernandez v. Counhlin, 18 F.3d 133, 136 (2d Cir. 1994). The court must not dismiss a complaint "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41,45-46 (1957).

On a motion to dismiss, the court may consider any "documents upon which the complaint relies and which are integral to the complaint," Subaru Distribs. Corn. V. Subaru of Am., Inc., 425 F.3d 119, 122 (2d Cir. 2005), as well as "public disclosure documents required by law to be, and that have been, filed with the SEC." Rothman v. Grenor, 220 F.3d 8 1, 88 (2d Cir. 2000). From the allegations contained in the Complaint, the Court finds that the Funds' Prospectus (with its incorporated supplements) is integral to the Complaint and that Plaintiffs knew about it and relied on it in bringing the instant action. Moreover, the Prospectus is a public document that is required to be and has been filed with the SEC. See Schwartz Decl., Ex. 3, last page; In re Merrill Lwch & Co., Inc., Research Reports Secs. Liti~2, 72 F. Supp. 2d 243,247 n.2 (S.D.N.Y. 2003) (finding that fund prospectus was properly considered in determination of motion to dismiss because it was a public document and was filed with SEC). The Court will therefore consider the Funds' Prospectus dated January 28,2005 & Schwartz Decl., Ex. 3), and its incorporated supplements dated February 18, 2005 (Id., Ex. 1), and April 8, 2005 (Id,, Ex. 2), in making its determination on the motion to dismiss Count I for failure to state a claim.

Count I

In Count I of their Complaint, Plaintiffs allege that Defendants have violated Section 36(b) of the Investment Company Act, 15 U.S.C. tj 80a-35(b) ("Section 36(b)"), which imposes a fiduciary duty with respect to the receipt ...


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