Brouk v. Managed Funds, Incorporated

• Decision Date: 06 March 1961
• Docket Number: No. 16566.,16566.
• Parties: J. John BROUK, James J. Mullen, Jr., W. Munro Roberts, Jr. et al., Appellants, v. MANAGED FUNDS, INCORPORATED, et al., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

286 F.2d 901 (1961)

J. John BROUK, James J. Mullen, Jr., W. Munro Roberts, Jr. et al., Appellants, v. MANAGED FUNDS, INCORPORATED, et al., Appellees.

No. 16566.

United States Court of Appeals Eighth Circuit.

January 13, 1961.

Rehearing Denied March 6, 1961.

Forrest M. Hemker, St. Louis, Mo., for appellants. Greensfelder, Hemker & Wiese, St. Louis, Mo., were with him on the brief.

Robert S. Allen, St. Louis, Mo., for appellee. R. Walston Chubb, Robert S. Allen, Dominic Troiani, Lewis, Rice, Tucker, Allen & Chubb, St. Louis, Mo., were on the brief.

Before WOODROUGH, VAN OOSTERHOUT, and MATTHES, Circuit Judges.

WOODROUGH, Circuit Judge.

These appeals are taken from an order of the District Court which denied motions made by appellants to dismiss for lack of jurisdiction of subject matter or person or both in two actions brought against appellants and others by Managed Funds Incorporated and by one Emanuel Josephson. The actions had been consolidated and the order determined that the motions to dismiss the complaints for want of jurisdiction involved a controlling question of law upon which there is a substantial ground for difference of opinion and that an immediate appeal from the Court's order may materially advance the ultimate determination of the litigation. Pursuant to application to this Court to appeal under Section 1292(b), 28 U.S.C.A., the appeals were allowed to review the District Court's ruling on the motions to dismiss as related to the claims asserted against these appellants and the denial of appellants' motion to dismiss on jurisdictional grounds.

The plaintiff Managed Funds Incorporated, is a registered open end investment company within the purview of the Investment Company Act of 1940 (54 Stat. 789-847, 15 U.S.C.A. § 80a-1 et seq.) Prior to the commencement of the present actions a stop order proceeding was had against it before the Securities and Exchange Commission under Section 8(d) of the Securities Act, 15 U.S.C.A. § 77h(d), and a stop order was issued by the Commission upon extensive findings. In re Managed Funds Inc. Par. 76,662, C.C.H. Federal Securities Law Reporter, Current.

The general object and nature of the present consolidated actions is an accounting, injunction and recovery of money damages by Managed Funds for alleged violations of the Investment Company and the Investment Advisers Act of 1940 which are in general the same violations found by the Commission.

The Josephson case is a stockholders' derivative action prosecuted for and on behalf of Managed Funds, Inc., but in which Managed Funds, Inc., is named as a defendant. The Managed Funds case is a direct action by the corporation itself embracing the same general factual background.

Emanuel Josephson filed the derivative action in the United States District Court, District of Delaware. Managed Funds, Inc., filed its action in the United States District Court, Eastern District of Missouri.

Defendants, Hilton H. Slayton and Hovey E. Slayton, were officers and directors of the fund and owned or controlled defendant, Slayton Associates, Inc., the Funds' investment adviser and defendants, Slayton and Company, Inc. and Mutual Fund Distributors, Inc., which were engaged in the selling of Funds' shares. Defendant, Model, Roland & Stone, is a stock brokerage partnership composed of the individual defendants indicated. These appellants and defendants, Boas, Cunningham, Hicks, Jester, Shields and Stubbs are former members of the Board of Directors of Managed Funds, Inc.

The Josephson complaint rests jurisdiction on the claimed violation of the Investment Company and Investment Advisers Act of 1940, and rules of the Securities and Exchange Commission promulgated thereunder. Managed Funds' amended complaint rests jurisdiction on alleged violations of the Investment Company Act of 1940 and rules of the Securities and Exchange Commission promulgated pursuant to it.

Appellant, Jefferson J. Rebstock, and appellant, Earl R. Rice, are citizens and residents of the State of Louisiana. They appeared specially and by motions sought dismissal of the four counts of Funds' amended complaint for lack of jurisdiction of both subject matter and person. Appellants, W. Munro Roberts, Jr., J. John Brouk and James J. Mullen, Jr., are citizens and residents of the State of Missouri. They moved to dismiss for lack of jurisdiction of subject matter. Like motions were filed respecting the Josephson complaint and the adoption thereof by Protective Casualty Insurance Company. Similar motions were filed by all appellants on this appeal.

These appellants and some other directors are denominated by Fund in the amended complaint as "outside directors", that is, directors alleged to have had actual or constructive knowledge of the alleged wrongful acts of the Slaytons individually and the Slayton Companies and broker defendants.

The facts pleaded in Count I of Funds' amended complaint are substantially as follows:

That the plaintiff, Managed Funds, Incorporated, is a registered open end investment company under the Investment Company Act selling its shares to the general public through underwriters, distributors, dealers and salesmen. That Fund entered into a contract with Slayton Associates, Inc., whereby it became "Funds' Investment Adviser" for agreed compensation of ½ of 1% of the asset value of Funds' asset portfolio, consisting of shares of common stock of various companies. That in December of 1953, Slayton Associates, Inc. employed defendant, Jaquith, as investment counselor and manager of Funds' securities portfolio and delegated its duties as investment adviser to defendant, Jaquith; that Slayton Associates, Inc., agreed to pay Jaquith, $50,000.00 a year for five years beginning in December of 1953, and a minimum of $35,000.00 a year for the next succeeding five years, which payments were to be applied against brokerage commissions Jaquith or his designees would receive respecting Funds' brokerage business channeled to Jaquith; that Jaquith channeled Funds' business to the stock brokerage partnership of Model, Roland and Stone, defendant herein, of which Jaquith was a member, whereby such partnership received brokerage commissions of over $1,500,000.00; that Jaquith and Model, Roland and Stone paid $50,000.00 a year to defendants, Smith and Stubbs, for which no services were performed, it being averred that Stubbs is a former business associate of the Slaytons and an employee and representative of Model, Roland and Stone, a former director of the Fund; that defendant, Smith, is also an employee and representative of defendant, Model, Roland and Stone, and a brother-in-law of defendant, Hovey E. Slayton.

That Funds' announced policy in offering its shares as contained in reports and prospectuses filed with the Securities and Exchange Commission was to provide for capital growth and reasonable income consistent therewith by realized profits on the sale of portfolio securities and dividends; and to make quarterly distributions to its shareholder; that after the arrangement with Jaquith, it is averred this policy was not followed, and distribution to shareholders were made of a predetermined income to meet which it was required that capital gains be realized, thereby permitting defendants, Slayton and Company, Incorporated, and Mutual Fund Distributors, Incorporated to make greater commissions and profits from the sale of Funds' shares. This policy, it is averred, resulted in mismanagement, loss and damage to Funds' investment portfolio by increased brokerage commissions for purchase and sale of portfolio securities and greater payments to Jaquith by Slayton Associates, Inc.; that Fund was caused to place its brokerage business for the sale of portfolio securities with brokers who also sold Funds' shares, and with brokers who rendered services to Slayton Associates, Inc., and to Slayton and Company, Inc., and Mutual Fund Distributors, Inc., seller and distributor of Funds' shares to satisfy obligations of companies for services rendered to them.

By paragraph 21 of Count I of the Funds' amended petition, it is averred that:

"The defendants committed, or with actual or constructive knowledge, as hereinabove set forth, aided, abetted, acquiesced in or condoned, directly or indirectly, violations of the Investment Company Act of 1940."

by (a) operating the fund in the interest of directors, etc., rather than Funds' security holders, 15 U.S.C.A. § 80a-1(b) (2); (b) caused Fund to publish and circulate documents containing untrue statements or omitting material facts, 15 U.S.C.A. § 80a-33; (c) caused Fund to deviate from a fundamental investment policy, 15 U.S.C.A. § 80a-13 and (d) that defendants, Model, Roland and Stone and Jaquith, acted as investment advisers without a written contract approved by the outstanding voting securities of Fund. 15 U.S.C.A. § 80a-15(a) Count II of Funds' amended complaint avers that the Court has jurisdiction of Count II because it is based on the same acts alleged in Count I of which the Court has jurisdiction under the Investment Company Act. And it is averred that Fund may be liable to purchasers of its shares by reason of the defendants having caused Fund to file false registration statement required by the Securities Act of 1933; that the Securities and Exchange Commission issued a stop order and that Funds' name and good will were damaged, and that Fund expended money for counsel fees and other expenses in connection with the Securities and Exchange proceedings.

Count III bases jurisdiction on the same grounds as Count II, and avers that Slaytons individually occupied a fiduciary relationship with Fund as Funds' President and Vice-President; that Model, Roland and Stone and Jaquith acted as investment advisers and therefore occupied a fiduciary relationship; that each of the other defendants had actual knowledge of the fiduciary relationship of the Slaytons to the Fund, and constructive knowledge of...