Bellikoff v. Eaton Vance Corp.

Citation481 F.3d 110
Decision Date15 March 2007
Docket NumberDocket No. 05-6957-cv.
PartiesPaul BELLIKOFF, individually and on behalf of all others similarly situated, John B. Perkins, individually and on behalf of all others similarly situated, Stephen R. Alexander and Rita Silvermetz, Plaintiffs-Appellants, Marvin Goldfarb, Phyllis Ann Jaffee Revocable Trust and Igor Lukashevich, individually and on behalf of all others similarly situated, Consolidated-Plaintiffs-Appellants, v. EATON VANCE CORP., Eaton Vance Management, Boston Management and Research, Lloyd George Investment Management Limited, Jessica M. Bibliowicz, James B. Hawkes, Samuel L. Hayes, III, William H. Park, Ronald A. Pearlman, Norton H. Reamer, Lynn A. Stout, John Does 1-100, Eaton Vance Tax-Managed Small Cap Growth Fund 1., Eaton Vance Tax-Managed Small Cap Growth Fund 1.1, Eaton Vance Tax-Managed Small Cap Growth Fund 1.0, Eaton Vance Tax-Managed Dividend Income Fund, Eaton Vance Tax-Managed Equity Asset Allocation, Eaton Vance Tax-Managed International Growth Fund, Eaton Vance Tax-Managed Mid-Cap Core Fund, Eaton Vance Tax-Managed Multi Cap Opportunity Fund, Eaton Vance Tax-Managed Small Cap Growth Fund 1., Eaton Vance Tax-Managed Small Cap Value Fund, Eaton Vance Tax-Managed Value Fund, Eaton Vance Balanced Fund, Eaton Vance Growth Fund, Eaton Vance Large Cap Core Fund, Eaton Vance Atlanta Cap Large Cap Fund, Eaton Vance Large Cap Value Fund, Eaton Vance Atlanta Cap Small Cap Fund, Eaton Vance Small Cap Growth Fund, Eaton Vance Small Cap Value Fund, Eaton Vance Special Equities Fund, Eaton Vance Utilities Fund, Eaton Vance Asian Small Companies Fund, Eaton Vance Emerging Markets Fund, Eaton Vance Greater China Growth Fund, Eaton Vance Greater India Fund, Eaton Vance Global Growth Fund, Eaton Vance Worldwide Health Science Fund, Eaton Vance Advisors Senior Floating-Rate Fund, Eaton Vance Atlanta Capital Intermediate Bond Fund, Eaton Vance Classic Senior Rate Fund, Eaton Vance Floating Rate Fund, Eaton Vance Floating Rate High Income Fund, Eaton Vance Government Obligations Fund, Eaton Vance High Income Fund, Eaton Vance Income Fund of Boston, Eaton Vance Institutional Senior Floating-Rate Fund, Eaton Vance Low Duration Fund, Eaton Vance Prime Rate Reserves, Eaton Vance Strategic Income Fund, Eaton Vance High Yield Municipals Fund, Eaton Vance Municipals Bond Fund, Eaton Vance National Limited Maturity Municipals, Eaton Vance National Municipals Fund, Eaton Vance Alabama Municipals Fund, Eaton Vance Arizona Municipals Fund, Eaton Vance Arkansas Municipals Fund, Eaton Vance California Limited Maturity Municipals Fund, Eaton Vance California Municipals Fund, Eaton Vance Colorado Municipals Fund, Eaton Vance Connecticut Municipals Fund, Eaton Vance Florida Insured Municipals Fund, Eaton Vance Florida Limited Maturity Municipals Fund, Eaton Vance Florida Municipals Fund, Eaton Vance Georgia Municipals Fund, Eaton Vance Hawaii Municipals Fund, Eaton Vance Kansas Municipals Fund, Eaton Vance Kentucky Municipals Fund, Eaton Vance Louisiana Municipals Fund, Eaton Vance Maryland Municipals Fund, Eaton Vance Massachusetts Fund, Eaton Vance Massachusetts Limited Maturity Municipals Fund, Eaton Vance Michigan Municipals Fund, Eaton Vance Minnesota Municipals Fund, Eaton Vance Mississippi Municipals Fund, Eaton Vance Missouri Municipals Fund, Eaton Vance New Jersey Limited Maturity Municipals Fund, Eaton Vance New Jersey Municipals Fund, Eaton Vance New York Limited Maturity Municipals Fund, Eaton Vance New York Municipals Fund, Eaton Vance North Carolina Municipals Fund, Eaton Vance Ohio Limited Maturity Municipals Fund, Eaton Vance Ohio Municipals Fund, Eaton Vance Oregon Municipals Fund, Eaton Vance Pennsylvania Limited Maturity Municipals Fund, Eaton Vance Pennsylvania Municipals Fund, Eaton Vance Rhode Island Municipals Fund, Eaton Vance South Carolina Municipals Fund, Eaton Vance Tennessee Municipals Fund, Eaton Vance Virginia Municipals Fund, Eaton Vance West Virginia Municipals Fund, Orbimed Advisors, LLC, Jack L. Treynor, Donald Dwight, Edward Smiley, Payson F. Swaffield, Michael W. Weilheimer, Scott Page, Detective William Ahern, Duncan W. Richardson, Robert B. Macintosh, Cynthia A. Clemson, Judith Saryan, Michael R. Mach, Thomas J. Fetter, Thomas E. Faust, Eaton Vance Distributors, Inc. and Eaton Vance, Inc., Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Jerome M. Congress, Milberg Weiss Bershad & Schulman LLP, New York, NY, (Janine L. Pollack on the brief), for Plaintiffs-Appellants.

Charles Lee Eisen, Kirkpatrick & Lockhart Nicholson Graham LLP, Washington, D.C., (Jeffrey B. Maletta, Nicholas G. Terris, and Shanda N. Hastings on the brief), for Defendants-Appellees.

Before McLAUGHLIN, HALL, Circuit Judges, and GLEESON, District Judge.*

PER CURIAM.

Plaintiffs in this case are a group of investors in various Eaton Vance mutual funds. They brought this putative class action in the United States District Court for the Southern District of New York (Koeltl, J.) to recover for wrongs they allege to have suffered at the hands of the Eaton Vance corporate empire and several affiliated entities.

The vehicle chosen to right these perceived wrongs was the Investment Company Act of 1940 (the "ICA"), which, for all of its protections, does little for the plaintiffs in this case. On appeal, we are principally concerned with whether there are implied private rights of action under sections 34(b), 36(a), and 48(a) of the ICA. We hold that there are not.

BACKGROUND

This appeal arises from the dismissal of a putative class action suit brought against Eaton Vance mutual funds and myriad associated entities.1 Together, the defendants are responsible for marketing, managing, and distributing shares of various Eaton Vance mutual funds. The suit was brought on behalf of all persons who held shares in any Eaton Vance fund between January 30, 1999 and November 17, 2003.

Plaintiffs allege that during this roughly four-year time span the defendants siphoned funds from Eaton Vance mutual funds to pay kickbacks to brokers who agreed to promote the sale of fund shares. Plaintiffs further allege that the expansion in fund assets — resulting from increased broker enthusiasm generated by the alleged kickbacks — increased the advisory fees paid to the Investment Advisor and Distributor Defendants, while providing no benefits to the funds or the fund investors. Finally, the plaintiffs argue that the advisory fees were disproportionate to the value of services provided and were outside the bounds of what would have been negotiated at arm's length.

To no small extent, the plaintiffs' claims rest upon the notion that the benefits of certain "economies of scale" were not passed along to shareholders. Specifically, the defendants orchestrated arguably improper "shelf-space" payment schemes with brokers such as Morgan Stanley, Salomon Smith Barney, and Wachovia. The plaintiffs contend that these arrangements included: (1) cash payments to brokers in return for the brokers' agreement to promote sales of fund shares; (2) directing fund portfolio brokerage to brokers in return for agreements by the brokers to promote the funds (a practice known as "directed brokerage"); and (3) excessive commission arrangements with brokers.

The engine driving this misbehavior was the fees paid to the Investment Advisor and Distributor Defendants, which were calculated as a percentage of assets under management. Thus, as more investors were drawn to the funds through these arguably nefarious business practices, the fees paid to various defendants mushroomed.

The conduct in question had already raised eyebrows at the Securities and Exchange Commission ("SEC") before the complaint in this matter was filed. Indeed, on November 17, 2003, the SEC and the National Association of Securities Dealers ("NASD") fined and sanctioned Morgan Stanley for accepting impermissible payments from the defendants here in exchange for aggressively pushing Eaton Vance funds over other comparable investment options. The SEC explained that "[t]his matter arises from Morgan Stanley DW's failure to disclose adequately certain material facts to its customers . . . [namely that] it collected from a select group of mutual fund complexes amounts in excess of standard sales loads and Rule 12b-1 trail payments." In re Morgan Stanley DW, Inc., Exchange Act Release No. 48,789, available at http://www.sec.gov/litigation/admin/33-8339.htm. The SEC concluded that this conduct violated Section 17(a)(2) of the Securities Act of 1933, which prohibits a broker from obtaining money or property "by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading."

Smelling blood in the water, five investors then filed complaints in the United States District Court for the Southern District of New York against Eaton Vance and many of its affiliated entities, alleging, inter alia, violations of the ICA, the Investment Advisers Act, and breaches of fiduciary duties. The various plaintiffs then stipulated to a consolidation before Judge John G. Koeltl pursuant to Fed. R.Civ.P. 42(a). In his pre-trial order of April 23, 2004, Judge Koeltl directed the plaintiffs to file a consolidated amended complaint (the "CAC"). The pre-trial order further instructed the defendants to "outline their objections to such complaint in a letter to plaintiffs' counsel." Following the submission of the CAC, the defendants dutifully submitted their objections. Having reviewed the letters, but without explicit guidance from the court, the plaintiffs filed a Second Amended Complaint (the "SAC") in August 2004.

The SAC enumerated ten causes of action, only four of which are relevant to this appeal. In essence, the plaintiffs allege that: (1) the defendants made misrepresentations and...

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