Lasker v. Burks
| Citation | 567 F.2d 1208 |
| Decision Date | 11 January 1978 |
| Docket Number | No. 23,D,23 |
| Parties | Fed. Sec. L. Rep. P 96,282 Howard M. LASKER and Irving Goldberg, Plaintiffs-Appellants, v. Harry G. BURKS, Jr., Edward B. Burr, Thomas F. Chalker, John R. Haire, Harvey C. Hopkins, S. P. Hutchison, Donald L. Kemmerer, A. S. Mike Monroney, Charles F. Phillips, Jeptha H. Wade, Anchor Corporation and Fundamental Investors, Inc., Defendants-Appellees. ocket 77-7060. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Anthony L. Tersigni, New York City (Aranow, Brodsky, Bohlinger, Benetar & Einhorn, Steven Mallis, Herbert A. Einhorn, David J. Sweet and Richard N. Gray, New York City, on brief), for plaintiffs-appellants.
Daniel A. Pollack, New York City, for defendants-appellees.
Seward & Kissel, Eugene P. Souther and Anthony R. Mansfield, New York City, on brief, for defendant-appellee Fundamental Investors, Inc.
Pollack & Kaminsky and Martin I. Kaminsky, New York City, on brief, for defendants-appellees Anchor Corp., Edward B. Burr, Thomas F. Chalker, John R. Haire and S. P. Hutchison.
Dewey, Ballantine, Bushby, Palmer & Wood, Leonard Joseph, John M. Friedman, Jr., New York City, on brief, for defendants-appellees Harry G. Burks, Jr., Harvey C. Hopkins, Donald L. Kemmerer, A. S. Mike Monroney, Charles L. Phillips and Jeptha H. Wade.
Before LUMBARD, OAKES and MESKILL, Circuit Judges.
This appeal by two mutual fund shareholders raises an important question of first impression: can minority directors of a registered mutual fund, who were nominated by the majority directors of the fund to be " independent" directors pursuant to the requirements of the Investment Company Act, 15 U.S.C. § 80a-10(a), terminate a nonfrivolous stockholder's derivative action against the fund's majority directors and its investment adviser? We are of the view that to permit such action by those "independent" minority directors of a registered mutual fund would be contrary to the public interests which Congress has sought to protect. Accordingly, we reverse the judgment of the district court which dismissed the complaint and remand for further proceedings.
Howard Lasker and Irving Goldberg commenced this derivative action in February, 1973, against individuals who had been directors of Fundamental Investors, Inc. (the Fund), an open-end investment company 1 registered under the Investment Company Act, 15 U.S.C. § 80a-1 to -52, and the Fund's registered investment adviser, Anchor Corporation. The plaintiffs sought to recover losses sustained by the Fund in connection with its purchase between November 28 and December 8, 1969, of $20 million in Penn Central 270-day notes from Goldman, Sachs & Co. The derivative complaint charged the defendants with violations of §§ 13(a)(3) and 36 of the Investment Company Act, 15 U.S.C. §§ 80a-13(a)(3), 80a-35 (1970), breach of their common-law fiduciary duties, violations of § 206 of the Investment Advisers Act, 15 U.S.C. § 80b-6 (1970), and breach of Anchor's investment advisory contract with the Fund.
It is undisputed that Anchor never made any independent investigation of Penn Central's financial situation before the Fund's purchase of the notes. Moreover, although reports of Penn Central's operations in early 1970 showed mounting losses, it was not until May that the Fund officers made any attempt to resell any part of the notes to Goldman, Sachs, or otherwise to realize on the investment. On June 21, 1970, Penn Central filed a petition for reorganization which is still in process in the Eastern District of Pennsylvania. Consequently, the Fund's Penn Central notes were not paid at maturity.
In November 1970, the Fund, joined by three other noteholders, 2 sued Goldman, Sachs in the Southern District of New York for recovery of their losses arising from their purchases of Penn Central notes. In July 1973, then District Judge Gurfein stayed the instant action, which had been commenced five months earlier, pending resolution of the suit against Goldman, Sachs. That suit was settled on behalf of the Fund in July 1974. Under the settlement, Goldman, Sachs took back the Fund's Penn Central notes, paid the Fund $5,250,000, and assigned to the Fund a 73.75 percent interest in the proceeds of the notes in the reorganization proceedings. The Fund's co-plaintiffs did not settle, and the jury rendered verdicts in their favor against Goldman, Sachs for the full amount of their claims. 3
On July 24, 1974, the Fund's board of directors met and discussed the pending Lasker case. They decided that five of the statutorily disinterested directors, none of whom were involved in the derivative action, 4 should decide what action should be taken regarding the Lasker case, and act accordingly on behalf of the entire board. 5 This procedure had been discussed prior to the July board meeting by the defendant John R. Haire, president of the Fund and chairman of Anchor's board of directors, and Roger Wickers, an officer of both the Fund and Anchor. Upon Haire's instruction, Wickers had ascertained that Stanley H. Fuld, former chief judge of the New York Court of Appeals, would be available to serve as special counsel. The minority directors agreed to consider what should be done about the Lasker case, and instructed Wickers to retain Judge Fuld to advise them.
Judge Fuld, in his report of December 5, 1974, supplemented on December 18, 1974, concluded, on the basis of the information furnished to him, that neither Anchor nor the Fund directors would be found liable under federal or state law. At the same time, Judge Fuld pointed out the absence of legal authority on whether a mutual fund's investment adviser is required to conduct independent research regarding its investment recommendations. He further cautioned that it was "impossible to predict . . . what a trier of fact will find, particularly in complex circumstances." After considering the special counsel's reports, on January 6, 1975, the minority directors instructed counsel for the Fund to seek dismissal of the Lasker action on the ground that it was their business judgment that further prosecution of the action would not be in the best interests of the Fund.
Judge Werker, in passing on the motion to dismiss, held that the minority directors, in the exercise of their business judgment, had the power to bar further prosecution of the case, provided they were truly disinterested and independent. As a factual issue had been raised regarding whether the minority directors were independent and disinterested, he granted discovery on that issue. Lasker v. Burks, 404 F.Supp. 1172 (S.D.N.Y.1975). After such discovery, the motion to dismiss was renewed and granted by Judge Werker on January 7, 1977. In his second opinion, 426 F.Supp. 844 (S.D.N.Y.1977), Judge Werker found no factual support for the conclusion that the minority directors had not acted independently. In accordance with his earlier opinion, he dismissed the complaint.
From what this record discloses regarding the Fund's investment in Penn Central notes on Anchor's advice, we cannot say that, following a trial on the merits, the defendants would be found free from liability for the Fund's losses. We see nothing in the findings of Congress, the legislation regulating investment companies and their advisers, or in the decisions of the courts which suggests that under such circumstances disinterested directors, such as the five who acted here, have the power to terminate litigation brought by mutual fund stockholders against the fund's investment adviser and its majority directors for breach of their fiduciary duties. On the contrary, the findings of Congress, the statutory scheme, and the relevant case law persuade us that the statutorily disinterested directors of a registered investment company were never meant to have the final word in determining whether it is in the best interest of a mutual fund to press claims against their co-directors, and the adviser with which those directors are affiliated, for breach of fiduciary duties.
In response to disclosure of grave abuses in the management of investment companies, Congress in 1940 enacted the Investment Company Act (ICA), 15 U.S.C. §§ 80a-1 to -52 (1970), and the Investment Advisers Act (IAA), 15 U.S.C. §§ 80b-1 to -21 (1970). Congress acted after receiving a report from the Securities and Exchange Commission which showed that investment funds were organized by investment advisers; that the funds were administered under contracts that where highly favorable to the advisers; that the directors of the funds were selected by the investment adviser; and that the board was usually dominated by persons affiliated with the adviser. 6 Congress found that numerous practices in the management of such funds adversely affected the national public interest and the interest of investors. Accordingly, Congress declared it to be the policy and purpose of the ICA to mitigate and eliminate those aspects of the conduct and administration of the funds which benefitted the managers and adversely affected the stockholders of the fund. 7
The ICA provides that no more than 60% Of a registered company's board of directors can be "interested persons" affiliated with the investment adviser. 8 Moreover, it gives the statutorily disinterested directors, usually referred to as "independent directors," certain powers to supervise management and auditing arrangements. 9 Thus, section 15(c) of the ICA,15 U.S.C. § 80a-15(c) (1970), imposes on the disinterested directors the duty to review and approve the contracts of the investment adviser and the principal underwriter; section 16(b), 15 U.S.C. § 80a-16(b) (1970), provides that the statutorily disinterested directors will appoint other disinterested directors to fill vacancies resulting from the assignment of the advisory contracts; and section 32(a), 15 U.S.C. § 80a-31(a) (1970), requires that the accountants who prepare the...
To continue reading
Request your trial
-
Gaines v. Haughton
...litigation, see Burks v. Lasker, 441 U.S. 471, 478, 480, 485, 99 S.Ct. 1831, 1837, 1838, 1840, 60 L.Ed.2d 404 (1979), rev'g 567 F.2d 1208 (2d Cir. 1978); United Copper Securities Co. v. Amalgamated Copper Co., 244 U.S. 261, 263-64, 37 S.Ct. 509, 510-11, 61 L.Ed. 1119 (1917) (Brandeis, J.); ......
-
Burks v. Lasker
...it would be consistent with the Act to allow the independent directors to terminate a suit, even though not frivolous. Pp. 480-485. 567 F.2d 1208, reversed and Daniel A. Pollack, Pikesville, Md., for petitioners. Ralph C. Ferrara for the Securities and Exchange Commission, Washington, D. C.......
-
Maldonado v. Flynn
...(8th Cir. 1979), cert. denied, ___ U.S. ___, 100 S.Ct. 670, 62 L.Ed.2d 647 (1980). 19 Even the Second Circuit's opinion, Lasker v. Burks, 567 F.2d 1208 (2d Cir. 1978), expressly declared that its holding was narrowly based "on the unique nature of the investment company and its symbiotic re......
-
Abramowitz v. Posner
...an adverse decision would be likely to result in considerable expense and liability for the individuals concerned." Lasker v. Burks, 567 F.2d 1208, 1212 (2d Cir. 1978), rev'd, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979). The Supreme Court, on appeal, expressly disavowed the quotation......
-
Litigation Discovery and Corporate Governance: the Missing Story About the "genius of American Corporate Law"
...994 (N.Y. 1979). The Supreme Court accepted this type of approach in Burks v. Lasker, 441 U.S. 471 (1979), reversing Lasker v. Burks, 567 F.2d 1208 (2d Cir. 1978). Some states have codified the SLC procedure. See, e.g., WIS. STAT. § 180.0744 (2012); Einhorn v. Culea, 2000 WI 65, 235 Wis. 2d......
-
Constraining Corporate Law Principles in Affiliate World
...litigation brought by shareholders against majority directors for breach of their fiduciary duties" (quoting Lasker v. Burks, 567 F.2d 1208, 1212 (2d Cir. 1978))). 172. S. REP. NO. 91-184, at 5 (1969), as reprinted in 1970 U.S.C.C.A.N. 4897, 4901.173. See Galfand v. Chestnutt Corp., 545 F.2......