Kamen v. Kemper Financial Services, Inc.

• Decision Date: 18 July 1990
• Docket Number: No. 89-2967,89-2967
• Citation: 908 F.2d 1338
• Parties: , Fed. Sec. L. Rep. P 95,363, 17 Fed.R.Serv.3d 224 Jill S. KAMEN, Plaintiff-Appellant, v. KEMPER FINANCIAL SERVICES, INC., and Cash Equivalent Fund, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1338

908 F.2d 1338

59 USLW 2076, Fed. Sec. L. Rep. P 95,363,

17 Fed.R.Serv.3d 224

Jill S. KAMEN, Plaintiff-Appellant, v. KEMPER FINANCIAL SERVICES, INC., and Cash Equivalent Fund Defendants-Appellees.

No. 89-2967.

United States Court of Appeals Seventh Circuit.

Argued May 11, 1990.

Decided July 18, 1990.

Joel Sprayregen, Clifford Yuknis, Shefsky, Saitlin & Froelich, Chicago, Ill., Richard Meyer, Millberg, Weiss, Bershad, Specthree & Lerach, New York City, for plaintiff-appellant.

Joan M. Hall, Joel T. Pelz, Ellen R. Kordik, Jenner & Block, Arthur J. McGivern, Gwenda M. Burkhardt, Charles F. Custer, Martin M. Ruken, Stuart D. Kenney, Vedder, Price, Kaufman & Kammholz, Chicago, Ill., for defendants-appellees.

Before CUMMINGS, EASTERBROOK and RIPPLE, Circuit Judges.

EASTERBROOK, Circuit Judge.

Cash Equivalent Fund is a money market mutual fund with a sweeps feature. Brokers offer the Fund to their customers as an adjunct to their principal accounts. When an account has a cash balance, a computer "sweeps" the money into the Fund, where it earns interest until the customer reinvests in stocks or other financial instruments; the Fund redeems shares automatically to supply the cash for these transactions. The Fund and its investment adviser, Kemper Financial Services, Inc., say that the extra costs of implementing a sweeps feature and the additional transactions it generates, plus the check-writing and wire transfer features of the Fund, justify a fee exceeding the norm for money market funds. Kemper receives an annual administration fee of 0.38% of the Fund's assets. It also receives an investment management fee starting at 0.22% of the first $500 million of the Fund's assets and dropping in increments to 0.15% of the assets exceeding $3 billion. As a result of these fees, the Fund pays interest at a rate approximately 0.2% per annum lower than money market funds that operate passively, including one that Kemper itself manages, the Kemper Money Market Fund.

Despite the difference in fees and payouts, the Fund has grown steadily and now manages more than $5 billion of assets. One might think this judgment of investors dispositive: offered extra services at lower interest, the Fund's investors chose the extra services; others have sent their money elsewhere to get a higher return. Whether the extra services are "worth" the price is the sort of judgment people make every day when deciding whether to buy a stripped down computer or pay extra for one with bells and whistles; our government does not try to determine whether extra features are worth a higher price.

Things are not so simple when the services are rendered by an investment adviser rather than a manufacturer or retailer of computers. Section 36(b) of the Investment Company Act of 1940, 15 U.S.C. Sec. 80a-35(b), provides that the adviser of a registered investment company "shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services". Fiduciary duties require honest dealing. Managers of all corporations owe fiduciary duties to their firms. These duties have never been thought to justify judicial review of levels of compensation paid, short of extreme cases amounting to waste. Nonetheless, Sec. 36(b) has been understood in light of its legislative history to put investment advisers on leashes shorter than those of corporate managers generally, and to require the federal courts to decide whether the fees charged by investment advisers are "excessive". Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 534-41, 104 S.Ct. 831, 837-41, 78 L.Ed.2d 645 (1984).

Jill S. Kamen, who owns shares of the Fund, filed this suit under Sec. 36(b), contending that Kemper's fees are excessive and should be reduced, with excess fees for prior years returned to the Fund. Kamen added a claim that in soliciting the investors' approval of the fee structure in 1984, the Fund had misleadingly compared the fees it pays to Kemper with the fees the Kemper Money Market Fund pays. Cash Equivalent Fund pays approximately 0.2% of its assets per annum more than the Money Market Fund does; Kamen believes that the proxy statement implied that the Fund's fees are equivalent to or lower than those paid to the Money Market Fund. Section 20(a), 15 U.S.C. Sec. 80a-20(a), forbids using the mails to send a proxy statement that violates rules established by the Securities and Exchange Commission. The SEC has by rule under the Investment Company Act adopted its rules under the Securities Exchange Act of 1934, which forbid materially misleading statements. See 17 C.F.R. Secs. 270.20a-1(a), 240.14a-9(a).

Judge Nordberg first held that Sec. 20(a) creates a private right of action, 659 F.Supp. 1153 (N.D.Ill.1987), and then dismissed the portion of the complaint based on the proxy solicitation in 1984, holding that Kamen needed but had neglected to make a demand on the Fund's board of directors. See Fed.R.Civ.P. 23.1. He also struck Kamen's demand for a jury trial on the demand for restitution of excessive fees. We denied Kamen's petition for mandamus in an unpublished order because any error could be reviewed on appeal from a final decision, and the Supreme Court denied certiorari over Justice White's dissent, which observed that other courts of appeals disagree with First National Bank of Waukesha v. Warren, 796 F.2d 999 (7th Cir.1986), on which the decision rested. Kamen v. Nordberg, 485 U.S. 939, 108 S.Ct. 1119, 99 L.Ed.2d 279 (1988).

Although Fox holds that an investor need not made a demand on the directors when proceeding under Sec. 36(b), that claim did not last much longer. Judge Nordberg asked a magistrate to analyze Kemper's argument that Kamen is not an adequate representative of the other investors in the Fund. The magistrate recommended that the court grant summary judgment for the defendants on the Sec. 36(b) claim because Kamen is not an adequate representative of the class under Fed.R.Civ.P. 23. Magistrate Balog wrote:

[N]o other shareholder has joined in this suit, instituted a claim, or inquired into plaintiff's action; the other shareholders have approved the fees charged by Kemper; after notice of plaintiff's allegations, the shareholders approved an increase in fees. Based on these facts, it can only be said that plaintiff's interests are antagonistic to those of the other shareholders. In such a case, plaintiff cannot adequately protect those interests.... It is apparent from the record as it stands that plaintiff's concerns are not those of a class, but are a private matter. As such, plaintiff cannot maintain this suit as a class action.

Judge Aspen, to whom the case was transferred for decision, adopted the magistrate's report and granted the "motion for summary judgment on the issue of plaintiff's adequacy as a class representative. This cause may proceed, if plaintiff so chooses, as a non-class action." After the parties pointed out that the suit was not filed as a class action, and that adequacy of representation is material (if at all) only under Rule 23.1, which governs derivative actions, the court entered judgment for the defendants, stating that because "plaintiff was adjudicated as a non-adequate representative plaintiff cannot proceed individually".

Kamen's appeal presents three questions: whether the Sec. 20 claim should have been dismissed for failure to make a demand on the directors; whether the Sec. 36(b) claim should have been dismissed because she stands alone among the Fund's shareholders; and whether, if the Sec. 36(b) claim should be reinstated, she would be entitled to a jury trial. Defendants maintain that only questions about the adequacy of representation are properly before us, because only that question was resolved in the final decision, and the notice of appeal identified only that decision as the subject of appeal. Defendants misunderstand the rules governing issues that may be litigated on appeal. An appeal from the final judgment brings up for review all decisions that shaped the contours of that judgment. E.g., Chaka v. Lane, 894 F.2d 923 (7th Cir.1990); Kaszuk v. Bakery & Confectionery Union, 791 F.2d 548 (7th Cir.1986). It is unnecessary to identify earlier interlocutory orders in the notice of appeal. These orders may not themselves be appealed; they are not "final" and so are outside the scope of 28 U.S.C. Sec. 1291. Kamen's notice of appeal specified the final decision, and we have jurisdiction to review all of the legal questions preserved in the district court and in this court affecting the validity of that decision.

I

Kamen's complaint as finally amended alleges that she did not make a demand on the board of directors because the seven independent directors (of the ten-member board) "receive aggregate remuneration of approximately $300,000 a year for serving as directors of the Fund and all of the other funds in the Kemper group" and therefore "are dependent upon and subservient to" Kemper. It alleges in addition that demand would be futile because the Fund solicited the proxies, so a demand would request that the directors sue themselves, and that because the Fund has asked for the dismissal of the suit on the merits the directors obviously are not interested in pursuing the claims. Judge Nordberg thought these allegations insufficient to excuse a demand under Rule 23.1, as do we.

It is far from clear that Rule 23.1 applies to a suit under Sec. 20 of the Investment Advisers Act. The Rule applies to a "derivative action brought ... to enforce a right of a corporation ..., the corporation ... having failed to enforce a right which may properly be asserted by it". Violations of Sec. 20 do not yield rights "of the corporation" in the customary sense. Kamen does not sue in the right of the Fund; she sues the Fund for injury done her by the Fund. The theory of a suit under the proxy rules is that the corporation violated a right of the investor to truthful information. If the investor...