Debenedictis v. Merrill Lynch & Co., Inc.
| Decision Date | 18 June 2007 |
| Docket Number | No. 06-1867.,06-1867. |
| Parties | Thomas J. DeBENEDICTIS, On Behalf of Himself and all others Similarly Situated, Appellant v. MERRILL LYNCH & CO., INC.; Merrill Lynch, Pierce, Fenner & Smith, Incorporated; Merrill Lynch Group, Inc.; Fam Distributors, Inc.; Merrill Lynch Investment Managers, L.P.; Fund Asset Managers, L.P.; Princeton Services, Inc. |
| Court | U.S. Court of Appeals — Third Circuit |
James R. Malone, Jr., Esquire (Argued), Joseph G. Sauder, Esquire, Chimicles & Tikellis LLP, Haverford, PA, for Appellant.
Lori A. Martin, Esquire, (Argued), William Cutler Pickering Hale and Dorr LLP, New York, NY, Marc T.G. Dworsky, Esquire, Munger, Tolles & Olson, Los Angeles, CA, Brian F. Amery, Esquire, Bressler, Amery & Ross, Florham Park, NJ, Jeffrey J. Greenbaum, Esquire, Sills, Cummis, Epstein & Gross, Newark, NJ, for Appellees.
Before: SCIRICA, Chief Judge, FUENTES, and ALARCÓN,* Circuit Judges.
Thomas DeBenedictis appeals from the order of the District Court for the District of New Jersey dismissing, as time-barred, his securities class action claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure against Merrill Lynch & Co., Inc.; Merrill Lynch, Pierce, Fenner & Smith, Inc.; Merrill Lynch Group, Inc.; Fam Distributors, Inc.; Merrill Lynch Investment Managers, L.P.; Fund Asset Management, L.P.; and Princeton Services, Inc. (collectively "Merrill"). Mr. DeBenedictis's central claim is that Merrill's Fund Registration Statements ("Registration Statements"), which are comprised of the Merrill Lynch Global Growth Fund, Inc. Prospectus ("prospectus") and a separate Statement of Additional Information ("SAI"), misled investors by failing to disclose that Class B shares were never a rational choice of investment for them and that Merrill brokers received larger commissions on sales of such shares. Mr. DeBenedictis filed this action on January 30, 2004.
Mr. DeBenedictis argues that the District Court erred in determining that the Registration Statements, certain news articles, and NASD press releases constituted "storm warnings" sufficient to trigger inquiry notice to Mr. DeBenedictis of his claims prior to January 30, 2002. We will affirm the decision of the District Court because we conclude that each of Mr. DeBenedictis's claims is time-barred.
Mr. DeBenedictis filed this action on January 30, 2004. He alleged in his complaint that he purchased $500,000 Class B shares through his broker at Merrill in five funds between February 1999 and August 1, 2001. Between January 30, 1999 and April 2003, Merrill offered four classes of mutual fund shares: Classes A, B, C, and D (collectively, the "Merrill Funds").
The prospectus described these shares as follows:
The fund offers four share classes, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. Each share class represents an ownership interest in the same investment portfolio. When you choose your class of shares you should consider the size of your investment and how long you plan to hold your shares. Your Merrill Lynch Financial Consultant can help you determine which share class is best suited to your personal financial goals.
For example, if you select Class A or Class D shares, you generally pay a sales charge at the time of purchase. If you buy class D shares, you also pay an ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge waiver.
If you select Class B or Class C shares, you will invest the full amount of your purchase price, but you will be subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying an initial sales charge. In addition, you may be subject to a deferred sales charge when you sell Class B or Class C shares.
The prospectus contained the following description of the costs involved in purchasing Class B and Class C shares:
If you select Class B or Class C shares, you do not pay an initial sales charge at the time of purchase. However, if you redeem your Class B shares within four years after purchase or your Class C shares within one year after purchase, you may be required to pay a deferred sales charge. You will also pay distribution fees of 0.75% and account maintenance fees of 0.25% each year under distribution plans that the Fund has adopted under Rule 12b-1. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying an initial sales charge. The Distributor uses the money that it receives from the deferred sales charges and the distribution fees to cover the costs of marketing, advertising and compensating the Merrill Lynch Financial Consultant or other securities dealer who assists you in purchasing Fund shares.
The SAI also contained a discussion of the fees involved in acquiring Class B and Class C shares:
Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in Select Pricing Funds.
Because no initial sales charges are deducted at the time of the purchase, Class B and Class C shares provide the benefit of putting all of the investor's dollars to work from the time the investment is made. The deferred sales charge alternatives may be particularly appealing to investors that do not qualify for the reduction in initial sales charges. Both Class B and Class C shares are subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution fees potentially may be offset to the extent any return is realized on the additional funds initially invested in Class B or Class C shares. In addition, Class B shares will be converted into Class D shares of the Fund after a conversion period of approximately eight years, and thereafter investors will be subject to lower ongoing fees.
The SAI set forth the compensation payable to the financial consultants as follows:
Merrill Lynch compensates its Financial Consultants for selling Class B and Class C shares at the time of purchase from its own funds. Proceeds from the CDSC and the distribution fee are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of dealers (including Merrill Lynch) related to providing distribution-related services to the Fund in connection with the sale of the Class B and Class C shares. . . . The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of purchase. See "Distribution Plans" below. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the NASD asset-based sales charge rule. See "Limitations on the Payment of Deferred Sales Charges" below.
The SAI contained the following information concerning the compensation of Merrill's sales personnel:
Investors should understand that the purpose and function of the initial sales charges with respect to the Class A and Class D shares are the same as those of the CDSCs and distribution fees with respect to the Class B and Class C shares in that the sales charges and distribution fees applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares.
The prospectus contained a table setting forth the fees and expenses for the different classes of shares:
This table shows the different fees and expenses that you may pay if you buy and hold the different classes of shares of the Fund. Future expenses may be greater or less than those indicated below.
Shareholder Fees (fees paid directly from your investment):
Class A Class B(a) Class C Class D
Maximum Deferred Sales Charge (Load) (as
a percentage of original purchase price or
redemption proceeds, whichever is lower)
None(c) 4.0% (b) 1.0% (b) None(c)
Redemption Fee
None None None None
Maximum Account Fee
None None None None
Management Fee(d)
0.75% 0.75% 0.75% 0.75%
Other Expenses (including transfer agency
fees)(f)
0.23% 0.24% 0.24% 0.22%
(a) Class B shares automatically convert to Class D shares about eight years after you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and you redeem within one year.
(d) The Fund pays the Manager a fee at the annual rate of 0.75% of the average daily net assets of the Fund not exceeding $1.5 billion and 0.725% of the average daily net assets in excess of $1.5 billion. For the period October 31, 1997 (commencement of operations) to August 31, 1998, the Manager received a fee equal to 0.75% of the Fund's average daily net assets.
(e) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account Maintenance Fee is the term used in this Prospectus and all other Fund materials. If you hold Class B or Class C shares for a long time, it may cost you more in distribution (12b-1) fees than the maximum sales charge that you would have paid if you had bought one of the other classes.
(f) The Fund pays the Transfer Agent $11.00 for each Class A and Class D shareholder...
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