Forsythe v. Sun Life Financial, Inc.

• Decision Date: 19 January 2006
• Docket Number: No. CIV.A. 04-10584-GAO.,CIV.A. 04-10584-GAO.
• Citation: 417 F.Supp.2d 100
• Parties: Eric FORSYTHE, Individually and on Behalf of all Others Similarly Situated, Plaintiff, v. SUN LIFE FINANCIAL, INC., et al., Defendants.
• Court: U.S. District Court — District of Massachusetts

Page 100

417 F.Supp.2d 100

Eric FORSYTHE, Individually and on Behalf of all Others Similarly Situated, Plaintiff, v. SUN LIFE FINANCIAL, INC., et al., Defendants.

No. CIV.A. 04-10584-GAO.

United States District Court, D. Massachusetts.

January 19, 2006.

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Richard A. Acocelli, Weiss & Yourman, New York City, Jerald Bien-Willner, Bernstein Litowitz Berger & Grossman LLP, San Diego, CA, Nancy F. Gans, Moulton & Gans, PC, Boston, MA, Robert S. Gans, Bernstein Litowitz, Berger & Grossman LLP, San Diego, CA, for Plaintiffs. Kim E. Levy, Milberg, Weiss, Bershad & Schulman LLP, New York City, Marshall N. Perkins, Law Offices of Charles J. Piven, P.A, Baltimore, MD, Janine L. Pollack, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, Michael Reese, Milberg, Weiss, Bershad & Schulman LLP, J. Erik Sandstedt, Bernstein Litowitz, Berger & Grossman LLP, Steven G. Schulman, Milberg Weiss, Bershad Hynes & Lerach LLP, James E. Tullman, Weiss & Yourman, New York City, for Plaintiffs.

Abigail K. Hemani, Goodwin Procter LLP, James Rehnquist, Goodwin Procter, LLP, Jonathan A. Shapiro, Wilmer Cutler Pickering Hale and Dorr LLP, Allison H. Stiles, Goodwin Procter LLP, Boston, Matthew A. Stowe, Wilmer Cutler, Pickering Hale and Dorr LLP, Boston, MA, Defendants.

Michelle H. Blauner, Shapiro Haber & Urmy LLP, Alison V. Douglass, Goodwin Procter LLP, John J. Falvey, Jr., Testa, Hurwitz & Thibeault, LLP, Edward F. Haber, Shapiro Haber & Urmy LLP, Boston, MA, for Movants.

MEMORANDUM AND ORDER

O'TOOLE, District Judge.

I. Background

This case is a putative class action brought by four named plaintiffs—Eric Forsythe, the City of Chicago Deferred Compensation Plan, Larry R. Eddings, and Richard Koslow—who either now own or have owned mutual funds within the Massachusetts Financial Services (MFS) fund complex. They purport to bring their claims as a class action (with the exception of Count V, styled as a derivative action) on behalf of a class defined as "all persons or entities who held shares, units, or like interests in any of the MFS Funds between March 24, 1999 and March 31, 2004 inclusive ... and were damaged thereby [excepting the defendants and others closely related to the defendants]." The claims are stated directly on behalf of the class under the Investment Company Act (ICA) of 1940, 15 U.S.C. §§ 80a-1 — 80a-64, and the common law and derivatively under the Investment Advisers Act (IAA) of 1940, 15 U.S.C. §§ 80b-1-80b-21. The consolidated amended complaint¹ names the following persons or entities as defendants: (1) Massachusetts Financial Services Company (MFS Company), the investment adviser to the MFS Funds, (2) MFS Distributors, Inc. (MFS Distributors), MFS Company's wholly-owned registered broker-dealer, (3) Sun Life Financial Inc., the ultimate parent company of MFS Company (Sun Life), and (4) twelve trustees of various MFS Funds (the Trustee Defendants).²

In general terms, the complaint makes the following allegations: The defendants participated in a scheme during the class period whereby they made substantial payments to brokers in exchange for the brokers' steering unwitting clients to invest in the MFS Funds. The practices engaged in were sometimes referred to by the defendants as buying "shelf space" and satisfying "strategic alliances." The plaintiffs allege that such arrangements existed between the defendants and many brokerage houses.³ The defendants are alleged to have compensated the brokers by means of a variety of methods including wrongful utilization of "directed brokerage,⁴ payment of excessive commissions in the form of "soft dollars" beyond what was allowed by law, and payments of cash or "hard dollars" to brokers (sometimes referred to as "revenue sharing") that were allegedly reimbursed from fund assets. These schemes are alleged to have violated provisions of the Security and Exchange Commission's Rule 12b-1 on allowable marketing fees. See 17 C.F.R. § 270.12b-1. In March 2004 these "shelf space"/"strategic alliance" schemes were the subject of an SEC regulatory enforcement action against and settlement with MFS Company for failure adequately to disclose the arrangements to the MFS Boards and to MFS shareholders.

The plaintiffs further allege that the defendants used assets of the MFS Funds to engage in these schemes and charged excessive and improper fees, allegedly motivated by the prospect that if the schemes were successful, more investors would be steered into MFS Funds and thus the fees that the defendants would collect would increase as the amount of assets under management increased. The plaintiffs allege that as a result the defendants reaped substantial profits, while the MFS Funds and their shareholders received no benefit.

Additionally, the plaintiffs allege that these schemes created insurmountable conflicts of interest for MFS Company as investment adviser to the MFS Funds because it was not motivated to act in the best interests of fund investors but instead was concerned with increasing its own management fees.⁵ Because these arrangements were not disclosed to investors, the plaintiffs assert that MFS Funds' prospectuses, annual statements, and similar public filings were materially false and misleading. Finally, the plaintiffs allege that the Trustee Defendants who oversaw the MFS Funds failed properly to supervise and monitor the investment adviser MFS Company because of their dependence on and control by the investment adviser.

The defendants have moved to dismiss the entire complaint on various grounds. I conclude that the motion to dismiss ought to be granted in part and denied in part as set forth below.

II. Counts I, II and IV are dismissed because there is no implied private right of action under ICA 34(b), § 36(a) or § 48(a).

In Count I, the plaintiffs purport to assert a claim on behalf of the class against MFS Company and the Trustee Defendants for alleged violations of § 34(h) of the ICA, 15 U.S.C. § 80a-33(b),⁶ based upon materially false and misleading statements in annual reports, semi-annual reports, registration statements and other filings and public statements. In Count II, the plaintiffs assert claims, again on behalf of the class, against MFS Company, the Trustee Defendants, and MFS Distributors for alleged breaches of their fiduciary duties under § 36(a) of the ICA, 15 U.S.C. § 80a-35(a).⁷ Count IV alleges violations of § 48(a) of the ICA, 15 U.S.C. § 80a-47(a), by Sun Life and MFS Company.⁸ Count IV alleges that MFS Company acted as a "control person" of both the Trustee Defendants and MFS Distributors (the wholly-owned broker dealer of MFS Company) and thus is liable for having caused the violations of the ICA alleged in Counts I (§ 34(b), II § 36(a), and III § 36(b)). Similarly, the plaintiffs allege that as a parent of MFS Company, Sun Life is liable for MFS Company's breaches of those same provisions. The defendants argue that Counts I, II, and IV should be dismissed because the statutes at issue may not be enforced by a private right of action.⁹ I agree.

Neither § 34(b), § 36(a), nor § 48(a) expressly provides for enforcement by a private right of action. To bring these claims, the plaintiffs must show that there is an implied private right of action under each statute. For the following reasons, I conclude that there is no such implied private right of action and that Counts I, II, and IV should therefore be dismissed.

In Gonzaga Univ. v. Doe, 536 U.S. 273, 122 S.Ct. 2268, 153 L.Ed.2d 309 (2002) and Alexander v. Sandoval, 532 U.S. 275, 121 S.Ct. 1511, 149 L.Ed.2d 517 (2001), the Supreme Court clarified the law regarding implied private rights of action. See Bonano v. East Caribbean Airline Corp., 365 F.3d 81, 84, 86 n. 4 (1st Cir. 2004). A private right of action, like all substantive federal law, must be created by Congress. See Sandoval, 532 U.S. at 286, 121 S.Ct. 1511; Bonano, 365 F.3d at 86. A statute may imply the existence of a private enforcement cause of action if it indicates Congress' intent to create both a private right and a private remedy under the statute. See Gonzaga Univ., 536 U.S. at 283-84, 122 S.Ct. 2268, Sandoval, 532 U.S. at 286, 121 S.Ct. 1511; Bonano, 365 F.3d at 84. Without a finding of a congressional intention to create a private remedy, however, courts may not infer one, regardless of how desirable that might be as a policy matter or how compatible it might be with the purpose or objective of the statute. Sandoval, 532 U.S. at 286-87, 121 S.Ct. 1511.

Finding a congressional intention to imply a private right of action, like other tasks of statutory interpretation, depends in the first instance on the text and structure of the statute. See, Gonzaga Univ., 536 U.S. at 283-84, 122 S.Ct. 2268, Sandoval, 532 U.S. at 288-89, 121 S.Ct. 1511, Bonano, 365 F.3d at 84-85. Thus, a private right of action may be implied by statutory text that contains "rights-creating" language. Gonzaga Univ., 536 U.S. at 283-84, 122 S.Ct. 2268; Sandoval, 532 U.S. at 288-89, 121 S.Ct. 1511. Generally, however, statutes that focus on the persons or conduct to be regulated and not on the persons to be protected by the regulation create "no implication of an intent to confer rights on a particular class of persons." See Sandoval, 532 U.S. at 289, 121 S.Ct. 1511. Moreover, when Congress has expressly provided a method of enforcing substantive rules, it may ordinarily be inferred that Congress correspondingly intended not to provide others. See Sandoval, 532 U.S. at 290, 121 S.Ct. 1511, Bonano, 365 F.3d at 85; see also Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979) ("Obviously ... when Congress wished to provide a private damage remedy, it knew how to do so and did so expressly."). In particular, courts should be cautious about finding an implied private right of action where Congress has provided within a statutory scheme a narrow ground for private...