Green v. Fund Asset Management, L.P.
| Decision Date | 23 February 1998 |
| Docket Number | No. Civ. 97-3502 DRD.,Civ. 97-3502 DRD. |
| Citation | 19 F.Supp.2d 227 |
| Parties | Jack GREEN, Individually and as Trustee, Lawrence P. Belden, Trustee, and Stanley Simon, Trustee, Plaintiffs, v. FUND ASSET MANAGEMENT, L.P., Merrill Lynch Asset Management, L.P., Merrill Lynch & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Princeton Services, Inc., Arthur Zeikel, Terry K. Glenn, Munienhanced Fund, Inc., Munivest Fund II, Inc., Muniyield Fund, Inc., Muniyield Insured Fund, Inc., Muniyield Insured Fund II, Inc., Muniyield Quality Fund, Inc., and Muniyield Quality Fund II, Inc., Defendants. |
| Court | U.S. District Court — District of New Jersey |
Bruce I. Goldstein, Saiber, Schlesinger, Satz & Goldstein, Newark, NJ, Robert E. Sullivan, Beverly Gudenowski, Sullivan, Weinstein & McQuay, P.C., Boston, MA, Laurence M. Johnson, Kirsten Nelson Callahan, Mahoney, Hawkes & Goldings, LLP, Boston, MA, for Jack Green, individually and as Trustee, Lawrence P. Belden, Trustee, and Stanley Simon, Trustee.
Paul A. Rowe, Alan S. Naar, Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP, Woodbridge, NJ, James N. Benedict, Mark Holland, James F. Moyle, Sean M. Murphy, Kelley P. Swift, Rogers & Wells, New York City, for Fund Asset Management, L.P., Merrill Lynch Asset Management, L.P., Merrill Lynch & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., Princeton Services, Inc., Arthur Zeikel, Terry K. Glenn.
Robert J. Del Tufo, Skadden, Arps, Slate, Meagher & Flom LLP, Newark, NJ, Thomas J. Dougherty, James R. Carroll, Skadden, Arps, Slate, Meagher & Flom LLP, Boston, MA, for MuniEnhanced Fund, Inc., MuniVest Fund II, Inc., MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc.
The complaint in this action charges that defendants have violated and are violating Sections 8(a), 34(b) and 36(a) and (b) of the Investment Company Act of 1940 and are liable to plaintiffs under state law. Defendants have moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons set forth below, the claims asserted under Sections 8(a), 34(b) and 36(a) of the Act will be dismissed, and in all other respects defendants' motion will be denied.
Plaintiffs are shareholders in seven investment companies which are the named defendants in this action, MuniEnhanced Fund, Inc., MuniVest Fund II, Inc., MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Quality Fund, Inc., and MuniYield Quality Fund II, Inc. (the "Funds"). Plaintiffs invested a total of more than $44,000.00 in the Funds between May 22 and October 18, 1995. Jack Green has brought suit individually and in his capacity as a trustee of seven trusts that invested in the Funds. The other two plaintiffs, Lawrence P. Belden and Stanley Simon, sue solely as trustees of trusts that invested in the Funds.1
The Funds are closed-end investment companies that are registered with the Securities and Exchange Commission ("SEC") under the Federal securities laws and publicly traded on the New York Stock Exchange. All of the Funds are incorporated under the laws of Maryland and have their principal places of business in Plainsboro, New Jersey. The Funds' goal is to provide shareholders with income exempt from Federal income taxes by investing in long-term tax-exempt municipal bonds. The Funds attempt to increase the yields paid to their common stockholders through the use of leverage. The Funds leverage by issuing shares of preferred stock that pay dividends based upon prevailing short-term interest rates and investing the proceeds from the sales of the preferred stock in longer-term obligations that, under normal market conditions, pay higher rates. The spread between the short-term rates paid by the Funds to holders of the preferred stock and the longer-term rates received by the Funds provides holders of the common stock with a potentially higher yield.
Defendant Fund Asset Management, L.P. ("FAM") serves as the Funds' investment adviser and is responsible for managing the Funds' investment portfolios and providing administrative services to the Funds. Pursuant to written investment advisory agreements, the Funds pay FAM a fee for its services based upon a percentage of their weekly net assets. The MuniEnhanced Fund, Inc. prospectus discloses the advisory fee as follows:
For the services provided by the Investment Adviser [FAM] under the Investment Advisory Agreement, the Fund will pay a monthly fee at an annual rate of .50 of 1% of the Fund's average weekly net assets (i.e., the average weekly value of the total assets of the Fund, minus the sum of accrued liabilities of the Fund and accumulated dividends on the shares of preferred stock). For purposes of this calculation, average weekly net assets is determined at the end of each month on the basis of the average net assets of the Fund for each week during the month.
Compl. Ex. A, Tab 1 at page 20.2
Defendant Merrill Lynch Asset Management, L.P. ("MLAM") is an affiliate of FAM. MLAM and FAM are organized under the laws of Delaware and have their principal places of business in Plainsboro, New Jersey. Defendant Princeton Services, Inc. ("PSI"), a Delaware corporation with its principal place of business in Plainsboro, New Jersey, is the general partner of FAM and MLAM. PSI has a 1% interest in FAM and MLAM. Defendant Merrill Lynch and Co., Inc. ("ML & Co.") is FAM's and MLAM's sole limited partner and has a 99% interest in FAM and MLAM. ML & Co. is a publicly traded holding company that, through its subsidiaries and affiliates, provides investment, financing, insurance and related services on a global basis. ML & Co. is a Delaware corporation and maintains its corporate headquarters in New York City.
Defendant Arthur Zeikel is the President and a director of each of the Funds, President and Chief Investment Officer of MLAM and FAM, President and a director of PSI, and an Executive Vice President of ML & Co. Defendant Terry Glenn is the Executive Vice President of each of the Funds and Executive Vice President of FAM and MLAM.
Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF & S"), a securities broker-dealer and investment bank, served as the principal underwriter for the offerings of the Funds' common stock. MLPF & S also has entered into auction agent agreements with the Funds to sell the Funds' preferred stock. The 1994 MuniYield Insured Fund, Inc. annual statement discloses the fees generated by the preferred stock auctions as follows:
The Fund pays commissions to certain broker-dealers at the end of each auction at an annual rate ranging from 0.25% to 0.375%, calculated on the proceeds of each auction. For the year ended October 31, 1994, MLPF & S, an affiliate of FAMI [FAM's predecessor], received $591,736 as commissions. Moyle Decl., Tab A at 16.3
A wholly owned subsidiary of ML & Co., MLPF & S is a Delaware corporation and maintains its corporate headquarters in New York City.
Plaintiffs brought this action to redress alleged violations of Sections 8(e), 34(b) and 36(a) and (b) of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. ("ICA"). In their complaint, plaintiffs claim that defendants breached their disclosure obligations and fiduciary duties under the ICA and state law.4
Plaintiffs allege that defendants "failed to explicitly or-sufficiently disclose" that the calculation of FAM's management fee would include assets purchased with the proceeds from sales of the preferred stock. Compl. ¶ 63(1). They claim that because the advisory fee is measured as a percentage of all of the Funds' capitalization, including leverage, there is a strong financial incentive for FAM to keep the Funds fully leveraged at all times, even when it would be in the best interest of the investors to reduce or eliminate leverage.5 They allege that the fee arrangement creates an inherent conflict of interest which was undisclosed in the Funds' prospectuses, filings with the SEC and its periodic reports to the shareholders. Compl. ¶ 63(2), (4). Plaintiffs also allege that defendants failed to disclose that the decision to issue preferred stock was subject to a conflict of interest because FAM's affiliate, MLPF & S, received fees from the sales of preferred stock. Compl. ¶ 63(3). In addition, they claim that defendants have continually misled investors as to the level of expense charged to the Funds, common stockholders. Compl. ¶ 68.
Plaintiffs seek compensatory damages and injunctive relief. They ask for an order permanently restraining and enjoining defendants from entering into any compensation arrangement between the Funds and any investment adviser under which "the compensation payable to such investment advisor is determined by, dependent upon, or measured or influenced by, the amount of financial leverage of its common equity investment maintained by such fund." Compl., Prayer for Relief ¶ 3.
DISMISSAL PURSUANT TO RULE 12(b)(6)
A complaint must be dismissed pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted if the court finds "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In analyzing motions to dismiss, all allegations set forth in the complaint must be accepted as true and all reasonable inferences must be drawn in the plaintiff's favor. Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir.1991). A court should allow a plaintiff to amend the complaint instead of dismissing it where "a more carefully drafted complaint might state a claim upon which relief could be granted." Friedlander v. Nims, 755 F.2d 810, 813 (11th Cir.1985); see Howze v. Jones & Laughlin Steel Corp., 750 F.2d 1208, 1212 (3d Cir. 1984).
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