Halebian v. Berv

• Decision Date: 23 July 2012
• Docket Number: No. 06 Civ. 4099 (NRB).,06 Civ. 4099 (NRB).
• Citation: 869 F.Supp.2d 420
• Parties: John HALEBIAN, individually and on behalf of all other similarly situated trust beneficiaries and derivatively on behalf of CitiFunds Trust III, Plaintiff, v. Elliot J. BERV, Donald M. Carlton, A. Benton Cocanougher, Mark T. Finn, Stephen Randolph Gross, Diana R. Harrington, Susan B. Kerley, Alan G. Merten, and R. Richardson Pettit, Defendants, and CitiFunds Trust III, Nominal Defendant.
• Court: U.S. District Court — Southern District of New York

869 F.Supp.2d 420

John HALEBIAN, individually and on behalf of all other similarly situated trust beneficiaries and derivatively on behalf of CitiFunds Trust III, Plaintiff,

v.Elliot J. BERV, Donald M. Carlton, A. Benton Cocanougher, Mark T. Finn, Stephen Randolph Gross, Diana R. Harrington, Susan B. Kerley, Alan G. Merten, and R. Richardson Pettit, Defendants,andCitiFunds Trust III, Nominal Defendant.

No. 06 Civ. 4099 (NRB).

United States District Court,

S.D. New York.

July 23, 2012.

Joel C. Feffer, Esq., Harwood Feffer L.L.P., New York, NY, for Plaintiff.

James S. Dittmar, Esq., Goodwin Procter L.L.P., Boston, MA, Michael K. Isenman, Esq., Goodwin Procter L.L.P., Washington, DC, for Defendants.

MEMORANDUM AND ORDER

NAOMI REICE BUCHWALD, District Judge.

I. Introduction

On July 31, 2007, in Halebian v. Berv ( “Halebian I” ), 631 F.Supp.2d 284 (S.D.N.Y.2007), we dismissed the complaintof John Halebian (“plaintiff”), which was brought against nine members of the board of trustees (“defendants”) of CitiFunds Trust III (the “Trust”), a business trust organized under the laws of the Commonwealth of Massachusetts. In his complaint, plaintiff challenges defendants' decision in 2005 to continue to employ the existing investment adviser to the mutual funds comprising the Trust when the ownership of the investment adviser changed from Citigroup, Inc. to Legg Mason, Inc.

On August 29, 2007, plaintiff appealed from the judgment that we entered against him. In the intervening years, three appellate-court decisions have analyzed this case. In the last, the Second Circuit affirmed our judgment dismissing the complaint's second and third claims but vacated our judgment dismissing the complaint's first claim, a derivative claim. Remanding the case to us with specific instructions to convert the defendants' original motion to dismiss this derivative claim into one for summary judgment under Federal Rule of Civil Procedure 56, the Second Circuit directed us to make an express finding as to the independence of defendants under the provision of state law governing the dismissal of derivative proceedings. In addition to this task, pending before us are plaintiff's motions to amend his complaint and for discovery, both of which he filed following remand. Addressing these three motions in reverse order and for the reasons stated below, plaintiff's motions are denied and defendants' converted motion for summary judgment is granted.

II. Background¹

The general facts underlying this case are now well reported in four published opinions. See Halebian I, 631 F.Supp.2d at 287–91;Halebian v. Berv ( “Halebian II” ), 590 F.3d 195, 199–203 (2d Cir.2009); Halebian v. Berv ( “Halebian III” ), 457 Mass. 620, 621–24, 931 N.E.2d 986, 987–89 (2010); Halebian v. Berv ( “Halebian IV” ), 644 F.3d 122, 124–27 (2d Cir.2011). Like the Second Circuit, “[w]e see no need to reiterate them here except insofar as we think it necessary to an understanding of our resolution” of the outstanding issues on remand. Halebian IV, 644 F.3d at 124. In light of the task with which the Second Circuit has charged us, however, we do set out facts here that have not been previously catalogued, particularly facts regarding defendants and their investigation of the alleged improprieties that underlie this case.

A. The Citigroup–Legg Mason Transaction

On June 23, 2005, Citigroup, Inc. (“Citigroup”) entered into an agreement to sell substantially all of its asset management business to Legg Mason, Inc. (“Legg Mason”) (the “transaction”). Finn Decl. Exs. D (“Proxy Statement”) 10, K (“Report”) Ex. 17 (article announcing the transaction). As of that date, Citi Fund Management Inc. (“CFM”), a subsidiary of Citigroup, served as the investment adviser to the six mutual funds—each of which has its own separate shareholders—that then comprised the Trust, which was at that time an investment company registered with the Securities and Exchange Commission (the “SEC”).²See Halebian I, 631 F.Supp.2d at 287–88; Proxy Statement 9–10, App. A A–3, App. B B–8. Under the Investment Company Act of 1940, as amended, 15 U.S.C. § 80a–1 et seq. (the “ICA”), the sale of the asset management business and in particular CFM triggered the termination of the existing investment advisory agreements between the mutual funds comprising the Trust and CFM (the “Old Agreements”), requiring these mutual funds to enter into new investment advisory agreements (the “New Agreements”). See Halebian I, 631 F.Supp.2d at 288 (discussing applicable law). Pursuant to the ICA, the New Agreements had to be approved by a majority of the members of the board of trustees who are not “interested persons” under the ICA and by a vote of a majority of the outstanding shares of each of the mutual funds. See15 U.S.C. § 80a–15(a), (c).

B. The Board

At all relevant times, the board of trustees (the “board”) of the Trust was composed of ten members. R. Jay Gerken (“Gerken”) was an acknowledged “interested person” under the ICA who served on the board and was also employed as a director and officer for multiple subsidiaries of Citigroup, including CFM. See Proxy Statement 50, 52. In addition to overseeing the six mutual funds that comprised the Trust, Gerken also served on the governing boards for well over a hundred other mutual funds, which were all within the family of funds for which subsidiaries of Citigroup served as investment advisers. See id. at 52.

Defendants occupied the remaining nine seats on the board. Like Gerken, defendants served on multiple governing boards within the Citigroup family of funds—between thirty-two and thirty-seven boards in each case at all relevant times—and so were involved as a result of the transaction in voting to approve new investment advisory agreements on behalf of many more mutual funds than only the six that comprised the Trust. See id. 50–52. Unlike Gerken, defendants were not employees or otherwise acknowledged to be “interested persons” under the ICA of Citigroup, CFM, the Trust, or any other relevant individuals or entities. See id. We list defendants' names immediately below and note (i) the date on which they began serving as trustees or directors to mutual funds within the Citigroup family of funds; (ii) the compensation they received for their service on the board in the calendar year ended December 31, 2004; and (iii) the overall compensation they received for their service as trustees or directors for mutual funds within the Citigroup family of funds in the calendar year ended December 31, 2004:

Elliot J. Berv (“Berv”) 1989/$4,663/$90,200;

Donald M. Carlton (“Carlton”) 1997/$4,797/$92,800;

A. Benton Cocanougher (“Cocanougher”) 1991/$4,276/$83,400;

Mark T. Finn (“Finn”) 1989/$4,939/$95,400;

Stephen Randolph Gross (“Gross”) 1986/$4,959/$95,300;

Diana R. Harrington (“Harrington”) 1992/$4,646/$90,100; Susan B. Kerley (“Kerley”) 1992/$6,259/$120,200;

Alan G. Merten (“Merten”) 1990/$4,239/$82,600; and

R. Richardson Pettit (“Pettit”) 1990/$4,699/$90,300.

Id. at 50–55. During the years preceding the events in question here, the compensation that several defendants received for their service as trustees and directors amounted to a significant portion of their annual income ( i.e. 25% to 50%). Report 33. In addition, through their service as trustees and directors, defendants accrued retirement benefits as of the events in question here collectively worth $3,600,000.³

In an apparent effort to confirm that defendants were still not “interested persons” under the ICA or otherwise subject to a conflict of interest, defendants were asked to complete a questionnaire shortly prior to their approval and recommendation of the New Agreements (the “First Questionnaire”). In the First Questionnaire, defendants answered questions bearing on their backgrounds as well as their interests in and relationships to the Trust and the various individuals and entities related to it that were tied to Citigroup and Legg Mason in one manner or another.⁴ In particular, defendants addressed sets of questions that were similarly posed to all of the directors and trustees serving within the Citigroup family of funds and that delved inter alia into (i) their ownership of securities in any of the mutual funds within the Citigroup family of funds; ⁵ (ii) their recent employment histories, see First Questionnaire 7–8; (iii) their relationships with any of the mutual funds within the Citigroup and Legg Mason families of funds as well as the directors, trustees, and officers of those mutual funds, see id. at 8–10; (iv) their relationships with any of the investment advisers or other financial service providers to the mutual funds within the Citigroup and Legg Mason families of funds as well as certain of their officers, see id. at 10–13; (v) their involvement in any pertinent legal proceedings, see id. at 15–17; (vi) their level of expertise with accounting and financial matters, see id. at 17–18; and (vii) their nomination to the governing boards on which they served. See id. at 18–19. At the conclusion of the First Questionnaire, defendants signed their names, attesting that “[t]he foregoing answers are correctly stated to the best of my knowledge, information and belief.” Id. at 19.

The answers that defendants provided to these questions between July 15, 2005 and July 26, 2005,⁶ reveal the breadth and depth of their professional experience: four defendants worked as professors at well-respected colleges and universities where two of them self-identified that they served as professors of finance, see, e.g., Cocanougher First Questionnaire 7 (reflecting employment history with Texas A & M University); six defendants worked in one or another capacity in finance, consulting, or accounting, see, e.g., Finn First Questionnaire 7 (reflecting employment history in investment management); and one defendant, Carlton, noted that he served on the board of directors of at least two large corporations ( i.e. American...