Krinsk v. Fund Asset Management, Inc.

• Decision Date: 04 March 1987
• Docket Number: No. 85 Civ. 8428 (JMW).,85 Civ. 8428 (JMW).
• Citation: 654 F. Supp. 1227
• Parties: Jeffrey KRINSK, Plaintiff, v. FUND ASSET MANAGEMENT, INC., Merrill Lynch Asset Management, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch & Co., Inc., and CMA Money Fund, Defendants.
• Court: U.S. District Court — Southern District of New York

654 F. Supp. 1227

Jeffrey KRINSK, Plaintiff, v. FUND ASSET MANAGEMENT, INC., Merrill Lynch Asset Management, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch & Co., Inc., and CMA Money Fund, Defendants.

No. 85 Civ. 8428 (JMW).

United States District Court, S.D. New York.

March 4, 1987.

Richard M. Meyer of Milberg Weiss Bershad Specthrie and Lerach, New York City, for plaintiff.

James K. Manning, Paul Windels, III, Amy J. Leeson of Brown and Wood, New York City, for defendant CMA Money Fund.

James N. Benedict, Mark Holland of Rogers & Wells, New York City, for defendant Fund Asset Management Inc.

OPINION

WALKER, District Judge:

INTRODUCTION

Plaintiff Jeffrey Krinsk brings this action on behalf of the CMA Money Fund ("Fund"), of which he is a shareholder, against Defendants Fund Asset Management, Inc., ("FAM"), Merrill Lynch Asset Management, Inc., ("MLAM"), Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill Lynch"), Merrill Lynch & Co., Inc., ("ML") and the Fund. In his amended complaint Krinsk claims in substance that the defendants, in violation of their fiduciary duties, have reaped excessive fee payments from the Fund. He alleges specific violations of §§ 12(b), 15, 20, and 36(b) of the Investment Company Act of 1940 as amended (the "Act"), 15 U.S.C. § 80a-1 et seq., and demands a jury trial.

The defendants have moved to dismiss all of the plaintiff's claims save that under § 36(b). They argue that no private cause of action exists under § 12(b) or § 20 and, further, that since the § 15 claim complains of a fee paid directly by shareholders to Merrill Lynch it is not recoverable in a derivative action and, in any event, fails to state a claim upon which relief may be granted. Defendants also have moved to strike the plaintiff's jury trial demand.

The Parties and Their Relationships

The Fund, it is claimed, is the largest money market fund in existence with assets exceeding $18 billion. Defendant FAM is the investment advisor for the Fund. It is a wholly-owned subsidiary of defendant ML. In exchange for investment advisory and management services provided to the Fund and its shareholders, FAM receives an investment advisory fee that is based on a percentage of the Fund's net assets.

Defendant Merrill Lynch, another subsidiary of ML, is a securities broker which, since September 1, 1983, has provided distribution and shareholder services to the Fund and its shareholders in exchange for a distribution fee that is also based on a percentage of the Fund's net assets.

Merrill Lynch also sponsors something it calls the Cash Management Asset Program ("CMA Program"). The CMA Program links together three components to offer "integrated financial services" to participants. Each member is entitled to (a) a securities margin account, (b) one of three money market fund accounts (the CMA Money Fund, the CMA Government Securities Fund, or the CMA Tax-Exempt Fund) and a federally insured money market deposit account and (c) a Visa card and checking account. Each CMA Program participant then receives a comprehensive monthly statement that details the activity in his account for that month. Each such participant, regardless of whether he is a shareholder in the Fund, is charged an annual $65 fee by Merrill Lynch to participate in the CMA Program.

Claims and Proceedings to Date

Krinsk's original complaint (all of which survived in the amended complaint) alleged that defendants violated §§ 36(b) and 20 of the Act and demanded a jury trial. Its First Claim asserted that FAM and Merrill Lynch charged the Fund excessive advisory and distribution fees, respectively, in violation of their fiduciary duties to the Fund and its shareholders under § 36(b). The Second Claim asserted that on or about July 26, 1984, the defendants caused the Fund to send to its shareholders a materially false and misleading proxy statement for the August 31, 1984 annual meeting of shareholders. Plaintiff claims that this proxy statement identified comparative fees charged by the defendants for services to other funds, and stated that the fee charged to the CMA Money Fund was averaging¹ at approximately .38 per cent of the Fund's asset value, but omitted to state that the fee for the only other fund of comparable size, the Merrill Lynch Ready Assets Trust, was averaging at approximately .34 per cent. The plaintiff also claims that the proxy statement failed to disclose other pertinent facts relating to the defendants' profitability. The complaint alleges that based on the deficient proxy materials, the Fund's shareholders voted to approve the continuance of the existing investment advisory agreement and infers that, had there been full disclosure, they would not have done so. By way of relief the original complaint seeks "damages" for these alleged violations of § 36(b) and § 20. Addressing this original complaint, the defendants moved to strike the jury trial demand and to dismiss the Second Claim on the grounds that § 20 of the Act does not create a private right of action in the context of a claim for excessive advisory fees.

While this motion was sub judice, the plaintiff filed an amended complaint. He added to the § 36(b) claim an allegation that the service fees (the $65 recurring charge to CMA Program participants) paid to Merrill Lynch were excessive. He also added two further claims for relief under § 12(b) and § 15 of the Act and continued to demand a jury trial as to all claims.

The Third Claim alleges that the defendants violated § 15 of the Act by failing to describe in the investment advisory contract the annual $65 service charge imposed upon each shareholder by Merrill Lynch for participation in the CMA Program. The Fourth Claim alleges that the defendants violated § 12(b) of the Act because the Fund pays distribution fees to Merrill Lynch and its employees on the basis of the average daily net assets of the Fund instead of whether or not they have sold Fund shares. As to all four claims, Krinsk requests an award of "damages" to the Fund.

Upon the filing of the amended complaint, the defendants promptly moved to dismiss the Third and Fourth Claims. They argue that Krinsk's Third Claim under § 15 challenges a service fee that is paid directly to Merrill Lynch by each shareholder individually for participation in the CMA Program and not by the Fund, and that, therefore, the claim may not be brought derivatively on behalf of the Fund. Alternatively, they argue that the fee is not compensation for advisory services and thus does not fall within the scope of § 15 requirements for inclusion in the investment advisory contract. They challenge plaintiff's fourth claim under § 12(b) on the grounds that no private right of action exists under that section in the context of this § 36(b) action. They also persist in their contention that no claim asserted by the plaintiff entitles him to a jury trial.

DISCUSSION

I. Private Causes of Action Under § 20 and § 12(b)

The question of whether there exists a private right of action under a statute is "basically a matter of statutory construction." Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 15, 100 S.Ct. 242, 245, 62 L.Ed.2d 146 (1979). The Supreme Court in Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 2087, 45 L.Ed.2d 26 (1975) outlined four factors to be considered in deciding whether to find a private right of action where none was specifically provided for:

First, is the plaintiff "one of the class for whose especial benefit the statute was enacted," — that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law?

Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 2088, 45 L.Ed.2d 26 (1975). In cases decided since Cort v. Ash, the Supreme Court has made it clear that these factors are to be used in order to focus on Congressional intent. See, Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1978); Transamerica, 444 U.S. at 23-24, 100 S.Ct. at 249.

Mindful of these basic principles, the Court turns to whether Congress may be held to have intended to authorize private causes of action under § 12(b) and § 20 of the Act in the context of an action for recovery of excessive advisory fees under § 36(b).

The Investment Company Act of 1940 as Amended

Congress enacted the Act to curb preceived abuses in the investment company industry based, in part, upon the lack of arms-length dealing between investment companies and their advisors which provided opportunities for misappropriation of company assets by advisors. The Act's "findings and declaration of policy" includes the statement:

... that the national public interest and the interest of investors are adversely affected ... when investment companies are ... operated ... in the interest of ... investment advisors ... or other affiliated persons thereof, or in the interest of ... brokers or dealers ...

15 U.S.C. § 80a-1.

The Act set up a regulatory scheme under the Securities and Exchange Commission ("SEC") whereby investment company managers are required to manage for the benefit of the investors. For example, the Act requires that at least 40 per cent of the investment company's directors be "disinterested." 15 U.S.C. § 80a-10. Through § 20, the Act controls proxy solicitation. 15 U.S.C. § 80a-20. It also governs contracts between the Fund and both investment advisors and underwriters. See e.g. 15 U.S.C. § 80a-15.

For the past quarter century the courts have also permitted private litigants to sue under...