Krinsk v. Fund Asset Management, Inc.
| Decision Date | 27 June 1988 |
| Docket Number | No. 85 Civ. 8428 (JMW).,85 Civ. 8428 (JMW). |
| Citation | 715 F. Supp. 472 |
| 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 |
COPYRIGHT MATERIAL OMITTED
Milberg Weiss Bershad Specthrie & Lerach by Richard M. Meyer, Melvyn I. Weiss, Jonathan Mack, New York City, for plaintiff Jeffrey Krinsk.
Rogers & Wells by James N. Benedict, Mark Holland, Jordan D. Cooper, Barry W. Rashkover, New York City, for defendants Fund Asset Management, Inc., Merrill Lynch Asset Management, Inc., Merrill Lynch, Pierce, Fenner & Smith Inc. and Merrill Lynch & Co., Inc.
Brown & Wood by James K. Manning, Paul Windels III, New York City, for defendant CMA Money Fund; Philip L. Kirstein, Sr. Vice President and Gen. Counsel, Merrill Lynch Asset Management, Inc., Plainsboro, N.J., of counsel.
Index to the Opinion
Page
Introduction ............................................................. 475
I. Background ........................................................... 476
A. The CMA Program ...................................................... 476
B. Merrill Lynch & Co. and its Affiliates ............................... 478
C. Fees Paid by the Fund and its Shareholders ........................... 478
1. The Service Fee ................................................... 479
2. The Advisory Fee .................................................. 479
3. The 12b-1 Payments ................................................ 479
D. The Trustees ......................................................... 479
1. Information Available to the Trustees ............................. 479
2. Consideration of the Advisory Fee ................................. 481
E. The 12b-1 Plan ....................................................... 482
1. Adoption of the Plan .............................................. 482
2. Continuation of the Plan .......................................... 484
II. The Law .............................................................. 485
III. Findings And Conclusions as to the ? 36(b) Claims Introduction
?€” The Fund as a Component of the CMA Program ........................ 486
A. Nature and Quality of Services Provided to Shareholders .............. 486
1. MLAM's Services ................................................... 487
2. Shareholder Services .............................................. 488
B. Profitability to Merrill Lynch from the Fund ......................... 489
1. Financial Consultants and Rule 12b-1 Payments ..................... 490
2. Monthly Statement, New Account Processing and Marketing
Costs ............................................................ 492
3. Float Costs, Systems Excess Capacity, Imputed Income and
Wire and Order Costs ............................................. 492
4. Corporate Overhead ................................................ 493
5. Conclusion as to Profitability .................................... 494
C. Fall-Out Benefits .................................................... 494
1. Primary Fall-Out Benefits ......................................... 494
2. Secondary Fall-Out Benefits ....................................... 495
D. Economies of Scale ................................................... 496
E. Comparative Expense Ratios and Advisory Fees ......................... 496
1. Expense Ratio ..................................................... 497
2. Advisory Fee ...................................................... 497
F. The $65 CMA Service Fee .............................................. 497
G. Rule 12b-1 Plan Fees ................................................. 498
H. The Trustees: Expertise, Knowledge, Care ............................. 501
I. Conclusion as to the ? 36(b) Claim .............................. 502
IV. The Proxy Statement Claims ........................................... 503
INTRODUCTION
Plaintiff Jeffrey Krinsk brought this derivative action on behalf of the CMA Money Fund ("Fund"), under the Investment Company Act of 1940, as amended, 15 U.S. C. ? 80a-1 et seq. (the "Act"), to recoup allegedly excessive advisory fees paid by the Fund to its investment advisor. Defendants are Fund Asset Management, Inc. ("FAMI"), Merrill Lynch Asset Management Inc. ("MLAM"), Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPFS"), Merrill Lynch & Co., Inc. (collectively, "Merrill Lynch"), and the Fund. At all times relevant to this action, plaintiff has been a shareholder of the Fund.
Krinsk commenced this action on May 16, 1985,1 seeking initially to recover for the Fund all investment advisor compensation determined to be excessive for the period January 1, 1980 to May 16, 1985. On May 1, 1986, this Court held that the one year statute of limitations in ? 36(b) of the Act restricts plaintiff's claim to recoupment of fees paid to the investment advisor after May 17, 1984. Krinsk v. Fund Asset Management, Inc., Slip Op. 85 Civ. 8428 (JMW), 1986 WL 205 (May 1, 1986).
Plaintiff's first amended complaint alleged that the defendants had violated ?? 12(b), 15, 20 and 36(b) of the Act. On March 4, 1987, this Court dismissed the ?? 12(b) and 15 claims and struck plaintiff's demand for a jury trial. Krinsk v. Fund Asset Management, Inc., 654 F.Supp. 1227 (S.D.N.Y.1987). At the subsequent bench trial, beginning March 16, 1987, the Court heard evidence on plaintiff's remaining claims: (1) that for the period May 17, 1984 to December 31, 1986, fees were paid to the investment advisor in violation of the advisor's fiduciary duty under ? 36(b); and (2) that the 1984 Fund proxy statement distributed to CMA Fund shareholders by the defendants contained materially misleading statements.
The Court has carefully appraised the testimony of the witnesses in the context of their demeanor, interests and expertise, examined the numerous documents received in evidence and conducted a word-by-word review of the trial transcript. For the reasons stated below, the Court finds for defendants on both claims and dismisses the complaint. This opinion constitutes the Court's findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52.
The Fund is one component of a financial services package offered by Merrill Lynch called the Cash Management Account program ("CMA program"). Since, as all parties agree, the Fund must be considered in the context of the CMA program as a whole, it is necessary to explain that program and its operation in some detail.
The CMA program links together (1) a traditional securities brokerage account (the "securities" or "margin" account); (2) a savings vehicle consisting of one of three money market funds (one of which is the Fund) or an insured savings account; (3) a VISA debit card; (4) check-writing privileges; and (5) a comprehensive monthly statement. Merrill Lynch requires each incoming CMA participant to invest $20,000 in cash and/or securities; however, the participant need not maintain a minimum balance.
Merrill Lynch introduced the CMA program in 1977. From 1977 through 1986 the number of CMA participants grew from 34,792 to over one million. Although Merrill Lynch was the first to offer such a product, generically known as a central asset account, today many of the firm's competitors offer similar products.
The parties agree that the focal point of the CMA program is the securities account. T. 452 (Zeikel).2 Through it, CMA participants may purchase or sell securities on "margin" (credit) or with cash. Although Merrill Lynch offers no discount brokerage rates as part of the CMA program, individuals may negotiate with Merrill Lynch for reductions in the price of their transactions on the basis of the value of their securities business. T. 755-6 (Zeikel); 890-92 (Walsh).
CMA participants are an important source of commission revenue to Merrill Lynch. CMA securities accounts generate an average of $1,200 in commissions per year, while other Merrill Lynch securities accounts produce on average only $400 in commissions per year. T. 990 (White); Px. 26. As of December 31, 1986, the CMA brokerage accounts constituted one-fourth of all Merrill Lynch brokerage accounts, yet produced approximately one-half of Merrill Lynch's brokerage commission revenues.
A significant component of the CMA program is the primary savings vehicle or money account. In selecting a savings vehicle, the CMA participant chooses either one of three money market funds ?€” the CMA Money Fund, the CMA Government Securities Fund, the CMA Tax-Exempt Fund ?€” or the Insured Savings Account, a money market deposit account opened by Merrill Lynch on behalf of the participant at one or more banks or savings and loan institutions. Px. 75c. A participant is free to switch his designation of the primary savings vehicle at any time, and at any time may hold shares in more than one CMA savings vehicle.
The CMA program links the securities account to the primary savings vehicle through a "sweep" feature. Uninvested cash or "free credit balances" generated in the securities account through, for instance, payment of dividends or sale of securities, are swept automatically into the money account. Px. 2, 4, 6, 75a. When a participant's free credit balance is $1,000 or more, it is swept that day for investment the following day. Balances less than $1,000 are swept weekly.
The subject of this lawsuit, the CMA Money Fund, is a no-load, diversified, open-ended investment company registered under the Act. As of January 5, 1987, assets invested in the Fund exceeded $19 billion, making the Fund the...
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