RESERVE MANAGEMENT v. Anchor Daily Income Fund

• Decision Date: 28 September 1978
• Docket Number: No. 78 Civ. 3826 (KTD).,78 Civ. 3826 (KTD).
• Citation: 459 F. Supp. 597
• Parties: RESERVE MANAGEMENT CORPORATION and Argyle Arbitrage, LTD., Plaintiffs, v. ANCHOR DAILY INCOME FUND, INC., Anchor Corporation, Cash Management Trust of America, Capital Research and Management Company, Edward B. Burr, John R. Haire, S. P. Hutchinson, Melvin Intriligator, Leon T. Kendall, Louis F. Laun, Mary S. O'Connor, Charles F. Phillips, Beryl Robichaud, William J. Stephens, and Walter P. Stern, Defendants.
• Court: U.S. District Court — Southern District of New York

459 F. Supp. 597

RESERVE MANAGEMENT CORPORATION and Argyle Arbitrage, LTD., Plaintiffs, v. ANCHOR DAILY INCOME FUND, INC., Anchor Corporation, Cash Management Trust of America, Capital Research and Management Company, Edward B. Burr, John R. Haire, S. P. Hutchinson, Melvin Intriligator, Leon T. Kendall, Louis F. Laun, Mary S. O'Connor, Charles F. Phillips, Beryl Robichaud, William J. Stephens, and Walter P. Stern, Defendants.

No. 78 Civ. 3826 (KTD).

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

September 28, 1978.

COPYRIGHT MATERIAL OMITTED

Alexander & Green, New York City, for plaintiffs; Robert E. De Right, Jr., Robert L. Osar, New York City, of counsel.

Shearman & Sterling, New York City, for defendant Anchor Daily Income Fund; Richard P. Lasko, New York City, of counsel.

Pollack & Kaminsky, New York City, for defendants Anchor Corp., Burr, Haire, Hutchinson, and Intriligator; Daniel A. Pollack, T. Barry Kingham, Kenneth A. Zitter, New York City, of counsel.

Sullivan & Worcester, Boston, Mass., for defendants Phillips, Laun, O'Connor, Stephens, Kendall, and Robichaud; John A. Dudley, Boston, Mass., of counsel.

White & Case, New York City, for defendants Capital Research and Management Co. and Walter P. Stern; Peter M. Collins, New York City, of counsel.

O'Melveny & Myers, Los Angeles, Cal., for defendant Cash Management Trust of America; Richard C. Warmer, Los Angeles, Cal., of counsel.

OPINION AND ORDER

KEVIN THOMAS DUFFY, District Judge.

This is a case involving the business judgment of the independent directors of a mutual fund who, upon the withdrawal of their management, were faced with the task of investigating and thereafter determining which proposals of prospective managers should be submitted to the fund shareholders for their consideration. Plaintiff, Reserve Management Corporation hereinafter referred to as "RMC" is the disappointed suitor who sought to take over the management of the defendant Anchor Daily Income Fund, Inc. hereinafter referred to as "ADI Fund". The other plaintiff, Argyle Arbitrage, Ltd. hereinafter referred to as "Argyle" is a nominee for Bruce Bent and Henry Brown who are the principals of RMC. Argyle was used by Messrs. Bent and Brown to keep tabs on other mutual funds concerning the efficiency of investment and redemption of various money-market funds in competition with the fund managed by RMC.

Before setting out the facts relevant to this matter, a few words must be said about the posture of the case before me. This is not a class action, nor has anyone suggested in any way, at any time that it be certified as a class action. The plaintiffs herein, RMC and Argyle, are suing solely on their own behalf. While the complaint is couched in terms seeking an injunction for alleged violations of the Securities Exchange Act of 1934, the Investment Company Act, and the Investment Advisers Act, in reality RMC is seeking the opportunity to capture the management fees of ADI Fund, while Argyle seeks to force ADI Fund to resolicit its shareholders in order that RMC might capture the investment advisors fees which would be charged against the ADI Fund. This was well borne out at the hearing when the plaintiffs complained that they did not have the list of the names and addresses of ADI Fund investors. Such lists are jealously guarded within the mutual fund industry since they give a great advantage to a fund as to whom to solicit as potential customers.

I BACKGROUND OF THE PARTIES

A. Reserve Management Corporation.

Reserve Management Corporation was one of the very first of the investment advisors to promote a money-market fund whereby investors could trade through a mutual fund in the volatile money-market of the 1970's. While RMC suggests that the funds within its control were high-performance oriented throughout its management and that it provided outstanding efficiency of investment and redemption, there was evidence produced at the hearing indicating that RMC was not the leader in the money-market field that Messrs. Bent and Brown would have this Court believe.

It was apparent to me, as a result of the hearing held herein, that Messrs. Bent and Brown were the soul and sinew of RMC. It was also evident that neither individual had any substantial experience outside of the money management investment advisory field, although Brown claimed to have been the investment advisor for a pension fund at one time.

RMC, Bent and Brown have been the subject of scrutiny by the Securities and Exchange Commission and the Commission, charged with the regulation of investment companies and investment advisors, has made certain findings and an order imposing remedial sanctions naming all three as respondents. That order, dated June 27, 1977, was entered by way of an offer of settlement wherein the respondents agreed, without admitting or denying the allegations of the order for proceedings, to submit to certain sanctions.

It was specifically found by the SEC that

Brown and Bent willfully caused, aided and abetted willful violations by RMC of Section 15(a) of the Investment Company Act, RMC, Brown and Bent willfully caused, aided and abetted violations of Section 15(c) and 32(a) of the Investment Company Act and RMC, Brown and Bent willfully violated and willfully aided and abetted violations of Section 20(a) and 34(b) of the Investment Company Act and Rule 20a-1 thereunder . . ..

The order further provides:

It is ordered that for a period of 60 days:

1. The registration of RMC as an investment advisor be, and, it hereby is suspended; and

2. Brown and Bent be, and they hereby are, suspended from being associated with any investment advisor; and

3. RMC, Brown and Bent be, and they hereby are, prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment advisor or depositor of, or principal underwriter for, any registered investment company or affiliated person such an investment advisor, depositor or principal underwriter, provided that such sanctions be, and they hereby are, suspended and not imposed if, for a period of 3 years from the date of this order, RMC, Brown and Bent comply, in all material respects, with all of the undertakings set forth in their offer of settlement . . ..

While no one offered in evidence the stipulation or offer of settlement entered into by Bent, Brown and RMC, a number of its provisions became clear through the testimony elicited at the hearing. Bent, Brown and RMC were required to repay certain of the investment advisory fees to the investment company under their management and to waive such fees totalling about $1,400,000. Bent and Brown tried to pass these matters off as merely technical violations but these sanctions clearly were not immaterial nor imposed for merely "technical" violations.

B. Argyle Arbitrage, Ltd.

As pointed out already, Argyle Arbitrage, Ltd. is nothing more than a nominee for Bent and Brown and used by them as a vehicle to obtain information as to other money management funds. At one time, it owned units of ADI Fund totalling $2,500; but its interest has now been reduced to $515.

C. The Anchor Corporation.

The Anchor Corporation is an investment advisor registered with the Securities and Exchange Commission. It has rendered investment supervisory and corporate administrative services to various funds including the ADI Fund under terms of an advisory agreement. Among the other funds which were serviced by Anchor were Fundamental Investors, Inc., Anchor Growth Fund, Inc., Washington National Fund, Inc., Anchor Income Fund, Inc. and Anchor Spectrum Fund, Inc. The Anchor Group is not unknown to this Court. See Lasker v. Burks, 567 F.2d 1208 (2d Cir. 1978).

D. The Anchor Daily Income Fund, Inc.

The Anchor Daily Income Fund, Inc. is a money-market mutual investment company. As of April 30, 1978, the Anchor Daily Income Fund, Inc. had net assets of $32,166,000. and a net asset value per share of $1.

E. Cash Management Trust of America.

Cash Management Trust of America is a Massachusetts business trust and a money-market fund with assets of approximately $16,000,000. as of April 30, 1978. The value per share of this fund was also $1.

F. Capital Research and Management Company.

The Capital Research and Management Company, founded in 1931, is an investment advisor to twelve mutual funds, known collectively as the American Funds Group, and to two funds whose shares may be owned only by tax-exempt organizations. The funds in the American Funds Group had an aggregate net asset of approximately 2.8 billion dollars as of April 30, 1978.

G. The Individual Defendants.

With the exception of Walter P. Stern, the individual defendants collectively constituted the Board of Directors of each of the various Anchor Funds and more specifically, of the Anchor Daily Income Fund until on or about August 1, 1978.

The defendant, Walter P. Stern, has been a director of the ADI Fund since on or about August 1, 1978, and is an affiliated person with the Capital Research and Management Company and thus, an "interested person" as that term is defined in the Investment Advisers Act.

The defendants, Leon T. Kendall, Louis F. Laun, Charles F. Phillips, Mary S. O'Connor, Beryl Robichaud and William J. Stephens are the "outside, independent" or "disinterested directors" of the ADI Fund.

II BACKGROUND OF THE ACTION

At the beginning of 1978, the Anchor Corporation indicated to the Anchor Group of Funds that it was desirous of terminating its investment company management functions. Accordingly, the outside directors of the various Anchor Funds set up a contract committee to seek a replacement for the advisory services provided by the now withdrawing Anchor Corporation.¹ To this end, the outside directors decided to hire an independent outside counsel representing them to assist in finding a replacement investment advisor. After some preliminary investigation, the independent directors contacted and...