Schlusselberg v. Werly, 67 Civ. 94.

• Decision Date: 30 October 1967
• Docket Number: No. 67 Civ. 94.,67 Civ. 94.
• Citation: 274 F. Supp. 758
• Parties: Claire SCHLUSSELBERG, Plaintiff, v. Charles M. WERLY et al., Defendants.
• Court: U.S. District Court — Southern District of New York

274 F. Supp. 758

Claire SCHLUSSELBERG, Plaintiff, v. Charles M. WERLY et al., Defendants.

No. 67 Civ. 94.

United States District Court S. D. New York.

October 30, 1967.

Ira J. Sands, New York City, for plaintiff, Leonard I. Schreiber, New York City, of counsel.

Debevoise, Plimpton, Lyons & Gates, New York City, for defendants Putnam Management Co., Inc., Putnam Fund Distributors, Inc., Mutual Fund Associates Incorporated, Charles M. Werly and Charles Devens.

Barrett, Knapp, Smith & Schapiro, New York City, for defendant Putnam Investors Fund, Inc.

Townley, Updike, Carter & Rodgers, New York City, for defendant Howard W. Johnson.

WYATT, District Judge.

This is a motion by certain of the defendants for an order dismissing the action for improper venue (28 U.S.C. § 1406(a), Fed.R.Civ.P. 12(b) (3)). There is a motion in the alternative by these same defendants for an order transferring the action to the District of Massachusetts "for the convenience of parties and witnesses, in the interest of justice" (28 U.S.C. § 1404(a)). Two other defendants move to transfer the action to the District of Massachusetts for the same reason.

The action was commenced on January 10, 1967. There is one claim in the complaint, made by plaintiff as a stockholder of Putnam Investors Fund, Inc. (Fund) on behalf of that corporation.

The motion to dismiss for improper venue is made by defendants Putnam Management Company, Inc. (Adviser), Mutual Fund Associates Incorporated (Underwriter), Werly, Devens, and Johnson. Each such movant contends that he (or it) is not an "inhabitant" of this District, that this District is not one in which he (or it) "transacts business" and that no "act or transaction constituting the violation" occurred in this District, these being the venue requirements of the SEC Acts (15 U.S.C. §§ 78aa, 80a-43, and 80b-14. In the alternative, these defendants move to transfer the action to the District of Massachusetts for the "convenience of parties and witnesses, in the interest of justice" (28 U.S.C. § 1404(a)).

Fund, for whose benefit the action is brought, and Putnam Fund Distributors, Inc. (Distributor) move to transfer the action to the District of Massachusetts for the "convenience of parties and witnesses, in the interest of justice" (28 U.S.C. § 1404(a)).

Fund is represented by counsel independent of those counsel representing other defendants; so also defendant Johnson is represented by counsel independent of those counsel representing other defendants.

It is not necessary to determine whether venue is proper in this District or not. If the venue is not proper, a transfer rather than dismissal would be "in the interest of justice" (28 U.S.C. § 1406(a)). See 1 Moore's Federal Practice (2d ed.) 1907-09.

But assuming the venue to be proper, the action ought to be transferred to the District of Massachusetts and the motion to transfer is granted.

The Complaint

The complaint is lengthy but its averments may be put in summary fashion.

Fund is a Massachusetts corporation registered under the Investment Company Act of 1940 (15 U.S.C. § 80a-1 and following). It is an "open-end" "diversified" "management" "investment company" (15 U.S.C. §§ 80a-3, 80a-4, 80a-5).

Adviser is a Massachusetts corporation and is controlled by certain of the individual defendants who are also officers or directors, or both, of Fund. There is a Management Contract under which, for a fee, Adviser supplies investment research, advisory and other services to Fund. Adviser also acts in a similar fashion for three other funds, "the management of which is substantially identical".

Distributor is a New York corporation, wholly owned by Adviser; the officers and directors of Distributor hold similar positions with Adviser. Distributor under a contract sells, for a commission, the shares of Fund and "controls and directs the placement of brokerage business" for Fund.

Underwriter is a California corporation, wholly owned by Distributor; the officers and directors of Underwriter hold similar positions with Fund, Adviser and Distributor. Underwriter sells shares of Fund for commissions.

Adviser, Distributor and Underwriter and their officers and directors dominate and control Fund and the officers and directors of Fund.

Adviser has exercised control over Fund. By reason of its portfolio buying and selling, Fund generates huge "business and brokerage commissions for brokers" on various stock markets. Adviser has "exploited" the investment policies of the Fund for the benefit of Adviser, Distributor and Underwriter and their officers, directors and stockholders. Adviser could have made savings for Fund on its brokerage commissions but instead has caused Fund to pay the highest possible amount of commissions so that Adviser can "requisition" a part of the commissions and divert this part to brokers and dealers who sell Fund shares for Distributor or who supply "services and materials" to Adviser, Distributor and Underwriter. The dealers who sell Fund shares and to which commissions are diverted by Adviser, also sell shares "of other Funds for which the Adviser acts as investment adviser or the General Distributor acts as distributor, in which other Funds the Fund has no interest or investment and from which sales the Fund derives no financial advantage; and out of the balance of 40%, a portion was allocated to other dealers who furnished statistical, quotation and other information to the Adviser." The commissions diverted to such dealers are called "give-ups" or "reciprocals".

Fund could have executed its portfolio transactions more cheaply by using more efficient brokers, by paying lower commissions through elimination of "give-ups" and "reciprocals", and by using the so-called "third market". The practice followed in executing portfolio transactions of Fund was according to a plan to benefit Adviser, Distributor and Underwriter at the expense of Fund.

The principal relief sought is (a) an accounting to Fund by defendants for all damages to Fund and for all profits to defendants, and (b) a rescission of all contracts between Fund and the Adviser, Distributor and Underwriter.

Jurisdiction

Jurisdiction is asserted under the Investment Company Act of 1940 (15 U.S. C. § 80a-1 and following), the Investment Advisers Act of 1940 (15 U.S.C. § 80b-1 and following), the Securities Exchange Act of 1934 (15 U.S.C. § 78a and following) and the principle of pendent jurisdiction. The provisions of these SEC Acts which are claimed to have been violated are not specified but for present purposes at least it may be assumed that there is jurisdiction under those Acts. 15 U.S.C. §§ 78aa, 80a-43, and 80b-14; See Brown v. Bullock, 294 F.2d 415 (2d Cir. 1961).

Boston is the Single Focus of Challenged Activities of Defendants

Fund has its only offices at 265 Franklin Street in Boston. It has no telephone or telephone listing in New York, has no records here and no employees here. When investment securities are bought or sold by Fund, the orders are placed from Boston.

Fund has eleven directors, all defendants here; of these eleven directors, six appear to be "outside" directors, that is, not officers or employees of Fund and not connected with Adviser or Distributor or Underwriter. These six are Forbes (a private trustee with offices in South Dartmouth, Massachusetts), Gardiner (president of a trust company in Boston), Hunter (owner of a trustee and advisory service in Boston), Johnson (president of Massachusetts Institute a Technology at Cambridge), Hurley (member of a Boston law firm), and Reece (president of a company in Waltham, Massachusetts, making industrial sewing machines).

The other five directors of Fund are Werly, Devens, Putnam, Cutler and Lyman; these five are also officers of Fund and officers and directors of Adviser; all of them have their offices at 265 Franklin Street in Boston.

The Executive Committee of Fund consists of defendants Werly, Devens, Gardiner, Hunter and Hurley. The portfolio manager of Fund is one of its vice-presidents, defendant Nichols. The traders for the Fund, who do the actual buying and selling of portfolio shares, are two employees, Mullin and Farrell (not defendants), in the Boston office and who reside in the Boston area. It is these two traders who determine how portfolio transactions are to be handled; they choose the market to be employed and what brokers are to be used.

Adviser has its only offices at 265 Franklin Street in Boston. It has no telephone or telephone listing in New York, has no records here and no employees here. All its services to Fund are performed in Boston.

Adviser has six directors who are defendants here: Werly, Devens, Putnam, Cutler, Lyman and Nichols. There are at least two other directors of Adviser, Goss and Riley, who are not defendants here. They are all also officers of Adviser, and also officers or directors or both of Fund.

Defendants Ullman and Bresnahan are officers of Fund and of Adviser but not of Distributor or Underwriter and are not directors of any of the corporate defendants. They have their offices at 265 Franklin Street in Boston.

There is a vice-president and director of Adviser, Riley, who is in charge of allocating all "give-ups" on account of statistical, quotation and other services furnished. He is not a defendant. He is also a vice-president of Fund and head of the "Research Committee". He works in the Boston office and lives in the Boston area.

Distributor is a Massachusetts corporation (the averment in the complaint that it is a New York corporation appears to be an error). Distributor has its principal office in Boston. Distributor does have an office with four employees at 25 Broadway in New York. Three of these employees are Regional vice-presidents of Distributor who act in New York in connection with the sales, through dealers, of shares of Fund and of other investment companies for which Distributor acts as principal underwriter. The...