Stegall v. Ladner, CIV.A. 05-10062-DPW.

Decision Date14 October 2005
Docket NumberNo. CIV.A. 05-10062-DPW.,CIV.A. 05-10062-DPW.
Citation394 F.Supp.2d 358
PartiesWilliam STEGALL, on Behalf of Himself and All Others Similarly Situated, Plaintiff, v. Charles L. LADNER, James F. Carlin, William H. Cunningham, Ronald R. Dion, Steven Pruchansky, Norman H. Smith, John P. Toolan, James A. Shepherdson, Dennis S. Arnowitz, Richard P. Chapman, Jr., William J. Cosgrove, Richard A. Farrell, William F. Glavin, John A. Moore, Patti Mcgill Peterson, John W. Pratt, John Hancock Advisers, LLC, Independence Investment, LLC, Nicholas-Applegate Capital Management, Pzena Management, LLC, Shaw Assets Management, Inc., Sustainable Growth Advisers, LP, American Fund Advisors, Inc. Defendants.
CourtU.S. District Court — District of Massachusetts
394 F.Supp.2d 358
William STEGALL, on Behalf of Himself and All Others Similarly Situated, Plaintiff,
v.
Charles L. LADNER, James F. Carlin, William H. Cunningham, Ronald R. Dion, Steven Pruchansky, Norman H. Smith, John P. Toolan, James A. Shepherdson, Dennis S. Arnowitz, Richard P. Chapman, Jr., William J. Cosgrove, Richard A. Farrell, William F. Glavin, John A. Moore, Patti Mcgill Peterson, John W. Pratt, John Hancock Advisers, LLC, Independence Investment, LLC, Nicholas-Applegate Capital Management, Pzena Management, LLC, Shaw Assets Management, Inc., Sustainable Growth Advisers, LP, American Fund Advisors, Inc. Defendants.
No. CIV.A. 05-10062-DPW.
United States District Court, D. Massachusetts.
October 14, 2005.

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COPYRIGHT MATERIAL OMITTED

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Hank Bates, Little Rock, AR, David Pastor, Gilman and Pastor, LLP, Boston, MA, Randall K. Pulliam, Baron & Budd, P.C., Dallas, TX, for Plaintiff.

Jason N. Golub, Foley & Lardner, LLP, Washington, DC, Ashley K. Handwerk, Kirkpatrick & Lockhart, Nicholson Graham LLP, William Shaw McDermott, Kirkpatrick & Lockhart, Steven P. Wright, Kirkpatrick & Lockhart Nicholson Graham, Boston, MA, for Defendants.

MEMORANDUM AND ORDER

WOODLOCK, District Judge.


Plaintiff William Stegall seeks recovery for himself and others similarly situated from certain directors, investment advisers, and affiliates of the John Hancock Family of Funds (the "Funds"). Plaintiff contends that defendants improperly failed to participate in securities class actions in which the Funds were putative members. Defendants have moved to dismiss the action. For the reasons provided below, that motion will be granted.

I. Standard of Review

In considering a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), a court must take well-pled factual allegations in the complaint as true and must make all reasonable inferences in favor of the plaintiff. Watterson v. Page, 987 F.2d 1, 3 (1st Cir.1993). The court, however, need not credit "bald assertions, unsupportable conclusions, or opprobrious epithets." Chongris v. Bd. of Appeals, 811 F.2d 36, 37 (1st Cir.1987). Dismissal under Rule 12(b)(6) is only appropriate if the complaint, so viewed, presents no set of facts justifying recovery. Cooperman v. Individual, Inc., 171 F.3d 43, 46 (1st Cir.1999).

A reviewing court is not entirely constrained by the four corners of the complaint. Consideration may also be given to "documents the authenticity of which are not disputed by the parties; for official public records; for documents central to plaintiff's claim; or for documents sufficiently referred to in the complaint." Watterson, 987 F.2d at 3.

II. Background

The John Hancock Family of Funds consists of approximately 33 funds and is part of the larger corporate body whose parent is John Hancock Financial Services, Inc., referred to by plaintiff as the Parent Company Defendant. The remaining defendants are directors, advisors, and affiliates of the Funds. (Compl.¶¶ 11-15). As owners of securities, the Funds were putative class members in a number of class action

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lawsuits brought against publicly traded companies for alleged violations of securities law. Defendants allegedly did not ensure participation of the Funds in the lawsuits.

Consequently, plaintiff — who "at all relevant times owned one of the Funds," (Compl.¶ 10) — now seeks to recover losses resulting from those failures to participate in class action lawsuits. And, because the Funds share the same corporate parent and conduct themselves according to identical policies, plaintiff seeks to bring this action "on behalf of all the Funds." The losses allegedly stem from settlement monies that, if properly claimed by defendants as fiduciaries for plaintiff and the proposed class, would have increased the overall assets held by the Funds.

Recovery is sought under five counts: (1) breach of fiduciary duty; (2) negligence; (3) violation of section 36(a) of the Investment Company Act ("ICA"), 15 U.S.C. § 80a-35(a); (4) violation of section 36(b) of the ICA, 15 U.S.C. § 80a-35(b); and (5) violation of section 47(b) of the ICA, 15 U.S.C. § 80a-46(b). In response, defendants press a series of arguments in seeking dismissal of the complaint, to which I now turn.

III. Discussion

Mutual funds are customarily organized by large financial institutions to offer investors the opportunity, through pooling of resources, to enjoy the benefits of professional money managers. Seeking to address the inherent conflicts of interest of fund managers and the abuses that inevitably resulted, Congress enacted the ICA to protect investors who entrusted their money to such investment company funds. See H.R.Rep. No. 76-2639, at 10 (1940) (statute was "needed to protect small investors from breaches of trust upon the part of unscrupulous managements and to provide such investors with a regulated institution for the investment of their savings"). The statutory scheme addresses a number of distinct concerns arising out of "breaches of trust" by money managers, from provisions regarding the nature of board control to protection against excessive fees. Taken as a whole, the statute serves to establish the best interests of shareholders — and not managers — as the lodestar. Here, plaintiff contends defendants lost sight of this overarching responsibility. Defendants respond with a series of arguments attacking the adequacy of plaintiff's complaint.

A. Standing

Defendants argue, as grounds to dismiss plaintiff's entire complaint, that Mr. Stegall lacks standing to seek recovery for the harm alleged. Standing is a threshold question and, as the First Circuit quite recently observed, it "comprises a mix of constitutional and prudential criteria." Osediacz v. City of Cranston, 414 F.3d 136, 139 (1st Cir.2005) (citing Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 124 S.Ct. 2301, 159 L.Ed.2d 98 (2004), and N.H. Right to Life PAC v. Gardner, 99 F.3d 8, 13 (1st Cir.1996)). Distilled to its essence, standing comprises a three-part analysis requiring a plaintiff to show1 that (1) he suffered an injury in fact (2) that is fairly traceable to the alleged misconduct and (3) can be redressed by the relief plaintiff seeks from the court. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). In addition to these essential

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elements and [i]n keeping with these important concepts,

the Supreme Court has embellished the constitutional requirements attendant to standing with an array of prudential monitions. The prudential aspects of standing include "the general prohibition on a litigant's raising another person's legal rights, the rule barring adjudication of generalized grievances more appropriately addressed in the representative branches, and the requirement that a plaintiff's complaint fall within the zone of interests protected by the law invoked."

Osediacz, 414 F.3d at 139 (quoting Allen v. Wright, 468 U.S. 737, 750, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984)).

In his complaint, Mr. Stegall simply alleged that he "at all relevant times owned one of the Funds." (Compl.¶ 10) In his narrative response to defendants' motion, plaintiff specifies that he owns shares in the John Hancock Small Cap Fund, which is in a series of funds issued by John Hancock Investment Trust II (the "Trust").2 (Pl.'s Mem. Opp. at 5.) Defendant contends that this provides an insufficient showing of standing, in so far as plaintiff has failed to "(1) identify a single injury to his fund or any of the funds within the Trust, (2) identify a single class action settlement that any of the funds within the Trust were eligible for and (3) to identify any injury caused by any of the Defendants with respect to the management of the funds in the Trust." (Def.'s Reply at 3)

As an initial matter, plaintiff argues in his opposition that as an owner of a fund with the investment company, the Trust, he "has individual standing to pursue claims involving all of the funds within the [Trust]." (Pl.'s Mem. Opp. at 5.) I take this as a concession that he does not claim to have standing to seek recovery for injuries suffered by funds outside of the Trust. In any event, I find that he has no standing to pursue claims for other funds within the Trust, but rather only for those he himself owns.

Plaintiff distinguishes investment companies, such as the Trust, from individual unincorporated funds, such as the Small Cap Fund, arguing that the latter is a mere shell. For that reason, plaintiff argues that injuries to his fund confer standing to seek recovery for injuries suffered by all funds overseen by the Trust. Plaintiff's characterization of mutual funds, however, does not comport with the case law. In certain contexts, "each fund is a separate corporate entity with separate management contracts and share distribution plans ...." Wicks v. Putnam Investment Mgmt., LLC, 2005 WL 705360, at *3 (D.Mass. Mar. 28, 2005). When that is the case, one clearly may not use the corporate structure of the broader investment company to confer standing across all funds within that company. See In re Eaton Vance Corp. Sec. Litig., 219 F.R.D. 38, 41 (D.Mass.2003).

That conclusion is not altered where, as here, each fund is not separately incorporated. In Williams v. Bank One Corp., 2003 WL 22964376 (N.D.Ill. Dec. 15, 2003), the court found that the plaintiff could not bring a derivative shareholder suit on behalf

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of other unincorporated funds within a larger incorporated business trust:

[t]here is no precise parallel to the described arrangement in the corporate world, but the closest analogy still seems to be that of separate subsidiaries (the various mutual funds) that share a common parent (the Massachusetts business trust). What controls over the other factors identified in counsel's submission is the total separateness of the beneficial interest in the funds, with Williams being a shareholder in only two of them....

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