Strougo v. Scudder, Stevens & Clark, Inc., 96 Civ. 2136 (RWS).
| Citation | 964 F.Supp. 783 |
| Decision Date | 06 May 1997 |
| Docket Number | No. 96 Civ. 2136 (RWS).,96 Civ. 2136 (RWS). |
| Parties | Robert STROUGO, on behalf of The BRAZIL FUND, INC., Plaintiff, v. SCUDDER, STEVENS & CLARK, INC., Defendant, and The Brazil Fund, Inc., Nominal Defendant. Robert STROUGO, on behalf of himself and all others similarly situated, Plaintiff, v. Juris PADEGS, Nicholas Bratt, Edgar R. Fiedler, Roberto Teixeira Da Costs, Ronaldo A. Da Frota Nogueira, Wilson Nolen, Edmond D. Villani, and Scudder, Stevens & Clark, Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Wechsler Harwood Halebian & Feffer by Joel C. Feffer, Jeffrey M. Haber, Richard B. Brualdi, of counsel, New York City, for Plaintiff.
Debevoise & Plimpton by John S. Kiernan, Jeremy Feigelson, Edward V. Di Lello, of counsel, New York City, for Defendants.
Dechert, Price & Rhoads by Bernard J. Bonn, III, of counsel, Boston, MA, for Nominal Defendant The Brazil Fund.
Ropes & Gray by John D. Donovan, Jr., Timothy J. Hinkle, Silvestre A. Fontes, of counsel, Boston, MA, for Independent Directors of The Brazil Fund One International Place.
In this action alleging violations of the Investment Company Act of 1940, as amended (the "ICA"), 15 U.S.C. §§ 80a-1 et. seq., and breach of fiduciary duty under the common law, defendants Scudder, Stevens & Clark, Inc. ("Scudder"), Juris Padegs ("Padegs"), Nicholas Bratt ("Bratt"), Edmond Villani ("Villani"), Edgar Fiedler ("Fiedler"), Wilson Nolen ("Nolen"), Roberto Teixeira Da Costa ("Da Costa"), Ronaldo A. Da Frota Nogueira ("Nogueira"), and nominal defendant the Brazil Fund ("the Fund"), have moved to dismiss the complaint of Robert Strougo ("Strougo") for failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6), for failure to make pre-suit demand, pursuant to Fed.R.Civ.P. 23.1, and for failure to plead with particularity, pursuant to Fed.R.Civ.P. 9(b).
For the reasons set forth below, the motions will be granted in part and denied in part.
Strougo purchased 1,000 shares of the Fund on January 11, 1993, and has held shares continuously thereafter.
The Fund, a nominal defendant in this action, is a Maryland corporation whose principal executive office is located in New York, New York. The Fund is a non-diversified, closed-end investment company that invests in the securities of Brazilian companies. Shares in the Fund trade on the New York Stock Exchange.
Scudder is a Delaware corporation whose principal offices are located in New York, New York. Scudder serves as investment advisor to and manager of the Fund. It is a registered investment advisor under the Investment Advisers Act of 1940, as amended, 15 U.S.C. 80b-1 et seq.
Padegs is chairman of the board and a director of the Fund. He is also a managing director of Scudder and serves on both Scudder's board and the boards of other funds managed by Scudder.
Bratt is president and a director of the Fund. Bratt is also a managing director of Scudder and serves on the boards of other funds managed by Scudder.
Villani is a director of the Fund. He is also president and managing director of Scudder and serves on both Scudder's board and the boards of other funds managed by Scudder.
Scudder, Padegs, Bratt and Villani will be referred to as the "Scudder Defendants."
Fiedler is a director of the Fund and serves on the boards of seven other funds managed by Scudder. He received $30,003 in compensation for serving on boards of funds managed by Scudder and accrued $366,075 in deferred compensation for service on two Scudder funds.
Nolen is a director of the Fund. He also serves on the boards of fourteen other funds managed by Scudder. Nolen's aggregate compensation for service on these boards was $132,023 in 1994.
Nogueira is a director and resident Brazilian director of the Fund. He serves on the boards of three other funds managed by Scudder. Nogueira's aggregate compensation for serving on these boards was $54,997 in 1994.
Da Costa is a director and resident Brazilian director of the Fund. Da Costa was compensated $13,868 for serving on the Fund's board in 1994.
Strougo filed his initial complaint on March 22, 1996. He filed the first amended class action and verified shareholder derivative complaint (the "Complaint") on June 17, 1996. Defendants filed the instant motions on July 29 and July 30, 1996. Oral argument was heard on January 15, 1997, at which time the motions were deemed fully submitted.
On a motion to dismiss under rule 12(b)(6), the facts alleged in the complaint are presumed to be true, and all factual inferences are drawn in the plaintiff's favor. Mills v. Polar Molecular Corporation, 12 F.3d 1170, 1174 (2d Cir.1993). Accordingly, the facts presented here are drawn from the allegations of the Complaint and do not constitute findings of fact by the Court.
This action arises from the 1995 decision by the board of directors of the Brazil Fund, a closed-end investment company incorporated under Maryland law and traded on the New York Stock Exchange, to increase the Fund's capital by offering the Fund's existing shareholders rights to purchase additional shares of newly issued stock (the "Rights Offering"). Strougo asserts that Scudder and each of the directors of the Fund breached their respective fiduciary duties of loyalty and due care as a result of the development and implementation of the Rights Offering.
Scudder created the Brazil Fund in 1988. The Fund is a non-diversified, closed-end investment company registered under the Investment Company Act of 1940 (the "ICA") that invests almost exclusively in securities of Brazilian companies. Certain of the Fund's directors serve as executive officers of Scudder and receive substantial compensation from Scudder. A majority of the remaining directors of the Fund serve as directors of other closed-end funds affiliated with Scudder. Defendant Fiedler serves on the boards of eight funds managed by Scudder and received or accrued approximately $400,000 as a result of such directorships during 1994. Defendant Nolen serves on the boards of fifteen funds managed by Scudder and received $132,023 in 1994 as a result thereof. Defendant Nogueira serves on the boards of four funds managed by Scudder and received $54,997 in 1994 as a result thereof.
Unlike a traditional mutual fund in which investors purchase and redeem shares directly from and with the mutual fund, a closed-end fund has a fixed number of shares and (after the initial public offering) investors may only purchase shares from an existing shareholder through a stock exchange on which such shares are listed. Thus, shares in a closed-end fund are traded exactly like the shares of any other publicly-owned corporation. By contrast with an "open-end" mutual fund, in which the number of shares is not fixed and investors can purchase or redeem shares at current net asset value ("NAV") (calculated by dividing the fund's total assets by the number of shares outstanding), a closed-end fund has a fixed number of shares that originally were sold in a public offering. Per-share trading prices may be at either a premium or a discount to NAV, but more often are at a discount.
Because closed-end funds operate with a fixed number of shares, they have limited options for obtaining capital to make new investments. Once a fund's initial capital has been fully invested, new investments generally can be made only if the fund sells existing portfolio holdings. Other options for raising capital include secondary public offerings at net asset value, or rights offerings to current investors at or below NAV.
Scudder is paid a fee equal to a percentage of the Fund's net assets. From December 1994 through November 1995, the Fund's net assets declined significantly, dropping to $271 million on November 16, 1995, from $377 million on December 31, 1994. As the Fund's net assets materially declined, so did Scudder's fee.
As a result of the decline in net assets, as well as in Scudder's fees, Strougo alleges that defendants decided to raise additional capital to increase the Fund's net assets, and thereby restore Scudder's annual compensation. On October 13, 1995, defendants announced that the Fund would conduct the Rights Offering, whereby the Fund would issue transferable rights to its shareholders. Each Fund shareholder received one right for each share held; three rights entitled the holder to purchase an additional share at the "Subscription Price" of $15.75. The rights were transferrable; that is, if the shareholders did not wish to exercise their rights to purchase additional shares, they were entitled to sell the rights to any purchaser. The rights expired on December 15, 1995.
The Subscription Price was 30.19% below the Fund's NAV and resulted in per share NAV being reduced by $1.88. This $1.88 per share dilution was accompanied by a contemporaneous decline in the market price of the Fund's shares. The price of the Fund's stock declined, dropping $2.125 per share from $25.125 the day before the Rights Offering was announced to $23.25 one week later. Strougo alleges that as a result of the "coercive" Rights Offering, plaintiff and the other shareholders of the Fund, as well as the Fund itself, suffered harm in the form of market and dilution damages. The Complaint alleges that Rights Offerings "cause a loss to existing shareholders" because they "dilute the pro rata holdings of ... stock held by the fund allocable to existing shares [, and] because investment banking fees and other transactional costs are incurred by the closed-end fund." Moreover, Strougo alleges that the market value of the Fund's shares was depressed below what it would have been had the Rights Offering not been made.
The Complaint alleges six separate claims. Claim I, which is brought derivatively pursuant to ICA Section 36(b) on behalf of the Fund and against Scudder only, seeks the...
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