The Gabelli Global Multimedia Trust Inc v. Western Inv. LLC
| Decision Date | 01 April 2010 |
| Docket Number | Civil No. RDB 10-0557. |
| Citation | 700 F.Supp.2d 748 |
| Parties | The GABELLI GLOBAL MULTIMEDIA TRUST INC., Plaintiff,v.WESTERN INVESTMENT LLC, Western Investment Hedged, Partners LP, Western Investment Total Return Partners LP, Western Investment Total Return Fund Ltd., and Arthur Lipson, Defendants. |
| Court | U.S. District Court — District of Maryland |
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Alexander W. Major, G. Stewart Webb, Jr., Venable LLP, Baltimore, MD, for Plaintiff.
Richard W. Cohen, Todd S. Garber, Lowey Dannenberg Cohen & Hart, PC, White Plains, NY, for Defendants.
Plaintiff, the Gabelli Global Multimedia Trust, Inc., (“GGMT”) has filed this lawsuit alleging violations of sections 12(d)(1)(A)(i) and 48(a) of the Investment Company Act of 1940 (the “ICA” or “Act”) (15 U.S.C. §§ 80a-12(d)(1)(A)(i) and 80a-47(a)). Plaintiff contends that Defendants Western Investment LLC, Western Investment Hedged Partners LP, Western Investment Total Return Partners LP, Western Investment Total Return Fund Ltd., and Arthur D. Lipson have breached the anti-pyramiding provision of the ICA by illegally acquiring GGMT's voting stock and threatening to use that voting power in a proxy contest at GGMT's next shareholders' meeting. Defendants have moved to dismiss Plaintiff's Complaint for failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(6), lack of personal jurisdiction, Fed.R.Civ.P. 12(b)(2), and improper venue, Fed.R.Civ.P. 12(b)(3). The issues have been fully briefed and a hearing was held on March 18, 2010. The parties' arguments have focused on the threshold issue of whether GGMT has standing to assert private causes of action under sections 12(d)(1)(A)(i) and 48(a) of the ICA. For the reasons stated below, this Court finds that private causes of action may not be implied under these provisions of the Act, and Defendants' Motion to Dismiss (Paper No. 6) is accordingly GRANTED.
The Gabelli Global Multimedia Trust, Inc., (“Plaintiff” or “GGMT”) is a closed-end fund that is organized under the laws of Maryland and registered under the Investment Company Act. GGMT is located in Rye, New York, and its stock is traded on the New York Stock Exchange. (Compl. ¶ 13.) Defendants Western Investment Hedged Partners LP (“Hedged Partners”), Western Investment Total Return Partners LP (“Total Return Partners”), and Western Investment Total Return Fund Ltd. (“Total Return Fund”) (together, “Western Funds”), are investment companies organized under the laws of Delaware and the Cayman Islands. (Compl. ¶¶ 14-16.) Defendant Western Investment LLC, a limited liability company organized under the laws of Delaware, has sole voting and investment power over the security holdings of the Western Funds. Western Investment LLC is in turn solely controlled by Defendant Arthur D. Lipson (“Lipson”), a resident of Utah, who manages its voting and investment decisions. ( Id. ¶¶ 18-19.)
Lipson allegedly pursues an activist arbitrage investment strategy, whereby he seeks to profit from companies trading at a discount to their perceived “fair” value.1 Through his Western Funds, Lipson acquires stock in targeted companies and then takes steps to influence the companies' management and investment policies in order to close, and thereby profit from, the discount in their stock price. ( Id. ¶ 27.)
Under his arbitrage investment strategy, Lipson allegedly begins by acquiring a foothold stake in a target company. He structures his stock acquisitions so that each of the Western Funds purchases up to-but no more than-three percent of the outstanding shares of a target investment company. The strategy is allegedly designed to circumvent the anti-pyramiding provision of the ICA, § 12(d)(1)(A)(i), which prohibits any investment company from owning more than three percent of another investment company. ( Id. ¶ 2.) However, Plaintiff claims that despite Defendants' carefully choreographed strategy, they still contravene this provision when the Western funds' aggregate ownership exceeds the three percent limit set forth in § 12(d)(1)(A)(i). ( Id. ¶ 24.)
Lipson is alleged to have unlawfully acquired a foothold stake in GGMT. Defendants began purchasing stock in GGMT in late November 2009, and by mid-December they had already acquired over 3% of GGMT's voting stock. ( Id. ¶ 28.) On December 14, 2009, Western Investment LLC informed GGMT that Defendants proposed to nominate Lipson and Gregory R. Dube for election as directors of GGMT at its 2010 shareholders' meeting. ( Id. ¶ 28.) In their Schedule 13D, filed on February 26, 2010, Defendants revealed that they had acquired more than 5% of GGMT and wanted GGMT's management “to cause [GGMT's] discount to net asset value to be eliminated or substantially reduced.” ( Id. ¶ 30.)
On March 5, 2010, GGMT filed the present Complaint seeking declaratory and injunctive relief against Defendants for violations of §§ 12(d)(1)(A)(i) and 48(a) of the ICA. On that same day, GGMT also filed a Motion for Preliminary Injunction (Paper No. 2) and a Motion To Expedite Discovery (Paper No. 3).
On March 10, 2010, Defendants moved to dismiss GGMT's Complaint under Fed.R.Civ.P. 12(b)(6) on the basis that no private rights of action exist under §§ 12(d)(1)(A)(i) and 48(a). In addition, Defendants contend that dismissal is warranted under Fed.R.Civ.P. 12(b)(2) and 12(b)(3) for lack of personal jurisdiction and improper venue.
At the hearing conducted on March 18, 2010, the parties debated whether a private cause of action exists under §§ 12(d)(1)(A)(i) and 48(a) of the ICA-a threshold issue concerning standing. As the parties concede, this Court may consider the merits of GGMT's suit only if it first finds that a private cause of action may be considered under one of these statutory provisions.
Under Rule 8(a)(2), a complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” See Fed.R.Civ.P. 8(a). Rule 12(b)(6) of the Federal Rules of Civil Procedure authorizes the dismissal of a complaint if it fails to state a claim upon which relief can be granted see Fed.R.Civ.P. 12(b)(6), and therefore a Rule 12(b)(6) motion tests the legal sufficiency of a complaint.
A complaint must be dismissed if it does not allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Under the plausibility standard, a complaint must contain “more than labels and conclusions” or a “formulaic recitation of the elements of a cause of action” in order to survive a motion to dismiss. Id. at 555, 127 S.Ct. 1955. Well-pleaded factual allegations contained in the complaint are assumed to be true “even if [they are] doubtful in fact,” but legal conclusions are not entitled to judicial deference. Id.
To survive a Rule 12(b)(6) motion, the legal framework of the complaint must be supported by factual allegations that “raise a right to relief above the speculative level.” Id. On a spectrum, the Supreme Court has recently explained that the plausibility standard requires that the pleader show more than a sheer possibility of success, although it does not impose a “probability requirement.” Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). Instead, “[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. At bottom, the court must “draw on its judicial experience and common sense” to determine whether the pleader has stated a plausible claim for relief. Id.
The Investment Company Act of 1940 (the “ICA” or “Act”) establishes a scheme that regulates investment companies that provide mutual fund services. Mutual funds are entities that raise money from investors and invest the proceeds in securities. See Kamen v. Kemper Fin. Servs., 500 U.S. 90, 93, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991). The Act was adopted due to Congress's concerns about “the potential for abuse inherent in the structure of investment companies” and the need to protect investors in these companies. Burks v. Lasker, 441 U.S. 471, 480, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979). Its promulgation in 1940 came on the heels of a four-year study conducted by the SEC on the investment company industry, which “depicted fantastic abuse of trust by investment company management and wholesale victimizing of security holders.” United States v. Deutsch, 451 F.2d 98, 108 (2d Cir.1971); see also Harriman v. E.I. du Pont De Nemours & Co., 411 F.Supp. 133, 159 (D.Del.1975) (); Option Advisory Serv., Inc. v. SEC, 668 F.2d 120, 121 (2d Cir.1981) (per curiam) (). The Act requires all investment companies to register with the SEC, “with registration serving as the handle for the regulatory scheme.” Herpich v. Wallace, 430 F.2d 792, 814 (5th Cir.1970).
Section 12 of the ICA, which was adopted as part of the original statute in 1940, sets forth several detailed sections regulating the activities of investment companies. Included in this section is the anti-pyramiding provision, § 12(d)(1) which was designed “ ‘to prevent a registered investment company from controlling other investment companies and creating complicated pyramid structures.’ ” meVC Draper Fisher Jurvetson Fund I, Inc. v. Millennium Partners, L.P., 260 F.Supp.2d 616, 620 (S.D.N.Y.2003) ...
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