Yameen v. Eaton Vance Distributors, Inc.

• Decision Date: 14 October 2005
• Docket Number: No. CIV.A. 03-12437-DPW.,CIV.A. 03-12437-DPW.
• Citation: 394 F.Supp.2d 350
• Parties: Michelle YAMEEN, derivatively on behalf of the Eaton Vance Tax-Managed Growth Fund 1.1, Plaintiff, v. EATON VANCE DISTRIBUTORS, INC., James B. Hawkes, Samuel L. Hayes, Norton H. Reamer, Lynn A. Stout, William H. Park, Ronald A. Peralman, Jessica M. Bibliowicz, Jack L. Treynor, and Donald R. Dwight, Defendants, and Eaton Vance Tax-Managed Growth Fund 1.1, Nominal Defendant.
• Court: U.S. District Court — District of Massachusetts

394 F.Supp.2d 350

Michelle YAMEEN, derivatively on behalf of the Eaton Vance Tax-Managed Growth Fund 1.1, Plaintiff, v. EATON VANCE DISTRIBUTORS, INC., James B. Hawkes, Samuel L. Hayes, Norton H. Reamer, Lynn A. Stout, William H. Park, Ronald A. Peralman, Jessica M. Bibliowicz, Jack L. Treynor, and Donald R. Dwight, Defendants, and Eaton Vance Tax-Managed Growth Fund 1.1, Nominal Defendant.

No. CIV.A. 03-12437-DPW.

United States District Court, D. Massachusetts.

October 14, 2005.

Aimee E. Bierman, William Shaw McDermott, Eileen E. Pott, Gregory R. Youman, Kirkpatrick & Lockhart, Nicholson Graham LLP, Boston, MA, Jeffrey B. Maletta, Nicholas G. Terris, Kirkpatrick & Lockhart, Washington, DC, for Eaton Vance Distributors, Inc., Defendant.

Michelle H. Blauner, Edward F. Haber, Theodore M. Hess-Mahan, Christine E. Morin, Lara A Sutherlin, Shapiro Haber & Urmy LLP, Boston, MA, for Michelle Yameen, Plaintiff.

James S. Dittmar, Stuart M. Glass, Goodwin Procter LLP, Boston, MA, for Donald R. Dwight, Jack L. Treynor, Lynn A. Stout, Norton H. Reamer, Ronald A. Pearlman, Samuel L. Hayes, William H. Park, Defendants.

Andrew J. Hachey, George J. Skelly, Nixon Peabody LLP (BOS), Boston, MA, for Jessica M. Bibliowicz, Defendant.

Sanford F. Remz, Matthew C. Welnicki, Yurko & Salvesen, P.C., Boston, MA, for Eaton Vance Tax-Managed Growth Fund 1.1, Defendant.

MEMORANDUM AND ORDER

WOODLOCK, District Judge.

Plaintiff Michelle Yameen, a shareholder of the Eaton Vance Tax-Managed Growth Fund 1.1, brings this derivative action on the Fund's behalf. She alleges that the Defendants breached their fiduciary duties under Sections 36(b) and (a) of the Investment Company Act of 1940 ("ICA"), 15 U.S.C. § 80a-1 et seq., (Counts I and II), and Massachusetts law (Count III) by authorizing and receiving excessive distribution fees during the period of time that the Fund was closed to new investors.

Eaton Vance Distributors, Inc. ("Distributors"), nine Independent Trustees ("Trustees"), and nominal defendant Eaton Vance Tax-Managed Growth Fund 1.1 have moved to dismiss or alternatively, for summary judgment, as to the Amended Derivative Complaint ("Complaint") pursuant to Fed.R.Civ.P. 12(b)(6). The Plaintiff has elected not to oppose the motion to dismiss Counts II and III.¹ After full consideration of the remaining claim presented in Count I, I will grant the motions to dismiss all three counts.

I. BACKGROUND

Established on March 28, 1996, the Eaton Vance Tax-Managed Growth Fund 1.1 ("Fund") is an open-end management investment company, or mutual fund, and a series of the Eaton Vance Mutual Funds Trust ("Trust"). The Trust is governed by a six-member Board of Trustees ("Board").

Pursuant to a distribution agreement approved by the Board ("Distribution Agreement"), Distributors serves as the principal underwriter for the Fund. The Distribution Agreement governs the distribution of the Fund's shares, which are sold primarily through broker-dealers or other financial institutions.

The Fund offers several classes of shares with varying fee structures. Class A shareholders pay a sales charge, or "front-end load," at the time of purchase. The front-end load is calculated as a percentage of the purchase price. The Fund pays the front-end load to Distributors as compensation for distribution expenses, including commissions to the selling broker-dealer.

Purchasers of Class B and C shares pay no front-end load. Instead, Distributors pays the sales commissions and other up-front, sales-related expenses. According to the Distribution Agreement, the Fund must pay Distributors a commission of 5% and 6.25% for Class B and C shares, respectively, plus interest on outstanding amounts. To that end, the Fund collects a distribution charge equal to 0.75% per year of daily net assets, which it pays to Distributors on a monthly basis. Class B and C shares make these monthly payments to Distributors until the distribution charges are fully paid. At that point, the Fund ceases to collect the 0.75% fee.

The Fund also imposes an annual service fee on Class A, B, and C shares equal to 0.25% of the net asset value of the funds. This fee covers expenses for ongoing personal services, such as providing shareholders with assistance and information, and maintenance of shareholder accounts. See generally, NASD Rule 2830(b)(9).

On March 1, 2001, the Fund "closed", or stopped selling shares, to persons who were not already shareholders. It continued, however, to sell shares to existing shareholders. It also continued to charge the 0.75% fee payable to Distributors and the 0.25% service fee. The Plaintiff estimates that the Fund has paid a total of $155.3 million in distribution and service charges since March 1, 2001.

The Plaintiff contends that once the Fund closed to new investors, the distribution and service fees greatly exceeded the minimal distribution costs then actually being incurred. The single claim Plaintiff now presses in Count I is that Distributors breached its fiduciary duties under Section 36(b) of the ICA by receiving distribution and service fees after the Fund had closed to new investors.

II. DISCUSSION

A. Standard of review

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a court may dismiss a complaint "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002) (quoting Hishon v. King & Spalding, 467 U.S. 69, 104 S.Ct. 2229, 81 L.Ed.2d 59(1984)). In considering a motion to dismiss, a court "must accept as true the factual allegations of the complaint and draw all reasonable inferences in favor of [the Plaintiff]." Blackstone Realty LLC v. Federal Deposit Insurance Corporation, 244 F.3d 193, 197 (1st Cir.2001).

In cases, such as this one, where a plaintiff alleges that a mutual fund charged excessive fees, "a complaint must state more than a legal conclusion that a fee is excessive in order to survive a motion to dismiss." Krantz v. Fidelity Mgmt. & Research, Co., 98 F.Supp.2d 150, 158 (D.Mass.2000). "Conclusory allegations in a complaint, if they stand alone, are a danger sign that the plaintiff is engaged in a fishing expedition." DM Research v. College of Am. Pathologists, 170 F.3d 53, 55 (1st Cir.1999).

B. Legal framework

Three inter-related regulatory directives are relevant here: Section 36(b) of the ICA, SEC Rule 12b-1, and NASD Rule 2830.

The ICA is a comprehensive regulatory scheme enacted to protect shareholders from the "potential abuse inherent in the structure of investment companies." Daily Income Fund v. Fox, 464 U.S. 523, 536, 104 S.Ct. 831, 78 L.Ed.2d 645 (1984)(quoting Burks v. Lasker, 441 U.S. 471, 480, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979)); see also Investment Company Amendments Act of 1970, S.Rep. No. 91-184, reprinted in 1970 U.S.C.C.A.N. 4897, 4901(Leg.Hist. May 21, 1969). Unlike most corporations, investment companies are generally created and managed by a separate, pre-existing organization known as an investment advisor. Daily Income Fund, 464 U.S. at 536, 104 S.Ct. 831. The advisor supervises the daily operation of the fund and selects the company's board of directors. Id. As a result, the "relationship between investment advisers and mutual funds is fraught with potential conflicts of interest." Id. (internal citations omitted).

With respect to fees, Congress apparently believed that mutual fund shareholders needed special protection because the "forces of arms-length bargaining do not work in the mutual fund industry in the same manner as they do in other sectors of the American economy." Id. To that end, Section 36(b) of the 1970 Amendments to the ICA imposes a fiduciary duty upon mutual fund investment advisors and managers:

[T]he investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser.

15 U.S.C. § 80a-35(b).

This fiduciary duty with respect to fees applies not just to investment advisors, but to others, such as officers, directors, board members, and principal underwriters, who owe general fiduciary duties to mutual fund shareholders.² See 1970 U.S.C.C.A.N. at 4902 ("Other persons enumerated in Section 36(a) who may have a similar fiduciary duty with respect to compensation or payments received by them from the fund or its shareholders may also be sued for a breach of that duty.")

Intending to grant managers greater freedom to use fund assets for distribution costs, the Securities and Exchange Commission ("SEC") in 1980 adopted Rule 12b-1 under the ICA. See Bearing of Distribution Expenses by Mutual Funds, 45 Fed.Reg. 73898-01, 73898 (November 7, 1980). Rule 12b-1 allows mutual funds to use a percentage of their assets to compensate underwriters, dealers and sales personnel for services "in connection with" the distribution and marketing of the fund's shares. 17 C.F.R. § 270.12b-1(b); ING Principal Protection Funds Derivative Litigation, 369 F.Supp.2d 163, 167 (D.Mass.2005). As will become evident below, I concur with the view that it also allows mutual funds to choose between paying distribution and service charges up front and spreading them out over a period of several years. ING, 369 F.Supp.2d at 167.

The board of directors of a mutual fund may implement a fee structure in accordance with Rule 12b-1 only if "there is a reasonable likelihood that the plan will benefit the company and its shareholders." 17 C.F.R. § 270.12b-1(e). The adoption of a fee plan under Rule 12b-1 gives rise to the fiduciary duties imposed by Section 36(b). Id. Allegations, such as this one, that Rule 12b-1 fees are excessive have been brought under Section 36(b...