Summary
declining to dismiss § 36(b) claim based in part on allegation that advisers received a substantial fee from uninvested cash
Summary of this case from In re Mut. Funds Inv. LitigationOpinion
Civil Action No. 02-142-JJF
August 21, 2002
Joseph Rosenthal and Carmella P. Keener, Esquires of ROSENTHAL, MONHAIT, GROSS GODDESS, P.A., Wilmington, Delaware. Of Counsel: Richard B. Dannenberg, Richard W. Cohen, and Michelle Rago, Esquires of LOWEY DANNENBERG BEMPORAD SELINGER, P.C., White Plains, New York. Attorneys for Plaintiff.
Richard L. Horwitz and John M. Seaman, Esquires of POTTER ANDERSON CORROON LLP, Wilmington, Delaware. Of Counsel: Jeffrey B. Malletta, Ivan B. Knauer, Nicholas G. Terris, Esquires of KIRKPATRICK LOCKHART LLP, Washington, District of Columbia. Attorneys For Defendants.
Martin P. Tully, Esquire of MORRTS, NICHOLS, ARSHT, TUNNELL, Wilmington, Delaware. Of Counsel: Jonathan L. Greenblatt and Neil H. Koslowe, Esquires of SHEARMAN STERLING, Washington, District of Columbia. Attorneys for Nominal Defendant.
MEMORANDUM OPINION
Presently before the Court is a Motion To Dismiss The Complaint (D.I. 11) filed by Defendant, meVC Advisors, Inc. ("meVC Advisors") and a Motion To Dismiss (D.I. 14) filed by Defendant meVC Draper Fisher Jurvetson Fund, I, Inc. ("Fund"). For the reasons discussed, the notion to dismiss filed by meVC Advisors will be denied and the motion to dismiss filed by the Fund will be granted.
BACKGROUND
I. PROCEDURAL HISTORY
Plaintiff Millenco, L.P. ("Millenco") tiled this action under Section 36(b) of the Investment Company Act of 1940 ("ICA"), on behalf of the Fund, against meVC Advisors, alleging that the fees the Fund paid to meVC Advisors were ewessive. (D.I. 1). Millenco seeks recovery of the allegedly excessive fees on behalf of the Fund, which is named as a nominal defendant. (D.I. 1).
In lieu of an Answer, meVC Advisors filed a Motion To Transfer Venue (D.I. 7) and subsequently filed the instant Motion To Dismiss (D.I. 11). Similarly, the Fund filed a Motion To Dismiss (D.I. 14) and a Motion To Transfer Venue (D.I. 16).
meVC Advisors' Motion To Transfer Venue will be addressed by a separate memorandum order shortly.
Because § 36(b) of the ICA prohibits an action against the Fund because it has not received compensation or payments from a registered investment company, and because all parties have agreed to dismiss the Fund as a nominal defendant, the Court will not address the substance of the Motion To Dismiss (D.I. 14) filed by the Fund, but will grant the motion. Further, because the Court will grant the motion to dismiss, the Court will not address the Fund's motion to transfer, denying the motion as moot.
II. THE COMPLAINT
By its Complaint, Millenco alleges that the Fund, organized as a Delaware corporation, is a closed-end investment company that has elected to be treated as a business development company under Section 54 of the ICA. (D.I. 1 at ¶ 4). The Fund's stated objective is to make venture capital investments in information technology companies. (D.I. 1 at ¶ 8).
The Complaint alleges that principals of meVC Advisors and the Fund's sub-advisor, Draper Fisher Jurvetson Management Company, LLC ("Draper Advisors"), established the Fund and now serve as the Fund's executive officers. (D.I. 1 at ¶¶ 9-10). Further, the Complaint alleges that meVC Advisors and Draper Advisors chose the outside directors and compensate those directors more than $100,000 annually. (D.I. 1 at ¶¶ 10-11).
In March 2000, the Fund issued common stock to the public, receiving approximately $313,000,000 in proceeds from its offering. (D.I. 1 at ¶ 17). In anticipation of the initial public offering, the Fund entered into an advisory contract with meVC Advisors, a Delaware corporation registered as an investment advisor under the ICA, effective March 2000 ("Advisory Contract") for two years. (D.I. 1 at ¶ 5). The existence of the. Advisory Contract was disclosed in the Registration Statement filed with the Securities and Exchange Commission prior to the initial public offering. Pursuant to the Advisory Contract as alleged in the Complaint, meVC Advisors' compensation from the Fund for services provided is (1) 2.5% per annum of the Fund's net assets, calculated weekly, and payable monthly in arrears, ("NAV-based compensation") and (2) 20% of annual net capital gains, including net realized gains ("Incentive Fee"). (D.I. 1 at ¶ 12) The Complaint alleges that the "advisory contract between the Fund and meVC Advisors was not negotiated at arms-length, as the Fund is a captive of meVC Advisors and Draper Advisors, the direct and indirect recipients of the advisory fees. (D.I. 1 at ¶ 14).
The Court will not engage in an analysis of the factors utilized by the United States Court of Appeals for the Second Circuit in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982) . This is because the Court agrees with Millenco that the Gartenberg decision does not set a pleading standard, but rather is helpful only after the complete evidentiary record has been established.
The Complaint further alleges that meVC Advisors contracted with Draper Advisors to "identify, evaluate, structure, monitor, and dispose of the Fund's investments in Portfolio Companies, in return for 40% of meVC Advisors' NAV — based compensation and 90% of meVC Advisors' Incentive Fee." (D.I. 1 at ¶ 13). Allegedly, meVC Advisors further contracted with Fleet Investment Advisors ("Fleet Advisors") to manage the Fund's cash for 0.10% annum. (D.I. 1 at ¶ 16)
The Complaint alleges that meVC Advisors did not invest the cash proceeds obtained from the initial public offering properly, resulting in meVC Advisors receiving a substantial fee from this uninvested cash. (D.I. 1 at ¶ 24a). Further, the Complaint alleges that meVC Advisors has "very little to do" in light of the management subcontracts and because it does not have the burden and expense of effecting stockholder redemptions and incurs no brokerage transaction costs. (D.I. 1 at ¶ 15) . The Complaint also alleges that meVC Advisors "caused the Fund not to mark downloaded docket # the Fund's NAV in a timely manner for purposes of computing advisory fees," resulting in excessive fees. (D.I. 1 at ¶ 24b). Further, the Complaint alleges that the advisory fees were not adjusted despite the failure of the Fund to obtain approval from the Securities and Exchange Commission to allow follow-on investments. (D.I. 1 at ¶ 24c).
STANDARD OF REVIEW
Pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court may dismiss a complaint for failure to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(b)(6). The purpose of a motion to dismiss is to test the sufficiency of a complaint, not to resolve disputed facts or decide the merits of the case. Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993) When considering a motion to dismiss, a court must accept as true all allegations in the complaint and must draw all reasonable factual inferences in the light most favorable to the plaintiff. Neitzke v. Williams, 490 U.S. 319, 326 (1989); Piecknick v. Pennsylvania, 36 F.3d 1250, 1255 (3d Cir. 1994). The Court is "not required to accept legal conclusions either alleged or inferred from the pleaded facts."Kost, 1 F.3d at 183. Dismissal is only appropriate when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claims which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45 (1957). The burden of demonstrating that the plaintiff has failed to state a claim upon which relief may be granted rests on the movant. Young v. West Coast Industrial Relations Assoc., Inc., 763 F. Supp. 64, 67 (D. Del. 1991) (citations omitted)
As a general matter, a court may not consider matters outside the pleadings when adjudicating a motion to dismiss. However, a court may consider "document[s] integral to or explicitly relied upon in the complaint" without converting a motion to dismiss to a motion for summary judgment. In re Rockefeller Center Properties, Inc. Securities Litigation, 184 F.3d 280, 287 (3d Cir. 1999).
DISCUSSION
Section 36(b) of the ICA creates a fiduciary duty in a mutual fund's investment advisor "with respect to the receipt of compensation for services." 15 U.S.C. § 80a — 35(b). Section 36(b) also provides a private cause of action to a mutual fund investor, against the fund's advisor, for "breach of fiduciary duty in respect of such compensation" paid to the advisor. Id. The plaintiff bears the burden of establishing a breach of fiduciary duty. 15 U.S.C. § 80a — 35(b)(1); see also Green v. Belden, 286 F.3d 682 (3rd Cir. 2002)
The parties agree that to prove a violation of § 36(b) a plaintiff must show that the fee charged was "SO disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arms-length bargaining." Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923, 928 (2nd Cir. 1982) . Thus, in the context of a motion to dismiss, Millenco must allege sufficient facts in the Complaint to demonstrate that meVC Advisors breached their fiduciary duty by charging a fee so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arms-length bargaining. Id.
The Court, in considering a motion to dismiss a complaint alleging a violation of § 36(b), must examine the relationship between the fees charged and the services rendered by the investment advisor. It is well settled that a complaint may not allege that fees are excessive in a conclusory manner. Migdal v. Rowe Price-Fleming Int'l, Inc., 248 F.3d 321, 327 (4th Cir. 2001) However, the United States Court of Appeals for the Third Circuit has not had occasion to set a standard for evaluating excessive fees .
Although the Court is not convinced that Millenco can ultimately prove that the fees charged in this case are so disproportionately large that they bear no reasonable relationship to the services rendered under theGartenberg factors, the Court finds that Millenco has alleged facts sufficient to defeat the instant motion. In its Complaint, Millenco alleges that meVC Advisors did not invest the cash proceeds of the Fund properly, and, as a result, received a substantial fee from this uninvested cash. (D.I. 1 at ¶ 24a). Further, the Complaint alleges that meVC Advisors has "very little to do" because it does not have the burden and expense of effecting stockholder redemptions and incurs no brokerage transaction costs. (D.I. 1 at ¶ 15). Additionally, meVC Advisors allegedly has "very little to do" because it subcontracted with Fleet Advisors to manage the Fund's cash and subcontracted with Draper Advisors to "identify, evaluate, structure, monitor, and dispose of the Fund's investments in Portfoho Companies." (D.I. 1 at ¶¶ 16, 12). The Complaint also alleges that meVC Advisors "caused the Fund not to mark downloaded docket # the Fund's NAV in a timely manner for purposes of computing advisory fees," resulting i.n excessive fees. (D.I. 1 at ¶ 24b). Further, the Complaint alleges that the advisory fees were not adjusted despite the failure of the Fund to obtain approval from the Securities and Exchange Commission to allow follow-on investments. (D.I. 1 at 24c).
In light of these allegations, the Court concludes that the Complaint sufficiently alleges that the nature and quality of services provided by meVC Advisors to the Fund is disproportional to the fee charged. Although meVC Advisors disputes the allegations in the Complaint, the task of the Court at this juncture is not to evaluate or weigh the allegations. Therefore, the Court concludes that the Complaint pleads sufficient facts Lo state a claim for breach of fiduciary duty with regard to the compensation paid to the advisor under § 36(b) of the ICA.
CONCLUSION
In sum, the Court, at this juncture, need only review the factual allegations of the Complaint and determine if more than mere conclusory statements are asserted. In this case, as noted above, Millenco has pled facts, not empty conclusions, and therefore, meVC Advisors' Motion To Dismiss (D.I. 11) must be denied.
An appropriate Order will be entered.
ORDER
At Wilmington, this 21st day of August 2002, for the reasons discussed in the Memorandum Opinion issued this day, IT IS HEREBY ORDERED that:
(1) meVC's Motion To Dismiss The Complaint (D.I. 11) is DENIED.
(2) The Fund's Motion To Dismiss (D.I. 14) is GRANTED.
(3) The Fund's Motion To Transfer Venue (D.I. 16) is DENIED as moot.