Everett et al v. Bozic et al

MEMORANDUM OF LAW in Support re: 17 MOTION to Dismiss the Complaint.. Document

S.D.N.Y.June 13, 2005

UNITED STATES DISTRICT COURT SOUTHERNDISTRICT OF NEW YORK x JOHNMARSHALL EVERETT,PAMELA A. KRAMER, and WALTER W. LAWRENCE, on Behalfof Themselvesandall Other Similarly Situated, : 05 CV 00296(DAB) ECF CASE Plaintiffs, ORAL ARGUMENT REQUESTED V. MICHAEL BOZIC, EDWIN J. GARN, WAYNE E. HEDIEN, DR. MANUEL H. JOHNSON, JOSEPHJ. KEARNS, MICHAEL E. NUGENT, FERGUSREID, CHARLESA. FIUMEFREDDO, JAMES F. HIGGINS, MORGAN STANLEY DEAN WITTER & CO., [NC., MORGAN STANLEY INVESTMENT ADVISORS, and JOHNDOESNo. 1 through100, Defendants. x MEMORANDUM OF LAW IN SUPPORT OF THE INDEPENDENT TRUSTEE DEFENDANTS’ MOTION TO DISMISS Case 1:05-cv-00296-DAB Document 18 Filed 06/13/05 Page 1 of 8 TABLE OF CONTENTS TABLE OF AUTHORITIES . ii PRELIMINARY STATMENT 2 ARGUMENT 2 CONCLUSION S KTS:2419923 2 Case 1:05-cv-00296-DAB Document 18 Filed 06/13/05 Page 2 of 8 TABLE OF AUTHORITIES CASES AlliedFreightways,Inc. v. ChoIfin, 91 N.E.2d 765 (Mass. 1950) 5 n.3 Burksv. Lasker, 441 U.S. 471 (1979) 3 n.2, 4 Harhenv. Brown, 730 N.E.2d859 (Mass.2000) 3 Parish v. Maryland & Virginia Milk ProducersAss’n, 242 A.2d 512 (Md. 1968) 5 n.3 Rosenblalt v. GettyOil Co., 493 A.2d 929 (Del, 1985) 4 Wittmanv. Crooke, 707A.2d 422 (Md. Ct. Spec.App. 1998) 3 STATUTUES 15 U.S.C. § 80a-36 2, 3 n.2 — U — KL3 2419923 .2 Case 1:05-cv-00296-DAB Document 18 Filed 06/13/05 Page 3 of 8 UNITED STATESDISTRICT COURT SOUTHERNDISTRICT OF NEW YORK x JOHNMARSHALL EVERETT,PAMELA A. KRAMER, andWALTER W. LAWRENCE, on BehalfofThemselvesandall OtherSimilarly Situated, Plaintiffs, v. 05 CV 00296 (DAB) ECF CASE MICHAEL BOZIC, EDWIN J. GARN, WAYNE E. HEDIEN, DR. MANUEL H. JOHNSON,JOSEPH ORAL ARGUMENT REQUESTED J. KEARNS, MICHAEL E. NUGENT, FERGUS REID, CHARLES A. FIUMEFREDDO,JAMES F. HIGGINS, MORGAN STANLEY DEAN WITTER & CO., INC., MORGAN STANLEY INVESTMENT ADVISORS, andJOHNDOESNo. 1 through100, Defendants. x MEMORANDUM OF LAW IN SUPPORTOFTHE INDEPENDENT TRUSTEEDEFENDANTS’MOTION TO DISMISS DefendantsMichael Bozic, Edwin Garn,WayneHedien,Dr. ManuelJohnson, JosephKearns,MichaelNugentandFergusReid (collectively,the“IndependentTrustees”), submitthis memorandumof law in supportof theirmotion to dismisstheComplaintin this action.1 TheIndependentTrusteesalsojoin in andincorporateby reference,to theextent applicable,theargumentsset forth in thememorandumof law filed by theinstitutional defendants(the “Morgan StanleyMotion”). ‘A copyof theComplaintis attachedasExhibit A to the Declarationof YehudisLewis dated June8, 2005. KL3:2419923,2 1 Case 1:05-cv-00296-DAB Document 18 Filed 06/13/05 Page 4 of 8 PRELIMINARY STATMENT Plaintiffs, who arc investorsin two unspecifiedfundsmaintainedby Morgan StanleyDeanWitter & Co.,Inc. (“Morgan Stanley”),bringthis actionon behalfof themselves and investorsin over eighty otherunspecifiedMorganStanleyfundsto recovera sharein the proceedsof certainclass actionsettlements,whichplaintiffs guesssomeof theseunspecified MorganStanleyfundswouldhavebeenableto recoverhadthe IndependentTrustees,interested trustees,advisersandaffiliatesof thoseunspecifiedfunds filed timely proofsof claim. Whether styled asa commonlaw negligenceclaim,a commonlawbreachof fiduciary duty claim or a violation of Section36(a) oftheInvestmentCompanyAct of 1940 (“ICA”), plaintiffs’ novel legal theorycannotsurviveamotion to dismiss. ARGUMENT TheMorganStanleyMotion identifies four groundsfor dismissal. On behalfof the Independent Trusteesandto the extentapplicable,weadoptandincorporateeachof those grounds by referenceasif fully setforth herein, FortheCourt’s convenience,weprovidea summaryofthosegroundsapplicableto theIndependentTrustees. First,plaintiffs lackstandingto assertany of theirclaimsbecausetheComplaint fails to allegeany “concrete”or “particularized”injury to plaintiffs and, in any event,plaintiffs haveno right to pursuerelief onbehalfof investorsin otherfunds. SeeMorganStanleyMotion at I A-B. Second,plaintiffs haveno direct claimagainsttheIndependentTrustees.Their claimsmaybrought,if at all, only derivatively,andeventhenonly aftermakingaboarddemand. Id. at II A. Plaintiffs havemadeno demandon theBoard. Id. at II B. Third, thereis no privateright of actionunderICA Section36(a). Id. at III C. -2- KL3 24 199231 Case 1:05-cv-00296-DAB Document 18 Filed 06/13/05 Page 5 of 8 Fourth,plaintiffs’ solefederalclaim againstheIndependentTrusteesalsofails on themeritsbecauseSection36(a) is limited to breachesof duty involving “personalmisconduct,” which is notallegedhere.2 Id. atIV A. Thebusinessjudgmentrule providesthe IndependentTrusteeswith an additional andfifth groundfor dismissal.3Thatrule establishes“a presumptionthat directorsof a corporationactedin goodfaith andin thebest interestofthecorporation.”Wittmanv. Crooke, 707 A.2d 422, 425 (Md. Ct. Spec.App. 1998). AccordHarhenv. Brown, 730N.E.2d859, 865 (Mass.2000). To rebut thepresumptionof the businessjudgmentrule andwithstandamotion to dismiss,acomplaintmustallegefactsthat, if acceptedastrue,establishthat directorsviolated their fiduciary dutiesof careor loyalty by engagingin fraud, self-dealingor unconscionable conduct,or failing to actin thebestinterestsofthe corporation.SeeWittinan, 707 A.2dat 425; Harhen,730 N.E.2dat 865. TheComplaintcontainsno allegationsof fraud or self-dealing;the only fiduciary dutypossiblyatissuein this caseis theduty of care,but theComplaintfails to adequatelyallegefactsto establishthattheIndependentTrusteesbreachedeventhat duty. Most fundamentally,theComplaintfails to allegethat theIndependentTrustees wereactuallyinvolved in evaluatingwhetherparticularfunds hadpotentialclaimsin particular 2 Absentaviable federalclaim, theremainingcommonlaw claimsmustbedismissedfor lackofsubjectmatterjurisdiction. Thebusinessjudgmentrule appliesto all ofplaintiffs’ claimsagainstheIndependent Trustees,including their ICA Section36(a) claim. SeeBurksv. Lasker,441 U.S. 471, 478-89 (1979)(“Congresshasneverindicatedthatthe entirecorpusof statecorporationlaw is to be replacedsimply becausea plaintiff’s causeof actionis basedupona federalstatute. . . . TheICA ., therefore,do[es]not requirethatfederallaw displacestatelaws governingthepowersof directors ). TheMorganStanleyfundsareorganizedvariouslyasMarylandor Massachusettstatutorytrusts,andtheapplicationof thebusinessjudgmentrule to all of the claimsshouldthereforebeanalyzedunder thelawsof MarylandorMassachusetts.Because plaintiffs fail to specifythefundsin which theyhavean ownershipinterest,this motion analyzes plaintiffs’ claimsunderthe lawsof bothMarylandandMassachusetts. -3- KL124199232 Case 1:05-cv-00296-DAB Document 18 Filed 06/13/05 Page 6 of 8 classactionsor, alternatively,thattheIndependentTrusteesimproperlydelegatedthattaskto others. Thesefailuresarefatal. Thelaw recognizesthat “[tjhe realitiesof modemcorporatelife aresuchthat directorscannotbe expectedmanagetheday-to-dayactivitiesofa company.”Rosenblattv. GettyOil Co., 493 A.2d 929, 943 (Del. 1985) (emphasisadded). Accordingly,“[am informed decisionto delegateatask is asmuchan exerciseofbusinessjudgmentasany other.” Id. This principlemostparticularlyappliesto mutualfunds. By theirvery organizationalstructure,mutualfunds areexpectedto be managedby personsother than their directors.SeeBurks,441 U.S. at480-81 (“Most fundsare formed,sold, andmanagedby externalorganizations,. . . that areseparatelyownedandoperated ) (internalcitation omitted). Specifically,the law requiresfunddirectorsto delegatefundmanagementto competentserviceproviders. Id. (TheICA chargesindependentdirectorswith theresponsibility to “review andapprovethecontractsof the investmentadviserandtheprincipalunderwriter;the responsibilityto appointotherdisinterestedirectorsto fill vacanciesresulting from the assignmentof theadvisorycontracts;andarerequiredto selecttheaccountantswhopreparethe company’sSecuritiesandExchangeCommissionfinancialfilings.”) Id. at483 (internalcitations omitted). Participationin classactionsettlementsis clearlyataskthat fallsoutsidethescopeofa director’sdutiesandis properlydelegable.As such,andinasmuchastheComplaintdoesnot allegethat theIndependentTrusteesimproperlyselectedtheFunds’ serviceproviders,the businessjudgmentrule fully immunizestheIndependentTrusteesfrom any andall liability for -4- KL3~2419922.2 Case 1:05-cv-00296-DAB Document 18 Filed 06/13/05 Page 7 of 8 theallegeddecisionofthe Funds’ serviceprovidersnot to participatein certainclassaction settlements.4 CONCLUSION WHEREFORE,for theabove-statedreasonsandfor thereasonssetforth in the MorganStanleyMotion, theIndependentTrusteesrespectfullyrequestthat this Courtenteran orderdismissingwith prejudice,all of theclaimsassertedagainstthem. Dated:New York, New York June13, 2005 KRAMER LEVIN NAFTALIS & FRANKEL LLP CharlotteFischman(CF 8351) YehudisLewis (YL 9974) 1177 Avenueofthe Americas NewYork, New York 10036 (212) 715-9100 Attorneysfor Defendants MichaelBozic,EdwinGarn, WayneHedien, Dr. ManuelJohnson,JosephKearns,Michael NugentandFergusReid ~‘In anyevent,theallegeddecisionnot to participatein certainclassactionsettlementsis, at worst, an actofsimple negligence,which is insufficient to rebutthepresumptionof thebusiness judgmentrule. SeeParish v. Maryland& Virginia Milk ProducersAss‘n, 242 A.2d 512, 540 (Md. 1968)(holdingthat directorsmaybe liable only for “gross andculpablenegligence”in exerciseof businessjudgment).AccordAllied Freightways,Inc. v. Cholfin, 91 N.E.2d765, 768 (Mass. 1950)(holdingthat directorsarenotresponsiblefor “mere errorsofjudgmentor wantof prudence”but only for “clearandgrossnegligence”). For thesamereason,all of theclaimsareprecludedby theFunds’ charters,eachof which limits the liability ofa trusteeto conductinvolving only “willful misfeasance,badfaith, gross negligence,or recklessdisregardof thedutiesinvolved in theconductof his office.” 15 U.S.C. § 80(a)-17(h). -5- KL2.24199222 Case 1:05-cv-00296-DAB Document 18 Filed 06/13/05 Page 8 of 8