Appendix — Krantz v. Prudential Investments Fund Management LLC

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OPINION OF THE UNITED STATES COURT

OF APPEALS FOR THE THIRD CIRCUIT

DATED AND FILED AUGUST 30, 2002

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 02-1266

SHELDON KRANTZ, Appellant

V.

PRUDENTIAL INVESTMENTS FUND MANAGEMENT

LLC; PRUDENTIAL INVESTMENT MANAGEMENT

SERVICES LLC

On Appeal From the United States

District Court For the District

of New Jersey

(D.C. No. 98-cv-03722)

District Judge: Honorable Katharine

S. Hayden

Before: BECKER, Chief Judge, ROTH and

RENDELL, Circuit Judges.

(Filed: August 30, 2002)

OPINION OF THE COURT

PER CURIAM.

Plaintiff, a shareholder in the Prudential Jennison Growth

Fund (the "Fund"), brought this action pursuant to § 36(b) of

the Investment Company Act of 1940, as amended (the "ICA"),

15 U.S.C. § 80a-35(b), against Prudential Investment Fund

Management LLC, the investment adviser to the Fund (the

ee

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"adviser"), and Prudential Investment Management Services

LLC (collectively, "Prudential").' Plaintiff alleged that the

investment advisers received excessive compensation in breach

of their "fiduciary duty with respect to compensation" set forth

in § 36(b) of the ICA, 15 U.S.C. § 80a-36(b). The District

Court entered an order dismissing the action for failure to state

a claim. Fed. R. Civ. P. 12(b)(6). Because we agree that

- Plaintiff has failed to state a claim that the compensation

received by the investment advisers was received in breach of

their fiduciary duty, we affirm the order of the District Court.

I. Allegations and Standard of Review

Section 36(b) of the ICA provides that an investment adviser

has a "fiduciary duty with respect to the receipt of

compensation." 15 U.S.C. § 80a-35(b). Section 36(b) also

provides for a private cause of action by a shareholder against

the investment adviser and principal underwriter "for breach of

fiduciary duty in respect of ... compensation" paid by a fund.

Id. Section 10(a) of the ICA, 15 U.S.C. § 80a-10(a), mandates

that at least 40% of the members of the governing board of

every registered investment company not be "interested

persons," i.e., they must be independent of the investment

| The original Complaint was filed on August 7,

1998. Defendants moved to dismiss the Complaint arguing,

inter alia, that Plaintiff lacked standing to assert

derivative-type claims on behalf of any Prudential Funds other

than the one for which he was a shareholder. In response,

; Plaintiff filed an Amended Complaint on December 10, 1996,

which was substantially similar to the original Complaint

except that it asserted claims only on behalf of the Fund, and

not on behalf of all similarly situated Prudential funds.

AS i UY se

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adviser. Such directors are generally referred to as independent

directors. Section 15(c) of the ICA, 15 U.S.C. § 80a-15(c),

mandates that every agreement with an investment adviser or

distributor Le approved by a majority of independent directors.

The Amended Complaint seeks to recover the fees paid by the

Fund to its investment adviser and distributor, pursuant to

management and distribution agreements which were allegedly

entered into in violation of §§ 10(a) and 15(c) of the ICA. 18

U.S.C. §§ 80a-10(a), 80a-15(c). The Amended Complaint also

contends that the fees authorized were excessive.

Plaintiffs Amended Complaint alleges that none of the

members of the Fund's board are independent, as required by

§ 10(a), because they serve on numerous other boards for

various Prudential funds and receive a large aggregate

compensation for their combined services. Plaintiff contends

that under such a scenario the independent directors are

actually "controlled" by Prudential. Thus, Plaintiff submits that

the management and distribution agreements, which establish

the fees paid by the Fund to the investment adviser and

distributor, were not properly approved as required under

§ 15(c). Accordingly, Plaintiff argues that the receipt of funds

from invalid agreements is a breach of the Defendants’

fiduciary duty to negotiate at arm's length under § 36(b).

Finally, Plaintiff contends that in addition to violating the

independence requirement of § 36(b), the Defendants also

violated § 36(b) because their adviser-manager's fees

agreement were so disproportionately large that fees amounted

to a breach of their fiduciary duty.

Defendants urge that the only facts pleaded were that

directors served on multiple boards and were

well-compensated. They contend that this was inadequate

support either for the claim that the fees were excessive or for

the claim that these directors were "controlled" by the financial

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adviser. The District Court adopted the Defendants’ view, and

dismissed the amended complaint.

Our review of a dismissal pursuant to Fed. R. Civ. P.

12(b)(6) is plenary. Langford v. City of Atlantic City, 235 F.3d

845, 847 (3d Cir. 2000). "We must determine whether, under

any reasonable reading of the pleadings, the plaintiffs may be

entitled to relief, and we must accept as true the factual

allegations in the complaint and all reasonable inferences that

can be drawn therefrom." Nami v. Fauver, 82 F.3d 63, 65 (3d

Cir. 1996). While Fed. R. Civ. P. 8(a)(2) requires only a "short

and plain statement of the claim showing that the pleader is

entitled to relief," Rule 12(b)(6) is not without meaning.

"Although the pleading requirements . . . are very liberal, more

detail is often required than the bald statement by plaintiff that

he has a valid claim of some type against defendant." SA

Charles A. Wright and Arthur R. Miller, Federal Practice and

Procedure § 1357 at 318 (2d ed. 1990).

II. Dismissal For Failure to State a Claim

This case is one of five virtually identical actions filed by

Plaintiff's counsel in district courts in four separate circuits.

All of the other courts, including the courts of appeals for the

Fourth Circuit and the Second Circuit, have rejected Plaintiff's

arguments. See Migdal v. Rowe Price-Fleming Int'l, Inc., 248

F.3d 321, 330 (4th Cir. 2001); Verkouteren v. BlackRock Fin.

Megmt., Inc., No. 98 Civ. 4673, 1999 WL 511411, at *4

(S.D.N.Y. July 20, 1999), aff'd, 208 F.5d 204 (2d Cir. 2000);

Krantz v. Fidelity Mgmt. and Research Co., 98 F. Supp. 2d

150, 157 (D. Mass. 2000); Strougo v. BEA Assocs., No. 98 CIV

3725, 1999 WL 147737, at *3 (S.D.N.Y. Mar. 18, 1999).

The complaint in the Fourth Circuit asserted two related

claims:

Sa

First, plaintiffs alleged that the investment advisers

breached their fiduciary duty under Section 36(b) because

the fees they received were excessive. Second, plaintiffs

contended that the "independent" directors of each of the

mutual funds were not actually disinterested parties as

required by the ICA. See 15 U.S.C. §§ 80a-10(a) and

80a-15(c). Specifically, several of the funds' disinterested

directors served on the boards of between twenty-two and

thirty-eight ot.-er funds within the T. Rowe Complex. For

_ their services, these directors received aggregate

compensation of either $65,000 or $81,000 for their services

on these multiple boards. Plaintiffs alleged that since forty

percent of the boards were not disinterested, the advisory

agreements could not have been properly approved as

required by Section 15(c). Therefore, the defendant

investment advisers breached their fiduciary duty under

Section 36(b) by failing to negotiate their advisory

agreements at arm's length.

248 F.3d at 325. These allegations are functionally identical to

the ones made by Plaintiff in this case.

The Fourth Circuit first rejected the claim that the defendants

violated § 36(b) because the fees they received were excessive.

"In order to determine whether a fee is excessive for purposes

of Section 36(b), a court must examine the relationship

‘yetween the fees charged and the services rendered by the

investment adviser." /d. at 327. Since the plaintiffs failed to

allege any "facts pertinent to this relationship between fees and

services," the court concluded that dismissal pursuant to

12(b)(6) was appropriate. We adopt the Fourth Circuit

rationale, and, applying it to the Amended Complaint before us,

conclude that dismissal for failure to state a claim with respect

to excessive compensation was appropriate since Plaintiff

failed to allege any facts indicating that the fees received were

disproportionate to services rendered.

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The Fourth Circuit also rejected the claim that the

"independent" directors were "interested" as a result of their

participation on multiple boards and receipt of compensation

therefrom. Noting that there "is a presumption under the ICA

that natural persons are disinterested, see 15 U.S.C.

§ 80a-2(a)(9)," the court concluded that the plaintiff's

allegations failed to overcome that presumption. /d. at 331. In ©

support of that conclusion, the court pointed out that "neither

the ICA nor the SEC proscribes the use of multi-board

membership within mutual fund complexes." /d. at 330. In

fact, as noted, "membership on the boards of several funds

within a mutual fund complex is the prevailing practice in the

industry ... Indeed, the SEC has recently reaffirmed its

position that ‘a director of a fund who is also a director of

another fund managed by the same adviser generally would not

be viewed as an interested person of the fund under section

2(a)(9) solely as a result of this relationship." /d. (internal

citations omitted). We agree with the Fourth Circuit's ratio

decidendi. In the Amended Complaint, Plaintiff has failed to

allege any facts that, if true, would support a claim that the

"independent" directors of the Fund were actually "interested."*

. The District Court also concluded that Plaintiff

lacked standing because he failed to allege damages, as is

necessary under Article III's "case or controversy" requirement.

See Rosetti v. Shalala, 12 F.3d 1216, 1224 (3d Cir. 1993) ("the

plaintiff must show that he personally has suffered some actual

or threatened injury"). This conclusion was necessarily

subsumed in the District Court's conclusion that the Amended

Complaint failed to state a claim. As the court said, "By

definition, a violation of Section 36(b) encompasses excessive

payments to the fund's advisers. These payments belong to the

plaintiff via the Fund. As such, damages would be implicit in

a properly pleaded Amend[ed] Complaint. However, Plaintiff

(continued...)

Ta

Notwithstanding Plaintiff's characterization that this imposes

on him a "heightened standard" of pleading, we agree with the

District Court that the statutory scheme here is such that only

by alleging facts that, if proved, would render the directors

interested will plaintiff be able to overcome the presumption to

the contrary. This he did not do. Accordingly, the District

Court acted properly in granting the motion to dismiss.

III. Denial of Leave to Amend

Plaintiff also contends that the District Court abused its

discretion in denying him leave to amend his Amended

Complaint. We review for abuse of discretion. See Lake v.

Arnold, 232 F.3d 360, 373 (3d Cir. 2000) (standard of review

for a District Court's decision to grant or deny a motion to

amend the complaint is abuse of discretion). Rule 15(a) of the

Federal Rules of Civil Procedure provides that a party may

seek leave of the court to amend a pleading and that such leave

"shall be freely given when justice so requires." "Among the

grounds that could justify a denial of leave to amend are undue

delay, bad faith, dilatory motive, prejudice, and futility." Shane

v. Fauver, 213 F.3d 113, 115 (3d Cir. 2000). A District Court

has discretion to deny a plaintiff leave to amend where the

plaintiff was put on notice as to the deficiencies in his

’ (...continued)

here has failed to properly plead his Amended Complaint, and,

as such, the complaint should be dismissed." Krantz v.

Prudential Investments Fund Management, LLC, 77 F. Supp.

2d 559, 565-66 (D.N.J. 1999). Because the District Court's

conclusion on standing was based on the failure to state a

proper claim, and was not really an independent ground for

dismissal, we do not find it necessary to reach the issue on

appeal.

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complaint, but chose not to resolve them. Rolo v. City

Investing Co. Liquidating Trust, 155 F.3d 644, 654 (3d Cir.

1998). In this case, the District Court concluded that "plaintiff

should not be granted a second leave to amend when [he] was

on notice of the complaint's deficiencies and failed to rectify

them with his first amendment." Krantz v. Prudential

Investments Fund Management, LLC, 77 F. Supp. 2d 559, 560

(D.N.J. 1999). Plaintiff submits that this was an abuse of

discretion because he contends that he was not on notice of the

deficiencies in his Complaint. We disagree.

Plaintiff claims that he was not "on notice" of the defects in

his Complaint because the decision relied upon by the District

Court in granting Prudential's 12(b)(6) motion was decided

after Plaintiff filed his Amended Complaint. We find this

argument unpersuasive. First, Prudential cited Olesh v.

Dreyfus Corp., No. CV-94-1664, 1995 WL 500491 (E.D.N.Y.

Aug. 8, 1995) in its original motion to dismiss. Olesh held that

allegations that the directors served on multiple boards and

were well-compensated failed to demonstrate that the directors

were controlled and failed to state a claim under § 36(b).

Olesh, 1995 WL 500491 at *11. Thus, Plaintiff was on notice

that his allegations that serving on multiple boards and

receiving compensation for such service might not be sufficient

to state a claim that the directors were interested and could

have made changes in his Complaint before filing his Amended

Complaint. ©

_ Second, we note that Migdal, the case on which we primarily

rely in reaching our conclusion, and which was also relied on

by the District Court, was decided before Plaintiff filed his

opposition to Prudential's motion to dismiss the Amended

Complaint; Migdal was decided on January 20, 1999, and

Plaintiff filed his opposition papers on February 26, 1999.

Thus, we agree with the District Court that Plaintiff was on

notice, prior to filing his Amended Complaint and before

a i i lac lla

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responding to the second motion to dismiss, not only of the

potential problems with the allegations in his Complaint, but

also of the developing case law in this area. As such, the

District Court did not abuse its discretion in denying Plaintiff

leave to amend his Amended Complaint.

The order of the District Court dismissing Plaintiff's

complaint and denying leave to amend will be affirmed.

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OPINION AND ORDER OF THE UNITED STATES

DISTRICT COURT FOR THE DISTRICT OF

NEW JERSEY DATED JULY 30, 1999

Sheldon KRANTZ, Plaintiff,

V.

PRUDENTIAL INVESTMENTS FUND

MANAGEMENT LLC and Prudential Investment

Management Services LLC, Defendants.

No. 98-3722 (KSH).

United States District Court,

D. New Jersey.

July 30, 1999.

ORDER

HAYDEN, District Judge.

This Court having referred defendants’ motion to dismiss the

plaintiff's complaint to the Honorable Ronald J. Hedges,

United States Magistrate Judge, pursuant to 28 U.S.C.

§ 636(b)(1)(B); the Court having reviewed de novo the Report

and Recommendation of June 10, 1999; the Court having

considered plaintiffs’ objections to the Report as well as

defendants’ response to plaintiff's objections; and the Court

concluding that plaintiff should not be granted a second leave

to amend the complaint when plaintiff was on notice of the

complaint’s deficiencies and failed to rectify them with his first

amendment;

It is this 30" day of July, 1999

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ORDERED that the defendants’ motion to dismiss the

complaint is granted; and it is further

ORDERED that the Report and Recommendation of the

United States Magistrate Judge is adopted and incorporated as

the Opinion of this Court.

REPORT AND RECOMMENDATION

HEDGES, United States Magistrate Judge.

INTRODUCTION

This matter comes before me on defendants’ motion to

dismiss the Amended Complaint pursuant to Rule 12(b)(6) for

failure to state a claim upon which relief may be granted. The

motion was referred to me by Judge Hayden. I have considered

the papers submitted in support of and in opposition to the

motion. There was no oral argument. Rule 78.

STATEMENT OF FACTS

Plaintiff, a shareholder of the Prudential Jennison Growth

Fund (the “Fund”), brought this action pursuant to Section

36(b) of the Investment Company Act of 1940, as amended (the

“ICA”), 15 U.S.C. § 80a-35(b). The Fund is a registered

“investment company” within the meaning of the ICA. The

defendants are Prudential Investments Fund Management LLC,

the investment adviser to the Fund (the “Adviser’”), and

Prudential Investment Management Services LLC, the Fund’s

principal underwriter (the “Distributor”). The Distributor is a

Delaware limited liability company and an affiliate of the

Adviser. The Adviser's principal offices are located in

Newark, New Jersey.

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The original Complaint was filed on August 7, 1998.

Defendants moved to dismiss on October 23, 1998. In

response, plaintiff filed an Amended Complaint on December

10, 1998. The Amended Complaint contains a single claim for

relief under Section 36(b) of the ICA, 15 U.S.C. § 80a-35(b).

ICA Section 36(b) provides that an investment adviser has “a

fiduciary duty with respect of the receipt of compensation . . .

”” 15 U.S.C. § 80a-35(b). Section 36(b) also provides for a

private cause of action by a shareholder against the investment

adviser and principal underwriter “for breach of fiduciary duty

in respect of . . . compensation” paid by a fund. 15 U.S.C.

§ 80a-35(b). The Amended Complaint seeks to recover all of

the fees paid by the Fund to its investment Adviser and

Distributor pursuant to management and distribution

agreements (the “Agreements”), which were allegedly entered

into in violation of Section 15(c), of the ICA, 15 U.S.C. § 80a-

15(c).

Section 10(a) of the ICA, 15 U.S.C. § 80a-10(a), mandates

that at least 40% of the members of the governing board of

every registered investment company not be “interested

persons,” i.e., they must be independent to the investment

adviser. Such directors are generally referred to as independent

directors. Section 15(c), 15 U.S.C. § 80a-15(c), further

mandates that every agreement with an investment adviser or

distributor be approved by a majority of the independent

directors.

The Amended Complaint alleges that noné of the members

of the Fund board are independent, as required by ICA

Section 10(a), 15 U.S.C. § 80a-10(a). As a result, plaintiff

contends, the Agreements could not be properly approved as

required by ICA Section 15(c), 15 U.S.C. § 80a-15(c).

Consequently, by reason of their receipt of funds from invalid

Agreements, defendants have breached their fiduciary duty to

negotiate at arm’s-length. 15 U.S.C. § 80a-35(b).

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Accordingly, plaintiff seeks judgement: (1) declaring that

defendant violated Sections 10(a), 15(c), and 36(b) of the ICA

and that the Agreements are void; (2) awarding damages

against defendants, including return of all fees paid to it by

each of the Funds as well as related relief; and (3) providing

any other relief deemed just and proper.

Specifically, the Complaint alleges that the Fund’s board of

directors consists of 11 members, three of whom are admittedly

interested by reason of their employment. The remaining eight

directors are not employed by the Adviser, but serve on

multiple boards of the funds managed by the Adviser or its

affiliates (the “Fund Complex”) and receive substaniial

compensation therefrom (as high as $135,000). Some also

accrued substantial deferred compensation (as high as

$143,909). As a result, 40% of the Fund’s board is not

disinterested, as required by ICA Section 10(a), 15 U.S.C.

§ 80a-10(a), and approval of the Fund’s agreements with

defendants violated Section 15(c), 15 U.S.C. § 80a-15(c). Such

failure to negotiate at arm’s-length violates Section 36(b), 15

U.S.C. § 80a-35(b).

Plaintiff also alleges that in addition to violating

Section 36(b) by virtue of subverting the independence

requirement, the defendants violated Section 36(b) because

their adviser-manager’s fee were so disproportionately large

that it amounted to a breach of fiduciary duty in violation of

§ 36(b). Gartenberg v. Merrill Lynch Asset Management, Inc.,

694 F.2d 923, 930 (2d Cir. 1982), cert. denied, 461 U.S. 906,

103 S.Ct. 1877, 76 L. Ed. 2d 808 (1983). In this respect, the

Amended Complaint describes the widespread criticism of fees

paid by mutual funds to their advisers and the advisers’

affiliates. These criticisms have been leveled by the Chairman

of the SEC, industry analysts, and industry insiders.

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Defendants contend that: (1) plaintiff lacks standing since

he has failed to allege damages in accordance with Article III

of the Constitution, (2) Section 36(b) is limited to actions

alleging excessive compensation and the pleadings as now

written are insufficiently particular with respect [to] those

allegations, and (3) the Fund’s directors are disinterested as a

matter of law.

Plaintiff argues that: (1) plaintiff has standing since he is a

stockholder of the Fund and nothing else is required, (2)

Section 36(b) is not limited to actions alleging excessive fees

and even if Section 36(b) can be deemed so limited, the

Amended Complaint adequately alleges excessive fees, and

(3) they so dominated the Fund’s board of directors that less

than 40% of the board could be deemed “disinterested.”

Plaintiff also argues that there are additional “facts” that he can

add to the Amended Complaint as now written.

Discussion

When reviewing a motion to dismiss under Rule 12(b)(6),

all material allegations of-the complaint are accepted as true

[and] the complaint must be construed in favor of the plaintiff.

Warth v. Seldin, 422 U.S. 490, 501, 95 S. Ct. 2197, 45 L. Ed.

2d 343 (1975). A complaint should be dismissed only if, after

accepting as true all of the facts alleged in the complaint, and

drawing all reasonable inferences in the plaintiff's favor, no

relief could be granted under any set of facts consistent with the

allegations of the complaint. ALA, Inc. v. CCAIR, Inc., 29 F.3d

855, 859 (3d Cir. 1994). A court should allow a plaintiff to

amend a complaint instead of dismissing it where “a more

carefully drafted complaint might state a claim upon which

relief could be granted.” Green v. Fund Asset Management,

L.P., 19 F. Supp. 2d 227, 230 (D.N.J. 1998) (quoting

Friedlander v. Nims, 755 F.2d 810,813 (11th Cir. 1985)).

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I.

The Amended Complaint fails to allege

that the independent directors are

“interested persons” under the ICA.

Claims brought under the ICA are particularly appropriate

for dismissal for failure to state a claim under Rule 12(b)(6).

As one court recently observed: “[T]he law in this area

imposes a large number of threshold determinations before

litigation on the merits of acase may commence. The common

law and the ICA explicitly and implicitly regulate who may

bring a claim and upon what grounds.” Olesh v. Dreyfus

Corp., 1995 WL 500491, at *11 (E.D.N.Y. Aug. 8, 1995). The

Amended Complaint fails to meet the required “threshold”

determinations.

Under the ICA, at least 40% of a mutual fund’s board of

directors must be independent, i.e., not “interested” in the

fund’s investment adviser. 15 U.S.C. § 80a-10(a). The ICA

defines an “interested person” to mean one of six enumerated

categories, 15 U.S.C. § 80a-2(a)(19), including any “affiliated

person” of the investment adviser. 15 U.S.C. § 80a-

2(a(19)(b)(I). An “affiliated person”, in turn, is defined to

include a person or entity “controlled by” another person. 15

U.S.C. § 80a-2(a)(3). The ICA defines “control” as “the power

to exercise a controlling influence over the management or

policies of acompany.” 15 U.S.C. § 80a-2(a)(9).

Plaintiff's burden to plead facts that state a claim. rather

than mere legal conclusions, is heightened here by the statutory

presumption against his claim. As set forth in defendants’

moving brief, the ICA expressly provides that “[a] natural

person shall be presumed not to be a controlled person within

the meaning of [the Act].” 15 U.S.C. § 80a-2(a)(9) (emphasis

added). “The burden of overturning the presumption against

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control of a natural person is not one that will be lightly

assumed or easily carried to success.” Acampora v. Birkland,

220 F. Supp. 527, 543 (D. Colo. 1963) (quoting In the Matter

of Fundamental Investors, Inc., Investment Co. Act. Rel.

#3596).

Rule 8 of the Federal Rules of Civil Procedure further

requires that in a pleading, "facts must be stated, rather than

legal conclusions unsupported by facts,...." Charles A. Wright

& Arthur R. Miller, Federal Practice and Procedure; § 1216

at 152 (2d ed. 1990). A complaint's "bald assertions" or "legal

conclusions" do not need to be credited when deciding a

motion to dismiss. Morse v. Lower Merion School District,

132 F.3d 902, 906 (3d Cir. 1997).

With the presumption that the non-employee directors are

not "controlled" and Rule 8's prohibition against pleading legal

conclusions, in mind, does the Amended Complaint allege

adequate facts? A careful review reveals that it is almost

completely devoid of allegations, conclusory or otherwise, that

the directors are in fact controlled by any defendant. Plaintiff

charges that the independent directors of the Fund are

controlled by Prudential--and therefore "interested"--solely

because they serve on multiple funds managed by Prudential,

for which they receive between $1,000 and $7,500 per fund, for

aggregate compensation ranging between $45,000 and

$135,000 per year. Paragraph 28 sets forth a table of the

compensation received by each of the non-employee directors.

The table is supplemented by paragraph 29:

The excessive number of boards upon which the

Fund's directors serve and concomitant assembly-line,

truncated board meetings, effectively prevents them

from being able to fulfill their statutory role as

watchdogs for the public investors. Rather, the Fund's

board is effectively controlled by the Adviser and its

ene peste SO 0 Ups oe a ae

17a

affiliates and merely rubber-stamps proposals of

defendants. As a result, each of the directors is an

‘interested person’ within the meaning of ICA Sections

2(a)(3), 2(a)(19)(A)(1), and 2(a)(19)(B)(D).

These conclusory assertions are not supported by any other

allegation. The Amended Complaint does not allege a single

instance where defendants’ alleged "truncated board meeting"

invoked a course of action which prejudiced the shareholders

of the funds and should have been resisted by the independent

directors. Nor is a single instance alleged in which a proposal

was "rubber- stamped" without an informed decision.

The only factual allegation plaintiff does include in the

Amended Complaint-- that the Fund's directors serve on boards

of multiple funds for which they receive significant

compensation--fails to state a claim for relief. Courts have

unanimously held so. In Verkouteren v. Blackrock Fin.

Management, Inc., 37 F. Supp. 2d 256 (S.D.N.Y. 1999), the

court dismissed a complaint filed by the same firm that

represents plaintiffhere and which was virtually identical to the

complaint filed in this action. In Verkouteren, the plaintiff

alleged that the defendants violated Section 36(b) because the

investment advisory contracts were approved by directors who

Sat on over twenty fund boards for which they received

between $140,000 and $160,000 in aggregate compensation.

The court concluded that plaintiff's bare allegation that the

directors served on multiple boards for substantial

compensation was insufficient to plead domination.

Verkouteren, at 260-61.

In Migdal v. Rowe Price-Fleming, No. AMD-98-2162.

1999 WL 104795, slip. op. (D. Md. Jan. 20, 1999), the court

held that plaintiffs complaint--again, drafted by plaintiff's

counsel here and nearly identical to the complaint here--failed

to state a claim under Section 36(b). Similarly, in Strougo v.

ssaieeememeatammmmmuetamnieeietonmenae tres cetera cert

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BEA Associates, No. 98 Civ. 3725, 1999 WL 147737

(S.D.N.Y. March 18, 1999), Judge Sweet dismissed another

complaint filed by plaintiff's counsel here for failure to state a

claim pursuant to Rule 12(b)(6).

Yet another opinion, in Olesh v. Dreyfus Corp., 1995 WL

500491 (E.D.N.Y. Aug. 8, 1995), dismissed a complaint at the

pleading stage which alleged that service on multiple boards for

substantial compensation rendered directors "controlled" under

Section 2(a)(9) of the ICA. The plaintiffs alleged that the

directors of the Dreyfus funds were "interested" under the ICA

solely because (i) they sat on boards of over fifteen Dreyfus

funds and (ii) received over $50,000 annually in compensation

for their services. Jd. at *11. The court held that these

allegations failed to plead facts sufficient to demonstrate that

directors were "controlled" under § 2(a)(19) and § 2(a)(9)'. Id.

at *16. The court ruled that the plaintiffs were required to

present evidence establishing "actual domination and

operation." /d. Mere influence would fall short of this level of

proof.

The ICA's legislative history confirms that Congress did

not intend for multiple board membership, standing alone, to

compromise a director's independence. H.R. Rep. No. 91-1382

(Aug. 7, 1970) at 15; S. Rep. No. 910184 (May 21, 1969)

reprinted in 1970 U.S.C.C.A.N. 4897, 4929. In view of the

legislative history, the statutory. presumption and the

prohibition against pleading legal conclusions, plaintiff's

general allegations that the Fund's outside directors are

Plaintiff attempts to distinguish Olesh by

claiming it has little relevance. However, for purposes of this

motion, the court's control analysis of Section 2(a)(9) is directly

on point.

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19a

"controlled" by Prudential are inadequate. See Olesh, 1995

WL 500491, at *16.?

II.

Plaintiff fails to plead facts demonstrating that the fund

paid excessive fees in violation of

Section 36(b).

Plaintiff contends that he need not allege that the Fund

paid Prudential "excessive" fees to state a claim under 36(b),

15 U.S.C. § 80a-35(b), citing Green, et al. v. Fund Asset

Management, L.P., et al., 19 F. Supp. 2d 227, 234-35 (D.N.J.

1998). Defendants maintain that plaintiff must allege that the

compensation which has actually been paid to them was

excessive or disproportionate. They note that the Second

Circuit Court of Appeals has held that a plaintiff must establish

that an advisory fee is "so disproportionately large that it bears

no reasonable relationship to the services rendered and could

not have been the product of arm's length bargaining" in order

to prevail under Section 36(b). Gartenberg, supra, 694 F.2d at

928; see Krinsk v. Fund Asset Management, Inc., 875 F.2d 404

(2d Cir. 1989).

Plaintiff argues that Section 36(b) has not been "amended"

by the Second Circuit in Gartenberg by limiting it to actions

alleging excessive fees and that, even if Section 36(b) can be

deemed so limited, the Amended Complaint adequately alleges

, Defendants request this Court to hold as a

matter of law that [a claim contesting the independence of]

Fund directors who serve on multiple boards for which they

receive substantial compensation fails to state a claim under

Rule 12(b)(6). I decline to do so.

20a

excessive fees. Plaintiff cites Green, in which Judge

Debevoise stated:

Section 36(b) of the ICA is not expressly limited to

situations in which the advisory fees received by an

investment adviser were excessive disproportionate or

otherwise unreasonable. The statute encompasses the

receipt of fees by an investment adviser in violation of

the adviser's fiduciary duty, as it provides that '[n]o

action shall be brought or maintained against any

person other than the recipient of such compensation or

payments.’ 15 U.S.C.A. § 80a-35(3). [19 F. Supp. 2d at

234-35].

Judge Debevoise explained that when fees are collected in

breach of fiduciary duty in violation of Section 36(b), "[i]t

would flow that such fees were excessive and recoverable to

the extent permitted under that Section." Jd. at 235.’ See also

Green v. Nuveen Advisory Corp., 186 F.R.D. 486, 490 (N.D.

Ill. 1999) ("holding that compensation received while acting in

breach of fiduciary duty violates" Section 36(b)).

I agree that receipt of compensation while breaching a

fiduciary duty violates Section 36(b), 15 U.S.C. § 80a-35(b).

Plaintiff argues that since none of the members of the Fund

board are independent, their Agreements could not be properly

approved as required by ICA Section 15(c), 15 U.S.C.

§ 80a-15(c). Hence, receipt of funds from invalid Agreements

3

Judge Debevoise clarified this holding by

stating, "[o]f course, when fees are excessive or

disproportionate to the services rendered, this clearly gives rise

to aclaim for breach of fiduciary duty under Section 36(b)". 19

F. Supp. 2d at 235 n. 11.

2la

breaches their fiduciary duty of ICA Section 36(b), 15 U.S.C.

§ 80a-35(b). However, the Amended Complaint does not

sufficiently allege that the non-employee directors were

"interested." Plaintiffs conclusion that a fiduciary breach

necessarily flows from the invalid Agreements must therefore

fail.

Plaintiff's second argument, that the Amended Complaint

adequately alleges excessive fees, is also without merit. In

Krinsk, the court noted six factors to be considered when

determining whether fees are "excessively" large. Krinsk,

supra, 875 F.2d at 409. Those are the nature and quality of the

service, the extent to which economies of scale are realized, the

performance of the fund, the fees charged by other advisers,

and the independence and conscientiousness of the trustees. /d.

(citing Gartenberg, supra, 694 F.2d at 929-30). The Amended

Complaint only addresses the last factor (the- mooted

"independence" factor).

As pleaded, the Amended Complaint fails to allege how

the fees were excessive in light of the factors articulated in

Krinsk. Krinsk, 875 F.2d at 409. It simply characterizes all the

fees as "excessive," without pleading any facts that, if true,

would demonstrate that the fee is "so disproportionately large

that it bears no reasonable relationship to the services

rendered." Jd.

III.

Justiciable Controversy.

Defendant also alleges that plaintiff lacks standing since he

has failed to allege damages in accordance with Article III.

Plaintiff argues that he meets the standing requirements of

Section 36(b) because he is a stockholder of the Fund and

nothing else is required. However, in the context of the ICA,

22a

plaintiff must allege enough facts to show that the violations

caused some sort of damages. Seidel v. Lee, 954 F. Supp. 810,

818 (D. Del. 1996). Plaintiff's argument that simply owning

shares of the Fund confers standing upon himself, fails to grasp

the distinction between statutory standing and constitutional

standing. Satisfying the Article III "case or controversy"

requirement is the irreducible constitutional minimum of

standing. Lujan v. Defenders of Wildlife,.504 U.S. 555, 560,

112 S. Ct. 2130, 119 L. Ed. 2d 351 (1992).

In the context of this case, a properly pleaded Amended

Complaint would allege facts sufficient to establish injury. By

definition, a violation of Section 36(b) encompasses excessive

payments to the fund's advisers. These payments belong to the

plaintiff via the Fund. As such, damages would be implicit in

a properly pleaded Amended Complaint. However, plaintiff

here has failed to properly plead his Amended Complaint, and,

as such, the complaint should be dismissed.

CONCLUSION

For the reasons set forth above, I recommend that plaintiff's

Amended Complaint be dismissed.

23a

STATUTE AND RULE

Section 36(b), Investment Company Act of 1940, 15 U.S.C.

§ 80a-35(b):

Compensation or payments as basis of

fiduciary duty; civil actions by Commission

or security holder; burden of proof; judicial

consideration of director or shareholder

approval; persons liable; extent of liability;

exempted transactions; jurisdiction; finding

restriction

For the purposes of this subsection, the

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. An action may be

brought under this subsection by the

Commission, or by a security holder of such

registered investment company on behalf of

such company, against such investment adviser,

or any affiliated person of such investment

adviser, or any other person enumerated in

subsection (a) of this section who has a

fiduciary duty concerning such compensation or

payments, for breach of fiduciary duty in

respect of such compensation or payments paid

by such registered investment company or by

the security holders thereof to such investment

adviser or person. With respect to any such

action the following provisions shall apply:

24a

(1) It shall not be necessary to

allege or prove that any defendant

engaged in personal misconduct, and

the plaintiff shall have the burden of

proving a breach of fiduciary duty.

(2) In any such action approval by the

board of directors of such investment

company of such compensation or

payments, or of contracts or other

arrangements providing for such

compensation or payments, and

ratification or approval of such

compensation or payments, or of

contracts or other arrangements

providing for such compensation or

payments, by the shareholders of such

investment company, shall be given

such consideration by the court as is

deemed appropriate under all the

circumstances.

(3) No such action shall be brought or

maintained against any person other

than the recipient of such compensation

or payments, and no damages or other

relief shall be granted against any

person other than the recipient of such

compensation or payments. No award

of damages shall be recoverable for any

period prior to one year before the

action was instituted. Any award of

damages against such recipient shall be

limited to the actual damages resulting

from the breach of fiduciary duty and

shall i: no event exceed the amount of

—— Se _

25a

compensation or payments received

from such investment company, or the

security holders thereof, by such

recipient.

(4) This subsection shall not apply to

compensation or payments made in

connection with transactions subject to

section 80a-17 of this title, or rules,

regulations, or orders thereunder, or to

sales loads for the acquisition of any

security issued by a registered

investment company.

(5) Any action pursuant to this

subsection may be brought only in an

appropriate district court of the United

States.

(6) No finding by a court with respect

to a breach of fiduciary duty under this

subsection shall be made a basis (A) for

a finding of a violation of this

subchapter for the purposes of sections

80a-9 and 80a-48 of this title, section

780 of this title, or section 80b-3 of this

title, or (B) for an injunction to prohibit

any person from serving in any of the

capacities enumerated in subsection (a)

of this section.

26a

Fed. R. Civ. P. 8(a), 28 U.S.C. Rule 8(a):

Claims for Relief. A pleading which

sets forth a claim for relief... shall contain...

(2) a short and plain statement of the claim

showing that the pleader is entitled to relief

27a

LAW OFFICES OF JAMES V. BASHIAN. P.C.

James Bashian, Esq

Fairfield Commons. 271 Route 46 West,

Suite F-207

Fairfield, NJ 07004

(973) 227-6330

Attorneys for Plaintiff

UNITED STATES DISTRICT COURT

DISTRICT COURT OF NEW JERSEY

SHELDON KRANTZ, 98 Civ. 3722(KSH)

Plainuff, FIRST AMENDED COMPLAINT

UNDER SECTION 36(b) OF

\ THE INVESTMENT COMPANY

ACT OF 1940

PRUDENTIAL INVESTMENTS FUND

MANAGEMENT LLC and PRUDENTIAL :

INVESTMENT MANAGEMENT

SERVICES LLC,

Defendants

Plaintiff alleges the following upon personal knowledge

as to himself and his own acts, and as to all other matters upon

information and belief, based upon the investigation made by

and through his attorneys, which investigation included, inter

alia, a review of United States Securities and Exchange

Commission ("SEC") filings, press releases, news articles, and

other publicly available materials.

Nature Of The Action

# Plaintiff, a shareholder of Prudential Jennison

Growth Fund (the "Fund"), brings this action pursuant to

Section 36(b) of the Investment Company Act of 1940, as

amended (the "ICA"), 15 U.S.C. § 80a-35(b). against

Prudential Investments Fund Management LLC, the investment

adviser to the Fund (the "Adviser"), and Prudential Investment

28a

Management Services LLC, the Fund's principal underwriter

(the "Distributor"). The Fund is an investment company within

a series of the Prudential Investment Portfolios, Inc., a

diversified, open-end, management investment company

("Prudential Investment").

2. By this action, plaintiff seeks to recover the

compensation received by the Adviser and the Distributor

pursuant to management and distribution agreements (the

"Agreements"), which were entered into in violation of Section

1S(c) of the ICA, 15 U.S.C. § 80a-15(c), and to void the

Agreements.

Background

3. The investment company industry is one of the

few businesses in which participants act as if there are no

economies of scale. In fact, the participants act as if the reverse

is true. Arthur Levitt, Chairman of the SEC, testified before

Congress on March 19, 1997 that, notwithstanding the

enormous amount of monies that have been cascading into

mutual funds, "the fee structure of those funds appears to be

going up, not down." Levitt Tells Senate Appropriations Panel

Concern About Mutual Fund Fee Structure, 29 Sec. Reg & L.

Rep. (BNA), 370 (Mar. 21, 1997).

4. After noting, in October, 1996, that "total assets

under management now stand at more than $3 trillion [total

assets under management have since increased to about $5

trillion}, compared with about $450 billion at the beginning of

the decade and just $49 billion in 1980," and charting the

increase in management fees over the past decades, one

commentator stated as follows:

Given the industry's explosive growth,

it's hard to explain why management fees have

29a

also gone up on a percentage basis. The

money-management business is a textbook case

of an industry with tremendous operating

leverage. It's not capital-intensive, and once

assets hit a certain size, each additional dollar

that comes in the door can be managed at little

additional cost. If anything, management fees

should be going down.

Amy Arnott, "The Rising Tide" (Morningstar Inc. 1996).

Morningstar, Inc. ("Morningstar") is a leading publisher of

analytical information relating to the investment company

industry.

5. ICA Section 10(a), 15 U.S.C. § 80a-10(a),

mandates that at least 40% of the members of the governing

board of every registered investment company- not be

"interested persons," Le., they must be independent of the

investment adviser. Moreover, ICA Section 15(c), 15 U.S.C.

§ 80a-15(c), mandates that every agreement with an investment

adviser or distributor be approved by a majority of the

independent directors. The United States Supreme Court, in

Burks v. Lasker, 441 U.S. 471 (1979), after describing the

inherent conflict of interest between an investment adviser and

an investment company, noted that "the cornerstone of the

ICA's efforts to control conflicts of interest . . . is the

requirement that at least 40% of a fund's board be composed of

independent outside directors." 441 U.S. at 482. (Footnote

omitted.) In other words, the independent directors are to serve

as "watchdogs" for shareholders as "the structure and purpose

of the ICA indicate that Congress entrusted to the independent

directors . . . the primary responsibility for looking after the

interests of the fund's shareholders." Id. at 484-85. (Footnote

omitted.)

30a

6. Notwithstanding the structural protections built

into the ICA, investment advisers and their affiliates have been

able to engage in widespread fee-gouging.

7 The principal reason for the subversion of the

ICA is that the independent directors have largely been co-

opted by the adviser, are no longer independent "watchdogs,"

and have ceased to be able to distinguish the interests of the

adviser and its affiliates from the interests of the shareholders.

8. Jack Bogle, founder of the Vanguard Group, one

of the largest mutual fund complexes in the world, responded

during an interview conducted by Morningstar to the indicated

question as follows:

Q. We've talked about how the industry could do

a better job. How about the fund directors?

A. Well, fund directors are, or at least to a very

major extent, sort of a bad joke. They've

watched industry fees go up year after year,

they've watched expense ratios go up year after

year, they've added 12b-1 fees. J think they've

forgotten, maybe they've never even been told,

that the law, the Investment Company Act, says

they're required to put the interest of the fund

shareholders ahead of the interest of the fund

advisor. It's simply impossible for me to see

how they could have ever measured up to that

mandate, or are measuring up to it.

"Morningstar interviews . . . Jack Bogle, Founder of the

Vanguard Group," by Kathryn Haines and Russ Kinnel,

www.morningstar.net, posted June 5, 1998.

3la

9. More recently, in the October 1998 issue of

Mutual Funds, published by Time, Inc., Mr. Bogle again noted

that "Mutual fund fees are exorbitantly excessive." J. Bogle,

"Fund Fees Are Be yond Excessive," Mutual Funds at p. 80

(Time, Inc., October 1998). Mr. Bogle went on to explain the

reason why mutual fund fees are "exorbitantly excessive,"

Stating:

Simply put, the substantial economies of scale

in this business are not being passed along to

shareholders in the form of lower expenses. To

the contrary, many fund management firms are

earning extraordinary -- and, I would argue,

excessive -- profits on a growing pot of assets.

I find it almost unconscionable that an

"independent" fund director, who is bound by

law and fiduciary duty to represent

shareholders, would continue to approve almost

whatever fee is proposed to the fund board by

the fund manager. Fund boards should be

considering fee rate reductions.

Id.

10. A root cause of the transformation of the

position of director from "watchdog" to that of a sinecure, is

the practice of offering these individuals multiple directorships,

i.e., directorships of more than one fund managed by the same

investment adviser. The "Fund Director's Guidebook,"

compiled by eminent practitioners representing the investment

advisory industry, cautions that

the increased responsibility and workload as

well as potential conflicts that accompany

service on a number of boards must be

32a

considered when an individual serves on the

board of more than one fund with the same or

related sponsors.

Task Force - A.B.A. Sec. Bus. L., Fund Director's Guidebook,

52 The Bus. Law. 229, 240 (1996).

11. | The National Association of Corporate Directors

is anon-profit organization, the membership of which includes

more than 1,700 executive officers who serve on, or deal with,

corporate boards. It has issued the following guidelines when

considering candidates for board membership:

[T]he Commission recommends that boards in

general consider the following guidelines for

different categories of candidates:

[a] CEOs and. other _ senior

executives of public corporations: Boards

should prefer individuals who hold no more

than one or two public-company directorships

(including the position to be offered) in

addition to membership on their own company

board.

[b] Other individuals with full-time

positions: Boards should prefer individuals

who hold no more than three or four public-

company directorships (including the position

to be offered) in addition to membership on

their own organization's board.

[c] Other individuals: Boards

should prefer individuals who hold no more

than five or six public-company directorships

(including the position to be offered).

A MPN PETER ems eCe TETE

33a

National Ass'n of Corp. Directors, Report of the NACD Blue

Ribbon Commission on Director Professionalism, at 12 (1996).

(Footnote omrtted.)

12. The relationship between fee-gouging and

multiple directorships was documented in a study of trustee

compensation for 82 of the largest fund families. "[T]he study

revealed a disturbing pattern: The more money trustees get, the

more shareholders pay in expenses. This unexpected link

between trustees’ salaries and fund-family expenses raises

serious questions about the role independent trustees play in

protecting shareholders." Michael Mulvihill, "A Question of

Trust" (Morningstar, Inc. 1996). (Emphasis added.)

13. Theallegations in this complaint are remarkably

simple, and illustrate these problems. Plaintiff alleges that

none - much less 40% - of the members of the Fund's board are

independent, as required by ICA Section 10(a). Asa result, the

Agreements were not negotiated at arm's-length and could not

be properly approved as required by ICA Section 15(c).

Consequently, the Fund has paid defendants' excessive fees

pursuant to invalid, sweetheart contracts, thereby entitling

plaintiff to seek recovery of those fees pursuant to ICA Section

36(b).

Jurisdiction And Venue

14. _‘ This action is brought pursuant to ICA Section

36(b), 15 U.S.C. § 80a-35(b). Subject matter jurisdiction exists

under 15 U.S.C. § 80a-43, 15 U.S.C. § 80a-35(b)(5), and 28

U.S.C. § 1331.

15. Venue is properly laid in this District because

many of the acts and transactions, and much of the conduct,

constituting the alleged-violations of law occurred herein. The

defendants maintain their offices in this District.

34a

16. In connection with the acts, conduct, and other

wrongs alleged herein, defendants, directly and indirectly, used

the reams and instrumentalities of interstate commerce,

including the mails and telephone communications.

Parties

17. Plaintiffis, and continues to be, a shareholder of

the Fund, an investment company registered under the ICA.

18. | The Adviser serves as investment adviser to the

Fund and is excessively compensated therefor. Its principle

offices are located ut 100 Mulberry Street, Newark, New Jersey

07102-4077.

19. The Distributor provides distribution,

marketing, admunistrative, and other services and activities to

the Fund. It is a Delaware limited liability company, and an

affiliate of th: Adviser. The Distributor is excessively

compensated fir its distribution, marketing, and administrative

services.

Claim For Relief

20. The Fund is an "investment company" within

the meaning of the ICA. The ICA requires that an investment

company ‘such as the Fund be overseen by a board of directors

or trustezs of whom at least 40% may not be "interested"

persons, 15 U.S.C. § 80a-10(a). Such directors or trustees are

generaliy referred to as "independent" directors or trustees.

21. The ICA imposes strict criteria for

independence. For example, an independent director or trustee

may not have any affiliation or material relationship with a

fund's adviser, its underwriter, or a broker/dealer, or with any

35a

of their affiliates. ICA Section 2(a)(19), 15 U.S.C. § 80a-

2(a)(19). Under the ICA, an affiliation with a person arises

from, among other things, a relationship of control. ICA

Section 2(a)(3), 15 U.S.C. § 80a(2)(a)(3).

22. | Most investment companies, as here, are

externally managed -- they have no officers or employees apart

from those supplied by the investment adviser or other service

providers. For this reason, independent directors play an

especially vital role in the management of funds. Under the

ICA, they are required to, among other things: (a) approve any

contracts between a fund and its sponsors, underwriters, or

advisers; and (b) evaluate and approve fees paid to sponsors

and their affiliates, including advisory and distribution fees.

23. The defendants have received substantial fees

pursuant to the Agreements. However, as set forth below, the

Agreements were not approved by a board of which any (and

certainly not 40%) of the members were independent of the

Adviser.

24. | The Fund has an eleven member board of

directors. Three of the eleven directors are acknowledged

affiliates of the Adviser.

25. Richard A. Redeker is the President of

Prudential Investment, as well as a director of the Fund.

26. Robert F. Guniais Executive Vice President and

Treasurer of the Adviser, as well as a director of the Fund.

27. Mendel A. Melzer is Chief Investment Officer

of 38 Prudential Investment mutual funds and annuities, as well

as a director of the Fund.

28. The remaining eight directors are not employed

by the Adviser, but serve on multiple boards of the funds

managed by the Adviser or its affiliates (the "Fund Complex")

and receive substantial compensation therefrom:

Total 1997 Compensation

Received From The Fund

Name Of Director And The Fund Complex Number of Funds

Edward Beach $135,000 38

Delayne D Gold $135,000 38

Douglas H. McCorkindale $ 70,000 20

Thomas T. Mooney $115,000 31

Stephen P. Munn $ 45,000 15

Robin B. Smith $ 90,000 27

Louis A. Weil, Ill $ 90,000 26

Clay T. Whitehead $ 45,000 15

29. | Theexcessive number of boards upon whichthe

Fund's directors serve and concomitant assembly-line,

truncated board meetings, effectively prevents them from being

able to fulfill their statutory role as watchdogs for the public ©

investors. Rather, the Fund's board is effectively controlled by

the Adviser and its affiliates and merely rubber-stamps

proposals of defendants. As a result, each of the directors is an

"interested person" within the meaning of ICA Sections 2(a)(3),

2(a)(19)(A)(i), and 2(a)(19)(B)(i), 15 U.S.C. §§ 80a-2(a)(3),

80a-2(a)(19)(A)(i), and 80a-2(a)(19)(B)(i).

30. Beach, Gold, Mooney, and Weil also serve on

the board of directors of The High Yield Fund, Inc. along with

Redeker, Gunia, and Melzer.

31. | Thetotal compensation shown includes amounts

deferred under the funds’ deferred compensation plans.

Including accrued interest, total deferred compensation

amounted to $71,640; $143,909, and $139,097 for

37a

McCorkindale. Mooney, and Smith, respectively.

LS The foregoing compensation is greater than the

collective investment these individuals have in each of the

funds within the Fund Complex.

33. | Asalleged herein, ICA Section 10(a), 15 U.S.C.

§ 80a-10(a), requires that at least 40% of the members of the

board of directors of every registered investment company not

be "interested persons," i.e., be independent of the investment

adviser. ICA Section 15(c), 15 U.S.C. § 80a-15(c), provides,

in pertinent part, that it is "unlawful for any registered

investment company having a board of directors to enter into"

a contract or agreement with an investment adviser or

distributor, "unless the terms of such contract or agreement . .

. have been approved by the vote of a majority of directors,

who are not parties to such contract or agreement or interested

persons of any such party .. ..". As more than 60% of the

directors of the Fund are "interested persons" within the

meaning of the ICA, the Agreements could not have been

approved as required by Section 15(c) of the ICA.

Accordingly, the Agreements are invalid and the excessive

compensation paid to the Adviser and the Distributor wrongly

received.

34. | Byreason of the foregoing, the Adviser and the

Distributor have breached their fiduciary duty to the Fund by

accepting compensation pursuant to the non-arm's-length

Agreements. Plaintiff seeks, pursuant to Section 36(b)(3) of

the ICA, the "actual damages resulting from the breach of

fiduciary duty" by the Adviser and the Distributor, up to and

including, "the amount of compensation or payments received

from" the Fund.

WHEREFORE, plaintiff demands judgment

pursuant to Section 36(b) as follows:

38a

A. declaring that the Adviser and the Distributor

violated Sections 10(a), 15(c), and 36(b) of the ICA, and that

the Agreements are void ab initio;

B. awarding damages against the Adviser and the

Distributor, consisting of all fees paid to each of them by the

Funds beginning one year before this action was instituted,

together with interest, costs, disbursements, attorneys’ fees, and

such other items as may be allowed to the maximum extent

permitted by law; and

- such other and further relief as may be just and

proper.

Dated: December 10, 1998

Law Offices of James V.

Bashian, P.C.

By:

James V. Bashian, Esq.

Fairfield Commons,

271 Route 46 West,

Suite F-207

Fairfield, NJ 07004

(973) 227-6330

39a

Of Counsel:

Wechsler Harwood Halebian

& Feffer LLP

Stuart D. Wechsler

Joel C. Feffer

Jeffrey M. Haber

488 Madison Avenue

New York, New York 10022

(212) 935-7400

Attorneys for Plaintiff