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Kauffman v. Dreyfus Fund Inc.

decided: September 24, 1970.

JOSEPH B. KAUFFMAN ET AL.
v.
THE DREYFUS FUND, INC., ET AL., INVESTORS DIVERSIFIED SERVICES, INC., ET AL., APPELLANTS



Aldisert, Circuit Judge.

Author: Aldisert

ALDISERT, Circuit Judge.

Before us for review is an interlocutory order of the district court duly certified for appeal under the provisions of 28 U.S.C. § 1292(b) denying appellants' motions to dismiss the action in its entirety or, alternatively, to dismiss certain individual, representative, and derivative claims.

Plaintiff-appellee, a shareholder of four mutual funds,*fn1 filed a three-count action against 65 mutual funds, 38 investment advisers, 37 directors alleged to be serving contemporaneously as fund directors or trustees and investment advisers, and the Investment Company Institute, a trade association. Appellee also sued a number of unnamed defendants as part of the three defendant classes: mutual funds, investment advisers, and "self-dealing" directors.

Charging violations of the Sherman Act, 15 U.S.C. §§ 1, 2, and the Clayton Act, 15 U.S.C. §§ 15, 26, Count I alleges that appellants have engaged in a combination and conspiracy "with horizontal and vertical forms and levels of agreement," to adopt and stabilize fees for management services and investment services, to limit competition, to refrain from providing internal fund management, and to otherwise monopolize the management market.

Count II invokes provisions of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. It asserts that the investment advisers indulge in practices known as "give-ups," whereby they direct brokers to execute stock transactions for less than the commission paid to them, giving up the balance to non-executing brokers, and "reciprocals," whereby the advisers, in return for allocating portions of the commissions to non-executing brokers, receive additional compensation in the form of free or discounted investment advice and management services.

Count III, brought under the Securities Exchange Act of 1934, 15 U.S.C. § 78n, the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6, and the Investment Company Act, supra, charges appellants with misrepresentation in the preparation and issuance of proxy and other statements, including the failure to disclose, or the making of false disclosures with respect to, the alleged wrongdoing set forth in Counts I and II.

Appellee sought to maintain this action in several capacities: as a shareholder in his own right against the four funds in which he holds stock; as a class representative under Fed.R.Civ.Pro. 23 of all similarly situated shareholders of 65 mutual funds; by virtue of his class representation of all similarly situated shareholders derivatively on behalf of 65 mutual funds similarly situated; derivatively, under Fed.R.Civ.Pro. 23.1, on behalf of the four funds of which he is a shareholder; and derivatively on behalf of the four mutual funds as a class action on behalf of the 61 other funds similarly situated.

The district court overruled the challenges to appellee's right to bring the action in any or all of the above capacities. This appeal followed, presenting for our consideration the following issues:

A. Does a shareholder of a mutual fund have a primary or personal cause of action to recover damages allegedly sustained by his corporation by reason of violations of the antitrust and security laws?

1. If so, may he sue as a class representative under Rule 23 on behalf of all similarly situated shareholders of other mutual funds?

2. And if he may sue on behalf of these shareholders, may he thereby acquire standing to sue secondarily or derivatively on behalf of the 65 mutual funds?

B. Does a shareholder of mutual funds who sues derivatively on behalf of those funds have standing to bring a class derivative action on behalf of other funds similarly situated?

C. Is a conflict of interest or disabling antagonism presented by appellee's suit on behalf of mutual funds against which he is simultaneously ...


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