The opinion of the court was delivered by: Hayden, District Judge.
This Court having referred defendants' motion to dismiss the plaintiffs
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 plaintiffs 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 30th day of July, 1999
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
REPORT AND RECOMMENDATION
HEDGES, United States Magistrate Judge.
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.
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.
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
The Amended Complaint alleges that none 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).
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 ...