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IN RE DREYFUS MUTUAL FUNDS FEE LITIGATION

September 28, 2005.

In re DREYFUS MUTUAL FUNDS FEE LITIGATION.


The opinion of the court was delivered by: GARY LANCASTER, District Judge

MEMORANDUM

This is a putative class action in securities fraud. Plaintiffs, Vera A. Hays and Noah Wortman, allege that defendants, investment advisors, distributors, and directors of Dreyfus brand mutual funds, engaged in fraudulent fee arrangement schemes in violation of the Investment Company Act, the Investment Advisors Act, and Pennsylvania statutory and common law. Plaintiff seeks to recover the wrongfully charged fees and rescind the fee agreements under which these payments were made. Defendants have filed various motions to dismiss in which they argue that plaintiffs' complaint is legally and factually insufficient.

For the reasons set forth below, the motions will be disposed of as follows:

  Premier's Motion to Dismiss [doc. no. 22] is granted; Director Defendants' Motion to Dismiss [doc. no. 25] is granted; Parent Companies', Dreyfus Service Corporation's, and Investment Advisor Defendants' Motion to Dismiss [doc. no. 29] is granted, in part, and denied, in part;*fn1

  Nominal Defendant's Motion to Dismiss [doc. no. 33] is granted.

  I. BACKGROUND

  A. The Parties

  Two named plaintiffs bring this putative class action suit: plaintiff Hays, an investor in the Dreyfus Disciplined Stock Fund, and plaintiff Wortman, an investor in the Dreyfus (Basic) S&P 500 Stock Index Fund. Plaintiffs allege that they hold their shares currently, and that they also held them at some point between January 30, 1999 and November 17, 2003, the proposed Class Period.

  Plaintiffs have named five groups of defendants in their complaint: The Parent Companies, The Investment Advisors, The Distributors, The Directors, and The Dreyfus Funds. The Parent Companies are Mellon Financial and its wholly-owned subsidiary Mellon Bank, which acts as custodian of the Dreyfus Funds. The Investment Advisor Defendants are Dreyfus, a wholly-owned subsidiary of Mellon Bank, and Founders Asset Management LLC. Both are mutual fund management companies and have responsibility for overseeing the day-to-day management of the Dreyfus Funds. The Distributor Defendants are Dreyfus Service Corporation, a wholly-owned subsidiary of Dreyfus, and Premier Mutual Fund Services.*fn2 The Director Defendants are nine individuals who acted as directors of some of the Dreyfus Funds, and in some instances of related entities, such as Mellon Bank. The Dreyfus Funds, named as nominal defendants, are approximately 155 mutual funds that are managed by Dreyfus or Founders.

  B. The Factual Allegations

  Plaintiffs allege the following facts. In the most general terms, plaintiffs allege that defendants participated in an undisclosed mutual fund kick-back scheme through which they obtained substantial payments as a result of pushing Dreyfus Funds on unwitting investors. According to plaintiffs, the alleged scheme took the form of Shelf-Space agreements with major brokerage houses, financed with wrongful Directed Brokerage and Revenue Sharing arrangements, and improper use of 12b-1 Marketing Fees and Soft Dollars. Plaintiffs allege that substantial improper payments were made from mutual fund assets to ensure that major brokerage houses, such as Paine Webber and Merrill Lynch, would encourage their investors to buy Dreyfus brand mutual funds, rather than some other brand of mutual fund.*fn3

  Plaintiffs complain that these arrangements were not disclosed to investors, created conflicts of interest between investors and defendants, and resulted in excessive fees being charged to investors' accounts. According to plaintiffs, because the Distributor and Investment Advisor Defendants' fees were calculated based on the aggregate amount of money invested in Dreyfus products, they participated in these kick-back schemes in order to increase their own fees, without regard to the best interest of the investors, whom they were charged with protecting. In turn, plaintiffs allege that the Investment Advisor Defendants paid the Director Defendants excessive salaries in exchange for their approval of these wrongful schemes, making the Directors beholden to the Investment Advisors and their schemes, rather than to the best interest of the investors. C. The Complaint

  The consolidated amended complaint [doc. no. 17] asserts causes of action under the Investment Company Act of 1940, 15 U.S.C. § 80a-1, the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1, and Pennsylvania statutory and common law. With the exception of the IAA claim, which is asserted derivatively, all causes of action are brought on behalf of the proposed Class.

  Count I. Asserted against the Investment Advisor Defendants and the Director Defendants for violations of § 34(b) of the Investment Company Act. Plaintiffs allege that these defendants made materially false and misleading statements in prospectuses by failing to disclose the payment schemes detailed above.

  Count II. Asserted against the Distributor Defendants, the Investment Advisor Defendants, and the Director Defendants for violations of § 36(a) of the Investment Company Act. Plaintiffs allege that these defendants breached their fiduciary duties to investors by taking part in the payment schemes detailed above.

  Count III. Asserted against the Distributor Defendants, the Investment Advisor Defendants, and the Director Defendants for violations of § 36(b) of the Investment Company Act. Plaintiffs allege that these defendants breached their fiduciary duties with respect to the receipt of compensation for services by taking part in the payment schemes detailed above. Count IV. Asserted against Dreyfus and the Parent Companies for violations of § 48(a) of the Investment Company Act. Plaintiffs allege that these defendants, as "control persons", are secondarily liable for the misconduct of the Investment Advisor Defendants and Distributor Defendants alleged in Counts I, II, and III.

  Count V. Asserted against the Investment Advisor Defendants for violations of §§ 206 and 215 of the Investment Advisor Act. Plaintiffs' allege that these defendants breached their fiduciary duties by entering into investment advisor contracts which permitted improper payments under the above schemes.

  Count VI. Asserted against all defendants for violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 Pa. Cons. Stat. § 201-9.2(a). Plaintiffs have affirmatively abandoned this claim.

  Count VII. Asserted against the Investment Advisor Defendants for breach of fiduciary duty under Pennsylvania common law.

  Count VIII. Asserted against the Director Defendants for breach of fiduciary duty under Pennsylvania common law.

  Count IX. Asserted against all defendants for aiding and abetting breach of fiduciary duty under Pennsylvania common law. Count X. Asserted against all defendants for unjust enrichment under Pennsylvania common law. Plaintiffs assert that defendants received wrongful sums as a result of their participation in the payment schemes.

  II. STANDARD OF REVIEW

  When the court considers a Rule 12(b)(6) motion to dismiss,*fn4 the issue is not whether plaintiff will prevail in the end or whether recovery appears to be unlikely or even remote. The issue is limited to whether, when viewed in the light most favorable to plaintiff, and with all well-pleaded factual allegations taken as true, the complaint states any valid claim for relief. See ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994). In this regard, the court will not dismiss a claim merely because plaintiff's factual allegations do not support the particular legal theory he advances. Rather, the court is under a duty to examine the complaint independently to determine if the factual allegations set forth could provide relief under any viable legal theory. 5A Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 1357 n. 40 (2d ed. 1990); see also Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

  Plaintiffs need not prove or establish all of the facts necessary to ultimately prevail on their claims in order to survive a motion to dismiss. Nor can defendants prevail on a motion to dismiss by arguing that plaintiffs' legal theories are unreasonable or unprovable. Instead, in ruling on a motion to dismiss, we seek only to determine whether, taking ...


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