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