Memo #
19169
U.S. DISTRICT COURT DISMISSES SECTION 36 CLAIMS RELATING TO FUNDS' NON-PARTICIPATION IN CLASS ACTION SETTLEMENTS
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[19169]
September 16, 2005
TO: BOARD OF GOVERNORS No. 45-05
PRIMARY CONTACTS - MEMBER COMPLEX No. 37-05
SEC RULES MEMBERS No. 101-05
SMALL FUNDS MEMBERS No. 79-05
RE: U.S. DISTRICT COURT DISMISSES SECTION 36 CLAIMS RELATING TO FUNDS’
NON-PARTICIPATION IN CLASS ACTION SETTLEMENTS
The U.S. District Court for the Northern District of Illinois, Eastern Division, granted
motions to dismiss in two separate class action lawsuits involving allegations that the
investment advisers and boards of directors for two families of mutual funds failed to cause the
funds to participate in multiple class action settlements for which the funds were eligible.1
According to the complaints, plaintiffs suffered losses by forfeiting their share of settlement
proceeds. In both cases, the plaintiffs charged defendants with violations of Sections 36(a),
36(b), and 47(b) of the Investment Company Act of 1940 (“ICA”), and with breach of fiduciary
duty and negligence claims under state law.
In granting the defendants’ motions to dismiss, the judge in each case determined that:
The plain statutory text of Section 36(a) provides a private right of action only for the
SEC, and does not permit mutual fund investors to initiate a claim for breach of
fiduciary duty involving personal misconduct;
While Section 36(b) does provide a private right of action for a fund shareholder, the
action must relate to a fiduciary duty with respect to the “receipt of compensation
for services,” which was not the case here, where plaintiffs alleged only that
defendants failed to cause the funds to participate in class action settlements;
Plaintiffs had no claim under Section 47(b) since the Section 36 claims were
dismissed and no other violation occurred under the ICA; and
1 Dull v. Arch, Case No. 05 C 140, N.D. Ill., 2005 U.S. Dist. LEXIS 14988 (July 27, 2005); and Jacobs v. Bremner, Case No.
05 C 143 N.D. Ill., 2005 U.S. Dist. LEXIS 14762 (July 20, 2005).
2
The Court would not retain jurisdiction over the state claims because all the federal
claims were dismissed before trial.
Barry E. Simmons
Associate Counsel