Sheldon Krantz v. Prudential Investments Fund Management LLC

PRECEDENTIAL
Filed August 30, 2002
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 02-1266
SHELDON KRANTZ, Appellant
v.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC;
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
On Appeal From the United States District Court
For the District of New Jersey
(D.C. No. 98-cv-03722)
District Judge: Honorable Katharine S. Hayden
Argued: July 29, 2002
Before: BECKER, Chief Judge, ROTH and
RENDELL, Circuit Judges.
(Filed: August 30, 2002)
JOEL C. FEFFER, ESQUIRE
(ARGUED)
DANIELLA QUITT
Weschsler, Harwood, Halebian and
Feffer, LLP
488 Madison Avenue, 8th Floor
New York, NY 10022
Counsel for Appellant
JAMES N. BENEDICT, ESQUIRE
(ARGUED)
MARK HOLLAND, ESQUIRE
SEAN M. MURPHY, ESQUIRE
MARK K. DULKA, ESQUIRE
Clifford, Chance, Rogers and Wells
200 Park Avenue
New York, NY 10166
HERBERT J. STERN, ESQUIRE
JOEL M. SILVERSTEIN, ESQUIRE
Stern, Greenberg, and Kilcullen
75 Livingston Avenue
Roseland, NJ 07068
Counsel for Appellees
OPINION OF THE COURT

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PER CURIAM.
Plaintiff, a shareholder in the Prudential Jennison
Growth Fund (the "Fund"), brought this action pursuant to
S 36(b) of the Investment Company Act of 1940, as
amended (the "ICA"), 15 U.S.C. S 80a-35(b), against
Prudential Investment Fund Management LLC, the
investment adviser to the Fund (the "adviser"), and
Prudential Investment Management Services LLC
(collectively, "Prudential").1 Plaintiff alleged that the
investment advisers received excessive compensation in
breach of their "fiduciary duty with respect to
compensation" set forth in S 36(b) of the ICA, 15 U.S.C.
S 80a-36(b). The District Court entered an order dismissing
the action for failure to state a claim. Fed. R. Civ. P.
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1. The original Complaint was filed on August 7, 1998. Defendants
moved to dismiss the Complaint arguing, inter alia, that Plaintiff lacked
standing to assert derivative-type claims on behalf of any Prudential
Funds other than the one for which he was a shareholder. In response,
Plaintiff filed an Amended Complaint on December 10, 1998, which was
substantially similar to the original Complaint except that it asserted
claims only on behalf of the Fund, and not on behalf of all similarly
situated Prudential funds.
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12(b)(6). Because we agree that Plaintiff has failed to state
a claim that the compensation received by the investment
advisers was received in breach of their fiduciary duty, we
affirm the order of the District Court.
I. Allegations and Standard of Review
Section 36(b) of the ICA provides that an investment
adviser has a "fiduciary duty with respect to the receipt of
compensation." 15 U.S.C. S 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. Id. Section 10(a) of the ICA,
15 U.S.C. S 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 of the investment adviser. Such
directors are generally referred to as independent directors.
Section 15(c) of the ICA, 15 U.S.C. S 80a-15(c), mandates
that every agreement with an investment adviser or
distributor be approved by a majority of independent
directors. The Amended Complaint seeks to recover the fees
paid by the Fund to its investment adviser and distributor,
pursuant to management and distribution agreements
which were allegedly entered into in violation ofSS 10(a)
and 15(c) of the ICA. 18 U.S.C. SS 80a-10(a), 80a-15(c). The
Amended Complaint also contends that the fees authorized
were excessive.

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Plaintiff ’s Amended Complaint alleges that none of the
members of the Fund’s board are independent, as required
by S 10(a), because they serve on numerous other boards
for various Prudential funds and receive a large aggregate
compensation for their combined services. Plaintiff
contends that under such a scenario the independent
directors are actually "controlled" by Prudential. Thus,
Plaintiff submits that the management and distribution
agreements, which establish the fees paid by the Fund to
the investment adviser and distributor, were not properly
approved as required under S 15(c). Accordingly, Plaintiff
argues that the receipt of funds from invalid agreements is
a breach of the Defendants’ fiduciary duty to negotiate at
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arm’s length under S 36(b). Finally, Plaintiff contends that
in addition to violating the independence requirement
of S 36(b), the Defendants also violated S 36(b) because
their adviser-manager’s fees agreement were so
disproportionately large that fees amounted to a breach of
their fiduciary duty.
Defendants urge that the only facts pleaded were that
directors served on multiple boards and were well-
compensated. They contend that this was inadequate
support either for the claim that the fees were excessive or
for the claim that these directors were "controlled" by the
financial adviser. The District Court adopted the
Defendants’ view, and dismissed the amended complaint.
Our review of a dismissal pursuant to Fed. R. Civ. P.
12(b)(6) is plenary. Langford v. City of Atlantic City, 235
F.3d 845, 847 (3d Cir. 2000). "We must determine whether,
under any reasonable reading of the pleadings, the
plaintiffs may be entitled to relief, and we must accept as
true the factual allegations in the complaint and all
reasonable inferences that can be drawn therefrom." Nami
v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996). While Fed. R. Civ.
P. 8(a)(2) requires only a "short and plain statement of the
claim showing that the pleader is entitled to relief," Rule
12(b)(6) is not without meaning. "Although the pleading
requirements . . . are very liberal, more detail is often
required than the bald statement by plaintiff that he has a
valid claim of some type against defendant." 5A Charles A.
Wright and Arthur R. Miller, Federal Practice and Procedure
S 1357 at 318 (2d ed. 1990).
II. Dismissal For Failure to State a Claim
This case is one of five virtually identical actions filed by
Plaintiff ’s counsel in district courts in four separate
circuits. All of the other courts, including the courts of
appeals for the Fourth Circuit and the Second Circuit, have
rejected Plaintiff ’s arguments. See Migdal v. Rowe Price-
Fleming Int’l, Inc., 248 F.3d 321, 330 (4th Cir. 2001);
Verkouteren v. BlackRock Fin. Mgmt., Inc., No. 98 Civ. 4673,
1999 WL 511411, at *4 (S.D.N.Y. July 20, 1999), aff ’d, 208
F.3d 204 (2d Cir. 2000); Krantz v. Fidelity Mgmt. and

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Research Co., 98 F. Supp. 2d 150, 157 (D. Mass. 2000);
Strougo v. BEA Assocs., No. 98 CIV 3725, 1999 WL 147737,
at *3 (S.D.N.Y. Mar. 18, 1999).
The complaint in the Fourth Circuit asserted two related
claims:
First, plaintiffs alleged that the investment advisers
breached their fiduciary duty under Section 36(b)
because the fees they received were excessive. Second,
plaintiffs contended that the "independent" directors of
each of the mutual funds were not actually
disinterested parties as required by the ICA. See 15
U.S.C. SS 80a-10(a) and 80a-15(c). Specifically, several
of the funds’ disinterested directors served on the
boards of between twenty-two and thirty-eight other
funds within the T. Rowe Complex. For their services,
these directors received aggregate compensation of
either $65,000 or $81,000 for their services on these
multiple boards. Plaintiffs alleged that since forty
percent of the boards were not disinterested, the
advisory agreements could not have been properly
approved as required by Section 15(c). Therefore, the
defendant investment advisers breached their fiduciary
duty under Section 36(b) by failing to negotiate their
advisory agreements at arm’s length.
248 F.3d at 325. These allegations are functionally identical
to the ones made by Plaintiff in this case.
The Fourth Circuit first rejected the claim that the
defendants violated S 36(b) because the fees they received
were excessive. "In order to determine whether a fee is
excessive for purposes of Section 36(b), a court must
examine the relationship between the fees charged and the
services rendered by the investment adviser." Id. at 327.
Since the plaintiffs failed to allege any "facts pertinent to
this relationship between fees and services," the court
concluded that dismissal pursuant to 12(b)(6) was
appropriate. We adopt the Fourth Circuit rationale, and,
applying it to the Amended Complaint before us, conclude
that dismissal for failure to state a claim with respect to
excessive compensation was appropriate since Plaintiff
failed to allege any facts indicating that the fees received
were disproportionate to services rendered.
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The Fourth Circuit also rejected the claim that the
"independent" directors were "interested" as a result of their
participation on multiple boards and receipt of
compensation therefrom. Noting that there "is a
presumption under the ICA that natural persons are
disinterested, see 15 U.S.C. S 80a-2(a)(9)," the court
concluded that the plaintiff ’s allegations failed to overcome

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that presumption. Id. at 331. In support of that conclusion,
the court pointed out that "neither the ICA nor the SEC
proscribes the use of multi-board membership within
mutual fund complexes." Id. at 330. In fact, as noted,
"membership on the boards of several funds within a
mutual fund complex is the prevailing practice in the
industry. . . . Indeed, the SEC has recently reaffirmed its
position that ‘a director of a fund who is also a director of
another fund managed by the same adviser generally would
not be viewed as an interested person of the fund under
section 2(a)(9) solely as a result of this relationship.’ " Id.
(internal citations omitted). We agree with the Fourth
Circuit’s ratio decidendi. In the Amended Complaint,
Plaintiff has failed to allege any facts that, if true, would
support a claim that the "independent" directors of the
Fund were actually "interested."2 Notwithstanding Plaintiff ’s
characterization that this imposes on him a "heightened
standard" of pleading, we agree with the District Court that
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2. The District Court also concluded that Plaintiff lacked standing
because he failed to allege damages, as is necessary under Article III’s
"case or controversy" requirement. See Rosetti v. Shalala, 12 F.3d 1216,
1224 (3d Cir. 1993) ("the plaintiff must show that he personally has
suffered some actual or threatened injury"). This conclusion was
necessarily subsumed in the District Court’s conclusion that the
Amended Complaint failed to state a claim. As the court said, "By
definition, a violation of Section 36(b) encompasses excessive payments
to the fund’s advisers. These payments belong to the plaintiff via the
Fund. As such, damages would be implicit in a properly pleaded
Amendment Complaint. However, Plaintiff here has failed to properly
plead his Amended Complaint, and, as such, the complaint should be
dismissed." Krantz v. Prudential Investments Fund Management, LLC, 77
F. Supp. 2d 559, 565-66 (D.N.J. 1999). Because the District Court’s
conclusion on standing was based on the failure to state a proper claim,
and was not really an independent ground for dismissal, we do not find
it necessary to reach the issue on appeal.
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the statutory scheme here is such that only by alleging
facts that, if proved, would render the directors interested
will plaintiff be able to overcome the presumption to the
contrary. This he did not do. Accordingly, the District Court
acted properly in granting the motion to dismiss.
III. Denial of Leave to Amend
Plaintiff also contends that the District Court abused its
discretion in denying him leave to amend his Amended
Complaint. We review for abuse of discretion. See Lake v.
Arnold, 232 F.3d 360, 373 (3d Cir. 2000) (standard of
review for a District Court’s decision to grant or deny a
motion to amend the complaint is abuse of discretion). Rule
15(a) of the Federal Rules of Civil Procedure provides that
a party may seek leave of the court to amend a pleading
and that such leave "shall be freely given when justice so
requires." "Among the grounds that could justify a denial of
leave to amend are undue delay, bad faith, dilatory motive,

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prejudice, and futility." Shane v. Fauver, 213 F. 3d 113,
115 (3d Cir. 2000). A District Court has discretion to deny
a plaintiff leave to amend where the plaintiff was put on
notice as to the deficiencies in his complaint, but chose not
to resolve them. Rolo v. City Investing Co. Liquidating Trust,
155 F.3d 644, 654 (3d Cir. 1998). In this case, the District
Court concluded that "plaintiff should not be granted a
second leave to amend when [he] was on notice of the
complaint’s deficiencies and failed to rectify them with his
first amendment." Krantz v. Prudential Investments Fund
Management, LLC, 77 F. Supp. 2d 559, 560 (D.N.J. 1999).
Plaintiff submits that this was an abuse of discretion
because he contends that he was not on notice of the
deficiencies in his Complaint. We disagree.
Plaintiff claims that he was not "on notice" of the defects
in his Complaint because the decision relied upon by the
District Court in granting Prudential’s 12(b)(6) motion was
decided after Plaintiff filed his Amended Complaint. We find
this argument unpersuasive. First, Prudential cited Olesh v.
Dreyfus Corp., No. CV-94-1664, 1995 WL 500491 (E.D.N.Y.
Aug. 8, 1995) in its original motion to dismiss. Olesh held
that allegations that the directors served on multiple boards
and were well-compensated failed to demonstrate that the
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directors were controlled and failed to state a claim under
S 36(b). Olesh, 1995 WL 500491 at *11. Thus, Plaintiff was
on notice that his allegations that serving on multiple
boards and receiving compensation for such service might
not be sufficient to state a claim that the directors were
interested and could have made changes in his Complaint
before filing his Amended Complaint.
Second, we note that Migdal, the case on which we
primarily rely in reaching our conclusion, and which was
also relied on by the District Court, was decided before
Plaintiff filed his opposition to Prudential’s motion to
dismiss the Amended Complaint; Migdal was decided on
January 20, 1999, and Plaintiff filed his opposition papers
on February 26, 1999. Thus, we agree with the District
Court that Plaintiff was on notice, prior to filing his
Amended Complaint and before responding to the second
motion to dismiss, not only of the potential problems with
the allegations in his Complaint, but also of the developing
case law in this area. As such, the District Court did not
abuse its discretion in denying Plaintiff leave to amend his
Amended Complaint.
The order of the District Court dismissing Plaintiff ’s
complaint and denying leave to amend will be affirmed.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit

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