- - I-,
1 MILBERG WEISS BERSHAD& SCHULMAN LLP L.! Lti
2 Jeff S. Westerman (94559) -.,---z;355 South Grand Avenue, Suite 4170 -1:,•
3Los Angeles, CA 90071-3172
. 4 Telephone: (213) 617-12005 Facsimile: (213) 617-1975 ORIGINAL
c 6 MILBERG WEISS BERSHAD ':' 52 ,
7 & SCHULMAN LLP i P LT; n(:.q„ c....Steven G. Schulman ,-- L-:• J--/ -, • - - - '71
- *8 Kim E. Levy I :. r.•:,.,,-; — --,--Michael R. Reese -, PI9 One Pennsylvania Plaza - Ft :.7. 010 New York, New York 10119 1 :--':;-- c../.?
1 17.—_,9,_ c.,-,11 Telephone: (212) 594-5300 • - z —4
Facsimile: (212) 868-1229 1 -'1213 Counsel for Plaintiffs [Additional Counsel Appear on Signature Page] - -
14 UNITED STATES DISTRICT COURT
15
-'\S 16
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
6V0 17 ). t v,.it'''' C VO4 . 5593 'AK 1—w - c,18 NICHOLAS J. CORBI and RODNEY ) Civil Action No.
19 T. JELINEK, on Behalf of Himself ) 1and all Others Similarly Situated, ) CLASS ACTION
20 )
21 Plaintiffs, ) COMPLAINT FOR EXCESSIVE FEES i) IN VIOLATION OF SECTIONS 34(b),
22 vs. ) 36(b) AND 48(a) OF THE INVESTMENT
• 23 .THE CAPITAL GROUP) COMPANY ACT AND SECTIONS 206
AND 215 OF THE INVESTMENTCOMPANIES, INC, THE CAPITAL ) i
24 ADVISERS ACT, AND FOR ,.-• ,-, ,,, RESEARCH AND IVIANAGEMENT ). • . .25 CO., AMERICAN FUNDS) BREACHES OF FIDUCIARY DUTY. ,
)• '''' .. DISTRIBUTORS, INC., PAUL G.
.. ' 26 ) DEMAND FOR JURY TRIAL(caption continued on next page) ) _.,..........._
27 DOCKETED ON CM
28JUL 2 I 2004
(---',"
BY 4%066 W i
2. ;,.
1 MTLBERG WEISS BERSHAD& SCHULMAN LLP
2 Jeff S. Westerman (94559)355 South Grand Avenue, Suite 41703Los Angeles, CA 90071-3172
C PY4 Telephone: (213) 617-1200Facsimile: (213) 617-19755
6 MILBERG WEISS BERSHAD C—r—
& SCHULMAN LLP r—7
I—Steven G. Schulman
8 Kim E. Levy
rr—egF>0
9 Michael R. Reese (.0
-
One Pennsylvania Plaza•
10 New York, New York 10119 •-4
1 1 Telephone: (212) 594-5300Facsirnile: (212) 868-1229
12
13 Counsel for Plaintiffs [Additional Counsel Appear on Signature Page]1
14 UNITED STATES DISTRICT COURT
15 CENTRAL DISTRICT OF CALIFORNIA
16 WESTERN DrVISION
17 CV1114..5593 RGK18 NICHOLAS J. CORBI and RODNEY ) Civil Action No. (ctt 29
T. JELINEK, on Behalf of Himself )19
and all Others Similarly Situated, ) CLASS ACTION20 . -
21Plaintiffs, ) COMPLAINT FOR EXCESSIVE FEES
) IN VIOLATION OF SECTIONS'34(b),22 vs. ) 36(b) AND 48(a) OF THE INVESTMENT
23 THE CAPITAL GROUP ) COMPANY ACT AND SECTIONS 206) AND 215 OF THE INVESTMENT
24 RESEARCH AND MANAGEMENTCOMPANIES, INC., THE CAPITAL \
ADVISERS _ACT, AND FOR
))---.BRE-AttrE:§1-25 CO., AMERICAN FUNDS 6FFB3UCIARX DUTY
-DISTRIBUTORS, INC., PAUL G.
(-1,, 1 9y.7,0t4tY26 ) (`EiMANOTOOttRY TRIAt
(caption continued on next page) la o Wtg. =441:t
co-,z,-,cf az Rye. ou 5.1 '44
27 a)ioc)(.1f.wly,: Ole itn4
4divWi
7- 7-
1
. ,. ,, . . .. _ _ ... .
HAAGA, JR., ROBERT G. , • ) 1i
O'DONNELL, ROBERT A. FOX, )2 LEONADE D. JONES, JOHN G. ) 13 MCDONALD, LUIS G. NOGALES, )
JAMES K. PETERSON, HENRY ) 1
4 RIGGS and PATRICIA K. WOOLF, ) 1
5 )1
Defendants, ) ,6
)AMCAP FUND, AMERICAN.
7
)BALANCED FUND, AMERICAN )
8 HIGH-INCOME MUNICIPAL )
BOND FUND, AMERICAN HIGH- ) •9 INCOME TRUST FUND, )
10 AMERICAN MUTUAL FUND, THE) 1BOND FUND OF AMERICA,
1 )1 1CAPITAL INCOME BUILDER ) . 1
12 FUND, CAPITAL WORLD BOND ) ,FUND, CAPITAL WORLD
13 )GROWTH AND INCOME FUND,
,I
14 EUROPACIFIC GROWTH FUND, ) 1FUNDAMENTAL INVESTORS )
15FUND, THE GROWTH FUND OF )
16 AMERICA, THE INCOME FUND )
17 OF AMERICA, INTERMEDIATE )BOND FUND OF AMERICA, THE )
18 INVESTMENT COMPANY OF )AMERICA FUND, LIMITED TERM)
19 - iTAX-EXEMPT BOND FUND OF )20 . AMERICA, THE NEW ECONOMY )
21 FUND, NEW PERSPECTIVE )FUND, NEW WORLD FUND, )
22 S1VIALLCAP WORLD FUND, THE )
23 TAX-EXEMPT BOND FUND OF )AMERICA, THE TAX-EXEMPT )
24 FUND OF CALIFORNIA, THE )TAX-EXEMPT FUND OF25
)MARYLAND, THE TAX-EXEMPT )
26 FUND OF VIRGINIA, U.S. )27 (caption continued on next page) )
28
• _ • . -
1 GOVERNMENT SECURITIES )FUND, WASHINGTON MUTUAL )
2 INVESTORS FUND, THE CASH )
3 MANAGEMENT TRUST OF )AMERICA FUND, THE TAX- )
4 EXEMPT MONEY FUND OF )5 AMERICA, THE U.S. TREASURY )
MONEY FUND OF AMERICA )6 (collectively, the "AMERICAN )7 FUNDS"), )
)8 Nominal Defendants. )
9 ))
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
1 NATURE OF THE ACTION
2 Plaintiffs Nicholas J. Corbi and Rodney T. Jelinek ("Plaintiffs"), by and through
3 their counsel, allege the following based upon the investigation of counsel, which included
4 a review of United States Securities and Exchange Commission ("SEC") filings, as well as
5 other regulatory filings, reports, and advisories, press releases, media reports, news
6 articles, academic literature, and academic studies. Plaintiffs believe that substantial
7 additional evidentiary support will exist for the allegations set forth herein after a
8 reasonable opportunity for discovery.
9 1. Plaintiffs bring this action as a class action on behalf of investors in mutual
10 funds belonging to The Capital Group Companies, Inc. ("Capital Group") which include
11 the American Funds (referred to collectively herein as the "American Funds"), and
12 derivatively on behalf of the American Funds, against the American Funds investment
13 advisers, their corporate parents and the American Funds directors.
14 2. This complaint alleges that the Investment Adviser Defendant (as defined
15 herein) drew upon the assets of the American Funds to pay brokers to aggressively push
16 American Funds over other funds, and that the Investment Adviser Defendant concealed
17 such payments from investors by disguising them as brokerage commissions. Such
18 brokerage commissions, though payable from fund assets, are not disclosed to investors in
19 the American 'Funds public filings or elsewhere.
20 3. American Funds investors were thus induced to purchase American Funds by
21 brokers who received undisclosed payments from the Investment Adviser Defendant to
22 push American Funds over other mutual funds and who therefore had an undisclosed
23' conflict of interest. Then, once invested in one or more of the American Funds, American
24 Funds investors were charged and paid undisclosed fees that were improperly used to pay
25 brokers to aggressively push American Funds to yet other brokerage clients.
26 4. The Investment Adviser Defendant was motivated to make these secret
27 payments to finance the improper marketing of American Funds because their fees were
28
1
I calculated as a percentage of funds under management and, therefore, tended to increase as
2 the number of American Funds investors grew. The Investment Adviser Defendant
3 attempted to justify this conduct on the ground that by increasing the American Funds
4 assets they were creating economies of scale that inured to the benefit of investors but, in
5 truth and in fact, American Funds investors received none of the benefits of these
6 purported economies of scale. Rather, fees and costs associated with the American Funds
7 were excessive during the Class Period (as defined herein), in large part because the
8 Investment Adviser Defendant continued to skim from the American Funds to finance
9 their ongoing marketing campaign. The American Funds Directors, who purported to be
10 American Funds investor watchdogs, knowingly or recklessly permitted this conduct to
11 occur.
12 5. By engaging in this conduct, the Investment Adviser Defendant, and the
13 defendant entities that control it, breached their statutorily-defined fiduciary duties under
14 Sections 36(a) and (b) of the Investment Company Act of 1940 (the "Investment Company
15 Act") and Section 206 of the Investment Advisers Act of 1940 (the "Investment Advisers
16 Act"), breached their common law fiduciary duties, and knowingly aided and abetted the
17 brokers in the breach of fiduciary duties to their clients. The Investment Adviser
18 Defendant also violated Section 34(b) of the Investment Company Act because, to further
19 •their improper campaign, they made untrue Statements of material fact in fund registration
20 statements, and material omissions, with respect to the procedure for determining the
21 amount of fees payable to the Investment Adviser Defendant and with respect to the
22 improper uses to which the fees were put. Additionally, the American Funds Directors
23 breached their common law fiduciary duties to the American Funds investors by
24 knowingly or recklessly allowing the Improper conduct alleged herein to occur and harm
25 American Funds investors.
26
27
28
2
1 6. On January 28, 2004, The Los Angeles Times published an article about a
2 Senate committee hearing on mutual fund abuses which stated, in pertinent part, as
3 follows:
4 "The mutual fund industry is indeed the world's largest skimming operation,"
5 said Sen. Peter Fitzgerald (R-I11.), chairman of the panel, comparing the
• 6 scandal-plagued industry to "a $7-trillion trough" exploited by fund
7 managers, brokers and other insiders.
8 JURISDICTION AND VENUE
9 7. The claims asserted herein arise under and pursuant to Sections 34(b), 36(b)
10 and 48(a) of the Investment Company Act, 15 U.S.C. §§80a-33(b), 80a-35(a) and (b) and
• 11 80a-47(a), Sections 206 and 215 of the Investment Advisers Act, 15 U.S.C. §§80b-6 and
12 80b-15, and common law.
13 8. This Court has jurisdiction over the subject matter of this action pursuant to
14 Section 44 of the Investment Company Act, 15 U.S.C. §80a-43; Section 214 of the
15 Investment Advisers Act, 15 U.S.C. §80b-14; and 28 U.S.C. § 1391(b).
16 9. Many of the acts charged herein, including the creation and utilization of
• 17 improper revenue sharing agreements, occurred in substantial part in this District.
18 Defendants conducted other substantial business within this District and many Class
19 members reside within this District. Additionally, defendant Capital Group maintains its
20 principal offices in this judicial district.
21 10. In connection with the acts alleged in this complaint, defendants, directly or
22 indirectly, used the means and instrumentalities of interstate commerce, including, but not
23 limited to, the mails, interstate telephone communications, and the facilities of the national
24 securities markets.
25
26
27
28
3
1 PARTIES
2 11. Plaintiff Nicholas J. Corbi purchased during the Class Period and continues to
3 own shares or units of the American Balanced Fund and has been damaged by the conduct
4 alleged herein.
5 12. Plaintiff Rodney T. Jelinek purchased during the Class Period and continues
6 to own shares or units of the Investment Company of America Fund and has been
7 damaged by the conduct alleged herein.
8 13. Defendant The Capital Group Companies, Inc. ("Capital Group"), is a
9 financial services company and the ultimate parent of defendants bearing the American
10 name. Capital Group maintains its corporate headquarters at 333 South Hope Street, Los
11 Angeles, California 90071.
12 14. Defendant Capital Research and Management Company ("Capital
13 Research"), is registered as an investment advisor under the Investment Advisers Act.
14 Capital Research, a wholly owned subsidiary of Capital Group, is headquartered at 333
15 South Hope Street, Los Angeles, California 90071. Capital Research manages the
16 investment portfolio and business affairs of the American Funds, consisting of 29 funds.
17 Capital Research, along with Capital Group, has ultimate responsibility for overseeing the
18 day-to-day management of the American Funds. American Balanced Fund, Inc., a
19 Maryland corporation with its principal place of business located at P.O. Box 7650, One
20 Market, Steuart Tower, San Francisco, California 94120, is the registrant of the American
21 Balanced Fund.
22 15. Defendant Capital Research is hereinafter referred to as the "Investment
23 Adviser Defendant."
24 16. Defendant American Funds Distributors, Inc. ("American Distributors"), a
25 registered broker-dealer, is the distributor of the American Funds. In this capacity,
26 American Distributors was responsible for underwriting, sponsoring and retailing the
27
28
4
9
1 American Funds. American Distributors is located at 333 South Hope Street, Los Angeles,
2 CA 90071.
3 17. Defendants Paul G. Haaga, Jr. ("Haaga"), Robert G. O'Donnell
4 ("O'Donnell"), Robert A. Fox ("Fox"), Leonade D. Jones ("Jones"), John G. McDonald
5 ("McDonald"), Luis G. Nogales ("Nogales"), James K. Peterson ("Peterson"), Henry
6 Riggs ("Riggs") and Patricia K. Woolf ("Woolf') were Directors and/or Officers of the
7 American Funds during the Class Period and are collectively referred to herein as the
8 "Director Defendants". For the purposes of their service as directors and/or officers of the
9 American Funds, the business address of each of the Director Defendants is 333 South
10 Hope Street- 55th Floor, Los Angeles, California 90071.
11 18. During the Class Period, Haaga has served as President and Director of the
12 Funds. He served as a member of 17 boards in the American Fund complex. Haaga is
13 deemed an interested person because of his affiliation with the Investment Adviser,
14 namely, his position as Executive Vice President and Director of Capital Research as well
15 as Director of American Distributors.
16 19. During the Class Period, O'Donnell has served Chairman of the Board and
17 Principal Executive Officer of the Funds. He served as a member of three boards in the
18 American Fund complex. O'Donnell is deemed an interested person because of his
19 affiliation with the Investment Adviser, namely, his position as a Senior Vice President
20 and Director of Capital Research.
21 20. During the Class Period, Fox served as a member of seven boards in the
22 American Fund complex. For the calendar year ending December 31, 2002, Fox received
23 compensation totaling $190,300 for his service as an American Funds director.
24 21. During the Class Period, Jones served as a member of six boards in the Fund
25 complex. For the calendar year ending December 31, 2002, Jones received compensation
26 totaling $157,800 for his servicè as an American Funds director.
27
28
5
1 22. During the Class Period, McDonald served as a member of eight boards in the
2 American Fund complex. For the calendar year ending December 31, 2002, McDonald
3 received compensation totaling $269,800 for his service as an American Funds director.
4 23. During the Class Period, Nogales served as a member of two boards in the
5 American Fund complex. For the calendar year ending December 31, 2002, Nogales
6 received compensation totaling $23,300 for his service as an American Funds director.
7 24. During the Class Period, Peterson served as a member of two boards in the
8 American Fund complex. For the calendar year ending December 31, 2002, Peterson
9 received compensation totaling $47,500 for his service as an American Funds director.
10 25. During the Class Period, Riggs served as a member of four boards in the
11 American Fund complex. For the calendar year ending December 31, 2002, Riggs
12 received compensation totaling $107,500 for his service as an American Funds director.
13 26. During the Class Period, Woolf served as -a member of six boards in the
14 American Fund complex. For the calendar year ending December 31, 2002, Wolf received
15 compensation totaling $154,300 for her service as an American Funds director.
• 16 27. Defendants John Does 1-100 were American Funds Directors and/or Officers
17 during the Class Period, and any other wrongdoers later discovered, whose identities have
18 yet to be ascertained and which will be determined during the course of plaintiffs'
19 counsel's ongoing investigation.
20 28. Nominal defendants the American Funds, as identified in the caption of this
21 complaint and on the list annexed hereto as Exhibit A, are open-ended management
22 companies consisting of the capital invested by mutual fund shareholders, each having a
23 board of Directors charged with representing the interests of the shareholders in one or a
24 series of the funds. The American Funds are named as nominal defendants to the extent
25 that they may be deemed necessary and indispensable parties pursuant to Rule 19 of the
26 Federal Rules of Civil Procedure and to the extent necessary to ensure the availability of
27 adequate remedies.
28
6
-
1PLAINTIFFS' CLASS ACTION ALLEGATIONS
2 29. Plaintiffs bring certain of these claims as a class action pursuant to Federal
3 Rule of Civil Procedure 23(a) and (b)(3) on behalf of a class, consisting of all persons or
4 entities who purchased, redeemed or held shares or like interests in any of the American
5 Funds between July 14, 1999 and January 9, 2004, inclusive (the "Class Period"), and who
6 were damaged thereby (the "Class"). Excluded from the Class are defendants, members of
7 their immediate families and their legal representatives, heirs, successors or assigns and
8 any entity in which defendants have or had a controlling interest.
9 30. The members of the Class are so numerous that joinder of all members is
.10 impracticable. While the exact number of Class members is unknown to plaintiffs at this
11 time and can only be ascertained through appropriate discovery, plaintiffs believe that
12 there are many thousands of members in the proposed Class. Record owners and other
13 members of the Class may be identified from records maintained by American Funds,
14 American Distributors and the Investment Adviser Defendant and may be notified of the
15 pendency of this action by mail, using the form of notice similar to that customarily used
16 in securities class actions.
17 31. Plaintiffs' claims are typical of the claims of the members of the Class as all
18 members of the Class are similarly affected by defendants' wrongful conduct in violation
19 of federal law that is complained of herein.
20 • 32. Plaintiffs will fairly and adequately protect the interests of the members of the
21 Class and have retained counsel competent and experienced in class and securities
22 litigation.
23 33• Common questions of law and fact exist as to all members of the Class and
24 predominate over any questions solely affecting individual members of the Class. Among
25 the questions of law and fact common to the Class are:
26 (a) whether the Investment Company Act was violated by defendants' acts
27 as alleged herein;
28
7
1 (b) whether the Investment Advisers Act was violated by defendants' acts
2 as alleged herein;
3 (c) whether the Investment Adviser Defendant breached their common law
4 fiduciary duties and/or knowingly aided and abetted common law breaches of fiduciary
5 duties;
6 , (d) whether statements made by defendants to the- investing public during
7 the Class Period misrepresented or omitted to disclose material facts about the business,
8 operations and financial statements of the American Funds; and
9 (e) to what extent the members of the Class have sustained damages and
10 the proper measure of damages.
11 34. A class action is superior to all other available methods for the fair and
12 efficient adjudication of this controversy since joinder of all members is impracticable.
13 Furthermore, as the damages suffered by individual Class members may be relatively
14 small, the expense and burden of individual litigation make it virtually impossible for
15 members of the Class to individually redress the wrongs done to them. There will be no
16 difficulty in the management of this action as a class action.
17 SUBSTANTIVE ALLEGATIONS
18The Director Defendants Breached Their Fiduciary
Duties To American Funds Investors19 35. The defendants' public filings state that the Boards of Directors for the20 American Funds are responsible for the management and supervision of the American21 Funds. In this regard, the Statement of Additional Information dated March 1, 2003 for22 funds offered by American Funds (the "Statement of Additional Information"), which23 includes the American Balanced Fund, which is available to the investor upon request is24 typical of the Statements of Additional Information available for other American Funds. It25 states: "All fund operations are supervised by the fund's Board of Directors, which meets26 periodically and performs duties required by applicable state and federal laws."27
28
8
1 36. Moreover, the Statement of Additional Information states, with respect to the
2 duties of the Directors, as follows:
3 Under Maryland law, the business and affairs of the fund are managed
4 under the direction of the Board of Directors, and all powers of the
5 fund are exercised by or under the authority of the Board except as
6 reserved to the shareholders by law or the fund's charter or by-laws.
7 Maryland law requires each Director to perform his/her duties as a
8: Director, including his/her duties as a member of any Board
9 committee on which he/she serves, in good faith, in a manner he/she
10 reasonably believes to be in the best interest of the fund, and with the
11 care that an ordinarily prudent person in a like position would use
12 under similar circumstances.
13 [Emphasis added.]
14 37. The Statement of Additional Information also sets forth in greater detail the
15 purported process by which the investment managers are selected:
16 In determining whether to renew the Agreement each year, the
17 Contracts Committee of the Board of Directors evaluates information
18 provided by the Investment Adviser in accordance with Section 15(c)
19 of the 1940 Act, and presents its recommendations to the full Board of
20 Directors. At its most recent meetings, the Committee reviewed and
21 considered a number of factors in recommending renewal of the
22 existing Agreement, including the quality of services provided to the
23 fund (primarily measured by investment results), fees and expenses
24 borne by the fund, financial results of the Investment Adviser
25 (including comparisons to a group of publicly held mutual fund
26 managers) and comparative data for other mutual funds and selected
27 indexes.
28
• 9
1 In reviewing the quality of services provided to the fund, the
2 Committee noted, among other things, the favorable results of the fund
3 relative to the results of comparable funds during 2001, the first half of
4 2002, and the five- and ten-year periods ended June 30, 2002. The
5 Committee also considered the overall high quality and depth of the
6 Investment Adviser's organization in general and of the individuals
7 providing portfolio research and management services to the fund. In
8 addition, the Committee noted the Investment Adviser's continuing
9 financial strength and stability.
10 [Emphasis added.]
11 38. The Investment Company Institute ("ICI"), of which American is a member,
12 recently described the duties of mutual fund boards as follows:
13 More than 77 million Americans have chosen mutual funds to gain
14 . convenient access to a professionally managed and diversified portfolio
15 of investments.
16 Investors receive many other benefits by investing in mutual funds,
17 including strong legal protections and full disclosure. In addition,
18 shareholders gain an extra layer of protection because each mutual fund
19 has a board of directors looking out for shareholders' interests.
20 Unlike the directors of other corporations, mutual fund directors are
21 responsible for protecting consumers, in this case, the funds'
22 investors. The unique "watchdog" role, which does not exist in any
23 other type of company in America, provides investors with the
24 confidence of knowing the directors oversee the advisers who manage
25 and service their investments.
26 In particular, under the Investment Company Act of 1940, the board
27 of directors of a mutual fund is charged with looking after how the
28
10
1 fund operates and overseeing matters where the interests of the fund
2 and its shareholders differ from the interests of its investment adviser
3 or management company.
4 [Emphasis added.]'
5 39. In truth and in fact, the American Funds Boards of Directors were captive to
6 and controlled by the Investment Adviser Defendant, who induced the Director Defendants
7 to breach their statutory and fiduciary duties to manage and supervise the American Funds,
8 approve all significant agreements and otherwise take reasonable steps to prevent the
9 Investment Adviser Defendant from skimming American Funds assets. In many cases,
10 key American Funds Directors were employees or former employees of the Investment
11 Adviser Defendant and were beholden for their positions, not to American Funds
12 investors, but, rather, to the Investment Adviser Defendant they were supposed to oversee.
13 The Director Defendants served for indefinite terms at the pleasure of the Investment
14 Adviser Defendant and formed purportedly independent committees, charged with
15 responsibility for billions of dollars of fund assets (comprised largely of investors' college
16 and retirement savings).
17 40. To ensure that the Directors were compliant, the Investment Adviser
18 Defendant often recruited key fund Directors from the ranks of investment adviser
19 companies.
20 41. In exchange , for creating and managing the American Funds, including the
21 Columbia Real Estate Equity Fund, the Investment Adviser Defendant charged the
22
23 1 The ICI describes itself as the national association of the U.S. investment company24 industry. Founded in 1940, its membership includes approximately 8,601 mutual funds,
604 closed-end funds, 110 exchange-traded funds, and six sponsors of unit investment25 trusts. Its mutual fund members have 86.6 million individual shareholders and manage26 approximately $7.2 trillion in investor assets. The quotation above is excerpted from a
paper entitled Understanding the Role of Mutual Fund Directors, available on the ICI's27 web site at http://www.ici.org/issues/diribro mf directors .pdf.28
11
1 American Funds a variety of fees, each of which was calculated as a percentage of assets
2 under management. Hence, the more money invested in the funds, the greater the fees
3 paid to the Investment Adviser Defendant. In theory, the fees charged to fund investors
4 are negotiated at arm's-length between the fund board and the investment management
5 company and must be approved by the independent members of the board. However, as a
6 result of the Director Defendants' dependence on the investment management company,
7 and its failure to properly manage the investment advisers, millions of dollars in American
8 Funds assets were transferred through fees payable from American Funds assets to the
9 Investment Adviser Defendant that were of no benefit to fund investors.
10 42. These practices proved to be enormously profitable for Capital Group at the
11 expense of plaintiffs and other members of the Class who had invested in the American
12 Funds. In this regard, a Forbes article, published on September 15, 2003, stated as
• 13 follows:
14 The average net profit margin at publicly held mutual fund firms was
15 18.8% last year, blowing away the 14.9% margin for the financial
16 industry. overall . [f]or the most part, customers do not enjoy the
• 17 benefits of the economies of scale created by having larger funds.
18 Indeed, once a fund reaches a certain critical mass, the directors
19 know that there is no discernible benefit from having the fund
20 become bigger by drawing in more investors; in fact, they know the
21 opposite to be true - once a fund becomes too large it loses the ability
22 to trade in and out of positions without hurting its investors. [. . .]
23 The [mutual fund] business grew 71-fold (20 fold in real terms) in the
24 two decades through 1999, yet costs as a percentage of assets
25 • somehow managed to go up 29%. . . . Fund vendors have a way of
26 stacking their boards with rubber stamps. As famed investor Warren
27 Buffett opines in Berkshire Hathaway's 2002 annual report: 'Tens of
28
12
1 thousands of "independent" directors, over more than six decades, have
2 failed miserably.' A genuinely independent board would occasionally
3 fire an incompetent or overcharging fund advisor. That happens just
4 about never." [Emphasis added.]
5 43. Plaintiffs and other members of the Class never knew, nor could they have
6 known, from reading the fund prospectuses or otherwise, of the extent to which the
7 Investment Adviser Defendant was using so-called 12b-1 fees, directed brokerage (as
8 defined below) and excessive commissions to improperly siphon assets from the funds.
9The Investment Adviser Defendant Used
10 Rule 12b-1 Marketing Fees For Improper Purposes
11 44. Rule 12b-1, promulgated by the SEC pursuant to the Investment Company
12 Act, prohibits mutual funds from directly or indirectly distributing or marketing their own
13 shares unless certain enumerated conditions set forth in Rule 12b-1 are met. The Rule
14 12b-1 conditions require that payments for marketing must be made pursuant to a written
15 plan "describing all material aspects of the proposed financing of distribution," all
16 agreements with any person relating to implementation of the plan must be in writing; the
17 plan must be approved by a vote of the majority of the board of directors; and the board of
18 directors must review, at least quarterly, "a written report of the amounts so expended and
19 the purposes for which such expenditures were made." Additionally, the directors "have a
20 duty to request and evaluate, and any person who is a party to any agreement with such •
21 company relating to such plan shall have a duty to furnish, such information as may
22 reasonably be necessary to an informed determination of whether the plan should be
23 implemented or continued." The directors may continue the plan "only if the board of
24 directors who vote to approve such implementation or continuation conclude, in the
25 exercise of reasonable business judgment, and in light of their fiduciary duties under state
26 law and section 36(a) and (b) [15 U.S.C. 80a-35(a) and (b)] of the Act that there is a
27
28
13
1 reasonable likelihood that the plan will benefit the company and its shareholders."
2 [Emphasis added.]
3 45. The exceptions to the Section 12b prohibition on mutual fund marketing were
4 enacted in 1980 under the theory that the marketing of mutual funds, all things being
5 equal, should be encouraged because increased investment in mutual funds would
6 presumably result in economies of scale, the benefits of which would be shifted from fund
7 managers to investors. During the Class Period, the Director Defendants authorized, and
8 the Investment Adviser Defendant collected, millions of dollars in purported Rule 12b-1
9 marketing and distribution fees.
10 46. However, the purported Rule 12b-1 fees charged to American Funds investors
11 were highly improper because the conditions of Rule 12b-1 were not met. There was no
12 "reasonable likelihood" that the plan would benefit the company and its shareholders. On
13 the contrary, as the funds were marketed and the number of fund investors increased, the
14 economies of scale thereby created, if any, were not passed on to American Funds
15 investors. Rather, American Funds management and other fees increased. This increase
16 was a red flag that the Director Defendants knowingly or recklessly disregarded. As such,
17 the American Funds marketing efforts were creating diminished marginal returns under
18 circumstances where. increased fund size correlated with reduced liquidity and fund
19 performance. If the Director Defendants reviewed written reports of the amounts
20 expended pursuant to the American Funds Rule 12b-1 Plan, and the information pertaining
21 to agreements entered into pursuant to the Rule 12b-1 Plan, on a quarterly basis as required
22 - which seems highly unlikely under the circumstances set forth herein — the Director
23 Defendants either knowingly or recklessly failed to terminate the plans and the payments
24 made pursuant to the Rule 12b-1 Plan, even though such payments not only harmed
25 existing American Funds shareholders, but also were improperly used to induce brokers to
26 breach their duties of loyalty to their prospective American Funds investors.
27
28
14
1 47. As set forth below, in violation of Rule 12b-1 and Section 28(e) of the
2 Securities Exchange Act, defendants made additional improper payments to brokers, in the
3 form of excessive commissions, that were not disclosed or authorized by the American
4 Funds Rule 12b-1 plan.
5 The Investment Adviser Defendant Charged Its Overhead To6 American Funds Investors And Secretly Paid Excessive
Commissions To Brokers To Steer Clients To American Funds 7
48. Investment advisers routinely pay broker commissions on the purchase and8
sale of fund securities, and such commissions may, under certain circumstances, properly9
be used to purchase certain other services from brokers as well. Specifically, the Section10
28(e) "safe harbor" provision of the Securities Exchange Act carves out an exception to11
the rule that requires investment management companies to obtain the best possible12
execution price for their trades. Section 28(e) provides that fund managers shall not be13
deemed to have breached their fiduciary duties "solely by reason of [their] having caused14
the account to pay a . . . broker . . . in excess of the amount of commission another . . .15
broker . . . would have charged for effecting the transaction, if such person determined in16
good faith that the amount of the commission is reasonable in relation to the value of the17
brokerage and research services provided." 15 U.S.C. §28(e) (emphasis added). In other18
•words, funds are allowed to include in "commissions" payment for not only purchase and19
sales execution, but also for specified services, which the SEC has defined to include, "any20
service that provides lawful and appropriate assistance to the money manager in the21
performance of his investment decision-making responsibilities." The commission22
amounts charged by brokerages to investment advisers in excess of the purchase and sale23
charges are known within the industry as "Soft Dollars."24
49. The Investment Adviser Defendant's actions are not protected by the Section25
28(e) safe harbor. The Investment Adviser Defendant used Soft Dollars to pay overhead26
costs (for items such as computer hardware and software) thus charging American Funds27
28
15
1 investors for costs not covered by the Section 28(e) safe harbor and that, consistent with
2 the investment advisers' fiduciary duties, properly should have been borne by the
3 Investment Adviser Defendant. The Investment Adviser Defendant also paid excessive
4 commissions to broker dealers on top of any legitimate Soft Dollars to steer their clients to
5 American Funds and directed brokerage business to firms that favored American Funds.
6 Such payments and directed-brokerage payments were used to fund sales contests and
7 other undisclosed financial incentives to push American Funds. These incentives created
8 an undisclosed conflict of interest and caused brokers to steer clients to American Funds
9 regardless of the funds' investment quality relative to other investment alternatives and to
10 thereby breach their duties of loyalty. By paying the excessive brokerage commissions,
11 the Investment Adviser Defendant additionally violated Section 12 of the Investment
12 Company Act, because such payments were not made pursuant to a valid Rule 12b-1 plan.
13 50. The excessive commissions did not fund any services that benefited the
14 American Funds shareholders. This practice materially harmed plaintiffs and other
15 'members of the Class from whom the Soft Dollars and excessive commissions were taken.
16 51. Additionally, on information and belief, the defendants, similar to other
• 17 members of the industry, have a practice of charging lower management fees to
18 institutional clients than to ordinary mutual fund investors through their mutual fund
19 holdings. This discriminatory treatment cannot be justified by any additional services to
• 20 the ordinary investor and constitutes a further breach of fiduciary. duties.
21 52. On January 14, 2004, The Wall Street Journal published an article under the
22 headline, "SEC Readies Cases On Mutual Funds' Deals With Brokers." Citing "a person
23 familiar with the investigation," the article noted that the SEC is "close to filing its first
24 charges against mutual fund companies related to arrangements that direct trading
25 commissions to brokerage films that favor those fund companies' products." The article
26 stated in pertinent part as follows:
27
28
16
1 The SEC has been probing the business arrangements between fund
2 companies and brokerage firms since last spring. It held a news
3 conference yesterday to announce it has found widespread evidence
4 that brokerage firms steered investors to certain mutual funds
5 because of payments they received from fund companies or their
6 investment advisers as part of sales agreements.
7 Officials said the agency has opened investigations into eight brokerage
8 firms and a dozen mutual funds that engaged in a longstanding practice9
known as "revenue sharing." Agency officials said they expect that
10 number to grow as its probe expands. They declined to name either the
11 funds or the brokerage films.
12 The SEC said payments varied between 0.05% and 0.04% of sales and
13 up to 0.25% of assets that remained invested in the fund. [. . .]
14 People familiar with the investigation say regulators are looking into
15 examples of conflict of interest when fund companies use
.16 shareholder money to cover costs of sales agreements instead of
17 paying the sales costs themselves out of the firm's own pockets. The
18 boards of funds, too, could be subject to scrutiny for allowing
19 shareholders' commission dollars to be used for these sales
20 agreements. In other cases, the SEC is probing whether funds
21 violated policies that would require costs associated with marketing a
22 -fund to be included in a fund's so-called 12b-1 plan.
23 Id. [Emphasis added.] Recently, Edward Jones stated in its 10-K filing to the SEC that the
24 SEC is "seriously considering" regulatory action against the firm because of its revenue-
25 sharing arrangements with companies such as American Funds.
26
27
28
17
1 THE TRUTH BEGINS TO EMERGE
2 53. On January 9, 2004, the Wall Street Journal exposed the relationship between
3 Edward Jones and American, as well as seven mutual fund companies. According to the
4 article, American and the other fund companies paid Edward Jones substantial amounts to
5 favor those companies when pitching funds to customers. In an article, the Wall Street
6 Journal detailed Edward Jones' wrongdoing based on an investigation that included
7 interviews with 18 former and current Edward Jones brokers.
8 54. According to the article, the pressure to sell the preferred funds made it
9 financially foolhardy for Edward Jones brokers to sell non-preferred funds. Quoting
10 brokers who had sold only the preferred funds for years, the article reported as follows:
11 Individual brokers have a strong fmancial incentive to pitch favored
12 funds. The revenue-sharing payments are credited as income to the
13 profit-and-loss statements of brokerage branches. Those statements are
14 a significant factor in determining the size of brokers' bonuses,
15 generally awarded three times a year, according to foriner brokers. The
16 bonuses can add up to $80,000 or $90,000 for a good producer, and
17 often average about a third of total compensation.
18 "I sold no outside funds," says former broker Eddie Hatch, who
19 worked at Jones in North Carolina for 13 years, until he left in 2000 to
20 work for another brokerage firm. "You took a reduced payout" ifyou
21 sold funds not on the preferred list, he adds.
22 Jones floods its brokers with literature from its preferred funds, former
23 brokers say. "I didn't take the blinders off for nine years," says Scott
24 Maxwell of Cary, N.C., a broker who left Jones for another firm in
25 March of last year. He switched jobs, he says, largely because he was
26 uncomfortable with the limited fund selection. Mr. Maxwell says he
27
28
18
1 wanted to be freer to offer clients funds with better investment
2 performance and lower fees.
3 Jeff Davis says he was "young and wet behind the ears" when he was
4 hired at Jones in 1993 after a stint as a White House intern. Even
5 before he fully understood the financial incentives, he says he sold
6 the seven funds almost exclusively. "I was afraid not to," he adds.
7 Mr. Davis, who left Jones in 2001 and started his own business, also
8 says he was uncomfortable with the incentives and wanted more
9 leeway to sell other funds.
10 [Emphasis added.]
11 55. The revenue-sharing arrangements are harmful to investors, who, consistent
12 with Edward Jones' representations, believe they are receiving objective, independent
13 advice. In this regard, the Wall Street Journal article quotes a disappointed Edward Jones
14 client who invested in Putnam mutual funds, one of the seven fund families considered a
15 preferred partner which includes American Funds, as follows:
16 Like ;many who bought poorly performing Putnam mutual funds in
17 recent years, Nancy Wessels lost big. One of her investments, Putnam
18 Vista fund, dropped 40% from when she bought it in April 2000, near
19 the stock-market peak, until she sold it in May 2002. That performance
20 was worse than 80% of similar stock funds.
21 When training its brokers in fund sales, Jones gives them
22 information almost exclusively about the seven "preferred" fund
23 companies, according to former Jones brokers. Bonuses for brokers
24 depend in part on selling the preferred funds, and Jones generally
25 discourages contact between brokers and sales representatives from
26 rival funds. But while revenue sharing and related incentives are
27
28
19
1 familiar to industry insiders, Jones typically doesn't tell customers
2 about any of these arrangements.
3 "The deception is that the broker seems to give objective advice,"
4 says Tamar Frankel, a law professor at Boston University who
5 specializes in mutual-fund regulation. "In fact, he is paid more for
6 pushing only certain funds."
7 [Emphasis added.]
8 56. On January 14, 2004, the Wall Street Journal published an article under the
9 headline, "SEC Readies Cases On Mutual Funds' Deals With Brokers," citing "a person
10 familiar with the investigation," which stated that the SEC is "close to filing its first
11 charges against mutual fund companies related to arrangements that direct trading
12 commissions to brokerage firms that favor those fund companies' products." The article
13 stated in pertinent part as follows:
14 The SEC has been probing the business arrangements between fund
15 companies and brokerage firms since last spring. It held a news
16 conference yesterday to announce it has found widespread evidence
17 that brokerage firms steered investors to certain mutual funds
18 because of payments they received from fund companies or their
19 investment advisers as part of sales agreements.
20. Officials said the agency has opened investigations into eight brokerage
21 firms and a dozen mutual funds that engaged in a longstanding practice
22 known as "revenue sharing." Agency officials said they expect that
23 number to grow as its probe expands. They declined to name either the
24 funds or the brokerage firms.
25 The SEC said payments varied between 0.05% and 0.04% of sales and
26 up to 0.25% of assets that remained invested in the fund. [. . .]
27
28
20
1 People familiar with the investigation say regulators are looking into
2 examples of conflict of interest when fund companies use
3 shareholder money to cover costs of sales agreements instead of
4 paying the sales costs themselves out of the firm's own pockets. The
5 boards of funds, too, could be subject to scrutiny for allowing
6 shareholders' commission dollars to be used for these sales
7 agreements. In other cases, the SEC is probing whether funds
8 violated policies that would require costs associated with marketing a
9 fund to be included in a fund's so-called 12b-1 plan.
10 [Emphasis added.]
11 57. Additionally, on information and belief, the American Funds have a practice
12 of charging lower management fees to institutional clients than they charge to ordinary
13 mutual fund investors through their mutual fund holdings. This discriminatory treatment
14 cannot be justified by any additional services to the ordinary investor and is a further
15 breach of fiduciary duties.
16 The.Prospectuses Were Materially False And Misleading
17 58. Plaintiffs and other members of the Class were entitled to, and did receive,
18 one or more of the prospectuses (the "Prospectuses"), pursuant to which the American
19 Funds shares were offered, each of which contained substantially the same materially,false
20 •and misleading statements and omissions regarding 12b-1 fees, commissions and Soft
21 Dollars.
22 59. The Statement of Additional Information dated March 1, 2003, for funds
23 offered by the Investment Advisor Defendants, referred to in certain of the American
24 Funds Prospectuses and available to the investor upon request, states as follows with
25 respect to Soft Dollars and revenue sharing:
26 The Investment Adviser places orders for the fund's portfolio securities
27 transactions. The Investment Adviser strives to obtain the best available
28
21
1 prices in its portfolio transactions taking into account the costs and
2 quality of executions. When, in the opinion of the Investment Adviser,
3 two or more brokers (either directly or through their correspondent
4 clearing agents) are in a position to obtain the best price and execution,
5 preference may be given to brokers who have sold shares of the fund
6 or who have provided investment research, statistical, or other related
7 services to the Investment Adviser. The fund does not consider that it
8 has an obligation to obtain the lowest available commission rate to
9 the exclusion of price, service and qualitative considerations.
10 [Emphasis added.]
11 60. The Prospectuses failed to disclose and misrepresented, inter alia, the
12 following material and damaging adverse facts which damaged plaintiffs and other
13 members of the Class:
14 (a) that the Investment Adviser Defendant authorized the payment from
15 fund assets of excessive commissions to broker dealers in exchange for preferential
16 marketing services and that such payments were in breach of their fiduciary duties, in
17 violation of Section 12b of the Investment Company Act, and unprotected by any "safe
18 harbor;"
19 (b) that the Investment Adviser Defendant directed brokerage payments to
20 firms that favored American Funds, which was a form of marketing that was not disclosed
21 in or authorized by the American Funds Rule 12b-1 Plan;
22 (c) that the American Funds Rule 12b-1 Plan was not in compliance with
23 Rule 12b-1, and that payments made pursuant to the plan were in violation of Section 12
24 of the Investment Company Act because, among other reasons, the plan was not properly
25 evaluated by the Director Defendants and there was not a reasonable likelihood that the
26 plan would benefit the company and its shareholders;
27
28
22
-
1 (d) that by paying brokers to aggressively steer their clients to the
2 American Funds, the Investment Adviser Defendant was knowingly aiding and abetting a
3 breach of fiduciary duties, and profiting from the brokers' improper conduct;
4 (e) that any economies of scale achieved by marketing of the American
5 Funds to new investors were not passed on to American Funds investors; on the contrary,
6 as the American Funds grew, fees charged to American Funds investors nevertheless
7 increased;
8 (f) that defendants improperly used Soft Dollars and excessive
9 commissions, paid from American Funds assets, to pay for overhead expenses the cost of
10 which should have been borne by FleetBoston and not American Funds investors; and
11 (g) that the Director Defendants had abdicated their duties under the
12 Investment Company Act and their common law fiduciary duties, that they failed to
13 monitor and supervise the Investment Adviser Defendant and that, as a consequence, the
14 Investment Adviser Defendant was able to systematically skim millions and millions of
15 dollars from the American Funds.
16 COUNT I
17Against The Investment Adviser Defendant
For Violations Of Section 34(b) Of The Investment
18 Company Act On Behalf Of The Class
19 61. Plaintiffs repeat and reallege each and every .allegation contained above as if
20 fully set forth herein.
21 62. This Count is asserted against the Investment Adviser Defendant in their role
22 •as investment advisers to the American Funds.
23 63. The Investment Adviser Defendant made untrue statements of material fact in
24 registration statements and reports filed and disseminated pursuant to the Investment
25 Company Act and omitted to state facts necessary to prevent the statements made therein,
26 in light of the circumstances under which they were made, from being materially false and
27 misleading. The Investment Adviser Defendant failed to disclose the following:
28
23
"
1 (a) that the Investment Adviser Defendant authorized the payment from
2 fund assets of excessive commissions to broker dealers in exchange for preferential
3 marketing services and that such payments were in breach of their fiduciary duties, in
4 violation of Section 12b of the Investment Company Act, and unprotected by any "safe
5 harbor;"
6 (b) that the Investment Adviser Defendant directed brokerage payments to
7 firms that favored American Funds, which was a form of marketing that was not disclosed
8 in or authorized by the American Funds Rule 12b-1 Plan;
9 (c) that the American Funds Rule 12b-1 Plan was not in compliance with
10 Rule 12b-1, and that payments made pursuant to the plan were in violation of Section 12
11 of the Investment Company Act because, among other reasons, the plan was not properly
12 evaluated by the Director Defendants and there was not a reasonable likelihood that the
13 plan would benefit the company and its shareholders;
14 (d) that by paying brokers to aggressively steer their clients to the
15 American Funds, the Investment Adviser Defendant was knowingly aiding and abetting a
16 breach of fiduciary duties, and profiting from the brokers' improper conduct;
17 (e) that any economies of scale achieved by marketing of the American
18 Funds to new investors were not passed on to American Funds investors; on the contrary,
19 as the American Funds grew, fees charged to American Funds investors increased;
20 (f) that defendants improperly used Soft Dollars and excessive
21 commissions, paid from American Funds assets, to pay for overhead expenses the cost of
22 which should have been borne by Capital Research and not American Funds investors; and
23 (g) that the Director Defendants had abdicated their duties under the
24 Investment Company Act and their common law fiduciary duties, that the Director
25 Defendants failed to monitor and supervise the Investment Adviser Defendant and that, as
26 a consequence, the Investment Adviser Defendant was able to systematically skim millions
27 and millions of dollars from the American Funds.
28
24
1 64. By reason of the conduct described above, the Investment Adviser Defendant
2 violated Section 34(b) of the Investment Company Act.
3 65. As a direct, proximate and foreseeable result of the Investment Adviser
4 Defendant's violation of Section 34(b) of the Investment Company Act, American Funds
5 investors have incurred damages.
6 66. Plaintiffs and members of the Class have been specially injured by the
7 defendants' violations of Section 34(b) of the Investment Company Act. Such injuries
8 were suffered directly by the shareholders, rather than by the American Funds themselves.
9 67. The Investment Adviser Defendant, individually and in concert, directly and
10 indirectly, by the use, means or instrumentalities of interstate commerce and/or of the
11 mails, engaged and participated in a continuous course of conduct to conceal such adverse
12 material information.
13 COUNT II
14Against American Distributors And The Investment Adviser Defendant
Pursuant To Section 36(b) Of The Investment Company Act
15 Derivatively On Behalf Of The American Funds
16 68. Plaintiffs repeat and reallege each and every allegation contained above and
17 otherwise incorporates the allegations contained above.
• 18 69. This Count is brought by the Class (as American Funds securities holders) on
19 behalf of the American Funds against American Distributors and the Investment Adviser
20 Defendant for breaches of American Distributors' and the Investment Adviser Defendant's
21 fiduciary duties as defined by Section 36(b) of the Investment Company Act.
22 70. American Distributors and the Investtnent Adviser Defendant each had a
23 fiduciary duty to the American Funds and the Class with respect to the receipt of
24 compensation for services and of payments of a material nature made by and to American
25 Distributors and the Investment Adviser Defendant.
26
27
28
25
1 71. American Distributors and the Investrhent Adviser Defendant violated
2 Section 36(b) by improperly charging investors in the American Funds purported Rule
3 12b-1 marketing fees, and by drawing on American Funds assets to make undisclosed
4 payments of Soft Dollars and excessive commissions, as defined herein, in violation of
5 Rule 12b-1.
6 72. By reason of the conduct described above, American Distributors and the
7 Investment Adviser Defendant violated Section 36(b) of the Investment Company Act.
8 73. As a direct, proximate and foreseeable result of American Distributors' and
9 the Investment Adviser Defendant's breach of the fiduciary duty of loyalty in their
10 respective roles as underwriter and investment advisers to American Funds investors, the
11 American Funds and the Class have incurred millions of dollars in damages.
12 74. Plaintiffs, in this Count, seek to recover the Rule 12b-1 fees, Soft Dollars,
13 excessive commissions and the management fees charged the American Funds by
14 American Distributors and the Investment Adviser Defendant.
15 COUNT III
16Against Capital Group And The Director Defendants (As Control
Persons Of' The Investment Adviser Defendant) And The Investment
17 Adviser Defendant (As Control Person Of American Distributors) For
18Violation Of Section 48(a) Of The Investment Company Act By The
Class And Derivatively On Behalf Of The American Funds 19 75. Plaintiffs repeat and reallege each and every allegation contained above as if20
fully set forth herein.21 76. This Count is brought pursuant to Section 48(a) of the Investment Company22 Act against Capital Group and the Director Defendants, who caused the Investment23 Adviser Defendant to commit the violations of the Investment Company Act alleged24 herein. It is appropriate to treat these defendants as a group for pleading purposes and to25 presume that the misconduct complained of herein is the collective actions of Capital26
Group and the Director Defendants.27
28
26
1 77. The Investment Adviser Defendant is liable under Section 34(b) of the
2 Investment Company Act to the Class and under Section 36(b) of the Investment Company
3 Act to the American Funds as set forth herein.
4 78. Capital Group and the Director Defendants were "control persons" of the
5 Investment Adviser Defendant and caused the violations complained of herein. By virtue
6 of their positions of operational control and/or authority over the Investment Adviser
7 Defendant, Capital Group and the Director Defendants directly and indirectly, had the
8 power and authority, and exercised the same, to cause the Investment Adviser Defendant
9 to engage in the wrongful conduct complained of herein.
10 79. Pursuant to Section 48(a) of the Investment Company Act, by reason of the
11 foregoing, Capital Group and the Director Defendants are liable to plaintiffs to the same
12 extent as are the Investment Adviser Defendant for their primary violations of Sections
13 34(b) and 36(b) of the Investment Company Act.
14 80. This Count is also brought pursuant to Section 48(a) of the Investment
15 Company Act against the Investment Adviser Defendant, which caused American
16 Distributors to commit the violations of the Investment Company Act alleged herein.
17 81. American Distributors is liable under Section 36(b) of the Investment
18 Company Act to the American Funds as set forth herein.
19 82. The Investment Adviser Defendant was a "control person" of American
20 Distributors and caused the violations complained of herein. By virtue of its position of
21 operational control and/or authority over American Distributors, the Investment Adviser
22 Defendant directly and indirectly, had the power and authority, and exercised the same, to
23 cause American Distributors to engage in the wrongful conduct complained of herein.
24 83. Pursuant to Section 48(a) of the Investment Company Act, by reason of the
25 foregoing, the Investment Adviser Defendant is liable to plaintiffs to the same extent as is
26 American Distributors for its primary violations of Section 36(b) of the Investment
27 Company Act.
28
27
_ _ _
1 84. By virtue of the foregoing, plaintiffs and the other Class members are entitled
•2 to damages against Capital Group, the Director Defendants, American Distributors and the
3 Investment Adviser Defendant.
4 COUNT IV
5 Against The Investment Adviser Defendant UnderSection 215 Of The Investment Advisers Act For Violations Of
6 Section 206 Of The Investment Advisers Act Derivatively
7 On Behalf Of The American Funds
885. Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth herein.9
1086. This Count is based upon Section 215 of the Investment Advisers Act, 15
11 U.S.C. §80b-15.
12 0 .87. The Investment Adviser Defendant served as "investment adviser" to the
13 American Funds and other members of the Class pursuant to the Investment Advisers Act.
1488. As fiduciaries pursuant to the Investment Advisers Act, the Investment
15 Adviser Defendant was required to serve the American Funds in a manner in accordance
16 with the federal fiduciary standards set forth in Section 206 of the Investment Advisers
17 Act, 15 U.S.C. §80b-6, governing the conduct of investment advisers. •
1889. During the Class Period, the Investment Adviser Defendant breached its
19 fiduciary duties to the American Funds by engaging in a deceptive contrivance, scheme,
•20
practice and course of conduct pursuant to which they knowingly and/or recklessly
21 engaged in acts, transactions, practices and courses of business which operated as a fraud
22 upon the American Funds. As detailed above, the Investment Adviser Defendant skimmed
23 money from the American Funds by charging and collecting fees from the American
24 Funds in violation of the Investment Company Act and the Investment Advisers Act. The
25 purpose and effect of said scheme, practice and course of conduct was to enrich the
26 Investment Adviser Defendant, among other defendants, at the expense of the American
27 Funds. The Investment Adviser Defendant breached its fiduciary duties owed to the
28
28
1 American Funds by engaging in the aforesaid transactions, practices and courses of
2 business knowingly or recklessly so as to constitute a deceit and fraud upon the American
3 Funds.
4 90. The Investment Adviser Defendant is liable as direct participants in the
5 wrongs complained of herein. The Investment Adviser Defendant, because of its position
6 of authority and control over the American Funds were able to and did control the fees
7 charged to and collected from the American Funds and otherwise control the operations of
8 the American Funds.
9 91. The Investment Adviser Defendant had a duty to (1) disseminate accurate and
10 truthful information with respect to the American Funds; and (2) truthfully and uniformly
11 act in accordance with its stated policies and fiduciary responsibilities to the American
12 Funds. The Investment Adviser Defendant participated in the wrongdoing complained of
13 herein in order to prevent the American Funds from knowing of the Investment Adviser
14 Defendant's breaches of fiduciary duties including: (1) the charging of the American
15 Funds and American Funds investors improper Rule 12b-1 marketing fees; (2) making
16 improper undisclosed payments of Soft Dollars; (3) making unauthorized use of "directed
, 17 brokerage" as a marketing tool; and (4) charging the American Funds for excessive and
18 iniproper commission payments to brokers.
19 92. As a result of the Investment Adviser's multiple breaches of its fiduciary
20 duties owed to the American Funds, the American Funds were damaged.
21 93. The American Funds are entitled to rescind their investment advisory
22 contracts with the Investment Adviser Defendant and recover all fees paid in connection
23 with such agreements.
24
25
26
27
28
29
1 COUNT V
2 Breach Of Fiduciary Duty Against The InvestmentAdviser Defendant On Behalf Of The Class
394. Plaintiffs repeat and reallege each of the preceding allegations as though fully
4set forth herein.
595. As investment adviser to the American Funds, the Investment Adviser
6 Defendant was a fiduciary to plaintiffs and other members of the Class and was required to
7act with the highest obligations of good faith, loyalty, fair dealing, due care and candor.
' 896. As set forth above, the Investment Adviser Defendant breached their fiduciary
9duties to plaintiffs and the Class.
10 97. Plaintiffs and the Class have been specially injured as a direct, proximate and11
foreseeable result of such breach on the part of the Investment Adviser Defendant and12
have suffered substantial damages.13 98. Because the Investment Adviser Defendant acted with reckless and willful14 disregard for the rights of plaintiffs and other members of the Class, the Investment15 Adviser Defendant is liable for punitive damages in an amount to be determined by the16 .
Jury.17 COUNT VI
18 Breach Of Fiduciary Duty Against The Director
19 Defendants On Behalf Of The Class
99.
20Plaintiffs repeat and reallege each of the preceding allegations as though fully
21 set forth herein.
22100. As American Funds Directors, the Director Defendants had a fiduciary duty
23 to the American Funds and American Funds investors to supervise and monitor the
24 Investment Adviser Defendant.
25101. The Director Defendants breached their fiduciary duties by reason of the acts
26 alleged herein, including their knowing or reckless failure to prevent the Investment
27 Adviser Defendant from (1) charging the American Funds and American Funds investors
28
30
1 improper Rule 12b-1 marketing fees; (2) making improper undisclosed payments of Soft
2 Dollars; (3) making unauthorized use of "directed brokerage" as a marketing tool; and (4)
3 charging the American Funds for excessive and improper commission payments to
4 brokers.
5 102. Plaintiffs and the Class have been specially injured as a direct, proximate and
6 foreseeable result of such breach on the part of the Investment Adviser Defendant and
7 have suffered substantial damages.
8 103. Because the Investment Adviser Defendant acted with reckless and willful
9 disregard for the rights of plaintiffs and the other members of the Class, the Investment
10 Adviser Defendant is liable for punitive damages in an amount to be determined by the
11 jury.
12 COUNT VII
13Aiding And Abetting A Breach Of Fiduciary
Duty Against The Investment Adviser14 Defendant On Behalf Of The Class
15 104. Plaintiffs repeat and reallege each of the preceding allegations as though fully
16 set forth herein.
17 105. At all times herein, the broker dealers that sold American Funds had fiduciary
18 duties of loyalty to their clients, including plaintiffs and the other members of the Class.
19 106. The Investment Adviser Defendant knew or should have known that the
20 broker dealers had these fiduciary duties.
21 107. By accepting improper Rule 12b-1 fees, Soft Dollars and excessive
22 commissions in exchange for aggressively pushing American Funds, and by failing to
23 disclose the receipt of such fees, the brokerages breached their fiduciary duties to plaintiffs
24 and the other members of the Class.
25 108. The Investment Adviser Defendant possessed actual or constructive
26 knowledge that the brokerages were breaching their fiduciary duties, but nonetheless
27 perpetrated the fraudulent scheme alleged herein.
28
31
1 109. The Investment Adviser Defendant's actions, as described in this complaint,
2 were a substantial factor in causing the losses suffered by plaintiffs and the other members
3 of the Class. By participating in . the brokerages' breaches of fiduciary duties, the
4 Investment Adviser Defendant is liable therefor.
5 110. As a direct, proximate and foreseeable result of the Investment Adviser
6 Defendant's knowing participation in the brokerages' breaches of fiduciary duties,
7 plaintiffs and the Class have suffered damages.
8 111. Because the Investment Adviser Defendant acted with reckless and willful
9 disregard for the rights of plaintiffs and the other members of the Class, the Investment
10 Adviser Defendant is liable for punitive damages in an amount to be determined by the
11 jury.
12 PRAYER FOR RELIEF
13 WHEREFORE, plaintiffs pray for relief and judgment, as follows:
14 (A) Determining that this action is a proper class action and certifying
15 plaintiffs as the Class representatives and plaintiffs' counsel as Class counsel pursuant to
16 Rule 23 of the Federal Rules of Civil Procedure;
17 (B) Awarding compensatory damages in favor of plaintiffs and the other
18 Class members against all defendants, jointly and severally, for all damages
19 sustained as a result of defendants' wrongdoing, in an amount to be proven at trial,
20 including interest thereon;
21 (C) Awarding punitive damages in favor of plaintiffs and the other Class
22 members against all defendants, jointly and severally, for all damages sustained as a result
23 of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
24 (D) Awarding the American Funds rescission of their contracts with the
25 Investment Adviser Defendant, including recovery of all fees which would otherwise
26 apply, and recovery of all fees paid to the Investment Adviser Defendant;
27
28
32
1 (E) Ordering an accounting of all American Funds-related fees,
2 commissions, and Soft Dollar payments;
3 (F) Ordering restitution of all unlawfully or discriminatorily obtained fees
4 and charges;
5 (G) Awarding such other and further relief as this Court may deem just and
6 proper, including any extraordinary equitable and/or injunctive relief as permitted by law
7 or equity to attach, impound or otherwise restrict the defendants' assets to assure that
8 plaintiffs and the Class have an effective remedy;
9 (H) Awarding plaintiffs and the Class their reasonable costs and expenses
to incurred in this action, including counsel fees and expert fees; and
11 (I) Such other and further relief as the Court may deem just and proper.
12 JURY TRIAL DEMANDED
13 Plaintiffs hereby demands a trial by jury.
14Dated: July 15, 2004 MILBERG WEISS BERS • D
15 & /
16
17 By: 41111,7 /,ff S. Westerman
18 355 South Grand Avenue, Suite 4170
19 Los Angeles, CA 90071-3172
20Telephone: (213) 617-1200Facsimile: (213) 617-1975
21MILBERG WEISS BERSHAD
22 & SCHULMAN LLP
23 Steven G. SchulmanKim E. Levy
24 Michael R. Reese
25 One Pennsylvania PlazaNew York, New York 10119
26 Telephone: (212) 594-5300
27 Facsimile: (212) 868-1229
28
33
,
WEISS & YOURMAN2 Joseph H. Weiss
3-551 Fifth AvenlaeSuite 1600
4 New York, New York 10176
5Telephone: (212) 682-3025Facsimile: (212) 682-3010
6LAW OFFICES OF CHARLES J.TIVEN, P.A.
7 Charles J. Piven8 Marshall N. Perkins
The World Trade Center — Baltimore9 Suite 2525
10 401 East Pratt StreetBaltimore, Maryland 21202
11 Telephone: (410) 332-003012 Facsimile: (410) 685-1300
13 STULL, STULL & 13RODY
14 Jules BrodyAaron Brody
15 6 East 45th Street
16 New York, New York 10017Telelphone: (212) 687-7230
17 Facsimile: (212) 490-2022
18 Counsel for Plaintiffs19
20 DOCS\212747v1
21
22 •
23
24
25
26
27
28
34•