Green v. Fund Asset Management, L.P.

286 F.3d 682 (2002)

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Green v. Fund Asset Management, L.P.

United States Court of Appeals for the Third Circuit

286 F.3d 682 (2002)

Facts

Fund Asset Management, L.P., and Merrill Lynch Asset Management, L.P. (advisers) (defendants) were the investment advisers to several publicly traded, closed-end investment funds. To increase returns to their common shareholders, the funds used leverage by issuing shares of preferred stock and investing the proceeds in long-term bonds with yields higher than the dividend rates payable by the funds on the preferred shares. The advisers’ fee was based on a percentage of the funds’ net assets. Shareholders of the funds (plaintiffs) alleged that because the bonds purchased using the proceeds from the issuance of preferred shares increased the funds’ assets on which the advisory fee was based, this incentivized the advisers to maximize the funds’ leverage and was a conflict of interest. The shareholders sued the advisers, claiming this conflict was a per se breach of the advisers’ fiduciary duty under § 36(b) of the Investment Company Act of 1940 (Company Act) with respect to the advisers’ compensation. Finding the allegations insufficient for a § 36(b) violation, the district court granted summary judgment to the advisers. The shareholders appealed to the United States Court of Appeals for the Third Circuit.

Rule of Law

Issue

Holding and Reasoning (Ward, J.)

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