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Dreyfus Mutual Funds-Class Action Defense Cases: Shareholders’ Investment Company Act § 36(b) Claim Must Be Brought Derivatively Not As A Class Action So Both It And § 48(a) Claim Based On It Fail Pennsylvania Federal Court Holds

Federal District Court Grants Defense Motion for Judgment on Pleadings and Dismisses Class Action Because § 36(b) Claims under Investment Company Act Cannot Proceed as a Class Action But Rather Must be Brought Derivatively

A putative class action alleging securities fraud was filed against investment advisors, distributors and directors of Dreyfus brand mutual funds (“Dreyfus”); the class action complaint asserted that “investment advisors and distributors of Dreyfus brand mutual funds, engaged in fraudulent fee arrangement schemes in violation of federal and state law.” In re Dreyfus Mutual Funds Fee Litigation, 428 F.Supp.2d 357, 357 (W.D. Pa. 2006). Id., at 357. After the federal court granted the defense motion to dismiss all but two counts in the complaint, the defense moved for judgment on the pleadings on the two remaining counts. The federal court granted the defense motion and dismissed the class action.

The two counts that remained after the defense motion to dismiss were for breach of fiduciary duty under § 36(b) of the Investment Company Act, and a § 48(a) “control person” claim that was premised on the § 36(b) allegation. Id., at 358. The defense now argued that the § 36(b) claim must be brought derivatively “and not as a class action,” and so both the § 36(b) claim and the § 48(a) claim arising from it must fail. Id. The Dreyfus Court recognized that “there are district court decisions allowing section 36(b) claims to proceed as direct actions,” but concluded that “the weight of recent authority” holds that “section 36(b) claims must be brought derivatively.” Id., at 359-60 (citations omitted).

The court then held that whether the class action complaint alleged direct or derivative claims turned on state law. It then examined plaintiffs’ claims under Maryland law and held that they “are derivative in nature” and “[b]ecause they are derivative, the section 36(b) claims cannot be asserted as class action claims.” Id., at 360. Because the § 36(b) claim fails, the court held that the § 48(a) claim falls also: “Section 48(a) does not provide an independent basis for liability.” Id.

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