NEW YORK, June 12, 2008 – Our securities litigators recently scored a major victory for Capital Research and Management Company when Judge Gary Feess of the United States District Court for the Central District of California dismissed, with prejudice, a securities class action complaint against Capital Research, its parent company, and an affiliated broker-dealer. See In re American Funds Securities Litigation, No. CV 06-7815 GAF (RNBx), 2008 WL 2323534 (C.D. Cal. June 5, 2008). Capital Research is the investment adviser to the American Funds family of mutual funds, the second largest fund family in the world with more than $1.4 trillion in assets under management.
Plaintiffs, representing a purported class of shareholders in eight American Funds, alleged that defendants violated the Securities Act of 1933 and the Securities and Exchange Act of 1934 because the funds' Prospectuses and Statements of Additional Information failed to disclose that defendants engaged in an alleged "kickback" scheme whereby they made revenue sharing payments or directed fund brokerage transactions to broker-dealers that sold the funds' shares.
We moved to dismiss the complaint on various grounds. At oral argument, Judge Feess delivered a tentative decision and indicated he was inclined to grant defendants' motion to dismiss the 1933 Act claims on statute of limitations grounds, but that he was not inclined to grant the motion with respect to the 1934 Act claims. Sean Murphy argued the motion on behalf of defendants, and vigorously asserted that the 1934 Act claims should be dismissed as well, on statute of limitations as well as other grounds.
We were apparently able to turn Judge Feess around at oral argument. In granting our motion to dismiss, Judge Feess adopted nearly all of our statute of limitations arguments, holding that plaintiffs' claims under both the 1933 and 1934 Acts were time-barred because plaintiffs were on inquiry notice of defendants' alleged fraud but failed to exercise reasonable diligence in investigating the underlying facts. He further held that plaintiffs' were not entitled to a tolling of the limitations period because certain exceptions relating to class actions were not present. Judge Feess held that Plaintiffs knew or should have known of the alleged "kickback" scheme as early as July 2004, when plaintiffs in another action against Capital Research ("Corbi") filed a complaint alleging a nearly identical scheme of wrongdoing against the same defendants. The filing of another action by the California Attorney General's Office and numerous publicly available news articles also put plaintiffs on inquiry notice of their claims.
Accordingly, while acknowledging that the issue of reasonable diligence does not usually lend itself to resolution on a motion to dismiss, Judge Feess held that based on the extensive public record and the filing of the nearly identical Corbi complaint, Plaintiffs would have been aware of the alleged kickback scheme with the exercise of reasonable diligence. Therefore, he dismissed the complaint.
The Milbank litigation team consisted of partners James Benedict, Sean Murphy, associates C. Neil Gray, Robert Miller, Deborah Elman, Rachel Penski, Krista Smokowski, Will Gross, and case manager Jennifer Russo.