Smith v. OPPENHEIMER FUNDS DISTRIBUTOR, INC.
824 F. Supp. 2d 511
S.D.N.Y.2011Background
- Smith, North Carolina resident, sues two mutual funds and trustee defendants in SDNY, derivatively on behalf of two funds under the ICA and IAA theories.
- Actions: 10 Civ. 7394 (Gold Fund) and 10 Civ. 7387 (Quest Fund); consolidated for briefing; venue transferred from Colorado under 28 U.S.C. § 1404(a).
- Funds pay distribution fees under Rule 12b-1; OFDI forwards asset-based compensation to retail brokers like Merrill Lynch.
- Plaintiff alleges since Oct. 1, 2007, asset-based compensation to broker-dealers violated the IAA and that trustees had duty to ensure compliant payments.
- Plaintiff asserts predicate ICA violations (under ICA §§ 36 and Rule 38a-1) support a Section 47(b) remedy; Defendants move to dismiss all complaints.
- Court treats two cases together for purposes of ruling and ultimately dismisses the federal claims, leaving potential IAA remedies against broker-dealers.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether ICA § 47(b) creates a private right of action | Smith argues 47(b) provides a private remedy irrespective of predicate ICA rights. | Defendants contend 47(b) is a remedial provision, not a standalone private action without a predicate right. | No private right of action; 47(b) is remedial and requires a predicate ICA violation with its own private right. |
| Can Section 36(a) serve as a predicate for § 47(b) | Smith contends § 36(a) creates an implied fiduciary duty enforceable through § 47(b). | Defendants argue § 36(a) has no private right of action and cannot predicate § 47(b). | No private right of action under § 36(a); cannot serve as predicate for § 47(b). |
| Can SEC Rule 38a-1 serve as a predicate for § 47(b) | Smith contends Rule 38a-1 creates a private right of action enforceable via § 47(b). | Defendants argue regulations lack rights-creating language; no private action via § 47(b). | No private right of action via Rule 38a-1; cannot predicate § 47(b). |
| Effect of failure to plead valid predicates on § 47(b) claim | Smith asserts § 47(b) should still apply as a remedy for ICA violations. | Defendants argue dismissal of predicate violations defeats § 47(b) liability. | § 47(b) claim dismissed due to failure to plead viable ICA predicate violations. |
| Remaining state-law claims and supplemental jurisdiction | Smith argues Massachusetts claims should remain with supplemental jurisdiction. | Defendants contend discretionary removal of supplemental jurisdiction after federal claims are dismissed. | Court declines supplemental jurisdiction after dismissing the federal claim. |
Key Cases Cited
- Alexander v. Sandoval, 532 U.S. 275 (Sup. Ct. 2001) (implied private rights of action require congressional intent)
- Sandoval, 532 U.S. 275 (Sup. Ct. 2001) (text and structure determine private rights and remedies)
- Olmsted v. Pruco Life Ins. Co., 283 F.3d 429 (2d Cir. 2002) (no private action under § 36(a); express remedies limit implied rights)
- Belikoff v. Eaton Vance Corp., 481 F.3d 110 (2d Cir. 2007) (no private action under § 34(b), § 36(a), § 48(a))
- Northstar Financial Advisors, Inc. v. Schwab Invs., 615 F.3d 1106 (9th Cir. 2010) (denies implied private rights under ICA post-Sandoval)
- Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (Sup. Ct. 1979) (private right of action in IAA context; cited for TAMA framework)