BlackRock Wins in Director Independence Case
February 15, 1999
A New York federal court judge has dismissed the second of five cases which challenge the independence of mutual fund directors based on their allegedly high pay.
Shareholder T. Robert Verkouteren failed to marshal "any evidence" that the pay that directors of the BlackRock Funds received destroyed their independence and left them in the control of the funds' advisory company, U.S. District Court Judge Whitman Knapp of New York said in a 12-page decision dated Feb. 4. Knapp, occasionally using sharp language, dismissed the case which Verkouteren filed against BlackRock Financial Management. But, the judge, as a matter of routine, gave Verkouteren 30 days to add further detail to his accusations. If Verkouteren does, the case could be re-opened.
The original complaint, which Verkouteren filed last year, "is almost completely devoid of allegations, conclusory or otherwise, that the directors are in fact controlled by" BlackRock, Knapp said. In the suit, Verkouteren asked that BlackRock be ordered to pay back the money it received for advising BlackRock funds because the funds' directors lost their independence due to their high pay.
Joel Feffer, a lawyer for Verkouteren, and a representative from BlackRock did not return calls seeking comments.
Knapp's decision was the second in a two-week period in which a federal judge rejected allegations that directors lost their independence because of the money they make from serving on the board of several different mutual funds in the same mutual fund complex. On Jan. 20, a federal court judge in Maryland dismissed a case against T. Rowe Price Associates and its affiliates. The T. Rowe Price case contained allegations similar to those in the BlackRock case. The plaintiff in the T. Rowe Price case must revise the allegations this month or face final dismissal.
In addition to the T. Rowe Price and BlackRock cases, similar suits are pending against Fidelity Investments, BEA Associates and Prudential.
The T. Rowe Price decision, only one page long, was spare in its analysis. Knapp, however, went into detail in explaining the reasons for dismissing the BlackRock case. His argument largely followed that which mutual fund lawyers have been making for months.
Fund advisers do not elect directors and they do not pay directors, Knapp said. And advisers appear to have no influence on the amount of pay directors receive and whether they are fired, Knapp said.
If shareholders are unhappy with the pay directors receive for the work they do, then, "shareholders have an easy remedy ... and it warrants emphasis here: they may vote to change" the directors' pay and duties, Knapp wrote.
"The court obviously understood how the business works," said Pamela Wilson, a lawyer at Hale & Dorr in Boston who represents mutual funds.
Wilson said Knapp's decision along with the decision in the T. Rowe Price case are consistent with industry practices, federal legislation and SEC actions. All of those permit fund directors to serve on more than one fund board in the same mutual fund complex.
Challenges to that system are "flatly contrary to the structure" of mutual funds outlined in federal legislation, Wilson said.
The issue of directors, their duties and independence will be a major topic in coming days. The SEC will hold a forum on directors' duties and powers Feb. 23 and Feb. 24 in Washington.