[Federal Register: March 16, 2005 (Volume 70, Number 50)]
[Notices]
[Page 12909-12912]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16mr05-117]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 26781; 812-12901]
The Brazilian Equity Fund, Inc., et al.; Notice of Application
March 9, 2005.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application under section 17(b) of the Investment
Company Act of 1940 (the ``Act'') for an exemption from section 17(a)
of the Act and under rule 17d-1 under the Act to permit certain joint
transactions.
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Summary of Application: Applicants request an order permitting the
proposed settlement of certain litigation in which the applicants are
named as defendants.
Applicants: The Brazilian Equity Fund, Inc. (``Fund''), Credit Suisse
Asset Management, LLC (``Adviser''), Enrique R. Arzac (``Arzac''),
James J. Cattano (``Cattano''), George W. Landau (``Landau''), Martin
M. Torino (``Torino'') and Richard W. Watt (``Watt,'' and together with
Arzac, Cattano, Landau and Torino, the ``Director Applicants'').
Filing Dates: The application was filed on November 8, 2002 and
amended on February 15, 2005.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on March 30, 2005, and should be accompanied by proof of service
on the applicants, in the form of an affidavit, or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC
[[Page 12910]]
20549-0609; Applicants, c/o Credit Suisse Asset Management, LLC, 466
Lexington Avenue, New York, NY 10017.
FOR FURTHER INFORMATION, CONTACT: Courtney S. Thornton, Senior Counsel,
at (202) 551-6812, or Michael W. Mundt, Senior Special Counsel, at
(202) 551-6821 (Division of Investment Management, Office of Investment
Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
Commission's Public Reference Branch, 450 Fifth Street, NW.,
Washington, DC 20549-0102 (telephone (202) 942-8090).
Applicants' Representations
1. The Fund, a corporation organized under the laws of the state of
Maryland, is a closed-end management investment company registered
under the Act. Shares of the Fund trade on the New York Stock Exchange
(``NYSE''). The Adviser, which is an investment adviser registered
under the Investment Advisers Act of 1940, serves as the Fund's
investment adviser.
2. The Adviser, the Fund, and certain of the Fund's current and
former directors (the ``Director Defendants'') are defendants in a
derivative and class action lawsuit filed in the United States District
Court for the Southern District of New York (``District Court'').\1\
The action (``Rights Offering Litigation''), which commenced in May
1997, arose out of the Fund's 1996 rights offering of its common stock
(``Rights Offering''). In his derivative capacity, the plaintiff
alleged that, in approving the Rights Offering, the Director Defendants
put the interests of the Adviser ahead of the interests of the Fund's
shareholders, thereby breaching their duties of loyalty and due care to
the shareholders of the Fund. The class action claim included similar
assertions but alleged that the Fund's shareholders were injured
directly by the Director Defendants' breach of their fiduciary duties.
Specifically, the complaint alleged violations of section 36(b) of the
Act (derivatively against the Adviser), section 36(a) of the Act
(against all defendants except the Fund), section 48 of the Act
(against the Director Defendants and the Fund), section 36(a) of the
Act (derivatively against all defendants except the Fund), and for
breach of fiduciary duty at common law.
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\1\ Robert Strougo v. Bassini, et al. (97 Civ. 3579) (RWS).
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3. On September 15, 1997, the defendants filed a motion to dismiss
the complaint in its entirety. The District Court granted the motion to
dismiss with respect to all class action claims and the section 36(b)
claim, but denied it with respect to all remaining derivative claims.
Thereafter, the Fund named from among its directors who are not
``interested persons'' of the Fund within the meaning of section
2(a)(19) of the Act (``Independent Directors'') two directors who are
not Director Defendants to act as a special litigation committee
(``Special Litigation Committee'') to investigate the matter and
determine whether any of the claims asserted in the complaint ought to
be prosecuted on behalf of the Fund. The Special Litigation Committee
concluded that the litigation should be discontinued and filed a motion
to dismiss the complaint in the derivative action. On September 15,
2000, the District Court granted summary judgment and dismissed all
remaining derivative claims on the basis of the Special Litigation
Committee's determination that continued prosecution of the derivative
action was not in the best interests of the Fund or its shareholders.
The plaintiff appealed this judgment on the grounds that the District
Court had erroneously dismissed the class action claims in the response
to the original (September 1997) motion to dismiss. On February 28,
2002, the Second Circuit Court of Appeals (``Second Circuit'') reversed
the decision of the District Court and reinstated the class action
claims, predicating its decision on its determination that the
plaintiff had shareholder standing under Maryland state law to bring
direct claims (as opposed to derivative claims). The Second Circuit
left the Rights Offering Litigation to the District Court on remand.
4. In addition to the Rights Offering Litigation, the Adviser is a
defendant in a separate action commenced on May 21, 1998 in the
District Court (``Fee Litigation'' \2\ and together with the Rights
Offering Litigation, the ``Actions''). The initial complaint alleged
that in negotiating the investment advisory fee with the Independent
Directors (who were alleged to be not truly independent), the Adviser
violated its fiduciary duty pursuant to section 36(b) of the Act.
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\2\ Robert Strougo v. BEA Associates (98 Civ. 3725) (RWS).
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5. The District Court dismissed the initial complaint upon motion
by the Adviser, but gave the plaintiff leave to replead. The amended
complaint restated the claim in the initial complaint but added an
additional claim under Section 36(a) of the Act asserting that the
Adviser was liable for breach of duty for negotiating an advisory
agreement with directors who were allegedly not independent. The
Adviser filed a motion to dismiss the amended complaint, but the
District Court denied the motion subject to the plaintiff adding the
Fund as a nominal defendant. The plaintiff subsequently filed a second
amended complaint to add the Fund as a defendant. The defendants moved
for summary judgment, and the District Court granted the motion on
February 28, 2002. The plaintiff filed a notice of appeal of the
judgment of the District Court on March 28, 2002.
6. Applicants state that, due to the inherent uncertainties of
litigation, as well as the additional costs and expenses that would be
necessary to further litigate the Actions, all parties to the Actions
reached a settlement on September 12, 2002, following extensive
settlement discussions. The settlement involves three separate
agreements: A settlement agreement between the plaintiff and the
defendants that has been approved by the District Court (``Settlement
Agreement''); an agreement among the Fund, the Adviser, and Gulf
Insurance Company (``Gulf'') relating to insurance coverage for certain
expenses in connection with the litigation and settlement of the
Actions (``Insurance Settlement Agreement''); and an agreement between
the Fund and the Adviser to share insurance proceeds and certain
expenses in connection with the litigation and settlement of the
Actions (``Settlement Costs Sharing Agreement''). The complete terms
and conditions of the proposed settlement were presented to and
unanimously approved by the Fund's board of directors, including all of
the Independent Directors, at a meeting held on June 27, 2002. In
evaluating the settlement and throughout the settlement negotiation and
evaluation process, the Independent Directors were advised by
independent legal counsel.
7. The District Court approved the Settlement Agreement on April 7,
2003 and entered an order approving the Settlement Agreement on April
9, 2003. The principal terms and conditions of the Settlement Agreement
are as follows:
a. The Fund will be liquidated and its net assets distributed to
shareholders.
b. Class members in the Rights Offering Litigation will be entitled
to receive either $1.00 or $0.25 per share (``Settlement Payments''),
depending on whether they exercised their rights in the Rights
Offering. The Settlement Payments have been fixed at $253,922.
[[Page 12911]]
c. Plaintiff was to apply to the District Court for an award of
attorneys' fees and related amounts, not to exceed $735,000 plus
reimbursement of expenses not exceeding $75,000, and a compensatory
award not to exceed $15,000. Following an objection made by a Fund
shareholder to the plaintiff's requested attorneys' fees, the amount
awarded by the District Court was fixed at $500,000 plus $70,561 of
disbursements, together with the $15,000 compensatory award, for a
total award of $585,561 (collectively, ``Plaintiff's Fees and
Expenses'').
d. The consummation of the Settlement Agreement is subject to
certain other conditions including: (i) The Fund shareholder class
shall have been certified for settlement by the District Court; (ii)
the Fund's shareholders shall have duly approved the liquidation of the
Fund, subject to the satisfaction of certain conditions; and (iii) the
Adviser shall not have been terminated as adviser to the Fund by a
shareholder vote. These conditions currently are satisfied.
8. The Fund and the Adviser asserted the right to insurance
coverage from Gulf under an errors and omissions policy insuring both
the Adviser and the Fund against certain losses, liabilities, and
related defense costs. Gulf has agreed to fund the settlement of the
Actions and to pay a portion of the defense costs incurred by the
Adviser and the Fund in connection with the Actions.
9. Under the Insurance Settlement Agreement, which has not been
reviewed or approved by the District Court, Gulf has agreed to
reimburse: (a) The Fund and the Adviser for the Plaintiff's Fees and
Expenses in the amount of $585,561; (b) the Fund and the Adviser for
$253,922 to fund the Settlement Payments plus mailing and related
expenses (estimated to be $25,000); and (c) $514,720 of certain costs
and attorneys' fees billed to the Adviser, the Fund and the Director
Defendants for defense of the Actions (``Defense Fee'') on or prior to
December 31, 2001, and 87.5% of certain costs and fees billed to the
Adviser, the Fund and the Director Defendants in connection with the
litigation and settlement of the Actions after December 31, 2001. Any
legal fees and expenses incurred in connection with the liquidation of
the Fund (currently estimated at $103,350) will be borne by the Fund to
the extent they are not paid by Gulf, and any legal fees and expenses
incurred in connection with the Application (currently estimated at
$75,000) will be split equally between the Fund and the Adviser, to the
extent they are not paid by Gulf.
10. Applicants state that the Settlement Costs Sharing Agreement
was the result of extensive negotiation between the Independent
Directors and the Adviser. Pursuant to the Settlement Costs Sharing
Agreement, which has not been reviewed or approved by the District
Court, the Adviser and the Fund have agreed to share in equal parts the
12.5% portion of the certain costs and fees they have incurred or will
incur in connection with the litigation and settlement of the Actions
after December 31, 2001, that are not paid by Gulf. In addition, under
the Settlement Costs Sharing Agreement:
a. The Adviser and the Fund agreed to bear equally any portion of
the Settlement Payments not reimbursed by Gulf, although it has since
been determined that Gulf's contribution will be sufficient to satisfy
all claims.
b. The Adviser and the Fund have agreed that the Defense Fee will
be payable $507,360 to the Adviser and $7,360 to the Fund. In
consideration for this payment, the Adviser has agreed to waive any and
all rights to indemnification from the Fund for the approximately $1.01
million in certain costs and fees incurred by it in connection with the
Fee Litigation prior to December 31, 2001.\3\ In addition, as
consideration for receiving from Gulf 87.5% of certain of the Adviser's
additional costs and fees in connection with the Actions after December
31, 2001, the Adviser has agreed to waive any and all rights to
indemnification from the Fund for any such costs and fees not paid by
Gulf.
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\3\ Pursuant to the investment advisory agreement between the
Adviser and the Fund (``Advisory Agreement''), the Adviser is
entitled to (i) indemnification from the Fund for any losses arising
from matters to which the Advisory Agreement relates (provided the
Adviser has not engaged in ``disabling conduct'' (i.e., willful
misfeasance, bad faith or gross negligence)), and (ii) advances from
the Fund for payment of reasonable expenses in connection with the
matter as to which it is seeking indemnification, provided certain
requirements are met. Accordingly, applicants state that the
Adviser's waiver of its right to indemnification will result in a
significant measurable economic benefit to the Fund and a
significant economic cost to the Adviser.
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c. The Adviser and the Fund also have agreed that all costs and
fees not otherwise reimbursed by Gulf associated with (i) liquidating
the Fund will be borne by the Fund, and (ii) applying for and obtaining
the order requested by the application (``Order'') will be shared
equally by the Adviser and the Fund.
11. Applicants state that in considering whether to approve the
terms of the settlement, the Board, advised by independent legal
counsel, reviewed and discussed at length the expected benefits to
shareholders from the liquidation and dissolution of the Fund,
including the realization by shareholders of their investment in the
Fund at net asset value. The Board also reviewed information about the
investment outlook for the Fund and the possible delisting of the
Fund's shares from the NYSE as a result of the steady deterioration of
the Fund's average market capitalization at that time. In approving the
terms upon which the Fund participated in the settlement arrangements,
the Board considered a number of factors, including: (i) The
possibility that the Fund would have to reimburse the Adviser for
additional legal expenses if the plaintiff appealed the District
Court's granting of the Adviser's motion for summary judgment in the
Fee Litigation; (ii) the conclusion by the Special Litigation Committee
that there was no basis on the merits to institute an action against
the Adviser in the Rights Offering Litigation; (iii) the re-institution
by the Second Circuit of the class action claims in the Rights Offering
Litigation, which could entail considerable legal expenses to defend;
and (iv) the fact that under the terms of the settlement, most of the
settlement costs would be absorbed by Gulf, and the Fund would be
relieved of substantial reimbursement obligations to the Adviser. The
Board also noted that extensive negotiations had been conducted between
the Adviser and Gulf and between the Fund and the Adviser and concluded
that the terms agreed upon were as favorable to the Fund as possible,
short of commencing an action against Gulf to seek further recovery.
Applicants' Legal Analysis
1. Section 17(a)(1) of the Act generally prohibits an affiliated
person of a registered investment company, or an affiliated person of
an affiliated person, from selling any securities or other property to
the company. The Adviser is an affiliated person of the Fund within the
meaning of section 2(a)(3)(E) of the Act, which defines an affiliated
person of an investment company to include any investment adviser to
that investment company. Applicants state that the release by the
Adviser of its right to indemnification (pursuant to the Advisory
Agreement) from the Fund for fees and expenses incurred by the Adviser
in the defense of the Actions in consideration of the Settlement Costs
Sharing Agreement could be viewed as a sale of a property right by the
Adviser to the Fund.
2. Section 17(b) of the Act authorizes the Commission to exempt a
proposed
[[Page 12912]]
transaction from section 17(a) provided that the terms of the
transaction, including the consideration to be paid or received, are
fair and reasonable and do not involve overreaching on the part of any
person concerned, and the proposed transaction is consistent with the
policy of the registered investment company as recited in its
registration statement and with the general purposes of the Act.
3. Section 17(d) of the Act and rule 17d-1 under the Act generally
prohibit an affiliated person of a registered investment company, or
affiliated persons of an affiliated person, when acting as principal,
from effecting any transaction in which the company is a joint or joint
and several participant unless permitted by Commission order upon
application. Applicants state that because the Adviser and the Director
Applicants are affiliated persons of the Fund,\4\ the proposed
settlement could be deemed a transaction or arrangement prohibited by
section 17(d) and rule 17d-1. In considering an application for an
order under rule 17d-1, the Commission must determine whether the
participation of the investment company in a joint enterprise or joint
arrangement is consistent with the provisions, policies and purposes of
the Act and the extent to which the company's participation would be on
a basis different from or less advantageous than that of the other
participants.
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\4\ Each Director Applicant is an affiliated person of the Fund
pursuant to section 2(a)(3)(D) of the Act, which defines an
``affiliated person'' of another person to include any director of
such other person.
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4. Applicants believe that the relative benefits from the proposed
settlement to the Fund markedly outweigh its contributions to the
settlement, and that the Fund's participation in the proposed
settlement is on terms that are at least as favorable to the Fund as to
the Adviser and the Director Applicants. Under the terms of the
proposed settlement, the Fund's contributions are limited to the
following: (a) 6.25% (50% of 12.5%) of the costs and fees incurred
after December 31, 2001 in connection with the litigation and
settlement of the Actions (the balance being paid by Gulf and the
Adviser); (b) 50% of the costs associated with obtaining the Order
after any contribution by Gulf; and (c) the costs associated with
liquidating the Fund after any contribution by Gulf. The Fund will make
no contribution in respect of the Settlement Payments and will be
relieved of any payment obligations to the class members in the Rights
Offering Litigation. In addition, as noted above, the Fund will be
relieved of its obligation to indemnify the Adviser for the legal fees
and expenses it has incurred in connection with the Actions.
5. Applicants state that the participation by the Director
Applicants in the proposed settlement is also consistent with the
provisions of section 17(d) and rule 17d-1. As part of the Settlement
Agreement, the Director Applicants will be released from any liability
in connection with the Rights Offering Litigation. Although the
Director Applicants' legal expenses incurred in connection with the
Rights Offering Litigation have been paid by the Fund, the Fund is
obligated under its articles of incorporation and by-laws (and, in the
case of the Independent Directors, under separate indemnification
agreements with each such Director) to pay those expenses regardless of
whether the Actions are settled, provided the Director Applicants have
not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties. Furthermore, the proposed
settlement is predicated upon the settlement of both Actions in their
entirety. Consequently, if the Director Applicants could not
participate, applicants state that the proposed settlement in all
likelihood would not be consummated, and the Fund would continue to
incur legal fees and expenses in connection with its indemnification of
the Director Applicants.
6. Applicants represent that the liquidation of the Fund cannot
occur without settlement of the Actions. Applicants state that the
liquidation of the Fund will benefit shareholders because it will
enable them to realize immediately the full net asset value of their
shares. Applicants note that at the Fund's annual meeting of
shareholders held on January 16, 2003, the holders of a majority of the
Fund's outstanding shares voted in favor of the Fund's liquidation.
Applicants also assert that the continued litigation of the Actions
would be detrimental to both the Fund and its shareholders because of
the costs and expenses to the Fund in connection with its defense of
the Actions.
7. Accordingly, applicants submit that the terms of the proposed
settlement, including the consideration to be paid or received, are
fair and reasonable and do not involve overreaching and that the
proposed transaction is consistent with the policy of the Fund and with
the general purposes of the Act. Applicants further submit that the
Fund's participation in the proposed settlement would not be on a basis
different from or less advantageous than that of the other
participants.
For the Commission, by the Division of Investment Management,
under delegated authority.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-1133 Filed 3-15-05; 8:45 am]
BILLING CODE 8010-01-P