- - I-,

1 MILBERG WEISS BERSHAD& SCHULMAN LLP L.! Lti

2 Jeff S. Westerman (94559) -.,---z;355 South Grand Avenue, Suite 4170 -1:,•

3Los Angeles, CA 90071-3172

. 4 Telephone: (213) 617-12005 Facsimile: (213) 617-1975 ORIGINAL

c 6 MILBERG WEISS BERSHAD ':' 52 ,

7 & SCHULMAN LLP i P LT; n(:.q„ c....Steven G. Schulman ,-- L-:• J--/ -, • - - - '71

- *8 Kim E. Levy I :. r.•:,.,,-; — --,--Michael R. Reese -, PI9 One Pennsylvania Plaza - Ft :.7. 010 New York, New York 10119 1 :--':;-- c../.?

1 17.—_,9,_ c.,-,11 Telephone: (212) 594-5300 • - z —4

Facsimile: (212) 868-1229 1 -'1213 Counsel for Plaintiffs [Additional Counsel Appear on Signature Page] - -

14 UNITED STATES DISTRICT COURT

15

-'\S 16

CENTRAL DISTRICT OF CALIFORNIA

WESTERN DIVISION

6V0 17 ). t v,.it'''' C VO4 . 5593 'AK 1—w - c,18 NICHOLAS J. CORBI and RODNEY ) Civil Action No.

19 T. JELINEK, on Behalf of Himself ) 1and all Others Similarly Situated, ) CLASS ACTION

20 )

21 Plaintiffs, ) COMPLAINT FOR EXCESSIVE FEES i) IN VIOLATION OF SECTIONS 34(b),

22 vs. ) 36(b) AND 48(a) OF THE INVESTMENT

• 23 .THE CAPITAL GROUP) COMPANY ACT AND SECTIONS 206

AND 215 OF THE INVESTMENTCOMPANIES, INC, THE CAPITAL ) i

24 ADVISERS ACT, AND FOR ,.-• ,-, ,,, RESEARCH AND IVIANAGEMENT ). • . .25 CO., AMERICAN FUNDS) BREACHES OF FIDUCIARY DUTY. ,

)• '''' .. DISTRIBUTORS, INC., PAUL G.

.. ' 26 ) DEMAND FOR JURY TRIAL(caption continued on next page) ) _.,..........._

27 DOCKETED ON CM

28JUL 2 I 2004

(---',"

BY 4%066 W i

2. ;,.

1 MTLBERG WEISS BERSHAD& SCHULMAN LLP

2 Jeff S. Westerman (94559)355 South Grand Avenue, Suite 41703Los Angeles, CA 90071-3172

C PY4 Telephone: (213) 617-1200Facsimile: (213) 617-19755

6 MILBERG WEISS BERSHAD C—r—

& SCHULMAN LLP r—7

I—Steven G. Schulman

8 Kim E. Levy

rr—egF>0

9 Michael R. Reese (.0

-

One Pennsylvania Plaza•

10 New York, New York 10119 •-4

1 1 Telephone: (212) 594-5300Facsirnile: (212) 868-1229

12

13 Counsel for Plaintiffs [Additional Counsel Appear on Signature Page]1

14 UNITED STATES DISTRICT COURT

15 CENTRAL DISTRICT OF CALIFORNIA

16 WESTERN DrVISION

17 CV1114..5593 RGK18 NICHOLAS J. CORBI and RODNEY ) Civil Action No. (ctt 29

T. JELINEK, on Behalf of Himself )19

and all Others Similarly Situated, ) CLASS ACTION20 . -

21Plaintiffs, ) COMPLAINT FOR EXCESSIVE FEES

) IN VIOLATION OF SECTIONS'34(b),22 vs. ) 36(b) AND 48(a) OF THE INVESTMENT

23 THE CAPITAL GROUP ) COMPANY ACT AND SECTIONS 206) AND 215 OF THE INVESTMENT

24 RESEARCH AND MANAGEMENTCOMPANIES, INC., THE CAPITAL \

ADVISERS _ACT, AND FOR

))---.BRE-AttrE:§1-25 CO., AMERICAN FUNDS 6FFB3UCIARX DUTY

-DISTRIBUTORS, INC., PAUL G.

(-1,, 1 9y.7,0t4tY26 ) (`EiMANOTOOttRY TRIAt

(caption continued on next page) la o Wtg. =441:t

co-,z,-,cf az Rye. ou 5.1 '44

27 a)ioc)(.1f.wly,: Ole itn4

4divWi

7- 7-

1

. ,. ,, . . .. _ _ ... .

HAAGA, JR., ROBERT G. , • ) 1i

O'DONNELL, ROBERT A. FOX, )2 LEONADE D. JONES, JOHN G. ) 13 MCDONALD, LUIS G. NOGALES, )

JAMES K. PETERSON, HENRY ) 1

4 RIGGS and PATRICIA K. WOOLF, ) 1

5 )1

Defendants, ) ,6

)AMCAP FUND, AMERICAN.

7

)BALANCED FUND, AMERICAN )

8 HIGH-INCOME MUNICIPAL )

BOND FUND, AMERICAN HIGH- ) •9 INCOME TRUST FUND, )

10 AMERICAN MUTUAL FUND, THE) 1BOND FUND OF AMERICA,

1 )1 1CAPITAL INCOME BUILDER ) . 1

12 FUND, CAPITAL WORLD BOND ) ,FUND, CAPITAL WORLD

13 )GROWTH AND INCOME FUND,

,I

14 EUROPACIFIC GROWTH FUND, ) 1FUNDAMENTAL INVESTORS )

15FUND, THE GROWTH FUND OF )

16 AMERICA, THE INCOME FUND )

17 OF AMERICA, INTERMEDIATE )BOND FUND OF AMERICA, THE )

18 INVESTMENT COMPANY OF )AMERICA FUND, LIMITED TERM)

19 - iTAX-EXEMPT BOND FUND OF )20 . AMERICA, THE NEW ECONOMY )

21 FUND, NEW PERSPECTIVE )FUND, NEW WORLD FUND, )

22 S1VIALLCAP WORLD FUND, THE )

23 TAX-EXEMPT BOND FUND OF )AMERICA, THE TAX-EXEMPT )

24 FUND OF CALIFORNIA, THE )TAX-EXEMPT FUND OF25

)MARYLAND, THE TAX-EXEMPT )

26 FUND OF VIRGINIA, U.S. )27 (caption continued on next page) )

28

• _ • . -

1 GOVERNMENT SECURITIES )FUND, WASHINGTON MUTUAL )

2 INVESTORS FUND, THE CASH )

3 MANAGEMENT TRUST OF )AMERICA FUND, THE TAX- )

4 EXEMPT MONEY FUND OF )5 AMERICA, THE U.S. TREASURY )

MONEY FUND OF AMERICA )6 (collectively, the "AMERICAN )7 FUNDS"), )

)8 Nominal Defendants. )

9 ))

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1 NATURE OF THE ACTION

2 Plaintiffs Nicholas J. Corbi and Rodney T. Jelinek ("Plaintiffs"), by and through

3 their counsel, allege the following based upon the investigation of counsel, which included

4 a review of United States Securities and Exchange Commission ("SEC") filings, as well as

5 other regulatory filings, reports, and advisories, press releases, media reports, news

6 articles, academic literature, and academic studies. Plaintiffs believe that substantial

7 additional evidentiary support will exist for the allegations set forth herein after a

8 reasonable opportunity for discovery.

9 1. Plaintiffs bring this action as a class action on behalf of investors in mutual

10 funds belonging to The Capital Group Companies, Inc. ("Capital Group") which include

11 the American Funds (referred to collectively herein as the "American Funds"), and

12 derivatively on behalf of the American Funds, against the American Funds investment

13 advisers, their corporate parents and the American Funds directors.

14 2. This complaint alleges that the Investment Adviser Defendant (as defined

15 herein) drew upon the assets of the American Funds to pay brokers to aggressively push

16 American Funds over other funds, and that the Investment Adviser Defendant concealed

17 such payments from investors by disguising them as brokerage commissions. Such

18 brokerage commissions, though payable from fund assets, are not disclosed to investors in

19 the American 'Funds public filings or elsewhere.

20 3. American Funds investors were thus induced to purchase American Funds by

21 brokers who received undisclosed payments from the Investment Adviser Defendant to

22 push American Funds over other mutual funds and who therefore had an undisclosed

23' conflict of interest. Then, once invested in one or more of the American Funds, American

24 Funds investors were charged and paid undisclosed fees that were improperly used to pay

25 brokers to aggressively push American Funds to yet other brokerage clients.

26 4. The Investment Adviser Defendant was motivated to make these secret

27 payments to finance the improper marketing of American Funds because their fees were

28

1

I calculated as a percentage of funds under management and, therefore, tended to increase as

2 the number of American Funds investors grew. The Investment Adviser Defendant

3 attempted to justify this conduct on the ground that by increasing the American Funds

4 assets they were creating economies of scale that inured to the benefit of investors but, in

5 truth and in fact, American Funds investors received none of the benefits of these

6 purported economies of scale. Rather, fees and costs associated with the American Funds

7 were excessive during the Class Period (as defined herein), in large part because the

8 Investment Adviser Defendant continued to skim from the American Funds to finance

9 their ongoing marketing campaign. The American Funds Directors, who purported to be

10 American Funds investor watchdogs, knowingly or recklessly permitted this conduct to

11 occur.

12 5. By engaging in this conduct, the Investment Adviser Defendant, and the

13 defendant entities that control it, breached their statutorily-defined fiduciary duties under

14 Sections 36(a) and (b) of the Investment Company Act of 1940 (the "Investment Company

15 Act") and Section 206 of the Investment Advisers Act of 1940 (the "Investment Advisers

16 Act"), breached their common law fiduciary duties, and knowingly aided and abetted the

17 brokers in the breach of fiduciary duties to their clients. The Investment Adviser

18 Defendant also violated Section 34(b) of the Investment Company Act because, to further

19 •their improper campaign, they made untrue Statements of material fact in fund registration

20 statements, and material omissions, with respect to the procedure for determining the

21 amount of fees payable to the Investment Adviser Defendant and with respect to the

22 improper uses to which the fees were put. Additionally, the American Funds Directors

23 breached their common law fiduciary duties to the American Funds investors by

24 knowingly or recklessly allowing the Improper conduct alleged herein to occur and harm

25 American Funds investors.

26

27

28

2

1 6. On January 28, 2004, The Los Angeles Times published an article about a

2 Senate committee hearing on mutual fund abuses which stated, in pertinent part, as

3 follows:

4 "The mutual fund industry is indeed the world's largest skimming operation,"

5 said Sen. Peter Fitzgerald (R-I11.), chairman of the panel, comparing the

• 6 scandal-plagued industry to "a $7-trillion trough" exploited by fund

7 managers, brokers and other insiders.

8 JURISDICTION AND VENUE

9 7. The claims asserted herein arise under and pursuant to Sections 34(b), 36(b)

10 and 48(a) of the Investment Company Act, 15 U.S.C. §§80a-33(b), 80a-35(a) and (b) and

• 11 80a-47(a), Sections 206 and 215 of the Investment Advisers Act, 15 U.S.C. §§80b-6 and

12 80b-15, and common law.

13 8. This Court has jurisdiction over the subject matter of this action pursuant to

14 Section 44 of the Investment Company Act, 15 U.S.C. §80a-43; Section 214 of the

15 Investment Advisers Act, 15 U.S.C. §80b-14; and 28 U.S.C. § 1391(b).

16 9. Many of the acts charged herein, including the creation and utilization of

• 17 improper revenue sharing agreements, occurred in substantial part in this District.

18 Defendants conducted other substantial business within this District and many Class

19 members reside within this District. Additionally, defendant Capital Group maintains its

20 principal offices in this judicial district.

21 10. In connection with the acts alleged in this complaint, defendants, directly or

22 indirectly, used the means and instrumentalities of interstate commerce, including, but not

23 limited to, the mails, interstate telephone communications, and the facilities of the national

24 securities markets.

25

26

27

28

3

1 PARTIES

2 11. Plaintiff Nicholas J. Corbi purchased during the Class Period and continues to

3 own shares or units of the American Balanced Fund and has been damaged by the conduct

4 alleged herein.

5 12. Plaintiff Rodney T. Jelinek purchased during the Class Period and continues

6 to own shares or units of the Investment Company of America Fund and has been

7 damaged by the conduct alleged herein.

8 13. Defendant The Capital Group Companies, Inc. ("Capital Group"), is a

9 financial services company and the ultimate parent of defendants bearing the American

10 name. Capital Group maintains its corporate headquarters at 333 South Hope Street, Los

11 Angeles, California 90071.

12 14. Defendant Capital Research and Management Company ("Capital

13 Research"), is registered as an investment advisor under the Investment Advisers Act.

14 Capital Research, a wholly owned subsidiary of Capital Group, is headquartered at 333

15 South Hope Street, Los Angeles, California 90071. Capital Research manages the

16 investment portfolio and business affairs of the American Funds, consisting of 29 funds.

17 Capital Research, along with Capital Group, has ultimate responsibility for overseeing the

18 day-to-day management of the American Funds. American Balanced Fund, Inc., a

19 Maryland corporation with its principal place of business located at P.O. Box 7650, One

20 Market, Steuart Tower, San Francisco, California 94120, is the registrant of the American

21 Balanced Fund.

22 15. Defendant Capital Research is hereinafter referred to as the "Investment

23 Adviser Defendant."

24 16. Defendant American Funds Distributors, Inc. ("American Distributors"), a

25 registered broker-dealer, is the distributor of the American Funds. In this capacity,

26 American Distributors was responsible for underwriting, sponsoring and retailing the

27

28

4

9

1 American Funds. American Distributors is located at 333 South Hope Street, Los Angeles,

2 CA 90071.

3 17. Defendants Paul G. Haaga, Jr. ("Haaga"), Robert G. O'Donnell

4 ("O'Donnell"), Robert A. Fox ("Fox"), Leonade D. Jones ("Jones"), John G. McDonald

5 ("McDonald"), Luis G. Nogales ("Nogales"), James K. Peterson ("Peterson"), Henry

6 Riggs ("Riggs") and Patricia K. Woolf ("Woolf') were Directors and/or Officers of the

7 American Funds during the Class Period and are collectively referred to herein as the

8 "Director Defendants". For the purposes of their service as directors and/or officers of the

9 American Funds, the business address of each of the Director Defendants is 333 South

10 Hope Street- 55th Floor, Los Angeles, California 90071.

11 18. During the Class Period, Haaga has served as President and Director of the

12 Funds. He served as a member of 17 boards in the American Fund complex. Haaga is

13 deemed an interested person because of his affiliation with the Investment Adviser,

14 namely, his position as Executive Vice President and Director of Capital Research as well

15 as Director of American Distributors.

16 19. During the Class Period, O'Donnell has served Chairman of the Board and

17 Principal Executive Officer of the Funds. He served as a member of three boards in the

18 American Fund complex. O'Donnell is deemed an interested person because of his

19 affiliation with the Investment Adviser, namely, his position as a Senior Vice President

20 and Director of Capital Research.

21 20. During the Class Period, Fox served as a member of seven boards in the

22 American Fund complex. For the calendar year ending December 31, 2002, Fox received

23 compensation totaling $190,300 for his service as an American Funds director.

24 21. During the Class Period, Jones served as a member of six boards in the Fund

25 complex. For the calendar year ending December 31, 2002, Jones received compensation

26 totaling $157,800 for his servicè as an American Funds director.

27

28

5

1 22. During the Class Period, McDonald served as a member of eight boards in the

2 American Fund complex. For the calendar year ending December 31, 2002, McDonald

3 received compensation totaling $269,800 for his service as an American Funds director.

4 23. During the Class Period, Nogales served as a member of two boards in the

5 American Fund complex. For the calendar year ending December 31, 2002, Nogales

6 received compensation totaling $23,300 for his service as an American Funds director.

7 24. During the Class Period, Peterson served as a member of two boards in the

8 American Fund complex. For the calendar year ending December 31, 2002, Peterson

9 received compensation totaling $47,500 for his service as an American Funds director.

10 25. During the Class Period, Riggs served as a member of four boards in the

11 American Fund complex. For the calendar year ending December 31, 2002, Riggs

12 received compensation totaling $107,500 for his service as an American Funds director.

13 26. During the Class Period, Woolf served as -a member of six boards in the

14 American Fund complex. For the calendar year ending December 31, 2002, Wolf received

15 compensation totaling $154,300 for her service as an American Funds director.

• 16 27. Defendants John Does 1-100 were American Funds Directors and/or Officers

17 during the Class Period, and any other wrongdoers later discovered, whose identities have

18 yet to be ascertained and which will be determined during the course of plaintiffs'

19 counsel's ongoing investigation.

20 28. Nominal defendants the American Funds, as identified in the caption of this

21 complaint and on the list annexed hereto as Exhibit A, are open-ended management

22 companies consisting of the capital invested by mutual fund shareholders, each having a

23 board of Directors charged with representing the interests of the shareholders in one or a

24 series of the funds. The American Funds are named as nominal defendants to the extent

25 that they may be deemed necessary and indispensable parties pursuant to Rule 19 of the

26 Federal Rules of Civil Procedure and to the extent necessary to ensure the availability of

27 adequate remedies.

28

6

-

1PLAINTIFFS' CLASS ACTION ALLEGATIONS

2 29. Plaintiffs bring certain of these claims as a class action pursuant to Federal

3 Rule of Civil Procedure 23(a) and (b)(3) on behalf of a class, consisting of all persons or

4 entities who purchased, redeemed or held shares or like interests in any of the American

5 Funds between July 14, 1999 and January 9, 2004, inclusive (the "Class Period"), and who

6 were damaged thereby (the "Class"). Excluded from the Class are defendants, members of

7 their immediate families and their legal representatives, heirs, successors or assigns and

8 any entity in which defendants have or had a controlling interest.

9 30. The members of the Class are so numerous that joinder of all members is

.10 impracticable. While the exact number of Class members is unknown to plaintiffs at this

11 time and can only be ascertained through appropriate discovery, plaintiffs believe that

12 there are many thousands of members in the proposed Class. Record owners and other

13 members of the Class may be identified from records maintained by American Funds,

14 American Distributors and the Investment Adviser Defendant and may be notified of the

15 pendency of this action by mail, using the form of notice similar to that customarily used

16 in securities class actions.

17 31. Plaintiffs' claims are typical of the claims of the members of the Class as all

18 members of the Class are similarly affected by defendants' wrongful conduct in violation

19 of federal law that is complained of herein.

20 • 32. Plaintiffs will fairly and adequately protect the interests of the members of the

21 Class and have retained counsel competent and experienced in class and securities

22 litigation.

23 33• Common questions of law and fact exist as to all members of the Class and

24 predominate over any questions solely affecting individual members of the Class. Among

25 the questions of law and fact common to the Class are:

26 (a) whether the Investment Company Act was violated by defendants' acts

27 as alleged herein;

28

7

1 (b) whether the Investment Advisers Act was violated by defendants' acts

2 as alleged herein;

3 (c) whether the Investment Adviser Defendant breached their common law

4 fiduciary duties and/or knowingly aided and abetted common law breaches of fiduciary

5 duties;

6 , (d) whether statements made by defendants to the- investing public during

7 the Class Period misrepresented or omitted to disclose material facts about the business,

8 operations and financial statements of the American Funds; and

9 (e) to what extent the members of the Class have sustained damages and

10 the proper measure of damages.

11 34. A class action is superior to all other available methods for the fair and

12 efficient adjudication of this controversy since joinder of all members is impracticable.

13 Furthermore, as the damages suffered by individual Class members may be relatively

14 small, the expense and burden of individual litigation make it virtually impossible for

15 members of the Class to individually redress the wrongs done to them. There will be no

16 difficulty in the management of this action as a class action.

17 SUBSTANTIVE ALLEGATIONS

18The Director Defendants Breached Their Fiduciary

Duties To American Funds Investors19 35. The defendants' public filings state that the Boards of Directors for the20 American Funds are responsible for the management and supervision of the American21 Funds. In this regard, the Statement of Additional Information dated March 1, 2003 for22 funds offered by American Funds (the "Statement of Additional Information"), which23 includes the American Balanced Fund, which is available to the investor upon request is24 typical of the Statements of Additional Information available for other American Funds. It25 states: "All fund operations are supervised by the fund's Board of Directors, which meets26 periodically and performs duties required by applicable state and federal laws."27

28

8

1 36. Moreover, the Statement of Additional Information states, with respect to the

2 duties of the Directors, as follows:

3 Under Maryland law, the business and affairs of the fund are managed

4 under the direction of the Board of Directors, and all powers of the

5 fund are exercised by or under the authority of the Board except as

6 reserved to the shareholders by law or the fund's charter or by-laws.

7 Maryland law requires each Director to perform his/her duties as a

8: Director, including his/her duties as a member of any Board

9 committee on which he/she serves, in good faith, in a manner he/she

10 reasonably believes to be in the best interest of the fund, and with the

11 care that an ordinarily prudent person in a like position would use

12 under similar circumstances.

13 [Emphasis added.]

14 37. The Statement of Additional Information also sets forth in greater detail the

15 purported process by which the investment managers are selected:

16 In determining whether to renew the Agreement each year, the

17 Contracts Committee of the Board of Directors evaluates information

18 provided by the Investment Adviser in accordance with Section 15(c)

19 of the 1940 Act, and presents its recommendations to the full Board of

20 Directors. At its most recent meetings, the Committee reviewed and

21 considered a number of factors in recommending renewal of the

22 existing Agreement, including the quality of services provided to the

23 fund (primarily measured by investment results), fees and expenses

24 borne by the fund, financial results of the Investment Adviser

25 (including comparisons to a group of publicly held mutual fund

26 managers) and comparative data for other mutual funds and selected

27 indexes.

28

• 9

1 In reviewing the quality of services provided to the fund, the

2 Committee noted, among other things, the favorable results of the fund

3 relative to the results of comparable funds during 2001, the first half of

4 2002, and the five- and ten-year periods ended June 30, 2002. The

5 Committee also considered the overall high quality and depth of the

6 Investment Adviser's organization in general and of the individuals

7 providing portfolio research and management services to the fund. In

8 addition, the Committee noted the Investment Adviser's continuing

9 financial strength and stability.

10 [Emphasis added.]

11 38. The Investment Company Institute ("ICI"), of which American is a member,

12 recently described the duties of mutual fund boards as follows:

13 More than 77 million Americans have chosen mutual funds to gain

14 . convenient access to a professionally managed and diversified portfolio

15 of investments.

16 Investors receive many other benefits by investing in mutual funds,

17 including strong legal protections and full disclosure. In addition,

18 shareholders gain an extra layer of protection because each mutual fund

19 has a board of directors looking out for shareholders' interests.

20 Unlike the directors of other corporations, mutual fund directors are

21 responsible for protecting consumers, in this case, the funds'

22 investors. The unique "watchdog" role, which does not exist in any

23 other type of company in America, provides investors with the

24 confidence of knowing the directors oversee the advisers who manage

25 and service their investments.

26 In particular, under the Investment Company Act of 1940, the board

27 of directors of a mutual fund is charged with looking after how the

28

10

1 fund operates and overseeing matters where the interests of the fund

2 and its shareholders differ from the interests of its investment adviser

3 or management company.

4 [Emphasis added.]'

5 39. In truth and in fact, the American Funds Boards of Directors were captive to

6 and controlled by the Investment Adviser Defendant, who induced the Director Defendants

7 to breach their statutory and fiduciary duties to manage and supervise the American Funds,

8 approve all significant agreements and otherwise take reasonable steps to prevent the

9 Investment Adviser Defendant from skimming American Funds assets. In many cases,

10 key American Funds Directors were employees or former employees of the Investment

11 Adviser Defendant and were beholden for their positions, not to American Funds

12 investors, but, rather, to the Investment Adviser Defendant they were supposed to oversee.

13 The Director Defendants served for indefinite terms at the pleasure of the Investment

14 Adviser Defendant and formed purportedly independent committees, charged with

15 responsibility for billions of dollars of fund assets (comprised largely of investors' college

16 and retirement savings).

17 40. To ensure that the Directors were compliant, the Investment Adviser

18 Defendant often recruited key fund Directors from the ranks of investment adviser

19 companies.

20 41. In exchange , for creating and managing the American Funds, including the

21 Columbia Real Estate Equity Fund, the Investment Adviser Defendant charged the

22

23 1 The ICI describes itself as the national association of the U.S. investment company24 industry. Founded in 1940, its membership includes approximately 8,601 mutual funds,

604 closed-end funds, 110 exchange-traded funds, and six sponsors of unit investment25 trusts. Its mutual fund members have 86.6 million individual shareholders and manage26 approximately $7.2 trillion in investor assets. The quotation above is excerpted from a

paper entitled Understanding the Role of Mutual Fund Directors, available on the ICI's27 web site at http://www.ici.org/issues/diribro mf directors .pdf.28

11

1 American Funds a variety of fees, each of which was calculated as a percentage of assets

2 under management. Hence, the more money invested in the funds, the greater the fees

3 paid to the Investment Adviser Defendant. In theory, the fees charged to fund investors

4 are negotiated at arm's-length between the fund board and the investment management

5 company and must be approved by the independent members of the board. However, as a

6 result of the Director Defendants' dependence on the investment management company,

7 and its failure to properly manage the investment advisers, millions of dollars in American

8 Funds assets were transferred through fees payable from American Funds assets to the

9 Investment Adviser Defendant that were of no benefit to fund investors.

10 42. These practices proved to be enormously profitable for Capital Group at the

11 expense of plaintiffs and other members of the Class who had invested in the American

12 Funds. In this regard, a Forbes article, published on September 15, 2003, stated as

• 13 follows:

14 The average net profit margin at publicly held mutual fund firms was

15 18.8% last year, blowing away the 14.9% margin for the financial

16 industry. overall . [f]or the most part, customers do not enjoy the

• 17 benefits of the economies of scale created by having larger funds.

18 Indeed, once a fund reaches a certain critical mass, the directors

19 know that there is no discernible benefit from having the fund

20 become bigger by drawing in more investors; in fact, they know the

21 opposite to be true - once a fund becomes too large it loses the ability

22 to trade in and out of positions without hurting its investors. [. . .]

23 The [mutual fund] business grew 71-fold (20 fold in real terms) in the

24 two decades through 1999, yet costs as a percentage of assets

25 • somehow managed to go up 29%. . . . Fund vendors have a way of

26 stacking their boards with rubber stamps. As famed investor Warren

27 Buffett opines in Berkshire Hathaway's 2002 annual report: 'Tens of

28

12

1 thousands of "independent" directors, over more than six decades, have

2 failed miserably.' A genuinely independent board would occasionally

3 fire an incompetent or overcharging fund advisor. That happens just

4 about never." [Emphasis added.]

5 43. Plaintiffs and other members of the Class never knew, nor could they have

6 known, from reading the fund prospectuses or otherwise, of the extent to which the

7 Investment Adviser Defendant was using so-called 12b-1 fees, directed brokerage (as

8 defined below) and excessive commissions to improperly siphon assets from the funds.

9The Investment Adviser Defendant Used

10 Rule 12b-1 Marketing Fees For Improper Purposes

11 44. Rule 12b-1, promulgated by the SEC pursuant to the Investment Company

12 Act, prohibits mutual funds from directly or indirectly distributing or marketing their own

13 shares unless certain enumerated conditions set forth in Rule 12b-1 are met. The Rule

14 12b-1 conditions require that payments for marketing must be made pursuant to a written

15 plan "describing all material aspects of the proposed financing of distribution," all

16 agreements with any person relating to implementation of the plan must be in writing; the

17 plan must be approved by a vote of the majority of the board of directors; and the board of

18 directors must review, at least quarterly, "a written report of the amounts so expended and

19 the purposes for which such expenditures were made." Additionally, the directors "have a

20 duty to request and evaluate, and any person who is a party to any agreement with such •

21 company relating to such plan shall have a duty to furnish, such information as may

22 reasonably be necessary to an informed determination of whether the plan should be

23 implemented or continued." The directors may continue the plan "only if the board of

24 directors who vote to approve such implementation or continuation conclude, in the

25 exercise of reasonable business judgment, and in light of their fiduciary duties under state

26 law and section 36(a) and (b) [15 U.S.C. 80a-35(a) and (b)] of the Act that there is a

27

28

13

1 reasonable likelihood that the plan will benefit the company and its shareholders."

2 [Emphasis added.]

3 45. The exceptions to the Section 12b prohibition on mutual fund marketing were

4 enacted in 1980 under the theory that the marketing of mutual funds, all things being

5 equal, should be encouraged because increased investment in mutual funds would

6 presumably result in economies of scale, the benefits of which would be shifted from fund

7 managers to investors. During the Class Period, the Director Defendants authorized, and

8 the Investment Adviser Defendant collected, millions of dollars in purported Rule 12b-1

9 marketing and distribution fees.

10 46. However, the purported Rule 12b-1 fees charged to American Funds investors

11 were highly improper because the conditions of Rule 12b-1 were not met. There was no

12 "reasonable likelihood" that the plan would benefit the company and its shareholders. On

13 the contrary, as the funds were marketed and the number of fund investors increased, the

14 economies of scale thereby created, if any, were not passed on to American Funds

15 investors. Rather, American Funds management and other fees increased. This increase

16 was a red flag that the Director Defendants knowingly or recklessly disregarded. As such,

17 the American Funds marketing efforts were creating diminished marginal returns under

18 circumstances where. increased fund size correlated with reduced liquidity and fund

19 performance. If the Director Defendants reviewed written reports of the amounts

20 expended pursuant to the American Funds Rule 12b-1 Plan, and the information pertaining

21 to agreements entered into pursuant to the Rule 12b-1 Plan, on a quarterly basis as required

22 - which seems highly unlikely under the circumstances set forth herein — the Director

23 Defendants either knowingly or recklessly failed to terminate the plans and the payments

24 made pursuant to the Rule 12b-1 Plan, even though such payments not only harmed

25 existing American Funds shareholders, but also were improperly used to induce brokers to

26 breach their duties of loyalty to their prospective American Funds investors.

27

28

14

1 47. As set forth below, in violation of Rule 12b-1 and Section 28(e) of the

2 Securities Exchange Act, defendants made additional improper payments to brokers, in the

3 form of excessive commissions, that were not disclosed or authorized by the American

4 Funds Rule 12b-1 plan.

5 The Investment Adviser Defendant Charged Its Overhead To6 American Funds Investors And Secretly Paid Excessive

Commissions To Brokers To Steer Clients To American Funds 7

48. Investment advisers routinely pay broker commissions on the purchase and8

sale of fund securities, and such commissions may, under certain circumstances, properly9

be used to purchase certain other services from brokers as well. Specifically, the Section10

28(e) "safe harbor" provision of the Securities Exchange Act carves out an exception to11

the rule that requires investment management companies to obtain the best possible12

execution price for their trades. Section 28(e) provides that fund managers shall not be13

deemed to have breached their fiduciary duties "solely by reason of [their] having caused14

the account to pay a . . . broker . . . in excess of the amount of commission another . . .15

broker . . . would have charged for effecting the transaction, if such person determined in16

good faith that the amount of the commission is reasonable in relation to the value of the17

brokerage and research services provided." 15 U.S.C. §28(e) (emphasis added). In other18

•words, funds are allowed to include in "commissions" payment for not only purchase and19

sales execution, but also for specified services, which the SEC has defined to include, "any20

service that provides lawful and appropriate assistance to the money manager in the21

performance of his investment decision-making responsibilities." The commission22

amounts charged by brokerages to investment advisers in excess of the purchase and sale23

charges are known within the industry as "Soft Dollars."24

49. The Investment Adviser Defendant's actions are not protected by the Section25

28(e) safe harbor. The Investment Adviser Defendant used Soft Dollars to pay overhead26

costs (for items such as computer hardware and software) thus charging American Funds27

28

15

1 investors for costs not covered by the Section 28(e) safe harbor and that, consistent with

2 the investment advisers' fiduciary duties, properly should have been borne by the

3 Investment Adviser Defendant. The Investment Adviser Defendant also paid excessive

4 commissions to broker dealers on top of any legitimate Soft Dollars to steer their clients to

5 American Funds and directed brokerage business to firms that favored American Funds.

6 Such payments and directed-brokerage payments were used to fund sales contests and

7 other undisclosed financial incentives to push American Funds. These incentives created

8 an undisclosed conflict of interest and caused brokers to steer clients to American Funds

9 regardless of the funds' investment quality relative to other investment alternatives and to

10 thereby breach their duties of loyalty. By paying the excessive brokerage commissions,

11 the Investment Adviser Defendant additionally violated Section 12 of the Investment

12 Company Act, because such payments were not made pursuant to a valid Rule 12b-1 plan.

13 50. The excessive commissions did not fund any services that benefited the

14 American Funds shareholders. This practice materially harmed plaintiffs and other

15 'members of the Class from whom the Soft Dollars and excessive commissions were taken.

16 51. Additionally, on information and belief, the defendants, similar to other

• 17 members of the industry, have a practice of charging lower management fees to

18 institutional clients than to ordinary mutual fund investors through their mutual fund

19 holdings. This discriminatory treatment cannot be justified by any additional services to

• 20 the ordinary investor and constitutes a further breach of fiduciary. duties.

21 52. On January 14, 2004, The Wall Street Journal published an article under the

22 headline, "SEC Readies Cases On Mutual Funds' Deals With Brokers." Citing "a person

23 familiar with the investigation," the article noted that the SEC is "close to filing its first

24 charges against mutual fund companies related to arrangements that direct trading

25 commissions to brokerage films that favor those fund companies' products." The article

26 stated in pertinent part as follows:

27

28

16

1 The SEC has been probing the business arrangements between fund

2 companies and brokerage firms since last spring. It held a news

3 conference yesterday to announce it has found widespread evidence

4 that brokerage firms steered investors to certain mutual funds

5 because of payments they received from fund companies or their

6 investment advisers as part of sales agreements.

7 Officials said the agency has opened investigations into eight brokerage

8 firms and a dozen mutual funds that engaged in a longstanding practice9

known as "revenue sharing." Agency officials said they expect that

10 number to grow as its probe expands. They declined to name either the

11 funds or the brokerage films.

12 The SEC said payments varied between 0.05% and 0.04% of sales and

13 up to 0.25% of assets that remained invested in the fund. [. . .]

14 People familiar with the investigation say regulators are looking into

15 examples of conflict of interest when fund companies use

.16 shareholder money to cover costs of sales agreements instead of

17 paying the sales costs themselves out of the firm's own pockets. The

18 boards of funds, too, could be subject to scrutiny for allowing

19 shareholders' commission dollars to be used for these sales

20 agreements. In other cases, the SEC is probing whether funds

21 violated policies that would require costs associated with marketing a

22 -fund to be included in a fund's so-called 12b-1 plan.

23 Id. [Emphasis added.] Recently, Edward Jones stated in its 10-K filing to the SEC that the

24 SEC is "seriously considering" regulatory action against the firm because of its revenue-

25 sharing arrangements with companies such as American Funds.

26

27

28

17

1 THE TRUTH BEGINS TO EMERGE

2 53. On January 9, 2004, the Wall Street Journal exposed the relationship between

3 Edward Jones and American, as well as seven mutual fund companies. According to the

4 article, American and the other fund companies paid Edward Jones substantial amounts to

5 favor those companies when pitching funds to customers. In an article, the Wall Street

6 Journal detailed Edward Jones' wrongdoing based on an investigation that included

7 interviews with 18 former and current Edward Jones brokers.

8 54. According to the article, the pressure to sell the preferred funds made it

9 financially foolhardy for Edward Jones brokers to sell non-preferred funds. Quoting

10 brokers who had sold only the preferred funds for years, the article reported as follows:

11 Individual brokers have a strong fmancial incentive to pitch favored

12 funds. The revenue-sharing payments are credited as income to the

13 profit-and-loss statements of brokerage branches. Those statements are

14 a significant factor in determining the size of brokers' bonuses,

15 generally awarded three times a year, according to foriner brokers. The

16 bonuses can add up to $80,000 or $90,000 for a good producer, and

17 often average about a third of total compensation.

18 "I sold no outside funds," says former broker Eddie Hatch, who

19 worked at Jones in North Carolina for 13 years, until he left in 2000 to

20 work for another brokerage firm. "You took a reduced payout" ifyou

21 sold funds not on the preferred list, he adds.

22 Jones floods its brokers with literature from its preferred funds, former

23 brokers say. "I didn't take the blinders off for nine years," says Scott

24 Maxwell of Cary, N.C., a broker who left Jones for another firm in

25 March of last year. He switched jobs, he says, largely because he was

26 uncomfortable with the limited fund selection. Mr. Maxwell says he

27

28

18

1 wanted to be freer to offer clients funds with better investment

2 performance and lower fees.

3 Jeff Davis says he was "young and wet behind the ears" when he was

4 hired at Jones in 1993 after a stint as a White House intern. Even

5 before he fully understood the financial incentives, he says he sold

6 the seven funds almost exclusively. "I was afraid not to," he adds.

7 Mr. Davis, who left Jones in 2001 and started his own business, also

8 says he was uncomfortable with the incentives and wanted more

9 leeway to sell other funds.

10 [Emphasis added.]

11 55. The revenue-sharing arrangements are harmful to investors, who, consistent

12 with Edward Jones' representations, believe they are receiving objective, independent

13 advice. In this regard, the Wall Street Journal article quotes a disappointed Edward Jones

14 client who invested in Putnam mutual funds, one of the seven fund families considered a

15 preferred partner which includes American Funds, as follows:

16 Like ;many who bought poorly performing Putnam mutual funds in

17 recent years, Nancy Wessels lost big. One of her investments, Putnam

18 Vista fund, dropped 40% from when she bought it in April 2000, near

19 the stock-market peak, until she sold it in May 2002. That performance

20 was worse than 80% of similar stock funds.

21 When training its brokers in fund sales, Jones gives them

22 information almost exclusively about the seven "preferred" fund

23 companies, according to former Jones brokers. Bonuses for brokers

24 depend in part on selling the preferred funds, and Jones generally

25 discourages contact between brokers and sales representatives from

26 rival funds. But while revenue sharing and related incentives are

27

28

19

1 familiar to industry insiders, Jones typically doesn't tell customers

2 about any of these arrangements.

3 "The deception is that the broker seems to give objective advice,"

4 says Tamar Frankel, a law professor at Boston University who

5 specializes in mutual-fund regulation. "In fact, he is paid more for

6 pushing only certain funds."

7 [Emphasis added.]

8 56. On January 14, 2004, the Wall Street Journal published an article under the

9 headline, "SEC Readies Cases On Mutual Funds' Deals With Brokers," citing "a person

10 familiar with the investigation," which stated that the SEC is "close to filing its first

11 charges against mutual fund companies related to arrangements that direct trading

12 commissions to brokerage firms that favor those fund companies' products." The article

13 stated in pertinent part as follows:

14 The SEC has been probing the business arrangements between fund

15 companies and brokerage firms since last spring. It held a news

16 conference yesterday to announce it has found widespread evidence

17 that brokerage firms steered investors to certain mutual funds

18 because of payments they received from fund companies or their

19 investment advisers as part of sales agreements.

20. Officials said the agency has opened investigations into eight brokerage

21 firms and a dozen mutual funds that engaged in a longstanding practice

22 known as "revenue sharing." Agency officials said they expect that

23 number to grow as its probe expands. They declined to name either the

24 funds or the brokerage firms.

25 The SEC said payments varied between 0.05% and 0.04% of sales and

26 up to 0.25% of assets that remained invested in the fund. [. . .]

27

28

20

1 People familiar with the investigation say regulators are looking into

2 examples of conflict of interest when fund companies use

3 shareholder money to cover costs of sales agreements instead of

4 paying the sales costs themselves out of the firm's own pockets. The

5 boards of funds, too, could be subject to scrutiny for allowing

6 shareholders' commission dollars to be used for these sales

7 agreements. In other cases, the SEC is probing whether funds

8 violated policies that would require costs associated with marketing a

9 fund to be included in a fund's so-called 12b-1 plan.

10 [Emphasis added.]

11 57. Additionally, on information and belief, the American Funds have a practice

12 of charging lower management fees to institutional clients than they charge to ordinary

13 mutual fund investors through their mutual fund holdings. This discriminatory treatment

14 cannot be justified by any additional services to the ordinary investor and is a further

15 breach of fiduciary duties.

16 The.Prospectuses Were Materially False And Misleading

17 58. Plaintiffs and other members of the Class were entitled to, and did receive,

18 one or more of the prospectuses (the "Prospectuses"), pursuant to which the American

19 Funds shares were offered, each of which contained substantially the same materially,false

20 •and misleading statements and omissions regarding 12b-1 fees, commissions and Soft

21 Dollars.

22 59. The Statement of Additional Information dated March 1, 2003, for funds

23 offered by the Investment Advisor Defendants, referred to in certain of the American

24 Funds Prospectuses and available to the investor upon request, states as follows with

25 respect to Soft Dollars and revenue sharing:

26 The Investment Adviser places orders for the fund's portfolio securities

27 transactions. The Investment Adviser strives to obtain the best available

28

21

1 prices in its portfolio transactions taking into account the costs and

2 quality of executions. When, in the opinion of the Investment Adviser,

3 two or more brokers (either directly or through their correspondent

4 clearing agents) are in a position to obtain the best price and execution,

5 preference may be given to brokers who have sold shares of the fund

6 or who have provided investment research, statistical, or other related

7 services to the Investment Adviser. The fund does not consider that it

8 has an obligation to obtain the lowest available commission rate to

9 the exclusion of price, service and qualitative considerations.

10 [Emphasis added.]

11 60. The Prospectuses failed to disclose and misrepresented, inter alia, the

12 following material and damaging adverse facts which damaged plaintiffs and other

13 members of the Class:

14 (a) that the Investment Adviser Defendant authorized the payment from

15 fund assets of excessive commissions to broker dealers in exchange for preferential

16 marketing services and that such payments were in breach of their fiduciary duties, in

17 violation of Section 12b of the Investment Company Act, and unprotected by any "safe

18 harbor;"

19 (b) that the Investment Adviser Defendant directed brokerage payments to

20 firms that favored American Funds, which was a form of marketing that was not disclosed

21 in or authorized by the American Funds Rule 12b-1 Plan;

22 (c) that the American Funds Rule 12b-1 Plan was not in compliance with

23 Rule 12b-1, and that payments made pursuant to the plan were in violation of Section 12

24 of the Investment Company Act because, among other reasons, the plan was not properly

25 evaluated by the Director Defendants and there was not a reasonable likelihood that the

26 plan would benefit the company and its shareholders;

27

28

22

-

1 (d) that by paying brokers to aggressively steer their clients to the

2 American Funds, the Investment Adviser Defendant was knowingly aiding and abetting a

3 breach of fiduciary duties, and profiting from the brokers' improper conduct;

4 (e) that any economies of scale achieved by marketing of the American

5 Funds to new investors were not passed on to American Funds investors; on the contrary,

6 as the American Funds grew, fees charged to American Funds investors nevertheless

7 increased;

8 (f) that defendants improperly used Soft Dollars and excessive

9 commissions, paid from American Funds assets, to pay for overhead expenses the cost of

10 which should have been borne by FleetBoston and not American Funds investors; and

11 (g) that the Director Defendants had abdicated their duties under the

12 Investment Company Act and their common law fiduciary duties, that they failed to

13 monitor and supervise the Investment Adviser Defendant and that, as a consequence, the

14 Investment Adviser Defendant was able to systematically skim millions and millions of

15 dollars from the American Funds.

16 COUNT I

17Against The Investment Adviser Defendant

For Violations Of Section 34(b) Of The Investment

18 Company Act On Behalf Of The Class

19 61. Plaintiffs repeat and reallege each and every .allegation contained above as if

20 fully set forth herein.

21 62. This Count is asserted against the Investment Adviser Defendant in their role

22 •as investment advisers to the American Funds.

23 63. The Investment Adviser Defendant made untrue statements of material fact in

24 registration statements and reports filed and disseminated pursuant to the Investment

25 Company Act and omitted to state facts necessary to prevent the statements made therein,

26 in light of the circumstances under which they were made, from being materially false and

27 misleading. The Investment Adviser Defendant failed to disclose the following:

28

23

"

1 (a) that the Investment Adviser Defendant authorized the payment from

2 fund assets of excessive commissions to broker dealers in exchange for preferential

3 marketing services and that such payments were in breach of their fiduciary duties, in

4 violation of Section 12b of the Investment Company Act, and unprotected by any "safe

5 harbor;"

6 (b) that the Investment Adviser Defendant directed brokerage payments to

7 firms that favored American Funds, which was a form of marketing that was not disclosed

8 in or authorized by the American Funds Rule 12b-1 Plan;

9 (c) that the American Funds Rule 12b-1 Plan was not in compliance with

10 Rule 12b-1, and that payments made pursuant to the plan were in violation of Section 12

11 of the Investment Company Act because, among other reasons, the plan was not properly

12 evaluated by the Director Defendants and there was not a reasonable likelihood that the

13 plan would benefit the company and its shareholders;

14 (d) that by paying brokers to aggressively steer their clients to the

15 American Funds, the Investment Adviser Defendant was knowingly aiding and abetting a

16 breach of fiduciary duties, and profiting from the brokers' improper conduct;

17 (e) that any economies of scale achieved by marketing of the American

18 Funds to new investors were not passed on to American Funds investors; on the contrary,

19 as the American Funds grew, fees charged to American Funds investors increased;

20 (f) that defendants improperly used Soft Dollars and excessive

21 commissions, paid from American Funds assets, to pay for overhead expenses the cost of

22 which should have been borne by Capital Research and not American Funds investors; and

23 (g) that the Director Defendants had abdicated their duties under the

24 Investment Company Act and their common law fiduciary duties, that the Director

25 Defendants failed to monitor and supervise the Investment Adviser Defendant and that, as

26 a consequence, the Investment Adviser Defendant was able to systematically skim millions

27 and millions of dollars from the American Funds.

28

24

1 64. By reason of the conduct described above, the Investment Adviser Defendant

2 violated Section 34(b) of the Investment Company Act.

3 65. As a direct, proximate and foreseeable result of the Investment Adviser

4 Defendant's violation of Section 34(b) of the Investment Company Act, American Funds

5 investors have incurred damages.

6 66. Plaintiffs and members of the Class have been specially injured by the

7 defendants' violations of Section 34(b) of the Investment Company Act. Such injuries

8 were suffered directly by the shareholders, rather than by the American Funds themselves.

9 67. The Investment Adviser Defendant, individually and in concert, directly and

10 indirectly, by the use, means or instrumentalities of interstate commerce and/or of the

11 mails, engaged and participated in a continuous course of conduct to conceal such adverse

12 material information.

13 COUNT II

14Against American Distributors And The Investment Adviser Defendant

Pursuant To Section 36(b) Of The Investment Company Act

15 Derivatively On Behalf Of The American Funds

16 68. Plaintiffs repeat and reallege each and every allegation contained above and

17 otherwise incorporates the allegations contained above.

• 18 69. This Count is brought by the Class (as American Funds securities holders) on

19 behalf of the American Funds against American Distributors and the Investment Adviser

20 Defendant for breaches of American Distributors' and the Investment Adviser Defendant's

21 fiduciary duties as defined by Section 36(b) of the Investment Company Act.

22 70. American Distributors and the Investtnent Adviser Defendant each had a

23 fiduciary duty to the American Funds and the Class with respect to the receipt of

24 compensation for services and of payments of a material nature made by and to American

25 Distributors and the Investment Adviser Defendant.

26

27

28

25

1 71. American Distributors and the Investrhent Adviser Defendant violated

2 Section 36(b) by improperly charging investors in the American Funds purported Rule

3 12b-1 marketing fees, and by drawing on American Funds assets to make undisclosed

4 payments of Soft Dollars and excessive commissions, as defined herein, in violation of

5 Rule 12b-1.

6 72. By reason of the conduct described above, American Distributors and the

7 Investment Adviser Defendant violated Section 36(b) of the Investment Company Act.

8 73. As a direct, proximate and foreseeable result of American Distributors' and

9 the Investment Adviser Defendant's breach of the fiduciary duty of loyalty in their

10 respective roles as underwriter and investment advisers to American Funds investors, the

11 American Funds and the Class have incurred millions of dollars in damages.

12 74. Plaintiffs, in this Count, seek to recover the Rule 12b-1 fees, Soft Dollars,

13 excessive commissions and the management fees charged the American Funds by

14 American Distributors and the Investment Adviser Defendant.

15 COUNT III

16Against Capital Group And The Director Defendants (As Control

Persons Of' The Investment Adviser Defendant) And The Investment

17 Adviser Defendant (As Control Person Of American Distributors) For

18Violation Of Section 48(a) Of The Investment Company Act By The

Class And Derivatively On Behalf Of The American Funds 19 75. Plaintiffs repeat and reallege each and every allegation contained above as if20

fully set forth herein.21 76. This Count is brought pursuant to Section 48(a) of the Investment Company22 Act against Capital Group and the Director Defendants, who caused the Investment23 Adviser Defendant to commit the violations of the Investment Company Act alleged24 herein. It is appropriate to treat these defendants as a group for pleading purposes and to25 presume that the misconduct complained of herein is the collective actions of Capital26

Group and the Director Defendants.27

28

26

1 77. The Investment Adviser Defendant is liable under Section 34(b) of the

2 Investment Company Act to the Class and under Section 36(b) of the Investment Company

3 Act to the American Funds as set forth herein.

4 78. Capital Group and the Director Defendants were "control persons" of the

5 Investment Adviser Defendant and caused the violations complained of herein. By virtue

6 of their positions of operational control and/or authority over the Investment Adviser

7 Defendant, Capital Group and the Director Defendants directly and indirectly, had the

8 power and authority, and exercised the same, to cause the Investment Adviser Defendant

9 to engage in the wrongful conduct complained of herein.

10 79. Pursuant to Section 48(a) of the Investment Company Act, by reason of the

11 foregoing, Capital Group and the Director Defendants are liable to plaintiffs to the same

12 extent as are the Investment Adviser Defendant for their primary violations of Sections

13 34(b) and 36(b) of the Investment Company Act.

14 80. This Count is also brought pursuant to Section 48(a) of the Investment

15 Company Act against the Investment Adviser Defendant, which caused American

16 Distributors to commit the violations of the Investment Company Act alleged herein.

17 81. American Distributors is liable under Section 36(b) of the Investment

18 Company Act to the American Funds as set forth herein.

19 82. The Investment Adviser Defendant was a "control person" of American

20 Distributors and caused the violations complained of herein. By virtue of its position of

21 operational control and/or authority over American Distributors, the Investment Adviser

22 Defendant directly and indirectly, had the power and authority, and exercised the same, to

23 cause American Distributors to engage in the wrongful conduct complained of herein.

24 83. Pursuant to Section 48(a) of the Investment Company Act, by reason of the

25 foregoing, the Investment Adviser Defendant is liable to plaintiffs to the same extent as is

26 American Distributors for its primary violations of Section 36(b) of the Investment

27 Company Act.

28

27

_ _ _

1 84. By virtue of the foregoing, plaintiffs and the other Class members are entitled

•2 to damages against Capital Group, the Director Defendants, American Distributors and the

3 Investment Adviser Defendant.

4 COUNT IV

5 Against The Investment Adviser Defendant UnderSection 215 Of The Investment Advisers Act For Violations Of

6 Section 206 Of The Investment Advisers Act Derivatively

7 On Behalf Of The American Funds

885. Plaintiffs repeat and reallege each and every allegation contained above as if

fully set forth herein.9

1086. This Count is based upon Section 215 of the Investment Advisers Act, 15

11 U.S.C. §80b-15.

12 0 .87. The Investment Adviser Defendant served as "investment adviser" to the

13 American Funds and other members of the Class pursuant to the Investment Advisers Act.

1488. As fiduciaries pursuant to the Investment Advisers Act, the Investment

15 Adviser Defendant was required to serve the American Funds in a manner in accordance

16 with the federal fiduciary standards set forth in Section 206 of the Investment Advisers

17 Act, 15 U.S.C. §80b-6, governing the conduct of investment advisers. •

1889. During the Class Period, the Investment Adviser Defendant breached its

19 fiduciary duties to the American Funds by engaging in a deceptive contrivance, scheme,

•20

practice and course of conduct pursuant to which they knowingly and/or recklessly

21 engaged in acts, transactions, practices and courses of business which operated as a fraud

22 upon the American Funds. As detailed above, the Investment Adviser Defendant skimmed

23 money from the American Funds by charging and collecting fees from the American

24 Funds in violation of the Investment Company Act and the Investment Advisers Act. The

25 purpose and effect of said scheme, practice and course of conduct was to enrich the

26 Investment Adviser Defendant, among other defendants, at the expense of the American

27 Funds. The Investment Adviser Defendant breached its fiduciary duties owed to the

28

28

1 American Funds by engaging in the aforesaid transactions, practices and courses of

2 business knowingly or recklessly so as to constitute a deceit and fraud upon the American

3 Funds.

4 90. The Investment Adviser Defendant is liable as direct participants in the

5 wrongs complained of herein. The Investment Adviser Defendant, because of its position

6 of authority and control over the American Funds were able to and did control the fees

7 charged to and collected from the American Funds and otherwise control the operations of

8 the American Funds.

9 91. The Investment Adviser Defendant had a duty to (1) disseminate accurate and

10 truthful information with respect to the American Funds; and (2) truthfully and uniformly

11 act in accordance with its stated policies and fiduciary responsibilities to the American

12 Funds. The Investment Adviser Defendant participated in the wrongdoing complained of

13 herein in order to prevent the American Funds from knowing of the Investment Adviser

14 Defendant's breaches of fiduciary duties including: (1) the charging of the American

15 Funds and American Funds investors improper Rule 12b-1 marketing fees; (2) making

16 improper undisclosed payments of Soft Dollars; (3) making unauthorized use of "directed

, 17 brokerage" as a marketing tool; and (4) charging the American Funds for excessive and

18 iniproper commission payments to brokers.

19 92. As a result of the Investment Adviser's multiple breaches of its fiduciary

20 duties owed to the American Funds, the American Funds were damaged.

21 93. The American Funds are entitled to rescind their investment advisory

22 contracts with the Investment Adviser Defendant and recover all fees paid in connection

23 with such agreements.

24

25

26

27

28

29

1 COUNT V

2 Breach Of Fiduciary Duty Against The InvestmentAdviser Defendant On Behalf Of The Class

394. Plaintiffs repeat and reallege each of the preceding allegations as though fully

4set forth herein.

595. As investment adviser to the American Funds, the Investment Adviser

6 Defendant was a fiduciary to plaintiffs and other members of the Class and was required to

7act with the highest obligations of good faith, loyalty, fair dealing, due care and candor.

' 896. As set forth above, the Investment Adviser Defendant breached their fiduciary

9duties to plaintiffs and the Class.

10 97. Plaintiffs and the Class have been specially injured as a direct, proximate and11

foreseeable result of such breach on the part of the Investment Adviser Defendant and12

have suffered substantial damages.13 98. Because the Investment Adviser Defendant acted with reckless and willful14 disregard for the rights of plaintiffs and other members of the Class, the Investment15 Adviser Defendant is liable for punitive damages in an amount to be determined by the16 .

Jury.17 COUNT VI

18 Breach Of Fiduciary Duty Against The Director

19 Defendants On Behalf Of The Class

99.

20Plaintiffs repeat and reallege each of the preceding allegations as though fully

21 set forth herein.

22100. As American Funds Directors, the Director Defendants had a fiduciary duty

23 to the American Funds and American Funds investors to supervise and monitor the

24 Investment Adviser Defendant.

25101. The Director Defendants breached their fiduciary duties by reason of the acts

26 alleged herein, including their knowing or reckless failure to prevent the Investment

27 Adviser Defendant from (1) charging the American Funds and American Funds investors

28

30

1 improper Rule 12b-1 marketing fees; (2) making improper undisclosed payments of Soft

2 Dollars; (3) making unauthorized use of "directed brokerage" as a marketing tool; and (4)

3 charging the American Funds for excessive and improper commission payments to

4 brokers.

5 102. Plaintiffs and the Class have been specially injured as a direct, proximate and

6 foreseeable result of such breach on the part of the Investment Adviser Defendant and

7 have suffered substantial damages.

8 103. Because the Investment Adviser Defendant acted with reckless and willful

9 disregard for the rights of plaintiffs and the other members of the Class, the Investment

10 Adviser Defendant is liable for punitive damages in an amount to be determined by the

11 jury.

12 COUNT VII

13Aiding And Abetting A Breach Of Fiduciary

Duty Against The Investment Adviser14 Defendant On Behalf Of The Class

15 104. Plaintiffs repeat and reallege each of the preceding allegations as though fully

16 set forth herein.

17 105. At all times herein, the broker dealers that sold American Funds had fiduciary

18 duties of loyalty to their clients, including plaintiffs and the other members of the Class.

19 106. The Investment Adviser Defendant knew or should have known that the

20 broker dealers had these fiduciary duties.

21 107. By accepting improper Rule 12b-1 fees, Soft Dollars and excessive

22 commissions in exchange for aggressively pushing American Funds, and by failing to

23 disclose the receipt of such fees, the brokerages breached their fiduciary duties to plaintiffs

24 and the other members of the Class.

25 108. The Investment Adviser Defendant possessed actual or constructive

26 knowledge that the brokerages were breaching their fiduciary duties, but nonetheless

27 perpetrated the fraudulent scheme alleged herein.

28

31

1 109. The Investment Adviser Defendant's actions, as described in this complaint,

2 were a substantial factor in causing the losses suffered by plaintiffs and the other members

3 of the Class. By participating in . the brokerages' breaches of fiduciary duties, the

4 Investment Adviser Defendant is liable therefor.

5 110. As a direct, proximate and foreseeable result of the Investment Adviser

6 Defendant's knowing participation in the brokerages' breaches of fiduciary duties,

7 plaintiffs and the Class have suffered damages.

8 111. Because the Investment Adviser Defendant acted with reckless and willful

9 disregard for the rights of plaintiffs and the other members of the Class, the Investment

10 Adviser Defendant is liable for punitive damages in an amount to be determined by the

11 jury.

12 PRAYER FOR RELIEF

13 WHEREFORE, plaintiffs pray for relief and judgment, as follows:

14 (A) Determining that this action is a proper class action and certifying

15 plaintiffs as the Class representatives and plaintiffs' counsel as Class counsel pursuant to

16 Rule 23 of the Federal Rules of Civil Procedure;

17 (B) Awarding compensatory damages in favor of plaintiffs and the other

18 Class members against all defendants, jointly and severally, for all damages

19 sustained as a result of defendants' wrongdoing, in an amount to be proven at trial,

20 including interest thereon;

21 (C) Awarding punitive damages in favor of plaintiffs and the other Class

22 members against all defendants, jointly and severally, for all damages sustained as a result

23 of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

24 (D) Awarding the American Funds rescission of their contracts with the

25 Investment Adviser Defendant, including recovery of all fees which would otherwise

26 apply, and recovery of all fees paid to the Investment Adviser Defendant;

27

28

32

1 (E) Ordering an accounting of all American Funds-related fees,

2 commissions, and Soft Dollar payments;

3 (F) Ordering restitution of all unlawfully or discriminatorily obtained fees

4 and charges;

5 (G) Awarding such other and further relief as this Court may deem just and

6 proper, including any extraordinary equitable and/or injunctive relief as permitted by law

7 or equity to attach, impound or otherwise restrict the defendants' assets to assure that

8 plaintiffs and the Class have an effective remedy;

9 (H) Awarding plaintiffs and the Class their reasonable costs and expenses

to incurred in this action, including counsel fees and expert fees; and

11 (I) Such other and further relief as the Court may deem just and proper.

12 JURY TRIAL DEMANDED

13 Plaintiffs hereby demands a trial by jury.

14Dated: July 15, 2004 MILBERG WEISS BERS • D

15 & /

16

17 By: 41111,7 /,ff S. Westerman

18 355 South Grand Avenue, Suite 4170

19 Los Angeles, CA 90071-3172

20Telephone: (213) 617-1200Facsimile: (213) 617-1975

21MILBERG WEISS BERSHAD

22 & SCHULMAN LLP

23 Steven G. SchulmanKim E. Levy

24 Michael R. Reese

25 One Pennsylvania PlazaNew York, New York 10119

26 Telephone: (212) 594-5300

27 Facsimile: (212) 868-1229

28

33

,

WEISS & YOURMAN2 Joseph H. Weiss

3-551 Fifth AvenlaeSuite 1600

4 New York, New York 10176

5Telephone: (212) 682-3025Facsimile: (212) 682-3010

6LAW OFFICES OF CHARLES J.TIVEN, P.A.

7 Charles J. Piven8 Marshall N. Perkins

The World Trade Center — Baltimore9 Suite 2525

10 401 East Pratt StreetBaltimore, Maryland 21202

11 Telephone: (410) 332-003012 Facsimile: (410) 685-1300

13 STULL, STULL & 13RODY

14 Jules BrodyAaron Brody

15 6 East 45th Street

16 New York, New York 10017Telelphone: (212) 687-7230

17 Facsimile: (212) 490-2022

18 Counsel for Plaintiffs19

20 DOCS\212747v1

21

22 •

23

24

25

26

27

28

34•