FRIENDLY, Circuit Judge:
In Fogel v. Chestnutt, 533 F.2d 731 (2 Cir. 1975)(Fogel I), cert. denied, 429 U.S. 824, 97 S.Ct. 77, 50 L.Ed.2d 86 (1976), we reversed a judgment of Judge Wyatt in the District Court, 383 F.Supp. 914, for the Southern District of New York which dismissed on
In agreement with the result although not with all the reasoning in the well-known decision of the First Circuit in Moses v. Burgin, 445 F.2d 369, cert. denied, 404 U.S. 994, 92 S.Ct. 532; 30 L.Ed.2d 547 (1971), we held the defendants liable because of their failure adequately to investigate the possibilities of recapture and make a full report to and secure informed and deliberate consideration of this by the independent directors, see 533 F.2d at 749-50, in violation of the Investment Company Act (ICA), contrast Tannenbaum v. Zeller, 552 F.2d 402 (2 Cir.), cert. denied, 434 U.S. 934, 98 S.Ct. 421, 54 L.Ed.2d 293 (1977). We remanded the case to the district court for the determination of damages, with certain instructions on that subject, 533 F.2d at 755-57, hereafter discussed. Familiarity with the opinion in Fogel I will be assumed.
The district court referred the determination of damages to Magistrate Schreiber as a special master. He received testimony from an expert witness for plaintiffs and eleven witnesses, several of them experts, for the defendants. The Magistrate largely sustained plaintiff's claims with respect to recapture of brokerage commissions on business actually transacted by the Adviser on the PBW, of tender offer fees that would have been payable if the Adviser or an affiliate had become a member of the NASD, and of underwriting discounts, commissions and allowances obtainable by having a brokerage affiliate become a member of the underwriting or selling group. However, he rejected plaintiffs' claims with respect to the recapture of commissions for reciprocal brokerage, a subject with which, as was also the case with underwriting discounts, our opinion in Fogel I did not specifically deal. After deducting added expenses to which the Adviser would have been subject, the Magistrate arrived at a total of damages for the years 1967-74 of $349,013.04 to which there was to be added interest at the legal rates in effect at the end of each year.
Exceptions were filed by both sides and were disposed of by the district court in an opinion reported in 493 F.Supp. 1192 (1980). The district judge accepted, with some downward modifications, the recommendations of the Magistrate favorable to plaintiffs. However, he sustained plaintiffs' exceptions to the large item relating to reciprocal commissions. The result was a judgment in the amount of $3,919,220, consisting of $2,370,357 of principal and $1,548,863 of interest.
Despite our recognition that defendant Currier was "a special case" and our suggestion that "equity would suggest the imposition of primary liability on the Adviser, which profited from the failure to recapture", 533 F.2d at 750, the attorney, Clendon H. Lee, who had represented all the defendants in Fogel I, continued to do so in the district court after remand. After noting the relevant passage on this subject in Fogel I, the Magistrate said:
The district court upheld this and directed that judgment be entered holding all defendants jointly and severally liable in the full amount, 493 F.Supp. at 1204.
All defendants have appealed. The defendants other than Currier, while continuing to be represented by Mr. Lee, retained new attorneys who, in addition to challenging the amount of the award, argue that no award was permissible since in their view there is no private cause of action for damages for violations of the ICA other than that provided in § 30(f) which admittedly is not applicable here,
Our opinion in Fogel I necessarily assumed that an adviser's and a director's breach of fiduciary duty under the ICA gave rise to a private cause of action for damages. Congress had sought to deal with the problem that the relationship between a mutual fund and its investment adviser and underwriters was rife with opportunities for self-dealing, see Moses v. Burgin, supra, 445 F.2d at 376, by requiring a minimum proportion of disinterested directors, § 10(a), and by vesting them with special responsibilities with respect to contracts between the fund and advisers and underwriters, § 15(c). In Fogel I, 533 F.2d at 745, we agreed with Chief Judge Aldrich, writing for the First Circuit in Moses v. Burgin, supra, 455 F.2d at 377, that
There was no occasion for us to discuss the existence of a private cause of action to enforce this duty since we had long since decided the point in Brown v. Bullock, 294 F.2d 415 (2d Cir. 1961), and, doubtless in view of this and the Supreme Court's decision in J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964) (§ 14 of Securities Exchange Act), which seemingly confirmed it, defendants' counsel did not raise the issue in brief or argument or in his petition for reconsideration.
Defendants now argue that we — and they — were mistaken in the basic assumption that plaintiffs were entitled to recover if they could show violations of the ICA by the defendants, and that decisions of the Supreme Court, particularly Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979); see also Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975); Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 97 S.Ct. 926, 51 L.Ed.2d 124 (1977); Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979); and Kissinger v. Reporters Committee for Freedom of the Press, 445 U.S. 136, 100 S.Ct. 960, 63 L.Ed.2d 267 (1980), although not dealing with the ICA, compel the conclusion that no implied private causes of action for damages exist under that statute. In addition to disputing defendants' contention, plaintiffs assert that we need not and should not reach its merits. For this they rely both on the preclusive effect of the pretrial order and on the principle of the law of the case.
Defendants' initial response is that the existence of an implied cause of action under the ICA is jurisdictional and hence may be raised at any time. This argument is simply one more instance of the fallacy, to which courts as well as counsel have not been immune, of confusing the question whether a court has jurisdiction with the question whether a complaint states a claim upon which relief can be granted.
The complaint based jurisdiction on the ICA, as well as the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934. It thus stated a claim arising under a law of the United States, of which the district court had jurisdiction under 28 U.S.C. § 1331(a), as well as § 44 of the ICA. If in fact the statutes relied upon by the plaintiffs did not authorize recovery of damages because of violations of the sort alleged, the complaint failed to state a claim upon which relief can be granted and was subject to dismissal upon that ground.
This lesson has been taught as often in decision as it has been ignored in argument and dicta. Justice Holmes preached it long ago in The Fair v. Kohler Die and Specialty Co., 228 U.S. 22, 25, 33 S.Ct. 410, 411, 57 L.Ed. 716 (1913), when he wrote:
Justice Black reaffirmed the principle in Bell v. Hood, 327 U.S. 678, 682-83, 66 S.Ct. 773, 776, 90 L.Ed. 939 (1946). Dealing with a case where the district court had dismissed for want of jurisdiction an action in which the plaintiff sought damages for violations of constitutional rights by FBI agents, his opinion stated:
Justice Jackson illuminated the distinction, which the court of appeals had failed to note, in Montana-Dakota Utilities Co. v. Northwestern Public Service Co., 341 U.S. 246,
Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979), is even closer to our case. The Court was there dealing with the applicability of the business judgment rule to a private right of action asserted under the ICA and the Investment Advisers Act. After noting that the courts below assumed that an implied right of action existed under each act, the Court said that it would assume without deciding that respondents had such causes of action — a course which would have been improper if in fact the lower courts had no jurisdiction. The Court's awareness of this was manifested in fn. 5:
It cited for this Mt. Healthy City Board of Education v. Doyle, 429 U.S. 274, 279, 97 S.Ct. 568, 572, 50 L.Ed.2d 471 (1977), which was to substantially the same effect.
Commendably recognizing that the footnote in Burks v. Lasker "is difficult to distinguish", Reply Brief p. 2, defendants cite a sentence from Kissinger v. Reporters Committee for Freedom of the Press, 445 U.S. 136, 149-50, 100 S.Ct. 960, 968-69, 63 L.Ed.2d 267 (1980), where the Court said, in deciding that there is no private right of action under the Records and Records Disposal Acts, 44 U.S.C. §§ 2901 et seq., 3303 et seq.:
This shows only that the Supreme Court in using "jurisdiction" language can make the same mistake for which it has repeatedly chided lower courts. It is impossible to believe that the Court intended by a mere stroke of the pen to obliterate a distinction that it had consistently drawn for many decades. Rather this was another instance where, as Justice Jackson observed in Montana-Dakota Utilities Co. v. Northwestern Public Service Co., supra, 341 U.S. at 249, 71 S.Ct. at 694:
As Justice Frankfurter once said, "`[j]urisdiction' competes with `right' as one of the most deceptive of legal pitfalls." City of Yonkers v. United States, 320 U.S. 685, 695, 64 S.Ct. 327, 333, 88 L.Ed. 400 (1944) (dissenting). Thus concluding that the question whether there is an implied cause of action for damages under the ICA goes to the merits rather than to jurisdiction, we pass on to plaintiffs' contentions with respect to the effect of the pretrial order and the principle of the law of the case.
On September 4, 1973, the district judge entered a pretrial order pursuant to F.R.Civ.P. 16. The order began by reciting that the pleadings had been deemed amended and supplemented by plaintiffs' supplemental complaint and that "[p]laintiffs abandon no issues raised in this supplemental pleading." (A-71) This was followed by several pages of stipulated facts. Next came a listing of the contentions of plaintiffs and defendants. The latter made no mention of any claim, such as may charitably be deemed to have been asserted in paragraphs 22 and 23 of the answer, see note 5, that the ICA did not authorize private recovery of damages for violations, although defendants did raise numerous issues of law, including an assertion (A-77e) that "[a]t all relevant times defendants and all directors have complied in all respects with the provisions of the Investment Company Act...." The order then proceeded to list materials on which the parties would rely and witnesses whom they expected to call.
Plaintiffs' argument that the pretrial order constituted an abandonment of any defense that there is no private cause of action for violation of the ICA other than those provided in § 30(f) and § 36(b) is forceful. F.R.Civ.P. 16 directs that the pretrial order "when entered controls the subsequent
If there is any answer to plaintiffs' contentions with respect to the pretrial order, it must be rather that defendants' abandonment of the no private cause of action defense, if we generously assume that paragraphs 22 and 23 of the answer adequately alleged this, was due to a justified belief that assertion of this would have been futile in view of our decision in Brown v. Bullock, supra, 294 F.2d 415, the uncontested assumption of an implied cause of action in Rosenfeld v. Black, 445 F.2d 1337 (2 Cir. 1971), cert. denied, 409 U.S. 802, 93 S.Ct. 24, 34 L.Ed.2d 62 (1972),
Defendants are also precluded from now litigating the existence of an implied cause of action for damages for their violations of the ICA because of the principle of the law of the case. We begin by dismissing defendants' contention that this principle is inapplicable because in Fogel I we did not expressly affirm the existence of a private cause of action. The principle applies as well to everything decided by necessary implication. See, e.g., Walston v. School Board, 566 F.2d 1201, 1205 (4 Cir. 1977); Terrell v. Household Goods Carriers' Bureau, 494 F.2d 16, 19 (5 Cir.), cert. denied,
However, in applying the principle of the law of the case, we must give serious consideration to defendants' contention that Supreme Court decisions subsequent to Fogel I have demonstrated that the assumption on which we acted without contest from them was in error. We unhesitatingly accept that, as we stated in Zdanok v. Glidden Co., 327 F.2d 944, 951 (2 Cir. 1964), "if, before a case in a district court has proceeded to final judgment, a decision of the Supreme Court demonstrates that a ruling on which the judgment would depend was in error, no principle of `the law of the case' would warrant a failure on our part to correct the ruling." Defendants' problem is with the requirement of demonstration. It is not enough, as explained by us in Zdanok, supra, 327 F.2d at 951-53, and by Judge Magruder in White v. Higgins, 116 F.2d 312, 317 (1 Cir. 1940), that defendants could now make a more persuasive argument against the existence of an implied cause of action than we would have thought likely when the case was last here. As Judge Magruder said, "mere doubt on our part is not enough to open the point for full reconsideration." The law of the case will be disregarded only when the court has "a clear conviction of error" with respect to a point of law on which its previous decision was predicated, Zdanok v. Glidden, supra, 327 F.2d at 953, citing Johnson v. Cadillac Motor Car Co., 261 F. 878, 886 (2 Cir. 1919). We have no such clear conviction that a private action will not lie under the ICA for an omission of the Adviser and interested directors to communicate fully and frankly to disinterested directors with respect to the Adviser's refusal, in furtherance of its own interests, to take action financially beneficial to the Fund which had been repeatedly called to the attention of the Adviser by the SEC and had been taken by other funds.
Appellants must concede that the Supreme Court has not yet passed on the question whether private causes of action for damages can be implied from the ICA. The closest approach that has been cited to us is Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979), which held that no private cause of action for damages can be implied from the Investment Advisers Act of 1940, although a cause of action for equitable relief could be implied. That distinction rested on a combination of two factors: (1) that § 215 of the Act provided only that contracts made in violation of its terms "shall be void" — a term ordinarily taken to mean merely that the person with power to avoid the contract "may resort to a court to have the contract rescinded and to obtain restitution of consideration paid", 444 U.S. at 18, 100 S.Ct. at 246, and (2) that the jurisdictional section, § 214, earlier drafts of which had incorporated by reference a provision of the Public Utility Holding Company Act of 1935 giving the federal courts jurisdiction "of all suits in equity and actions at law brought to enforce any liability or duty created by" the statute, had been changed during the course of enactment to the final version under which the jurisdiction was limited to "suits in equity to enjoin any violation", omitting any reference to actions at law or to liability. 444 U.S. at 21-22, 100 S.Ct. at 247-48.
The section concluded by declaring that
The Transamerica Court also noted, 444 U.S. at 20, 100 S.Ct. at 247,
In contrast to the three court of appeals decisions, all of very recent date, see 444 U.S. at 14 n.4, 100 S.Ct. at 244 n.4, sustaining the availability of a private cause of action under the Investment Advisers Act, the cases in the courts of appeals upholding the private cause of action for damages for violation of the ICA go back to our decision in Brown v. Bullock, supra, in 1961, and include the Third Circuit's 1963 decision in Taussig v. Wellington Fund, Inc., 313 F.2d 472, 476, cert. denied, 374 U.S. 806, 83 S.Ct. 1693, 10 L.Ed.2d 1031 (1963); the First Circuit's 1964 decision in Levitt v. Johnson, 334 F.2d 815 (1964), cert. denied, 379 U.S. 961, 85 S.Ct. 649, 13 L.Ed.2d 556 (1965); the Tenth Circuit's 1968 decision in Esplin v. Hirschi, 402 F.2d 94, 103 (1968), cert. denied, 394 U.S. 928, 89 S.Ct. 1194, 22 L.Ed.2d 459 (1969), and numerous other decisions of these courts of appeals, several subsequent to the 1970 amendment of § 36(b) on which defendants rely as negating an implied cause of action.
While, as defendants contend, this nose count is not quite so impressive as that with respect to Rule 10b-5 when the Supreme Court upheld an implied cause of action in Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), it is impressive enough.
Although we do not find it necessary to decide the point, we do not think § 36(b) was intended to negate implied causes of action which the courts have found under sections of the Act other than § 36. Indeed, we are already on record to this effect. See Tannenbaum v. Zeller, supra, 552 F.2d at 417. The problem to which § 36(b) was addressed was that with which the SEC had dealt in pages 125-49, 154 of its Report on Public Policy Implications of Investment Company Growth (PPI), H.R.Rep.No.2337, 89th Cong., 2d Sess. (1966). This was that advisers' fees, generally stated as a percentage of the market value of the managed assets, which had been altogether reasonable when a fund was launched, may have become unreasonably high when the fund grew to enormous size. See Jennings & Marsh, Securities Regulation: Cases and Materials, 1394, et seq. (4th ed. 1977). Section 36 of the 1940 Act had proved to be an ineffective vehicle for dealing with this problem since it expressly authorized action only by the SEC and imposed a very high standard of proof, to wit, "gross misconduct or gross abuse of trust". Although our decision in Brown v. Bullock sustained a complaint with respect to advisers' fees as pleading causes of action under other sections of the ICA, it was unlikely that a plaintiff could prove them. See Jennings & Marsh, supra, at 1395-96. Actions in state courts were likewise ineffective since those courts required objecting stockholders to show corporate "waste". Id. at 1396, citing the well-known case of Saxe v. Brady, 40 Del.Ch. 474, 184 A.2d 602 (1962); PPI at 133-38; Sen.Rep.No.91-184, 91st Cong.2d Sess. 5, reprinted in  U.S.Code Cong. & Admin.News 4897, 4901. In order to enable the courts to deal more effectively with this problem, the SEC proposed a bill amending the Act to provide that advisory fees must be "reasonable" irrespective of approval of the advisory contract by the directors or shareholders, and that shareholders as well as the SEC should be entitled to sue to enforce the new standard. Surely the last thing the SEC intended was the abolition of implied causes of action which the courts had recognized under other sections of the ICA, as the SEC had consistently favored, e.g., in its amicus brief to this court in Brown v. Bullock. That
As recounted in Jennings & Marsh, supra, at 1396-97, the mutual fund industry bitterly opposed the bill which "languished for over three years" until "largely at the prodding of Congress, the SEC and industry representatives reached a compromise which ultimately was embodied as an amendment to Section 36 of the Investment Company Act." The authors state, at 1397, that "The language of subsection (b) is a lesson in the art of studied ambiguity in drafting of statutes." We might agree with defendants that § 36(b), with the severe limitations of subsection (3), constitutes the exclusive remedy insofar as a private claim alleges solely that compensation of an adviser subsequent to June 14, 1972, the effective date of § 36(b), is so excessive in the sense of surpassing any reasonable relation to the services rendered that its payment is a breach of fiduciary duty. However, there is no reason to conclude that, by adopting a modified version of the SEC's proposal to afford an express private remedy with respect to one problem as to which the 1940 Act had proved ineffective, the 1970 Congress meant to withdraw the implied private cause of action in other areas which had been recognized over the previous decade by four courts of appeals, with the lone dissenting court having indicated strong willingness to reconsider. Tannenbaum v. Zeller, supra, 552 F.2d at 417. The present action is not one "for breach of fiduciary duty in respect of ... compensation or payments paid by such registered investment company or by the security holders thereof to such investment adviser or person" to which § 36(b) applies. It is rather for breach of the fiduciary duty to make a full disclosure to the independent directors of opportunities available to the Fund, even though a motivation for and the effect of the nondisclosure were to increase the gross fees by stimulating growth of the Fund and the net fees both by this and by obtaining from brokers "research" services which the Adviser would otherwise have had to supply at its own cost.
We are thus far from having "a clear conviction of error", see Zdanok v. Glidden Co., supra, 327 F.2d at 953, in the assumption in Fogel I, unchallenged at the time, that a private cause of action lay in respect of plaintiffs' complaints. In adopting a statute intended as a thorough and pervasive regulation of the investment company industry, in part because of the inadequacies of the 1933 and 1934 Acts "to cope with the grave abuses and evils that had developed in some quarters of the investment company business", Brown v. Bullock, supra, 194 F.Supp. at 217, and in the face of the declaration in § 1, it seems to us highly unlikely that Congress intended that, save for suits to recover short-swing profits, § 30(f), enforcement should be solely the task of the SEC and of the criminal law, and that injured investors should have no recourse in a federal court. While we recognize that the question of the existence of a private cause of action under the ICA has become more debatable than we or the defendants thought in 1975, we thus perceive no justification for departing from the law of the case.
As noted, we ended our opinion in Fogel I by saying, 533 F.2d at 755, that:
We began by fixing the periods during which liability for various sorts of recapture should exist; appellants voice no complaints with respect to these. We then said, 533 F.2d at 755-57:
Appellants' first argument with respect to damages is in substance an objection to our precluding, to the extent that we did, the presentation of evidence that recapture would have been adverse rather than beneficial to the Fund. They argue that such preclusion eliminated an essential link in proof of damages, namely, causation, since thoroughly informed independent directors could well have decided against recapture, as the directors of the Chemical Fund did, see Tannenbaum v. Zeller, supra, 552 F.2d 402. We reject the argument. The record revealed an utterly perfunctory presentation of the question of recapture to the independent directors, 533 F.2d at 746-50, whom Congress had mandated in order "to supply an independent check on management and to provide a means for the representation of shareholder interests in investment company affairs", S.Rep.No.91-184, 91st Cong., 1st Sess. 32 (1969), reprinted in  U.S.Cong. & Admin.News 4897, 4927 (1970). This "caused" the Fund to forgo recapture, by removing the switch which, after proper disclosure, the independent directors might have set so as to send the Fund down the recapture road. To require a plaintiff to prove that the independent directors would not have opted for recapture no matter how full the disclosure would make the disclosure requirement a dead letter. A pertinent analogy exists in the law with respect to misrepresentation. There it is settled that in order to show causation a plaintiff need not prove that the recipient "would not have acted or refrained from acting as he did unless he had relied on the misrepresentation." Restatement (Second) of Torts § 546, Comment b (1977). In this case failure of the defendants to make an adequate disclosure to independent directors is the legal equivalent of misrepresentation. Justice Blackmun's observation in Affiliated Ute Citizens v. United States, 406 U.S. 128, 154, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972), that "This obligation to disclose and this withholding of a material fact establish the requisite causation in fact", is fully applicable here. We reiterate our agreement with Moses v. Burgin, supra, 445 F.2d at 385, that "Management having wrongfully prevented the matter from coming up, must bear the full consequences."
Apart from the argument just rejected, appellants' criticisms with respect to damages relate solely to the allowances for underwriting discounts and commissions, and commissions that could have been earned on the PBW Exchange as "reciprocals" for Fund business given to brokers on the NYSE and AMEX. Neither of these was mentioned in the quoted portion of our opinion relating to damages. Thus it became necessary for the Magistrate and the district judge to categorize these claims as either business actually conducted or business rerouted to a regional exchange since Fogel I permitted a business desirability defense only as to the latter.
Plaintiffs' claim with respect to the recapture of underwriting discounts was that these could readily have been accomplished by establishing a brokerage affiliate with NASD membership and causing the affiliate to become a member of the underwriting or selling group which marketed the stocks in which the Fund invested. As a member the affiliate would have been entitled to commissions on the securities purchased by the Fund without having to do any actual marketing work, and could lawfully have paid such fees in the form of dividends to the Adviser, which would then have been obliged to credit them to the Fund. The Magistrate considered this to be an issue where full inquiry as to desirability, possibility and legality was required. He found possibility by combining our conclusion in Fogel I that NASD membership was available to an affiliate of the Adviser, 533 F.2d at 752, and a finding that the Adviser had sufficient leverage to force its way into the selling group. He found legality on the basis that although the rules of the NASD prohibited a broker acting on
The district court considered the subject and in a well reasoned discussion, 493 F.Supp. at 1197-99, agreed with the Magistrate except for thinking that, in light of the expenses and risks of underwriting, an underwriting syndicate might resist according a 25% share to an affiliate bearing none of these, and thus adopted a 20% share as more conservative.
Two specific criticisms are made by appellants with respect to the district judge's conclusion on this subject. First, they claim that "This category of damages should ... have been open to a full defense." (Reply Brief, p. 19). The short answer is that the Magistrate so held and there is no indication that the district judge disagreed. Second, they assert that "the way damages were computed for this category was wholly conjectural." Id. at 19 n.25. However, there was no doubt that some underwriting discounts and commissions could be recaptured, as conceded by defendant Greene and as found in Papilsky v. Berndt, and the district judge's 20% figure was modest enough.
A more controversial subject is plaintiffs' claim for reciprocal brokerage. Plaintiffs' expert, Sherman O. Jones, who had headed a brokerage affiliate of Waddell & Reed, Inc., adviser to United Fund, which had been one of the leaders in recapture, described this practice as follows: Because of the attractiveness of mutual fund business, typically consisting of large amounts of securities, under the then fixed commission rate structure, brokers receiving orders from advisers for execution on the NYSE or AMEX were willing to pay a reward by sharing with affiliates of advisers who were members of regional stock exchanges a portion of the commissions on business which the brokers conducted on such exchanges. In Fogel I, we referred to the portion of the SEC's PPI report dealing with that subject, 533 F.2d at 736, and also found on our own that at least until the abolition of reciprocals on July 15, 1973, an affiliate of the Adviser as a member of the PBW exchange could "obtain PBW Exchange business from NYSE brokers in return for execution on that exchange", 533 F.2d at 752. Plaintiffs' expert testified that only 60% of the commissions payable to brokers for business transacted on the NYSE and AMEX would have provided leverage for reciprocal dealing since the other 40% would be needed as a reward for research or other services. The established practice of reciprocation at the rate of $100 in shared commissions on the PBW for every $200 in commissions for fund transactions executed on NYSE and AMEX would result in recovery of 30% of the total commissions (60% subject to recapture times 50% recapture rate yields 30%).
The Magistrate considered this to be an area where the desirability defense was entertainable. He found that:
The principal basis stated for this was that:
He thought that:
He also criticized plaintiffs' witness for not analyzing "the Fund's trading figures in detail to arrive at a reasonably precise proportion of recapturable trade commissions", concluded that it was "plaintiffs' burden to elicit from their witnesses the detailed basis of the analysis, if there was any", and held they had failed to sustain this.
The district judge took a different view, 493 F.Supp. at 1199-203. He disagreed with the Magistrate's assessment that plaintiffs' estimates of the possibilities of recapture through reciprocals were overly optimistic. He thought that this conflicted with our opinion in Fogel I and with Judge Frankel's opinion in Papilsky v. Berndt and with the testimony that in addition to the advisers mentioned in the PPI Report and in our opinion who had pursued this method of recapture, the same device had been employed by Dreyfus Corp., adviser for one of the largest aggregations of mutual funds. He did not think detailed analysis of the Fund's trading figures was essential or even "meaningful". He cited testimony of plaintiffs' witness that beginning in 1969 Waddell & Reed's affiliate had increased the rate of reciprocal business from 50% to 75% and that over the period from 1966 to 1973 had recaptured 42% of commissions paid on all exchanges. However, in the interest of conservatism and because of possibly distinguishing factors, he reduced the percentage of NYSE and AMEX commissions that would be recaptured through reciprocal brokerage from Jones' 30% figure to 20%. On the basis of Jones' 2-1 formula, this was equivalent to finding that only 40% rather than 60% of the NYSE and AMEX commissions were subject to reciprocity.
We think the Magistrate was mistaken in the legal test he applied to reciprocals. The second category outlined in the quoted passage of our opinion in Fogel I was addressed to possible claims by plaintiffs "that the Adviser should have routed more of Fund's business to the PBW and Pacific Coast Exchanges, and of endeavoring to estimate what would have been recapturable if it had". 533 F.2d at 756 (emphasis added). What we had in mind was that the Adviser might not have been able to obtain the best possible execution if large amounts of the Fund's business had been rerouted to these regional exchanges and that the defendants should be allowed to establish this if they could. The plaintiffs' claim here at issue did not involve any change in the Fund's allocation of its own business among the various exchanges. The computations were based on the volume of transactions actually conducted for the Fund by brokers on the NYSE and AMEX and unrelated business done by those brokers on the PBW Exchange. Defendants' evidence was not that recapture of reciprocals was impracticable but that it was undesirable for various reasons, primarily the obvious one that the brokers executing trades for the Fund on NYSE and AMEX would like to retain full commissions on all their business on the PBW Exchange and thus would give some preference on a variety of matters to funds that allowed them to do this. This was precisely the kind of information that could and should have been placed before the disinterested directors so that they could weigh the intangible advantages of receiving more enthusiasm from brokers both in the execution of orders and in pushing sales and furnishing research against the ascertainable amounts that were obtainable by insisting on reciprocity. If the independent directors had received opinions such as those adduced from defendants' experts at the damages trial and had then decided not to seek reciprocals, we would have a different case, see Tannenbaum v. Zeller, supra, 552 F.2d at 416-29. Since the Magistrate applied a wrong legal standard, his findings are not, as urged by appellants, protected by the "unless clearly erroneous" provision
We therefore sustain the district court's computation of damages.
Our opinion in Fogel I recognized special problems with respect to the defendant John Currier. When elected as a director of the Fund in 1962 as an outside business man, he was an "unaffiliated" director, see 533 F.2d at 746 n.15. He remained so after his acquisition of a 2% stock interest in the Adviser in 1964. However, he became an "interested" director as a result of § 5 of the Investment Company Amendments Act of 1970, which amended § 10(a) to substitute the word "interested" for "unaffiliated" in the requirement for a minimum of 40% of independent directors and defined "interested person", §§ 2(19)(A)(iii), (B)(iii), so that Currier's stock interest in the Adviser, which had been reduced to 1.2% by that time, brought him within that term. While this made him ineligible to meet the 40% requirement, nothing in the Act explicitly imposes any special duties on directors who are "interested" but not a part of management.
All the defendants in Fogel I were represented by the same counsel, Clendon H. Lee. No argument was made to us that any difference existed as regards the liability of the Adviser, of the three management directors — Chestnutt, Sabel and Greene, and of Currier. The defense was that there was no liability on the part of anyone since Moses v. Burgin, supra, had been wrongfully decided or in any event was inapplicable to a no-load fund which sold its own shares without the intervention of an affiliated underwriter. However, we did take note of the problem with respect to Currier on our own initiative, saying, 533 F.2d at 750:
Defendants' petition for reconsideration was addressed solely to the broad issue we had decided; nothing was said as to Currier's special position.
Although our opinion ought surely to have alerted Lee and Currier, if they had not already been so, of Currier's need for separate counsel, Lee continued to act for all the defendants. Currier was not called as a witness at the hearings before Magistrate Schreiber. In the course of oral argument held after the submission of evidence, the Magistrate said to Lee:
Lee declined to take advantage of the opportunity, saying that "the Court is required to dismiss the case against the individuals." The Magistrate concluded in his report:
While by this time it had become crystal clear that Currier needed separate counsel, nothing was done about it,
Judgment was entered on June 27, 1980, finding all defendants jointly and severally liable.
At this time Currier did what should have been done long ago, namely, engage separate counsel. They promptly filed a motion on July 9, 1980, for an order pursuant to F.R.Civ.P. 59 and 52 for a new trial or to alter and amend the judgment "so as to diminish his [Currier's] liability and subordinate it to that of the other defendants." The district court denied the motion without opinion.
In their briefs in this court, Currier's counsel argue that our opinion in Fogel I was in error in holding Currier to be liable for a breach of fiduciary duty. They contend, inter alia, that he was never part of the Adviser's management and that rather than owing a duty of disclosure to nonmanagement directors as representatives of the
Without passing on the soundness of Currier's arguments, we at least agree that if these had been presented to us six years ago, there would have had to be much more extensive consideration whether Currier was liable at all than the short paragraph we have quoted. On the other hand, it would be a dangerous precedent to depart from the law of the case simply because new counsel have come up with arguments that could equally well have been presented when the case was first here. Currier does not fit the picture of the guileless innocent that counsel seek to draw. He is a graduate of Penn State University and the Harvard Business School and has had a successful and extensive business career. Our opinion in Fogel I, knowledge of which he does not deny, should have alerted him to the need of having his "special case" presented by petition for reconsideration or, failing that, by offering proof before the Magistrate. Instead he continued to allow himself to be represented by Lee, whom, as we learn from Currier's affidavit supporting his post-trial motion, was doing this without additional compensation. Beyond this, in light of the assurances given by plaintiffs' counsel, see note 3, and the absence of any suggestion that the other defendants are unable to pay the judgment, there seems to be little reason to fear that Currier will suffer actual financial loss.
However, we recognize that the very existence of the judgment constitutes a hardship. Although we fully understand the reluctance of the magistrate and the district judge to take action on our suggestion with respect to apportionment in light of Lee's stubborn refusal to address the issue even after the Magistrate's request, the record contained sufficient evidence for doing this and we see no reason why we should not do it ourselves rather than prolong this case by a second remand.
The judgment is affirmed as so modified. Plaintiffs may recover their costs against defendants other than Currier. No costs as between plaintiffs and Currier.