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IN RE NUVEEN FUND LITIG.

June 20, 1994

IN RE NUVEEN FUND LITIGATION

Conlon


The opinion of the court was delivered by: SUZANNE B. CONLON

Plaintiffs T.R.V. Holding Company and Seymour Specter bring this suit on behalf of all persons who owned shares of the Nuveen Municipal Value Fund, Inc. ("the NUV fund") or the Nuveen Premium Income Municipal Fund, Inc. ("the NPI fund") (collectively, "the Nuveen funds") on November 8, 1993. First Consolidated and Amended Class Action Complaint ("Complaint") P 2. Defendants are the Nuveen funds' seven directors, Richard J. Franke, Donald E. Sveen, Frank P. Wendt, Lawrence H. Brown, John O'Toole, Margaret K. Rosenheim, and Peter R. Sawers ("the directors"); the Nuveen funds' investment advisor, Nuveen Advisory Corporation ("Nuveen Advisory"); and the investment advisor's controlling parent corporation, John Nuveen & Company, Inc ("Nuveen"). Id. PP 14-27.

 Plaintiffs contend that defendants' decision to issue rights to new shares of stock in the Nuveen funds diluted plaintiffs' ownership interests in the Nuveen funds and was made only to increase Nuveen Advisory's management fees and generate underwriting fees for Nuveen. Id. P 5 plaintiffs' three-count complaint alleges that defendants breached their fiduciary duties in approving, announcing, implementing and completing these offerings. Defendants move to dismiss the complaint for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6).

 BACKGROUND

 Nuveen is a multi-million dollar investment banking and investment advisory firm. Complaint PP 15, 34. Nuveen is the largest manager of closed-end municipal bond funds in the United States, controlling 82 funds and $ 32.6 billion in assets. Id. P 34. Closed-end bond funds generally do not issue new shares after their initial offering; expansion is usually through the gradual increase in the value of the underlying portfolio. *fn1" Id. P 37. The NUV and NPI funds are both closed-end, diversified management investment companies registered under the Investment Company Act in the State of Minnesota. Id. PP 10-11. Prior to the offerings in issue, the NUV fund, a $ 1.8 billion closed-end fund that invests in tax-exempt municipal bonds, had 166 million shares of common stock outstanding. Id. PP 1, 10. Prior to the offerings, the NPI fund, a $ 1.2 billion leveraged, closed-end fund that invests in tax-exempt municipal bonds, had 53 million shares of common and 3,500 shares of preferred stock outstanding. Id. PP 1, 11.

 Nuveen's closed-end municipal bond funds account for at least 78 percent of Nuveen's business. Id. P 35. Nuveen profits on the closed-end municipal bond funds in two ways: (1) underwriting fees for new funds and (2) management fees based on a percentage of the assets managed by Nuveen Advisory, its wholly-owned subsidiary. Id. The management fees generated by Nuveen Advisory constitute approximately 75 percent of Nuveen's total revenues. Id.

 Plaintiffs claim that Nuveen's future growth through the creation of new closed-end municipal bond funds has been threatened by market saturation, declining investor interest, and high bond prices. Id. PP 39-45. Plaintiffs contend that by the fall of 1993, Nuveen's performance had stagnated along with the closed-end bond fund market. Id. PP 46-49. Earnings have been below analysts' projections, Nuveen's stock has been downgraded, and industry publications have noted the slowdown. Id. PP 48-54. Defendants began to feel the impact of the downturn and pressure to take action to turn the situation around. Id. PP 55-58. Thus, plaintiffs allege that defendants resorted to raising capital from the shareholders of its existing Nuveen funds through coercive rights offerings. Id. PP 59-64.

 On November 8, 1993, defendants announced that the Nuveen funds would offer rights to new shares enabling Nuveen funds' shareholders to purchase additional shares. Id. P 60. Specifically, the offerings allowed each NUV or NPI fund shareholder to purchase one additional share for every three shares already owned. Id. P 66. Under the offerings, the NUV fund could have issued up to 55 million new shares, increasing its outstanding shares by 33 percent; the NPI fund could have issued up to 17.7 million new shares, increasing its outstanding shares by 33 percent. Id. PP 3-4. In fact, only about half of the offered new shares were purchased. Approximately 28.3 percent of the NUV fund's shareholders exercised their rights, subscribing to 26.3 million new shares or 47.9 percent of the new shares offered. Id. P 89. Similarly, approximately 32.4 percent of the NPI fund's shareholders exercised their rights, subscribing to 10 million shares or 57.2 percent of the new shares offered. Id.

 Plaintiffs allege that defendants' November 8, 1993 announcement stemmed from pressure for growth and that the offerings were instituted for Nuveen's benefit rather than for the benefit of the Nuveen funds' shareholders. Id. PP 59-60. Specifically, plaintiffs claim Nuveen directly benefited from the offerings by receiving substantial underwriting fees and indirectly benefited from the offerings because Nuveen Advisory, Nuveen's wholly-owned subsidiary, will receive significantly greater management fees due to the Nuveen funds' increased assets under Nuveen Advisory's management. Id. P 16.

 Plaintiffs assert that the offerings harmed the Nuveen funds' shareholders. The price for the new shares was set at:

 
the lesser of (A) the net asset value per common share as of the date of the expiration of the offering (the "pricing date") or (B) 95% of the average of the last reported sale prices of a common share on the New York Stock Exchange on the pricing date and the four (4) preceding business days.

 Id. P 66. Plaintiffs explain that the pricing structure guaranteed that the new shares would be sold at a price below both the Nuveen funds' per share net asset value and per share market price. Id. PP 67-69. Plaintiffs contend that the November 8, 1993 announcement of the offerings placed downward pressure on the trading price for the Nuveen funds' shares in the months before the final price was determined on January 21, 1994. Id. PP 68, 71-80. Plaintiffs also contend that the challenged offerings gave shareholders three choices, all of which caused shareholders harm: (1) invest more money in the Nuveen funds and minimize their net asset value dilution; (2) refrain from investing more money in the Nuveen funds and suffer dilution from the addition of new shares and the deduction of underwriting fees; or (3) sell their Nuveen fund shares in an intentionally depressed market and suffer losses. Id. PP 82-85.

 Plaintiffs allege that defendants designed the offerings in a manner guaranteed to dilute shareholder proportionate ownership in the Nuveen funds. Id. P 65. Plaintiffs claim dilution of: shareholder proportionate ownership of assets, shareholder proportionate voting rights and/or control, the per share net asset value of shareholder investments, and the market value of shareholder investments. Id. Count I alleges that the directors and Nuveen Advisory violated their fiduciary duties under Section 36(a) of the Investment Company Act of 1940, which states in pertinent part:

 
The [Interstate Commerce] Commission is authorized to bring an action in the proper district court of the United States . . . alleging that a person serving or acting in one or more of the following capacities has engaged . . . in any act or practice constituting breach of fiduciary duty involving personal misconduct in ...

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