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Stanford University Law School
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[Web note: Page formatting approximates, but does not match exactly, that of filed paper document.]
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------------X
MARION FINKEL, :
:
Plaintiff, :
:
-against- : 96 Civ.
:
PUTNAM CONVERTIBLE OPPORTUNITIES :
AND INCOME TRUST, GEORGE PUTNAM, : CLASS ACTION
WILLIAM F. POUNDS, JOHN D. HUGHES, : COMPLAINT FOR
PAUL G. BUCUVALES, JAMESON A. : VIOLATIONS OF
BAXTER, HANS H. ESTIN, JOHN A. HILL, : FEDERAL SECURITIES
ELIZABETH T. KENNAN, LAWRENCE J. : LAW
LASSER, ROBERT E. PATTERSON, DONALD :
S. PERKINS, GEORGE PUTNAM, III, ELI :
SHAPIRO, A.J.C. SMITH, W. NICHOLAS :
THORNDIKE, SMITH BARNEY INC., DAIN : Plaintiff Demands a
BOSWORTH INCORPORATED, GRUNTAL & : Trial by Jury
CO., INC., THE ROBINSON-HUMPHREY :
COMPANY, INC., A.G. EDWARDS & SONS, :
INC., FAHNESTOCK& CO., INC., KEMPER :
SECURITIES, INC., ADVEST, INC., FIRST OF :
MICHIGAN CORPORATION, LEGG MASON :
WOOD WALKER INCORPORATED, SUTRO & :
CO. INCORPORATED, :
:
Defendants. :
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NATURE OF THE ACTION
1. This class action asserts claims under section 11 of
the Securities Act of 1933 and the common law on behalf of
purchasers of shares of the common stock of a closed-end fund, the
Putnam Convertible Opportunities and income Trust (the "Fund"),
that were issued in an initial public offering of 3,700,000 shares
of common stock at $25.00 per share ($92,500,000), including over-
allotments (the "IPO"), which offering was made pursuant to a
registration statement (the "Registration Statement"), of which a
prospectus was a part (the "Prospectus"), made effective on June
26, 1995. The claims herein are asserted against the Fund,
individuals controlling the Fund, and the underwriters
(individually and as a defendant class) of the IPO. As of June 19,
1996, the Fund's shares, which trade on the New York Stock Exchange
("NYSE"), closed at $22 3/4, a discount of nearly 15% of the Fund's
net asset value. Notwithstanding this substantial discount, there
has been no consideration of a share repurchase program nor a vote
of shareholders on whether to open-end the Fund
2. The Prospectus made material misrepresentations in
violation of section 11 of the Securities Act of 1933.
Specifically, the Registration Statement (which included the
Prospectus) falsely represented, inter alia, that if the Fund's
shares traded at a significant discount to their net asset value
for an extended period of time, Putnam Investment Management, Inc.
("Putnam Management"), the Fund's manager, would consider
recommending to the Fund's Trustees a share repurchase program that
would allow the Fund's investors to have their shares repurchased
by the Fund. (Prospectus at 47.)
3. Similarly, the Prospectus implied that the Fund
would consider putting to a shareholder vote whether to convert the
Fund to an open-end investment company (which would enable
shareholders to redeem their shares on demand at the shares' net
asset value) when a significant market discount from net asset
value arose. (Id.)
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4. The foregoing constituted defendants'
representations that Putnam would consider a repurchase program
and/or the Fund would put conversion to an open-end fund to a vote
of the Fund's shareholders if a discount from net asset value
existed for a substantial period of time, and by implication,
consideration of either or both of the foregoing two options would
be serious, substantial, and bona fide, and that there was a real,
as opposed to a theoretical, possibility that either a stock
repurchase program would be recommended by Putnam or that the Fund
would put conversion to an open-end fund to a vote of the Fund's
shareholders.
5. Defendants' representations in the Prospectus that
Putnam would consider recommending a share repurchase program if
the shares of the Fund trade at a significant discount to their net
asset value for an extended period of time and that the Fund would
consider putting to a shareholder vote whether to convert the Fund
to an open-end investment company when a significant market
discount from net asset value arose were false and misleading
because, when the Prospectus became effective, prevailing market
conditions and other factors that had been extant for a substantial
period of time before the effective date of the Prospectus made it
virtually certain that Putnam would not recommend a share
repurchase program or that the Fund would not put to a vote by the
shareholders of the Fund whether to open-end the Fund.
6. In addition, the Prospectus was false and misleading
because, inter alia,
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(a) Putnam did not intend to undertake a serious,
substantial bona fide stock repurchase program and in fact
either never considered or did not consider seriously a stock
repurchase program, although the predicate for such a program
--a market price reflecting a substantial discount from book
value--existed for practically the entire period from the date
of the IPO to the present;
(b) it was virtually certain that even if Putnam
considered a repurchase program, it would not recommend its
adoption by the Fund's Trustees, so that there was no real
possibility that a stock repurchase program would be
recommended by Putnam;
(c) The Fund did not intend to give serious, substantial
bona fide consideration to a vote by shareholders on open-
ending the Fund and in fact either never considered or did not
consider seriously putting the open-ending of the Fund to a
shareholder vote, although the predicate for a shareholder
vote on open-ending the Fund--a market price reflecting a
substantial discount from book value--existed for practically
the entire period from the date of the IPO to the present;
(d) it was virtually certain that even if the Fund
considered putting the open-ending of the Fund to a
shareholder vote, it would not recommend that the shareholders
vote in favor of open-ending, so that there was no real
possibility that a vote by shareholders on open-ending the
Fund would take place; and
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(e) The Prospectus' representation and covenant that
Putnam would consider a repurchase program or that the Fund
would put open-ending of the Fund to a shareholder vote if a
significant discount from net asset value existed for an
extended period of time, and the implications thereof, were
breached when (1) Putnam failed to give serious, substantial,
and bona fide consideration to a stock repurchase program; and
(2) the Fund failed to put to a shareholder vote the open-
ending of the Fund.
7. These misrepresentations were material because there
is a substantial likelihood that a reasonable investor would
consider them important in deciding whether to invest in the Fund
and because there is a substantial likelihood that the disclosure
of the misrepresentations would have been viewed by the reasonable
investor as having significantly altered the total mix of
information made available about the Fund for the following
reasons, among others:
(a) An open-end fund continuously offers shares to the
public at the per share net asset value--the value of the
fund's holdings divided by the number of shares. Shares of a
closed-end fund "frequently trade at a discount from net asset
value." (Prospectus at 47.) The development of such a
discount--such as the one that the Fund's shares are now
saddled with--exposes an investor in the closed-end fund--
here, members of the Class--to loss. Implementation of a
5
share repurchase program or conversion of the Fund to an open-
end fund is protection from such losses that the Prospectus
held out to plaintiff and the other members of the Class.
(b) Unlike open-end funds, as a closed-end fund, the
Fund is not obligated to buy back shares from investors at net
asset value. Therefore, part of the inherent value of the
Fund was the special procedures described in the Prospectus to
eliminate a significant discount in stock price to net asset
value. These discount elimination procedures represented a
risk-avoidance feature of the Fund's management and implied a
commitment on the part of the Fund to take steps to reduce the
significant discount that developed. Defendants'
representations falsely conveyed to investors a commitment on
the part of Putnam Management--thus, the Fund--to recommend
implementation of the stated procedures to address a net asset
value discount problem should it arise. In fact, the discount
elimination procedures set forth in the Prospectus were a
sham.
(c) The inherent value of a closed-end fund that does
not have a mechanism in place to address the discount problem
is lower than that of a closed-end fund with such a mechanism.
The fact that prevailing market conditions and other factors
that had been extant for a substantial period of time before
the effective date of the Prospectus made it virtually certain
that Putnam Management would not give serious consideration to
recommending a share repurchase program to the Trustees and
that shareholders would never be presented with a vote on
6
whether to convert the Fund to an open-end fund
notwithstanding a value attributable to the discount
elimination procedures described in the Prospectus. That
these material misrepresentations were made to the investors
in the Prospectus meant that the members of the Class paid an
artificially high price for their shares in the Fund.
8. Since September 1995 a discount of 10% or greater
(at times as great as 16%) from the net asset value of the Fund has
existed, but no action has been taken by defendants to alleviate
it. The Fund has failed to take action in accordance with its
promises set forth in the Prospectus, which constitutes a
contractual breach of the Fund's obligations set forth therein.
JURISDICTION AND VENUE
9. This action arises under section 11 of the
Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77k; and
principles of common law.
10. This Court has jurisdiction over the subject matter
of this action pursuant to section 22 of the Securities Act, 15
U.S.C. § 77v; and sections 1331 and 1337(a) of the Judicial Code,
28 U.S.C. §§ 1331, 1337(a); and under the Court's supplemental
jurisdiction, 28 U.S.C. § 1367.
11. Venue is proper in this District under section 22 of
the Securities Act. The wrongs alleged in this Complaint occurred,
in substantial part, in this District, including the offer and sale
of securities and the preparation and dissemination to the
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investing public of misleading information, particularly in a
registration statement of which a prospectus was a part and
pursuant to which securities were offered.
12. In connection with the acts, conduct, and other
wrongs complained of herein, defendants, directly and indirectly,
used the means and instrumentalities of interstate commerce and the
United States mails and the facilities of the national securities
markets.
BACKGROUND
13. This is a securities class action on behalf of a
class consisting of those individuals and entities who purchased
common stock of the Fund pursuant to a registration statement
filed under the Securities Act and the Investment Company Act of
1940, 1933 Act File No. 33-57901 and 1940 Act File No. 811-7253,
with the SEC and which, as amended, became effective on June 26,
1995 (the "Registration Statement").
14. The Registration Statement contained the Prospectus,
which was distributed in connection with the sale of the Fund
common stock.
15. Shares of the Fund's common stock are "securities"
within the meaning of the Securities Act. The Registration
Statement covered the sale of 3,700,000 shares (including over-
allotments) of the Fund common stock at $25.00 per Share, raising
total proceeds of approximately $92,500,000. The Fund's common
stock is listed and traded on the New York Stock Exchange under the
symbol "PCV." The Registration Statement and Prospectus were false
and misleading as set forth herein.
8
THE PARTIES
Plaintiff
16. Plaintiff Marion Finkel purchased 550 shares of the
Fund common stock sold pursuant to the Registration Statement at
$25.00 per share for $13,750.00. The purchase was made on June 26,
1995 and was from a selected dealer of an underwriter of the IPO.
Defendants
17. Defendant the Putnam Convertible O pportunities and
Income Trust, referred to herein as the "Fund," is a Massachusetts
business trust organized on February 23, 1995 pursuant to an
agreement and declaration of trust that operates as a diversified,
closed-end, management investment company. Its principal place of
business is in Boston, Massachusetts,
18. Defendant George Putnam was, at the time of the IPO,
the President and Principal Executive Officer of the Fund as well
as the Chairman of its board of directors and a Trustee of the
Fund. At that time he was also Managing Director of Putnam
Management, the manager of the Fund. He signed the Registration
Statement.
19. Defendant William F. Pounds was, at the time of the
IPO, Treasurer and Principal Financial Officer of the Fund, Vice
Chairman of the Fund's board of directors, as well as a Trustee of
the Fund. He signed the Registration Statement.
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20. Defendant John D. Hughes was, at the time of the IPO,
Vice Chairman of the Fund's board of directors, and Treasurer and a
Trustee of the Fund. He signed the Registration Statement.
21. Defendant Paul G. Bucuvales was, at the time of the
IPO, Assistant Treasurer and Principal Accounting Officer of the
Fund. He signed the Registration Statement.
22. Defendants Jameson A. Baxter, Hans H. Estin, John A.
Hill, Elizabeth T. Kennan, Lawrence J. Lasser, Robert E. Patterson,
Donald S. Perkins, George Putnam, III, Eli Shapiro, A. J. C.
Smith, and W. Nicholas Thorndike were each, at the time of the IPO,
Trustees of the Fund. Each of these Trustees of the Fund signed
the Registration Statement.
23. The Trustees of the Fund are each "responsible for
the general oversight of the Fund's business." (Prospectus at 31.)
Defendants Baxter, Hill, Patterson, Putnam, Pounds and Thorndike
are members of the Executive Committee of the Trustees.
(Prospectus at 35.)
24. The Underwriter Defendants consist of the major
underwriters of the IPO, who are acting as representatives of all
of the underwriters, each purchasing shares for resale as indicated
below:
Smith Barney Inc.. .................... 190,400
A.G. Edwards & Sons, Inc................ 190,400
Advest, Inc. .......................... 190,400
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Dain Bosworth Incorporated. ............ 190,400
Fahnestock & Co. Inc ................... 190,400
First of Michigan ...................... 190,400
Gruntal & Co., Incorporated ........... 190,400
Kemper Securities, Inc. ................ 190,400
Legg Mason Wood Walker Incorporated .... 190,400
The Robinson Humphrey Company, Inc. .... 190,400
Sutro & Co. Incorporated. .............. 190,400
25. Each of the purchases by the Underwriter Defendants
identified in paragraph 24 was for resale as part of the
underwriting of the IPO.
26. The Underwriter Defendants identified in paragraph 24 hereof are sued individually and as representatives of a
defendant class consisting of all of the underwriters of the IPO.
PLAINTIFF'S PLAINTIFF CLASS AND SUBCLASS ALLEGATIONS
THE PLAINTIFF CLASS
27. Plaintiff brings this action on her own behalf and
as a plaintiff class action pursuant to rules 23(a) and 23(b)(3) of
the Federal Rules of Civil Procedure on behalf of a plaintiff class
(the "Plaintiff Class") consisting of those individuals and
entities who purchased the Fund's shares on the IPO up to and
including June 19, 1996 (the "Class Period"). Excluded from the
Plaintiff Class are defendants; the members of the immediate family
of each of the Individual Defendants; any subsidiary, parent, or
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other affiliate of a corporate defendant; the members of the
Defendant Underwriter Class; and the legal representatives, heirs,
successors, or assigns of any such excluded party.
28. Because 3,700,000 shares of the Fund's common stock
were issued pursuant to the IPO and because after the IPO the Fund
had, and still has, in excess of 3,700,000 shares of common stock
issued and outstanding, a substantial number of which are actively
traded on the New York Stock Exchange, the members of the Plaintiff
Class are so numerous that joinder of all members is impracticable.
While the exact number of members of the Plaintiff Class can only
be determined by appropriate discovery, plaintiff believes that
Plaintiff Class members number at least in the thousands.
29. Plaintiff's claims are typical of the claims of the
other members of the Plaintiff Class. Plaintiff and all of the
other members of the Plaintiff Class sustained damages as a result
of defendants' wrongful conduct complained of herein.
30. Plaintiff will fairly and adequately protect the
interests of the members of the Plaintiff Class and has retained
counsel competent and experienced in class and securities
litigation.
31. A class action is superior to other available
methods for the fair and efficient adjudication of this
controversy. Because the damages suffered by individual Plaintiff
Class members may be relatively small, the expense and burden of
individual litigation make it virtually impossible for Plaintiff
Class members individually to seek redress for the wrongful conduct
alleged herein.
12
32. Common questions of law and fact exist as to all
members of the Plaintiff Class and predominate over any questions
solely affecting individual members of the Plaintiff Class. Among
the questions of law and fact common to the Plaintiff Class are:
(a) whether the Registration Statement (including the
Prospectus) contained false and misleading information;
(b) whether section 11 of the Securities Act was
violated by defendants' acts as alleged herein;
(c) whether defendants George Putnam, William F. Pounds,
John D. Hughes, and Paul G. Bucuvales were control persons of
the Fund within the meaning of section 15 of the Securities
Act;
(d) whether the Fund breached its contract with the
Class members; and
(e) whether the members of the Plaintiff Class have
sustained damages and, if so, the appropriate measure thereof.
33. Plaintiff knows of no difficulty that will be
encountered in the management of this litigation that would
preclude its maintenance as a class action.
34. The names and addresses of the purchasers of the
Fund common stock during the Class Period are available from the
Fund's transfer agent. Notice can be provided to such record
owners via first class mail using techniques and a form of notice
similar to those customarily used in class actions.
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DEFENDANT CLASS ALLEGATIONS
35. The Underwriters Defendants identified in paragraph
24 hereof are sued both individually and as representatives of a
defendant class (the "Defendant Class") consisting of the firms
that underwrote the IPO.
36. There are 49 members of the Defendant Class. The
members of the Defendant Class are so numerous and geographically
dispersed that joinder of all such Class members is impracticable.
37. There are questions of law or fact common to the
Defendant Class that predominate over any questions affecting only
individual members. These common questions include:
(a) whether the Registration Statement (which included
the Prospectus), failed to disclose material facts or
misrepresented material facts;
(b) whether the Underwriter Defendants and the other
members of the Defendant Class violated section 11 of the
Securities Act; and
(c) the measure by which damages may be determined in
connection with the Defendant Class's violations of section 11
of the Securities Act.
38. The defenses of the Underwriter Defendants to the
claims of plaintiff and the Plaintiff Class are typical of the
defenses of the other members of the Defendant Class to such
claims. It is expected that the Underwriter Defendants will retain
14
competent and experienced counsel in defense of this litigation,
and will fairly and adequately protect the interests of the
Defendant Class.
39. A class action against the Defendant Class is
superior to other available methods for the fair and efficient
adjudication of this controversy. The certification of a defendant
class in connection with the wrongs alleged herein will not present
any unusual difficulties or burdens. Absent certification of a
defendant class there exists the possibility of a multiplicity of
actions, the risk of inconsistent determinations, and the risk of
inconsistent standards to which the individual members of the
Defendant Class may be held.
FACTS
40. The Fund operates as a closed-end, diversified
management investment company managed and administrated by Putnam
Management pursuant to a management and an administration contract.
(Prospectus at 38.) Putnam Management "has been managing mutual
funds since 1937. The firm serves as the investment manager for
the funds in the Putnam family, with approximately ...$5 billion in
assets in 16 closed-end funds." (Prospectus at 17.) Management of
the Fund is overseen by the Trustees, who "are responsible for the
general oversight of the Fund's business." (Prospectus at 31.)
41. A closed-end investment fund is one in which shares
of beneficial interest in the fund in the form of stock are sold in
an offering, which are then publicly traded. For example, an
investor sells his investment in the Fund by trading his Fund
15
shares on the New York Stock Exchange, at a price determined by the
interplay of buyers and sellers--the market demand--and not by the
value of the assets of the Fund. This compares to an open-end
fund, which itself continuously offers shares to the public and
agrees to repurchase such shares at the net asset value of such
shares.
42. Shares of a closed-end fund often drop in price
after the initial sale of the stock to the public because operating
expenses diminish the net asset value of the fund, creating a
discount. This discount can and frequently does, as here, develop
with respect to the net asset value of a closed-end fund, when the
market price per share is less than and does not reflect the net
asset value of the fund. By contrast, an open-end fund suffers no
such deterioration because its market price equals its net asset
value. Accordingly, many investors considering the initial
offering of a closed-end fund and the initial offering of an open-
end fund will prefer the latter, especially when other things,
particularly the investment objectives, management, and investment
adviser, are equal.
43. The discount elimination provisions set forth in the
Prospectus are for the benefit of the Fund's shareholders, not the
Fund's management. It is in the interest of the management of the
Fund for the Fund to remain a closed-end fund, i.e., to not convert
to open-end fund, and to avoid repurchasing shares at net asset
value. This way the Fund's assets remain intact, removed from the
threat of forced liquidation to meet redemptions by shareholders.
16
THE FUND
44. The Fund was initially sold to the public pursuant
to a Registration Statement made effective on June 26, 1995. All
of the underwriters identified in paragraph 24 hereof plus the
other members of the Defendant Class of underwriters were
underwriters of that IPO.
45. The Fund, anticipating that a slight discount would
develop immediately following the IPO, explained in the Prospectus
that
Shares of closed-end investment companies often trade at
a discount to their net asset values, and the Fund's
Shares may likewise trade at a discount. The risks
associated with this characteristic of closed-end
investment companies may be greater for investors
expecting to sell shares of a closed-end investment
company soon after the completion of an initial public
offering of the company's shares. The net asset value
per Share will be reduced immediately following the
offering as a result of organizational and offering
expenses.
(Prospectus at 15-16.) The organizational and IPO expenses, which
approximated $793,816, (Prospectus at 17), represented 0.866% of
the gross proceeds raised on the IPO. This is a comparatively
small amount because it did not include the underwriters' sales
commission of 6% of the IPO price per share, an expense that is
often paid for out of the proceeds of an initial public offering.
Thus, investors were cautioned to anticipate an initial discount in
the net asset value of 0.866%. Indeed, this level was reached by
the fourth week of the Fund's trading after the IPO, in mid-July
1995.
17
46. A discount--particularly the large discount involved
here--is not desirable. Investors would not buy shares of a
closed-end fund at an initial price equal to its assets' value if
they knew that the share price would be sharply discounted to the
asset value. Anticipating this investor concern, the Fund included
in the Prospectus detailed descriptions of two different procedures
(described below) (the "discount elimination procedures") to follow
if a significant discount in share price/net asset value developed
over an extended period of time. The inclusion of this language
provided reassurance to investors that if their shares traded at a
large discount, there was a realistic possibility that they could
obtain the net asset value for their shares, either by a share
repurchase program or by a conversion of the Fund to an open-end
investment company, whereupon their shares would be redeemable on
demand at net asset value.
47. The Prospectus explained to investors that as
shareholders, they would be entitled to participate in certain Fund
management decisions, including the decision to convert the Fund to
an open-end one. The Prospectus provided in the section entitled
"Description of Shares" that describes "Certain Provisions in the
Agreement and Declaration of Trust," that
The affirmative vote of at least three-fourths of the
outstanding Shares is required to authorize any of the
following actions: . . . (4) conversion of the Fund to an
open-end investment company, or (5) amendment of the
Agreement and Declaration of Trust to reduce the three-
fourths of the total number of authorize the actions on
(1) through (5) above, unless with respect to any of the
foregoing such action has been authorized by the
affirmative vote of three-fourths of the total number of
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Trustees and three-fourths of the total number of
Continuing Trustees ..., in which case the affirmative
vote of a majority of the outstanding voting securities
of the Fund is required in connection with the actions in
(1) through (4) above ...
(Prospectus at 46.)
48. The Prospectus then described the mechanisms the
Fund had in place to address the net asset value discount problem.
In the section entitled "Repurchase of Shares; Conversion to Open-
End Status," the Prospectus provided:
Shares of closed-end investment companies often
trade at a discount to their net asset values, and the
Fund's Shares may likewise trade at a discount to their
net asset value. The market price of the Fund's Shares
will be determined by such factors as relative demand for
and supply of such Shares in the market, the Fund's net
asset value, general market and economic conditions, and
other factors beyond the control of the Fund.... Although
the Fund's shareholders will not have the right to redeem
their Shares, the Fund may take action to repurchase
Shares in the open market or make tender offers for its
Shares at their net asset value. In the event that the
Shares trade at a significant discount to their net asset
value for an extended period of time, Putnam [Management]
will consider recommending a share repurchase program to
the Trustees. A decision on whether to recommend a share
repurchase program will depend on prevailing market
conditions and other factors. Accordingly, there can be
no assurance that Putnam will recommend a share
repurchase program.
(Prospectus at 47.)
49. Conversion of the Fund to an open-end investment
fund upon share-holder approval was an alternate option to reduce a
discount, as described in this same paragraph of the Prospectus:
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The Fund may, by vote of at least three-fourths of the
outstanding Shares (or, under certain circumstances, such
lesser percentage as described above under "Description
of Shares - Certain Provisions in the Agreement and
Declaration of Trust"), be converted to an open-end
investment company, which would make the Fund's Shares
redeemable upon demand of shareholders at the Shares' net
asset value.
(Id.)
50. When read as a whole, the language in the Prospectus
informed investors that the Fund had procedures in place designed
to protect the investors' interest by at least making them whole if
the discount grew significant through converting the Fund to an
open-end fund or repurchasing shares at the net asset value, and
that they would have the ultimate decision-making power. Either
they could tender shares pursuant to a share repurchase program or
they could vote on whether to convert the Fund to an open-end fund.
51. As of June 14, 1996, the Fund's shares traded at a
discount of 14.94% to the Fund's net asset value (the Fund
calculates its discount on a weekly basis). In fact, the shares
have been trading at a double-digit discount since September 1995--
a significant discount for an extended period of time. For the
three months immediately preceding the Complaint's filing date, the
Fund's discount averaged 15.2 %; the average discount for the past
nine months was 13.25%. Thus, within the past six months there has
been a gap of roughly $12.5 million to $13.6 million between the
market price of the Fund's shares and its net asset value.
20
52. Notwithstanding that the Fund's shares have been
trading at a significant discount, for an extended period of time,
thus triggering the discount elimination procedures described
herein and set forth in the Prospectus, the Fund has failed to take
any action to alleviate this discount, contrary to the promises and
reassurances in the Prospectus.
53. Putnam Management has not recommended to the Fund's
Trustees that a share repurchase program be undertaken nor has the
Fund either commenced a share repurchase program or put the issue
of conversion of the Fund to an open-end investment fund to
shareholder vote. In none of its public filings or public
statements has the Fund stated or otherwise indicated that it has
or intends to address this significant discount.
54. The failure of Putnam Management to recommend to the
Fund's Trustees that a share repurchase program be undertaken and
of the Fund to put conversion of the Fund to an open-end investment
fund to shareholder vote constitutes a breach of the Fund's
obligations to the Class under the Prospectus.
THE FALSE AND MISLEADING
NATURE OF THE PROSPECTUS
55. The Prospectus for the Fund was false and misleading
because despite the provisions therein concerning steps that Putnam
Management and the Fund would take in the event of the development
of a significant discount between the net asset value and
the market price of the Fund shares for an extended period of time
to address this net asset value discount problem, prevailing market
conditions and other factors that had been extant for a substantial
21
period of time before the effective date of the Prospectus made it
virtually certain that Putnam would not recommend a share
repurchase program or put open-ending of the Fund to shareholder
vote. Rather, that language in the Prospectus, implying a reduced
level of risk to investors, was illusory, not a special feature
designed to protect investors.
56. The Prospectus failed to disclose that despite
representations to the contrary as described in the Prospectus--
that in the event of a significant discount in the net asset value,
Putnam Management would recommend to the Fund's Trustees that the
Fund commence a repurchase program or put to a shareholder vote
whether to convert the Fund to an open-ended fund--the Fund would
in fact take no action to get rid of the discount in the net asset
value that has been in the double-digits since September 1995, and
that for the last six months has averaged 15.2% (reaching as low
as 16.19% on March 22, 1996).
57. Defendants' representations in the Prospectus that
Putnam would consider recommending a share repurchase program if
the shares of the Fund trade at a significant discount to their net
asset value for an extended period of time and that the Fund would
consider putting to a shareholder vote whether to convert the Fund
to an open-end investment company when a significant market
discount from net asset value arose were false and misleading
because, when the Prospectus became effective, prevailing market
conditions and other factors that had been extant for a substantial
22
period of time before the effective date Of the Prospectus made it
virtually certain that Putnam would not recommend a share
repurchase program or that the Fund would not put to a vote by the
shareholders of the Fund whether to open-end the Fund.
58. In addition, the Prospectus was false and misleading
for the reasons set forth in paragraph 6 above.
59. These misrepresentations were material because there
is a substantial likelihood that a reasonable investor would
consider them important in deciding whether to invest in the Fund
and because there is a substantial likelihood that the disclosure
of the misrepresentations would have been viewed by the reasonable
investor as having significantly altered the total mix of
information made available about the Fund for the following
reasons, among others:
(a) An open-end Fund continuously offers shares to
the public at the per share net asset value--the value of
the fund's holdings divided by the number of shares.
Shares of a closed-end fund "frequently trade at a
discount from net asset value." (Prospectus at 47.) The
development of such a discount--such as the one that the
Fund's shares are now saddled with--exposes an investor
in the closed-end fund--here, members of the Class--to
loss. Implementation of a share repurchase program or
conversion of the Fund to an open-end fund is the
protection the Prospectus offers the members of the Class
from such losses.
23
(b) Unlike open-end funds, the Fund is not obligated
to buy back shares from investors at net asset value.
Therefore, part of the inherent value of the Fund is the
procedures described in the Prospectus to eliminate a
significant discount in stock price to net asset value.
These discount elimination procedures represent a risk-
avoidance feature of the Fund's management and imply a
commitment on the part of the Fund to take steps to
reduce the significant discount that developed.
Defendants' representations falsely conveyed to investors
a commitment on the part of the Fund to commence the
stated procedures to address the net asset value discount
problem. In fact, the discount elimination procedures
set forth in the Prospectus are a sham.
(c) The inherent value of a closed-end fund that
does not have a mechanism in place to address the
discount problem is lower than that of a closed-end fund
with such a mechanism in place. The fact that prevailing
market conditions and other factors that had been extant
for a substantial period of time before the effective
date of the Prospectus made it virtually certain that
Putnam Management would not recommend a share repurchase
program and that shareholders would never be presented
with a vote on whether to convert the Fund to an open-end
fund strips away the value attributable to such discount
elimination procedures. That these material
misrepresentations were made to the investors in the
Prospectus means that the members of the Class paid an
artificially high price for their shares in the Fund.
24
(d) The failure of the Fund to proceed with the
discount elimination procedures set fourth in the
Prospectus to cure its large net asset value discount
reveals that the Fund chooses to place greater emphasis
on keeping control of its captive asset base than on
improving shareholder value.
FIRST CLAIM FOR RELIEF
Against All Defendants
(Section 11, Securities Act)
60. Plaintiff incorporates by reference the allegations
of paragraphs 1 through 59 of this Complaint.
61. The Registration Statement (including the
Prospectus), which became effective on June 26, 1995, was false and
misleading, omitted to state other facts necessary to make the
statements therein not misleading, and failed to adequately
disclose material facts, as set forth herein.
62. Plaintiff and the other members of the Plaintiff
Class who acquired shares of the Fund that were the subject of the
Registration Statement did not know of the omissions or misleading
statements in the Registration Statement when such shares were
acquired.
63. The Fund is the registrant for the IPO and signed
the Registration Statement as the issuer of the stock sold in the
IPO.
64. Defendants George Putnam, William F. Pounds, John D.
Hughes, Paul G. Bucuvales, Jameson A. Baxter, Hans H. Estin, John
25
A. Hill, Elizabeth T. Kennan, Lawrence J. Lasser, Robert E.
Patterson, Donald S. Perkins, George Putnam, III, Eli Shapiro,
A.J.C. Smith, and W. Nicholas Thorndike each signed the
Registration Statement.
65. Each of the Underwriter Defendants listed in
paragraph 24 hereof and each of the other members of the Defendant
Class were underwriters of the IPO within the meaning of the
Securities Act.
66. Plaintiff and the other members of the Plaintiff
Class acquired the Fund stock issued pursuant or traceable to the
Registration Statement.
67. By reason of the foregoing, pursuant to section 11
of the Securities Act, each defendant is liable to plaintiff and
the other members of the Plaintiff Class for the difference between
the price paid for the stock and either the current value of such
stock if currently held by plaintiff or the Plaintiff Class member
or the price at which such stock was disposed of in the market if
disposed of before the commencement of this action.
68. This action was brought within one year of the
violations of section 11 of the Securities Act or within one year
after the discovery of the untrue statements or the omissions in
the Registration Statement complained of, or after such discovery
should have been made by the exercise of reasonable diligence, and
within three years from the date on which the shares were bona fide
offered to the public.
26
SECOND CLAIM FOR RELIEF
Against Defendants George Putnam, William F. Pounds,
John D. Hughes, and Paul G. Bucuvales
(Section 15, Securities Act)
69. Plaintiff incorporates by reference the allegations
of paragraphs 1 through 68 of this Complaint.
70. (a) Defendant George Putnam was, at the time of the
IPO, the President, Principal Executive Officer, and a Trustee of
the Fund, the Chairman of its board of directors of the Fund, as
well as Senior Vice President of Putnam; (b) defendant William F.
Pounds was, at the time of the IPO, Treasurer and Principal
Financial Officer of the Fund, its board's Vice Chairman, as well
as a Trustee of the Fund; (c) defendant John D. Hughes was, at the
time of the IPO, Vice Chairman of the Board and a Trustee of the
Fund; and (d) defendant Paul G. Bucuvales was, at the time of the
IPO, Assistant Treasurer and Principal Accounting Officer of the
Fund. As such, these individual defendants each had the power and
authority to cause or to prevent the wrongful conduct complained of
herein and were thereby "control persons" of the Fund within the
meaning of section 15 of the Securities Act.
71. As control persons of the Fund, the individual
defendants described above in paragraph 70 are jointly and
severally liable with and to the same extent as the Fund to
plaintiff and the other members of the Plaintiff Class for the
Fund's violations of section 11 of the Securities Act.
27
THIRD CLAIM FOR RELIEF
Against the Fund
(Breach of Contract)
72. Plaintiff incorporates by reference the allegations
of paragraphs 1 through 68 of this Complaint.
73. As part of its covenant with purchasers of shares,
the Fund agreed that if a significant discount in the market price
of the Fund's shares from their net asset value existed for an
extended period of time, either (1) Putnam would recommend to the
repurchase program or (2) the Fund would put to the shareholder
vote the question of whether to convert the Fund to an open-end
investment company.
74. Although all of the conditions precedent to the
actions to be taken by Putnam and/or the Fund as described in the
foregoing paragraph 73 have occurred, Putnam has failed to
recommend a share repurchase program and the Fund has failed to put
to a shareholder vote the question of whether to convert the Fund
to an open-end investment company. As a result, the Fund breached
the terms of its contract with plaintiff and the other members of
the Class.
75. The breach described in paragraph 74 above by the
Fund of the terms of its contract with plaintiff and the other
members of the Class is substantial--plaintiff and the other
members of the Class have been for an extended period of time and
continue to be subjected to a significant discount from the Fund's
net asset value--which the Fund refuses to alleviate, contrary to
28
its promise to plaintiff and the other members of the Class in the
Prospectus.
76. As a result of the Fund's breach of its contract,
plaintiff and the other members of the Class have been damaged.
Plaintiff and the other members of the Class have been deprived of
their ability to tender their shares to the Fund either pursuant to
a repurchase program or on demand, at net asset value.
77. Plaintiff and the other members of the Class have
suffered damages as a result of the Fund's breach of its contract.
PRAYER FOR RELIEF
WHEREFORE, plaintiff, on behalf of herself and all the
other members of the Plaintiff Class, prays for judgment as
follows:
(a) Declaring this action to be a proper plaintiff class
action maintainable pursuant to rule 23(b)(3) of the Federal
Rules of Civil Procedure and declaring Plaintiff to be a
proper representative of the Plaintiff Class;
(b) Declaring this action to be a proper defendant class
action maintainable pursuant to rule 23(b)(3) of the Federal
Rules of Civil Procedure and declaring the Underwriter
Defendants to be a proper representative of the Defendant
Class;
(c) On the first claim for relief, against all
defendants, awarding plaintiff and the other members of the
Plaintiff Class damages in an amount as yet unascertained;
29
(d) On the second claim for relief, against the
individual defendants George Putnam, William F. Pounds, John
D. Hughes, and Paul G. Bucuvales, awarding plaintiff and the
other members of the Plaintiff Class damages in an amount as
yet unascertained;
(e) On the third claim for relief, against the Fund,
awarding plaintiff and the other members of the Plaintiff
Class damages in an amount as yet unascertained; or, in the
alternative, awarding plaintiff and the other members of the
Plaintiff Class rescission of their purchases and awarding
them the consideration that they paid for the Fund's shares
(less any income received thereon) or, if such member of the
Plaintiff Class no longer owns such stock, for rescissionary
damages in an amount as yet unascertained;
(f) Awarding plaintiff and the other members of the
Plaintiff Class their costs and expenses in this litigation,
including reasonable attorneys' fees and experts' fees and
other costs and disbursements; and
(g) Awarding plaintiff and the other members of the
Plaintiff Class such other and further relief as may be just
and proper under the circumstances.
30
DEMAND FOR TRIAL BY JURY
Pursuant to rule 38(b) of the Federal Rules of Civil
Procedure, plaintiff hereby demands trial by jury of all issues.
Dated: New York, New York
June 19, 1996
RABIN & GARLAND
/s/
By:____________________________
Joseph P. Garland # JG-0888
Jacquiline Sailer
275 Madison Avenue
New York, New York 10016
(212) 682-1818
Attorneys for Plaintiff
31
CERTIFICATE OF PLAINTIFF
I, Marion Finkel, do hereby certify that:
I have reviewed the within complaint and authorized its
filing.
I did not purchase the shares of common stock of Putnam
Convertible Opportunities and Income Trust ("Putnam") that are the
subject of the complaint at the direction of my counsel or in order
to participate in any private action arising under the Securities
Exchange Act of 1934, as amended by the Private Securities
Litigation Reform Act of 1995.
I am willing to serve as a representative party on behalf
of a class, including providing testimony at deposition and trial,
if necessary.
During the Class Period I engaged in the following
transactions involving the common stock of Putnam as follows:
TRANSACTION TRADE DATE NO. OF SHARES PRICE/SHARE
----------- ---------- ------------- -----------
Bought 6/26/95 550 $25
I have not engaged in any other transaction involving the
common stock of Putnam.
I served as a representative party on behalf of a class
in the USX Corporation Steel Stock Securities Litigation, C.A. No.
93-1246 (W.D. Pa.), but have neither sought to serve nor served as
a representative party on behalf of a class in any other action
brought under the federal securities laws that was filed during the
three-year period preceding the date of this certification.
I will not accept any payment for serving as a
representative party on behalf of a class beyond my pro rata share
of any recovery, except as ordered or approved by the court in
accordance with section 27(a)(4) of the Securities Act of 1933 and
section 21D(a)(4) of the Securities Exchange Act of 1934, as
amended by the Private Securities Litigation Reform Act of 1995.
Nothing herein shall be construed to be or constitute a
waiver of my attorney-client privilege.
I certify under penalty of perjury that the foregoing is
true and correct.
Executed on June 19, 1996.
/s/
By: ______________________
Marion Finkel