◆ SpookStack

Investments and were to be surrendered as part of such merger. Subsequent to the transaction, it was determined that the opinion of counse! was based on erroneous information supplied to such counsel by the Investment Adviser and that the transaction was, in fact, a tender offer and consequently the shares acquired were in violation of the foregoing investment restriction. in addition, the SEC staff has alleged that without investments’ participation in the tender offer, the tender offer may not have been consummated. Because of the issuance of additional shares by Nigel, investments has been in compliance with the investment restriction since April 14, 1989. Ata meeting of the Board of Directors in January 1988, the Board initially concluded that based on very preliminary information, the Investment Adviser did not act with willful misfesance, gross negligence or bad faith in connection with the Nigel transaction. At the same meeting, the Investment Adviser advised the Board of Directors that in its view the price per share of the Nigel stock was then at an al! time low and that certain events involving Nigel, including a recent change in the management of Nigel, could cause a recovery in its price. Therefore, notwithstanding the investment restriction prohibiting holding more than 10%. of the outstanding securities of any class of any issuer, and in an attempt to maximize shareholder value, the Board of Directors set August 1, 1989 as the date by which the Fund must come into compliance with the 10% ownership limitation so as to allow the Investment Adviser a degree of flexibility in its attempt to seek improvement in the Nigel investment, and to monitor the effects of recent developments involving Nigel. The Board of Directors at its meeting in June. 1988 concluded that the Investment Adviser acted in good faith and at least one disclosure document dated prior to the Board of Directors’ meeting indicated the same determination by the Board. Such determinations were made primarily on the basis of the Board of Directors’ review of the foregoing jegal opinion and information supplied by Dr, Brenna, the.controlling person of the Investment Adviser, with respect to his understanding of the facts and circumstances surrounding the Nigel transaction as well as on the basis of the indemnification provision of the advisory agreement. Although the Investment Advisory Agreement by and between the Investment Adviser and Investments provides that the Investrnent Adviser has no liability for transactions under circumstances in which it does not act with willful misfeasance, gross negligence or bad faith, the Board of Directors nevertheless requested the investment Adviser to come into compliance with its investment restriction no later than August 1, 1989 and further directed that an independent counsel be appointed at the time that Investments shall come into compliance but not later than August 1, 1989, to determine whether the investment Adviser had: any liability with respect to the Nigel transaction, and if so, the extent of such liability. In October 1988, the Board of Directors restated its conclusion. reached at the meeting of the Board of Directors held on June 28, 1988, that, based on information that it had at that time, the Investment Adviser had acted honestly and in good faith in the Nigel transaction and that the Fund suffered no damage by acquiring additional shares of Nigel when such acquisition is compared with retention of the Aflease stock. The Board aiso decided at the October 1988 meeting that, based upon ail facts and circumstances known at the time of the meeting and as a result of discussions with counsel, the preliminary nature of the conclusions made at the June 28, 1988 meeting should be emphasized. The Board in its October 1988 meeting reiterated its intent, previously expressed during its January 29, 1988 meeting, that an independent consultant agreeable to the Board and the Adviser shall be appointed to examine the Nigel transaction, such examination to cover both the question of liability and the question of damages. Contrary to its action, in January, 1988, the Board of Directors, at its October 1988 meeting, determined that the independent consultant would be an attorney familiar with the Investment Company Act of 1940 and not an accountant or other non-lawyer. The Board, at its October 1988 meeting, also determined that until a conclusion is made by such attorney, the Board of Directors would not be in a position to make any conclusions as to the liability of the Investment Adviser for any potential josses incurred in connection with the Nigel transaction. _ 18 SST