An unusual fight pitting two groups of fund directors against each other is providing the SEC with its first public test of the agency's campaign to strengthen the role of independent fund directors.

Four independent directors of the closed-end Austria Fund have filed a complaint with the SEC contending that the fund's adviser, Alliance Capital Management LP of New York, and the fund's directors, may have violated the key federal securities law that governs the operations of mutual funds and closed-end funds.

The four directors - closed-end fund investor Ronald Olin of Asheville, N.C. and three business associates - alleged that Alliance and the fund's other directors may have violated their fiduciary duty to shareholders by taking steps the four Olin directors contend made an end-run around a shareholder vote earlier this year.

The Olin directors made their allegations in a letter dated March 30 to Paul Roye, director of the SEC's division of investment management. A copy of the letter was included in an SEC filing the Olin directors made on Oct. 12. The Austria Fund disclosed the split among the directors in a preliminary proxy statement the fund filed Nov. 5. The proxy statement also revealed that an Austria Fund shareholder has sued the fund and the 10 non-Olin directors.

Both the Olin directors' allegations and the lawsuit arise from a series of structural changes that a majority of the Austria Fund's directors approved earlier this year. On Jan. 13, Austria Fund shareholders elected Olin and three colleagues, Ralph Bradshaw, Gary Bentz and William Clark, as directors. The Olin directors defeated four incumbent members of the Austria Fund board, including Dave H. Williams, chairman of the board of Alliance Capital Management Corp. of New York.

Then, at a meeting March 19, the Austria Fund board voted to expand from 11 to 14 members. The proposal to expand the board passed by a vote of six to four, the Olin directors said in their letter to Roye. Those directors who voted in favor of the proposal included Reba W. Williams, wife of Dave H. Williams and a director of Alliance Capital Management Corp., John Carifa, Alliance president and chief operating officer, and a board member affiliated with the Austria Fund's sub-adviser, BAI Fondsberatung Ges.m.b.H. of Vienna, the Olin directors alleged.

The same six-to-four majority elected as new directors Dave H. Williams and two of the former directors who Olin and his colleagues defeated in the January proxy fight, according to the Olin directors. After he was selected as an Austria Fund director, Dave H. Williams was elected chairman by the board.

The board majority then approved a series of structural changes which the Olin directors contend have the effect of disenfranchising shareholders. These changes included a move which the Olin directors say enhanced Dave H. Williams' authority as chairman of the fund's board.

The Austria Fund board majority in June also approved a requirement that directors have substantial contacts with Austria. That move has come under fire as one part of a class action lawsuit which Austria Fund shareholder William Steiner filed against Williams and other Austria Fund directors on Oct. 1 in U.S. District Court in New York.

The non-Olin directors' moves violated state and federal securities laws, according to Steiner. The Austria-affiliated requirement and other moves by the non-Olin directors are an attempt to make it impossible to oust the non-Olin directors, Steiner alleged.

The non-Olin directors "began to manipulate the corporate machinery for their own benefit" after Williams and other directors were defeated in the January proxy vote, Steiner alleged.

The allegations against Alliance, its executives and the fund directors are without merit, according to a spokesperson for Alliance. The spokesperson declined further comment. The independent directors' lawyer, Earl Weiner of Sullivan & Cromwell of New York, declined to comment, citing the pending litigation with Steiner.

Steiner's lawyer, Jeffrey Haber of Wechsler Harwood Halebian & Feffer LLP of New York, declined to comment other than to say that Steiner was not associated with Olin. Olin was travelling and could not be reached for comment.

The Austria Fund had approximately $84 million in assets under management as of Sept. 30, according to Lipper of Summit, N.J. The fund was trading at a discount of 18.5 percent as of Nov. 5. The fund's one-year return through Nov. 5 ranked it third out of 10 funds in its peer group, Lipper reported. The fund's five-year return is the lowest of 10 funds, according to Lipper.

The Olin directors' complaint to the SEC marks the second time recently that the agency has been asked to step into a fight involving fund directors and a fund adviser in which the directors contend that the adviser may have violated federal securities laws. In 1997, the independent directors of the Navellier Series Trust Aggressive Small Cap Fund asked the SEC to investigate allegations that Navellier Management of Incline Village, Nev. may have violated federal securities laws. SEC examiners reviewed the matter but took no public action in the case.

The lack of public action in that case by the SEC generated criticism from the mutual fund industry. The Navellier case was one of the sparks which led the SEC to propose a series of new and revised rules last month to strengthen the role of independent directors. (MFMN 10/18/99) Action on the proposals is not expected before next year.

Chris Ullman, a spokesperson for the SEC, declined comment on the Austria Fund matter, citing the SEC's policy of keeping information about complaints and investigations confidential. The SEC has not filed suit against Alliance or any directors.

The events at the Austria Fund are an example of how pervasive the influence of a fund adviser can be, said Phillip Goldstein of Pleasantville, N.Y., a closed-end fund investor and shareholder in the Austria Fund. The proposed SEC rules, which would require a majority of independent directors on fund boards, are more cosmetic than substantive, Goldstein said.

The SEC proposals "have virtually no relevance to real life," Goldstein said. "Real life is the Austria Fund."

The changes at the Austria Fund after the January election make a mockery of the SEC's efforts, Goldstein said.

"It's like moving deck chairs around on the Titanic," Goldstein said of the SEC's proposals.

Ullman declined to respond to specific questions about the Austria Fund, but said that many critics of the agency do not know the complete facts that arise when the SEC receives a complaint and conducts an investigation. Roye made that same point at an SEC conference on independent directors Feb. 24 in response to criticisms about the SEC and its work on Navellier.

Participants in proxy fights and parties in litigation routinely jockey for position with the SEC, making complaints that their adversary violated securities laws as part of an effort to get the agency to intervene on their behalf, according to securities lawyers. The SEC alluded to that practice in an interpretive statement the agency issued Oct. 14. Although it will investigate allegations of violations of securities laws, it generally will not mediate private disputes, favor one party over another or try to effect a particular outcome, the SEC said.

Whatever the outcome of the Austria Fund dispute, the incident may provide more fodder for debate over one of the SEC's proposals. In October, the SEC said that if independent fund directors hire their own lawyer, that lawyer must be independent of the fund adviser. Some industry lawyers have complained that the requirement is unnecessarily strict.

The Olin directors raised the issue of Weiner's independence in their complaint letter to the SEC. Weiner did not respond directly to a request from the Olin directors for an opinion about the effects of actions at the March 19 meeting, according to the letter the Olin directors sent to Roye.

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