Shareholders of Merrill Lynch's Focus Twenty Fund lost a suit alleging that the fund advisor was guilty of negligence and breach of fiduciary duty. But more importantly, the judge ruled that the plaintiffs made a fatal mistake by not bringing their case to the fund's independent directors. Apparently, the plaintiffs' argument that the fund board's highly paid directors were not actually independent did not hold water.

Shareholders specifically alleged that the advisor to the fund, Fund Asset Management, purchased a large amount of Enron stock, despite knowing of "improprieties" at the energy company. The stock then dropped in value.

Shareholders also contended that bringing the case to the fund's independent directors was futile because futile because the directors are “interested persons” under the Investment Company Act.

The judge, however, thought otherwise: "nothing in the Complaint suggests that the MLF directors would not have been willing to explore the possibility of litigation against FAM." 

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