FRIENDLY, Circuit Judge.
Plaintiffs-appellees in this action in the District Court for the Southern District of New York are stockholders of defendant Dividend Shares, Inc., hereafter the “Fund,” a Maryland corporation having its principal office in New York City. The Fund is registered under the Investment Company Act of 1940, 15 U.S.C.A. § 80a-l et seq., as a diversifled open-end management investment company. The individual defendants are the directors of the Fund; two of them, Bullock and Clark, are also officers and directors of Calvin Bullock, Ltd., hereafter the Management Company, also a defendant, which is the Fund s investment adviser and principal underwriter and sole distributor.
The amended complaint, summarily stated, charges that the Fund has been harmed by payments to the Management Company under the investment advisory contract and the underwriting contract, that are claimed to have violated various provisions of the Investment Company Act, some of which will be discussed below. It alleges also that since prior to 1955 the election of directors of the Fund was procured by proxy statements that violated Rule X — 14a-9, 17 C.F.R. 14a-9, promulgated by the Securities and Exchange Commission pursuant to § 14(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78n(a), applicable here by virtue of § 20(a) of the Investment Company Act, 15 U.S.C.A. § 80a-20(a), and the Commission’s Rule 20a — 1, 17 C.F.R. § 270.20a-l; the reason alleged for this is that the proxy statements said the investment advisory arrangements between the Fund and the Management Company were “similar to the arrangements” between the latter “and five other companies,” two of which were intended to be the Bullock Fund, Ltd. and NationWide Securities Company, Inc., whereas in fact they differed in that the fees charged the two latter were ]4 of 1% of net assets but those charged the Fund were % of 1% of the first $100,000,000 of net assets and % of 1% of the excess. This, it is claimed, voided the election of directors in general and their annual extensions of the investment advisory contract, §§ 15(a) and 47(b), 15 U.S.C.A. §§ 80a — 15(a) and 80a-46(b), in particular, and caused the Fund’s shareholders to fail to exercise their statutory right, § 15(a) (3), to terminate the contract or seek its renegotiation. The complaint concludes with allegations, designed to meet F.R.Civ.Proc. 23(b), 28 U.S.C., as to futility of demand on the directors and lack of necessity for and futility of demand on the shareholders,
Defendants moved to dismiss for failure state a claim under the Constitution, laws or treaties of the United States * * * [or] upon which relief can be granted under the Investment Company Act of 1940, 15 U.S.C. § 80(a) [80a-l et seq.] and, to the extent the amended complaint purports to state a representative claim, for failure to state a claim on which relief can be granted * * * Judge Herlands denied the motion in an extensive opinion, 194 F.Supp. 207. Later, without “serious objection” from the plaintiffs and with none from the Securities and Exchange Commission, which had been allowed to appear as amicus in support of federal jurisdiction, as it has here, the judge resettled his order to in-elude the certification specified in 28 U.S. C. § 1292(b). This Court, Judge Clark disagreeing, granted leave to appeal under that section, believing that determination in limine of the issue of Federal jurisdiction, an issue of first impression in this Circuit, was desirable in order to avoid a lengthy trial which would be futile if such jurisdiction did not exist, and also that such a determination was likely to have precedential value for a large number of other suits against directors of registered investment companies now pending in the Southern District, see Chabot v. National Securities & Research Corp., 2 Cir., 1961, 290 F.2d 657, 659-660. Since the issue was novel and of public as well as private importanee, we also voted that the appeal should be heard in banc.
In addition to the general federal question grant of 28 U.S.C. § 1331, section 44 of the Investment Company Act, 15 U.S.C.A. § 80a-43, entitled “Jurisdiction of offenses and suits,” expressly vests the district courts with jurisdiction “of * * violation^] of, this subchapter or the rules, regulations, or orders thereunder,” this presumably referring to proceedings by the Commission under §§ 36 and 42 and to criminal prosecutions, and also “concurrently with State and Territorial courts, of all suits in equity and actions at law brought to enforce any liability or duty created by, or to enjoin any violation of, this subchapter or the rules, regulations, or orders thereunder.” Appellants disclaim any contention “that plaintiffs would have no federal remedy were they to allege injury caused by violation of the Act,” even though the Act does not expressly create a private claim for such violations, a disclaimer justified, inter alia, by statements in Schwartz v. Eaton, 2 Cir., 1959, 264 F.2d 195, 198 cf. Reitmeister v. Reitmeister, 2 Cir., 1947, 162 F.2d 691, 694. On the other side, appellees, if we understand aright, do not argue that every transgression by directors of a registered investment company necessarily gives rise to a federal claim. Cf. Pan American Petroleum Corp. v. Superior Court, 1961, 366 U.S. 656, 81 S.Ct. 1303, 6 L.Ed.2d 584. Holding, as we do, that violations of two sections of the Investment Company Act are sufficiently alleged, we find it unnecessary to pass on much that was said by the District Judge or to explore other grounds of federal jurisdiction asserted by appellees and found in their favor by him,' — at least one of which, that based on the allegedly false or misleading proxy statements, bristles with difficulties, see Howard v. Furst, 2 Cir., 1956, 238 F.2d 790, certiorari denied 1957, 353 U.S. 937, 77 S.Ct. 814, 1 L.Ed.2d 759; Dann v. Studebaker-Packard Corp., 6 Cir., 1961, 288 F.2d 201, and had better be resolved, should resolution be required, with the fuller development of the facts that will come from a trial.
(1) Section 37 of the Act, 15 U.S.C.A. § 80a-36, provides:
“Sec. 37. Whoever steals, unlawfully abstracts, unlawfully and willfully converts to his own use or to the use of another, or embezzles any of the moneys, funds, securities, credits, property, or assets of any registered investment company shall be deemed guilty of a crime, and upon conviction thereof shall be subject to the penalties provided in section 49. A judgment of conviction or acquittal on the merits under the laws of any State shall be a bar to any prosecution under this section for the same act or acts.”
Appellees say that the amended complaint, at least when read with the benevolence appropriate on a motion addressed to the pleadings, sufficiently alleges an unlawful and willful conversion; appellants respond that the complaint alleges merely excessiveness of the fees under the two contracts which, if made out, would be a waste of corporate assets giving rise to liability under Maryland law, but not a conversion within Section 37. Discussion of this demands a somewhat fuller statement of the amended complaint than has yet been made.
Although the amended complaint does allege excessiveness of the fees to the Management Company, attaining $921,-485 under the investment advisory contract and $403,097 under the underwriting and distribution contract in 1959, it does not stop at that. It alleges that each of the directors of the Fund “has been selected and nominated as such by defendants Bullock, Clark and the Management Company”; that each director receives substantial compensation for acting as such; that each director also serves as a director for one or more other investment companies supervised by the Management Company from which he receives substantial compensation, again at the selection and nomination of Bullock, Clark and the Management Company; that the directors other than Bullock and Clark are “beholden” to them and the Management Company for placing them in such positions; that Bullock, Clark and the Management Company “dominate and control the Board of Directors of the Fund”; that the wrongful transactions alleged were caused by these three defendants and that the others “participated and acquiesced in such transactions with knowledge or notice of their wrongful character”; that the contracts “and their respective yearly extensions were not the result of arm’s length bargaining, but were adopted as the result of the arbitrary action, collusion, gross negligence or reckless disregard of duty” of the individual defendants and the Management Company; that the directors made no effort to ascertain whether services similar to those supplied by the Management Company could be secured elsewhere on more advantageous terms or whether the Management Company itself could not be persuaded to take less, as it was alleged to have done for investment advisory services with the Bullock Fund and with Nation-Wide and for distribution charges with the latter; and that the fees were “excessive and out of proportion to the value of the services performed, as the defendants knew or should have known.” Of course, we in no way imply that these serious claims will or will not be made out; whether a federal question is alleged depends upon well-pleaded allegations of the complaint. See Mishkin, The Federal “Question” in the District Courts, 53 Colum.L.Rev. 157, 164 et seq. (1953). If the proof adduced to support the federal claims does not establish liability under them but does establish a non-federal one, Hurn v. Oursler, 1933, 289 U.S. 238, 53 S.Ct. 586, 77 L.Ed. 1148, will come into play.
Drawing our attention to the title of § 37, “Larceny And Embezzlement,” appellants properly contend that a complaint does not allege a violation of § 37 unless its substance would support an indictment; they lean heavily on Mr. Justice Jackson’s classic exposition of the requirements of phrases such as “willful” or, in that case, “knowing,” 18 U.S.C. § 641, in federal criminal statutes, in Morissette v. United States, 1952, 342 U.S. 246, 72 S.Ct. 240, 96 L.Ed. 288, as showing the complaint here would not. Appellees strongly urge another aspect of Morissette upon us — its explanation, 342 U.S. at page 271, 72 S.Ct. at page 254, that knowing conversion was added by “codifiers of the larceny-type offense” because “gaps or crevices have separated particular crimes of this general class and guilty men have escaped through the breaches”; the lawmakers included conversion of that sort because they “wanted to reach” all instances “under which one may obtain wrongful advantages from another’s property.” And, again, “Probably every stealing is a conversion, but certainly not every knowing conversion is a stealing * * * Conversion * * * may be consummated without any intent to keep and without any wrongful taking, where the initial possession by the converter was entirely lawful. Conversion may include misuse or abuse of property. It may reach use in an unauthorized manner or to an unauthorized extent of property placed in one’s custody for limited use,” 342 U.S. at pages 271-272, 72 S.Ct. at page 254.
Appellees are thus right in saying it is not fatal that the complaint does not charge “Larceny And Embezzlement” even though the title of § 37 is limited to that; willful conversion was included to cover more territory and therefore ought not be limited to larceny and embezzlement. United States v. Northway, 1887, 120 U.S. 327, 332, 7 S.Ct. 580, 30 L.Ed. 664; and compare § 37 with § 17(g) of the Investment Company Act, 15 U.S.C.A. § 80a-17(g), which speaks only of “larceny and embezzlement.” On the other hand, appellants are right that a complaint would not allege a violation of § 37 by directors (not affiliated with the investment adviser) if, for example, it set forth merely that the adviser was paying itself more than the contract provided and the non-affiliated directors had negligently failed to prevent or detect this. However, the complaint here goes well beyond that.
We should think it clear that a director who had authorized corporate funds to be paid as compensation for services to a person known to him to have rendered none was guilty of knowing or willful conversion in the criminal sense; we would think the same of a director who acquiesced in the payment of an executive’s salary to someone he knew to be acting only as an office boy. An indictment charging such a conduct would not be demurrable because the payments were pursuant to a publicized contract; that would simply be an evidentiary matter for the defense, since people do not generally publicize what they know to be criminally wrong. On the other hand, a mere error of judgment as to the Vorth of an employee’s services, even if egregious, would not be a knowing conversion provided the judgment was honest and considered, although the error might lead to civil liability for negligence. The charges in the complaint here go not so far as the first two cases but further than the last.
Although when the word “willfully” is “used in a criminal statute, it generally means an act done with a bad purpose,” it “is also employed to characterize a thing done without ground for believing it is lawful (Roby v. Newton, 121 Ga. 679, 49 S.E. 694, 68 L.R.A. 601), or conduct marked by careless disregard whether or not one has the right so to act. (United States v. Philadelphia & R. Ry. Co., [D.C.] 223 F. 207, 210; State v. Savre, 129 Iowa 122, 105 N.W. 387, 3 L.R.A., [N.S.] 455; State v. Morgan, 136 N.C. 628, 48 S.E. 670).” United States v. Murdock, 1933, 290 U.S. 389, 394-395, 54 S.Ct. 223, 225, 78 L.Ed. 381 —something that has been called, in a not unrelated context, “acts of insouciance, without concern for the consequences,” American Airlines, Inc. v. Ulen, 87 U.S.App.D.C. 307, 186 F.2d 529, 533, see Pekelis v. Transcontinental & Western Air, Inc., 2 Cir., 1951, 187 F.2d 122, 124-25 and footnote 2, 23 A.L.R.2d 1349, certiorari denied 1951, 341 U.S. 951, 71 S.Ct. 1020, 95 L.Ed. 1374; Grey v. American Airlines, Inc., 2 Cir., 1955, 227 F.2d 282, 285, certiorari denied 1956, 350 U.S. 989, 76 S.Ct. 476, 100 L.Ed. 855. Plainly the complaint charges that; indeed, at least when read with the required liberality, Conley v. Gibson, 1957, 355 U.S. 41, 47-48, 78 S.Ct. 99, 2 L.Ed.2d 80; Beacon Theatres, Inc. v. Westover, 1957, 359 U.S. 500, 506, 79 S.Ct. 948, 3 L.Ed.2d 988, it charges more and alleges that the directors were the tools of the Management Company and in truth were acting in its interest rather than in that of the Fund. In fairness to the defendants, we repeat that whether any of this will be proved is not before us; on this motion we are required to look only at the complaint. So viewed, it alleges a violation of § 37.
(2) The complaint also sufficiently states a claim under § 15(a) and (b), 15 U.S.C.A. § 80a-15(a) and (b). These provisions make it unlawful to act as investment adviser or as principal underwriter of a registered investment company for more that two years after the execution of a contract to that end, unless continuance of the contract “is specifically approved at least annually by the board of directors or by vote of a majority of the outstanding * * * securities of such company.” We have heretofore summarized the allegations of the complaint as to the action of the directors in voting these annual extensions.
Appellees contend that § 15 requires not merely ceremonial performance of the act of approval but its performance in a meaningful fashion, and that breach of the latter requirement creates a federal claim as breach of the former unquestionably does. They rely particularly on Baird v. Franklin, 2 Cir., 1944, 141 F.2d 238, 244, certiorari denied 1944, 323 U.S. 737, 65 S.Ct. 38, 89 L.Ed. 591, and specifically upon the majority’s concurrence in Judge Clark’s statement that § 6(b) of the Securities Exchange Act, 15 U.S.C.A. § 78f(b), imposed upon a stock exchange not only the duty “of enacting certain rules and regulations,” which it plainly did, but also “of seeing that they are enforced,” and that a person might sue the exchange for any injury sustained as a result of its failure to do that. Appellants would distinguish Baird v. Franklin as dealing with a new federally imposed duty on stock exchanges; they say that all Congress has done in § 15(a) and (b) is to require annual action by directors, standards for whose performance of that action or any other have long been prescribed by state law, and there is thus no reason to suppose that Congress meant to create any different standard.
Appellants’ argument fails to give adequate weight to the general scheme of the Investment Company Act and the Findings and Declaration of Policy of § 1, 15 U.S.C.A. § 80a-l. Subsection (a) of § 1 finds “that investment companies are affected with a national public interest” on various grounds therein stated; subsection (b) (2) declares that the national public interest and the interest of investors are adversely affected “when investment companies are organized, operated, managed * * * in the interest of * * * investment advisers * * * [or] of underwriters.” The section concludes with a further declaration “that the policy and purposes of this subchapter, * * * in accordance with which the provisions of this subchapter * * shall be interpreted, are to mitigate and, so far as feasible, eliminate the conditions enumerated in this section which adversely affect the national public interest and the interest of investors.” When Congress mandated annual approval of investment advisory and underwriting contracts, it must have been concerned with the substance and not simply with the form. It would scarcely seem consistent with the declared Congressional purpose to hold that although a federal court would have jurisdiction of a complaint alleging that the directors’ approval had come a few days late, or that notice of the directors’ meeting had been defective in some formal respect, the court lacks jurisdiction over a complaint alleging that the directors’ approval was given without any real consideration of the merits. It is similarly unreasonable to suppose that Congress would have wished to permit its purpose to protect investors in all investment companies using the mails or the means of interstate commerce to be frustrated if a particular state of incorporation should be satisfied with lower standards of fiduciary responsibility for directors than those prevailing generally. See Mishkin, supra, at page 195. Indication of Congressional intent to create a body of federal law giving rise to a distinctive federal claim has been found from evidence less compelling than here, Textile Workers Union of America v. Lincoln Mills, 1957, 353 U.S. 448, 77 S.Ct. 912, 1 L.Ed.2d 972. We think § 15(a) and (b) laid down a requirement of annual approval not merely formal but substantial, the minimum content of which is a matter of federal law; hence a complaint alleging failure to conform to that requirement sets forth a federal claim. See Mr. Justice Frankfurter’s dissenting opinion in Textile Workers Union v. Lincoln Mills, supra, 353 U.S. at pages 476-477, 479, 483-484, 77 S.Ct. 912, 1 L.Ed.2d 972.
Appellants have cited to us Brouk v. Managed Funds, Inc., 8 Cir., 1961, 286 F.2d 901, certiorari granted 366 U.S. 958, 81 S.Ct. 1921, appellees seek to distinguish it as holding only that directors of registered investment companies are not liable as insurers. The opinion does contain some language of that sort, 286 F.2d at page 918, but we are by no means certain the decision is adequately distinguished on that ground. So far as it is not, we must respectfully disagree, to the extent indicated herein.
The order denying the motion to dismiss is affirmed and the stay of proceedings dissolved.
. The grant of leave and an accompanying stay of proceedings were conditioned on appellants stipulating to consent to the striking of a similar action brought by appellees in the Supreme Court of New York from tlie trial calendar of that court and agreeing to take no steps to restore that action to the calendar until the stay in this proceeding was dissolved. Appellants so stipulated.
. The investment advisory contract must also have been initially approved “by the vote of a majority of the outstanding voting securities of such registered company,” § 15(a).
. The force of these considerations is heightened by the pains taken in § 10, 15 U.S.C.A. § 80a-10, to insure an adequate representation by independent directors.