U.S. District Judge Paul A. Crotty of the U.S. District Court for the Southern District of New York dismissed with prejudice investors’ suits that claimed excessive fees charged by the funds’ advisers and distributors ended up costing the funds millions of dollars in losses.
Crotty asserted in his ruling that even though the plaintiffs’ case had been “reconfigure(d)” after an earlier version was also thrown out, it still did not contain enough substance to sustain a charge of violating Section 36(b) of the Investment Company Act, the court contended.
The plaintiffs – five individual investors–held shares in the funds between May 2003 and March 2004. They accused Salomon Smith Barney of the Section 36(b) violations as a fund distributor, as well as four corporate affiliates that operated, managed, and advised the funds.
The suit charged defendants committed the 36(b) violations in relation to four types of fees:
- investment advisory fees,
- Rule 12b-1 fees,
- transfer agency fees, paid either to an affiliate or an independent third party to handle sales and redemptions of fund shares,; and
- administrative fees.
Among the plaintiffs’ allegations: that the funds underperformed as compared with their peers which meant that the fees “did not translate into superior investment advice.”
Crotty said that in deciding whether a fee is so excessive as to represent a fiduciary breach, a judge had to keep in mind six factors laid out in a 1982 case from the 2 nd U.S. Circuit Court of Appeals involving Merrill Lynch Asset Management:
- the nature and quality of the services provided by the advisers to the shareholders;
- the profitability of the mutual fund to the adviser-manager;
- “fall-out” benefits;
- the economies of scale achieved by the mutual fund and whether such savings are passed on to the shareholders;
- comparative fee structures with other similar funds; and
- the independence and conscientiousness of the mutual fund’s outside directors.
IThe ruling in n re Salomon Smith Barney Mutual Fund Fees Litigation,S.D.N.Y., No. 04 Civ. 4055 (PAC), 12/3/07 is here .
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