Bulletproof Burden: The Bell Tolls Again for Mutual Fund Plaintiffs


In the last five years courts have rendered more decisions concerning the Investment Company Act of 1940, 15 U.S.C. §80a-1 (the “ICA”), than in the previous twenty years of mutual fund litigation.[1] Many of the recent lawsuits have focused on one particular section of the ICA, Section 36(b), which concerns actions for breach of fiduciary duty with respect to receipt of compensation in connection with excessive fees.[2] This particular section of the ICA provides one of the only avenues for plaintiffs to file a private right of action. Moreover, the burden of proof on such plaintiffs remains very high under the Gartenberg standard.[3] Recent cases suggest the standard may be impenetrable.

More than 25 years ago, in Gartenberg v. Merrill Lynch Asset Management Inc., the United States Court of Appeals for the Second Circuit established the legal standard of review in §36(b) cases, which was later reaffirmed in 2010 in Jones v. Harris Associates L.P.[4] According to Jones, “to face liability under §36(b), an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.”[5] In order to determine whether or not the fee was disproportionately large, the court must engage in a consideration of the Gartenberg factors.[6] The factors include: (1) nature and quality of the services; (2) profitability; (3) fall-out benefits; (4) economies of scale; (5) comparative fee structures of other funds; and (6) the independence and conscientiousness of the Board.[7] This is a very high standard for plaintiffs to meet.

August 2016 brought disappointment once again to the plaintiffs of mutual fund litigation. In the most recently decided pair of class actions, Sivollela v. AXA Equitable Life Insurance Company and AXA Equitable Funds Management Group, LLC and Sanford et al. v. AXA Equitable Funds Management Group LLC, the plaintiffs failed to meet their burden of proof with respect to their primary allegations that FMG LLC charged “exorbitant fees” while delegating “all of the services” to sub-advisers and sub-administrators.[8] The majority of Plaintiffs’ case was presented through the testimony of expert witnesses, who Judge Sheridan of the Federal District Court for the District of New Jersey in Trenton decided were wholly unreliable and unqualified to testify to most of the subject matter at-issue in Plaintiffs’ case. Particularly, one of the main points at issue surrounded fall-out benefits, which is a Gartenberg factor. Plaintiffs’ were unable to present any expert witnesses qualified in fall-out benefits and therefore this testimony was precluded. This threw a wrench in Plaintiffs’ case because fall-out benefits were one of the areas of FMG’s reporting that was perhaps lacking and most vulnerable to attack. In addition to substantially lacking expert witness testimony, Plaintiffs’ presented only one named plaintiff’s testimony at trial communicating a lack of interest to the Court.[9]

The countless failures of plaintiffs in mutual fund litigation indicate that either they are missing the mark in their presentation to meet the standard of proof, or the burden of proof is simply impenetrable allowing companies and fund advisers to escape liability behind the shield of the Investment Company Act.

[1] https://www.ici.org/pdf/13_seclaw_05a.pdf

[2] Id.

[3] Id.

[4] Id.

[5] Jones v. Harris Associates L.P., 130 S. Ct. 1418, 1426 (2010).

[6] Sivolella v. Axa Equitable Life Ins. Co., Civil Action No. 11-cv-4194 (PGS)(DEA), 2016 U.S. Dist. LEXIS 113822, at *9 (D.N.J. Aug. 25, 2016)

[7] Id.


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Fordham Journal of Corporate & Financial Law