UNITED STATES DISTRICT COURT DISTRICT OF NEW …investorscoalition.com/sites/default/files/Redus-Tarchis v NY Life... · WALSH PIZZI O’REILLY FALANGA LLP ... Case 2:14-cv-07991-WHW-CLW

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

CYNTHIA ANN REDUS-TARCHIS, FREDRIC and BONNIE OLIVER, and MICHAEL PATTI,

Plaintiffs,

v.

NEW YORK LIFE INVESTMENT MANAGEMENT LLC,

Defendant.

::::::::: :::::

Civil Action No. 14-7991 (WHW/CLW)

Filed Electronically

ORAL ARGUMENT REQUESTED

REDACTED VERSION

BRIEF IN SUPPORT OF DEFENDANT’S MOTION FOR SUMMARY JUDGMENT

Liza Walsh Katelyn O’Reilly WALSH PIZZI O’REILLY

FALANGA LLP One Riverfront Plaza 1037 Raymond Boulevard, Suite 600 Newark, NJ 07102 (973) 757-1100

James O. Fleckner (pro hac vice) Katherine McKenney (pro hac vice) David Rosenberg (pro hac vice) GOODWIN PROCTER LLP 100 Northern Avenue Boston, MA 02210 (617) 570-1000

Gabrielle L. Gould GOODWIN PROCTER LLP The New York Times Building 620 Eighth Avenue New York, NY 10018 (212) 813-8800

Attorneys for Defendant New York Life Investment Management LLC

Case 2:14-cv-07991-WHW-CLW Document 90 Filed 12/18/17 Page 1 of 46 PageID: 3464

i

TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT ............................................................................... 1

BACKGROUND ....................................................................................................... 6

I. Procedural History ........................................................................................... 6

II. Summary of Material Facts ............................................................................. 7

A. The Funds and Their Management Structure ........................................ 7

B. NYLIM’s Services Provided to the Funds ............................................ 9

C. NYLIM’s Investment Management Fees ............................................ 12

D. The Funds’ Board of Trustees’ Independence and Conscientiousness ............................................................................... 14

The Funds’ Independent Trustees Are Independent and 1.Well-Qualified. .........................................................................14

The Board Established Standing Committees, Consistent 2.With Industry Best Practices. ....................................................16

The Board Met Extensively Throughout the Year ...................17 3. The Independent Trustees Engaged Independent Experts ........19 4.

E. The Independent Trustees Considered Extensive Information Relating to Each Gartenberg Factor in Approving the Investment Management Contracts and Fees ...................................... 20

The Board’s Assessment of the Nature and Quality of 1.Services Provided to the Funds .................................................22

The Board’s Assessment of Fees and Expenses of 2.Comparable Funds ....................................................................22

The Board’s Assessment of Economies of Scale .....................23 3. The Board’s Assessment of the Funds’ Profitability ................26 4. The Board’s Assessment of Fall-Out Benefits .........................27 5.

LEGAL STANDARDS ........................................................................................... 28


ii

ARGUMENT ........................................................................................................... 30

I. Plaintiffs Have Not Met Their Burden of Overcoming The Independent Trustees’ Business Judgment .................................................... 30

II. The Independent Trustees Carefully Considered Each of the Gartenberg Factors ........................................................................................ 32

A. The Independent Trustees’ Assessment of the Nature and Quality of Services Provided to the Funds is Entitled to Deference ............................................................................................. 32

B. Plaintiffs Have Not Alleged Any Fee and Expense Comparisons to Comparable Funds .................................................... 34

C. The Independent Trustees’ Assessment of Economies of Scale is Entitled to Deference ....................................................................... 35

D. The Independent Trustees’ Assessment of the Funds’ Profitability, Supported by the Opinion of an Industry Expert, is Entitled to Deference ........................................................................... 36

E. Plaintiffs Failed to Allege Any Facts Regarding Fall-Out Benefits ................................................................................................ 38

III. Plaintiffs Lack Standing Since Two Funds No Longer Exist ....................... 39

CONCLUSION ........................................................................................................ 40


iii

TABLE OF AUTHORITIES

Cases Page(s)

In re Am. Mut. Funds Fee Litig., 2009 U.S. Dist. LEXIS 120597 (C.D. Cal. Dec. 28, 2009) ................................ 36

Billings v. GTFM, LLC, 867 N.E.2d 714 (Mass. 2007) ............................................................................. 40

Burks v. Lasker, 441 U.S. 471 (1979) .............................................................................................. 4

Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984) ............................................................................................ 39

Gallus v. Ameriprise Fin., 497 F. Supp. 2d 974 (D. Minn. 2007) .............................. 6, 29, 30, 33, 34, 36, 37

Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982) .................................................................... 2, 30, 31

Hoffman v. UBS-AG, 591 F. Supp. 2d 522 (S.D.N.Y. 2008) ................................................................ 35

Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010) ........................................................... 2, 4, 20, 29, 33, 36, 39

Jones v. Harris Assocs. L.P., 611 F. App’x 359 (7th Cir. 2015) ....................................................................... 31

Kalish v. Franklin Advisers, Inc., 742 F. Supp. 1237 (S.D.N.Y. 1990) ................................................................... 38

Kasilag v. Hartford Inv. Fin. Servs., LLC, 2017 WL 773880 (D.N.J. Feb. 28, 2017) ............................................. 1, 3, 33, 38

Kolancian v. Snowden, 532 F. Supp. 2d 260 (D. Mass. 2008) ................................................................. 40

Krinsk, v. Fund Asset Mgmt., Inc. 875 F.2d 404 (2d Cir. 1989) ......................................................................... 31, 38


iv

Lawson v. FMR LLC, 134 S. Ct. 1158 (2014) .......................................................................................... 7

Mercedes-Benz USA, Inc. v. Coast Auto Grp., Ltd., 362 F. App’x 332 (3d Cir. 2010) ........................................................................ 30

Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358 (3d Cir. 1996) ............................................................................... 29

Paskowitz v. Prospect Capital Mgmt. L.P., 232 F. Supp. 3d 498 (S.D.N.Y. 2017) ................................................................ 34

Santomenno v. John Hancock Life Ins. Co., 677 F.3d 178 (3d Cir. 2012) ............................................................................... 39

Schuyt v. Rowe Price Prime Reserve Fund, 663 F. Supp. 962 (S.D.N.Y. 1987) ............................................................... 32, 38

Sivolella v. AXA Equitable Life Ins. Co., 2016 WL 4487857 (D.N.J. Aug. 25, 2016) ..................... 1, 30, 32, 33, 36, 38, 39

Weinstock v. Columbia Univ., 224 F.3d 33 (2d Cir. 2000) ................................................................................. 28

Statutes

15 U.S.C. § 80a-10(a) (ICA § 10(a)) ....................................................................... 14

15 U.S.C. § 80a-15(c) (ICA § 15(c)) ................................................................. 20, 22

15 U.S.C. § 80a-35(b) (ICA § 36(b)) ...............................................1-6, 29-34, 38-39

15 U.S.C. § 80a-35(b)(1) (ICA § 36(b)(1)) ............................................................. 29

Other Authorities

17 C.F.R. § 270.01(a)(7)(vi) .................................................................................... 17

Fed. R. Civ. P. 56(a)................................................................................................. 29


PRELIMINARY STATEMENT

Plaintiffs allege that Defendant New York Life Investment Management

LLC (“NYLIM”) received fees for managing four mutual funds (collectively, the

“Funds”) that “are so disproportionately large that they bear no reasonable

relationship to the services provided by Defendant and could not have been the

product of arm’s length bargaining.” Second Amended Complaint (“SAC”) ¶¶ 4-5.

After exhaustive discovery, the record clearly refutes Plaintiffs’ claim, and

demonstrates that the Funds’ independent trustees (the “Independent Trustees”)

engaged in robust, comprehensive review and negotiation of the fees. Those fees

are not disproportionately large; instead, they are entirely reasonable given the

extensive, high-quality services NYLIM provided to the Funds. The factual record

here is substantially stronger than in the two recent cases in this District wherein

the Court found for defendants on all counts.1

Given the strength of the record supporting NYLIM—and Plaintiffs’ failure

to adduce any evidence, either factual or from experts, that even suggests a

violation of Section 36(b) of the Investment Company Act of 1940 (“ICA”)—the

Court does not need a trial here, and summary judgment is warranted. The

Supreme Court has made clear that a plaintiff faces a high hurdle to establish a

1 See Kasilag v. Hartford Inv. Fin. Servs., LLC (“Hartford”), 2017 WL 773880 (D.N.J. Feb. 28, 2017), appeal filed, No. 17-1653 (3d Cir. Mar. 31, 2017).; Sivolella v. AXA Equitable Life Ins. Co. (“AXA”), 2016 WL 4487857 (D.N.J. Aug. 25, 2016), appeal filed, No. 16-4241 (3d Cir. Dec. 6, 2016).


2

violation of the standards articulated in Jones v. Harris Associates L.P., 559 U.S.

335, 346 (2010) (“Jones I”) (adopting standard established in Gartenberg v.

Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982)). Since the Supreme

Court decided Jones I, at least twenty lawsuits have been filed under Section 36(b)

against investment managers and subadvisors, and none have resulted in a

judgment for plaintiffs. This Court previously allowed Plaintiffs’ claims to

proceed to this stage on only the narrowest grounds, holding that, even as pleaded

in the complaint, three of the six Gartenberg factors did not weigh in favor of

Plaintiffs. Opinion at 24 [ECF No. 45].2 Now that discovery has closed, the

record establishes that Plaintiffs cannot prove their claims, especially since

Plaintiffs have elected to move forward without the expert evidence that is

essential in even attempting to prove the remaining Gartenberg factors.

Plaintiffs’ fundamental theory of liability is that NYLIM delegated

“substantially all of its responsibilities” under its investment management

agreements with the Funds to subcontractors and that any fee charged to the Funds

by NYLIM above what it paid to the subcontractors is a “mark-up” consisting 2 As the Court correctly found, there are only six Gartenberg factors; “[u]nderperformance is not a Gartenberg factor.” Opinion at 14. The six Gartenberg factors are: (i) the independence and conscientiousness of the independent trustees; (ii) the nature and quality of the manager’s services; (iii) comparative fee structures of similar funds; (iv) economies of scale realized by the manager; (v) the profitability of the mutual fund to the manager; and (vi) the existence of any “fall-out financial benefits” that accrue to the manager. Jones I, 559 U.S. at 344 & n.5 (citing Gartenberg, 694 F.3d at 929-32).


3

primarily of profit and disproportionate to the services rendered. SAC ¶¶ 5-9. The

mere fact that NYLIM delegated certain of its responsibilities to subadvisors and a

sub-administrator does not constitute a violation of ICA Section 36(b). The U.S.

Securities and Exchange Commission (“SEC”) has specifically approved this

“manager-of-managers” arrangement for NYLIM’s MainStay family of mutual

funds (the “MainStay Group of Funds”), which includes the Funds.3 With respect

to two of the four Funds, Plaintiffs’ theory also fails because the subadvisor,

MacKay Shields, LLC (“MacKay”), was a wholly owned subsidiary of NYLIM’s

parent company, New York Life Investment Management Holdings LLC

(“NYLIMH”); NYLIM could have dispensed with the corporate separateness

entirely and cannot be liable for the way that it internally structures itself as a

corporation. In any event, in addition to monitoring the wholly owned and (in the

other two instances) separate subadvisors and the sub-administrator, NYLIM itself

provided an array of essential services to the Funds, such as setting and altering the

Funds’ investment objectives and strategies, monitoring the Funds’ performance

and operations, performing compliance, accounting, legal and other functions for

3 Defendant’s Statement of Material Facts Not in Dispute in Support its Motion for Summary Judgment (“SUF”) ¶ 9 (request for and grant by SEC of exemptive order (the “2007 Exemptive Order”). This manager-of-managers structure, “first introduced in the early 1990s,” has “grown in popularity” to the point where “[m]any mutual funds today use a so-called ‘multi-manager structure . . . .,’” as reflected by the SEC’s approval of more than 200 exemptive applications approving these “manager-of-managers” arrangements. Id.


4

the Funds, preparing SEC filings, and providing copious information for the

Independent Trustees to discharge their oversight function.

Plaintiffs’ burden is especially heavy here. The ICA requires mutual funds

to have a board of trustees whose “disinterested” or independent members serve as

the “watchdogs” of the management of the funds and shareholders’ interests. Burks

v. Lasker, 441 U.S. 471, 483-84 (1979). Respecting this “watchdog” role, the

Supreme Court in Jones I instructed courts to give deference to the approval by a

fund’s independent directors of the fund’s fee arrangements “where [the] board’s

process for negotiating and reviewing the investment-adviser compensation is

robust . . . .” 559 U.S. at 351-353. The Supreme Court made clear that Section

36(b) does not call for “judicial second-guessing of informed board decisions”

where “the disinterested directors considered the relevant factors . . . even if a court

might weigh the factors differently.” Id. This Court has already recognized the

“considerable weight” to which such board approval is entitled. Opinion at 24.

Plaintiffs cannot clear these high hurdles in light of the undisputed evidence:

•

•

4 See Background Section II.D-E, Argument Sections I, II, infra.


5

•

In light of the overwhelming evidence in Defendants’ favor, Plaintiffs have

all but abandoned their claims. They chose to forego providing any affirmative

expert reports (ECF No. 80), which is telling—the same counsel for plaintiffs

served expert reports in at least six other Section 36(b) cases.7

In light of the uncontroverted facts and the absence of expert opinion to

support their claims, Plaintiffs have provided no basis for this Court to set aside the

Independent Trustees’ business judgment. Summary judgment should be granted

in Defendants’ favor because (i) it is undisputed that the Funds’ Independent

Trustees acted with independence and conscientiousness, such that their business

5 See Background Sections II.C, II.E.2, II.E.3; Argument Sections II.B, II.C., infra. 6 See Background Section II.D.4, Argument Section II.D, infra. 7 See Declaration of Katherine G. McKenney (“McKenney Decl.”), Appendix A.


6

judgment should be given substantial deference; (ii) it is undisputed that the

Independent Trustees gave careful and robust consideration to each of the

Gartenberg factors, a process that demonstrated that the fees were not

disproportionately large to the services rendered; and (iii) as to the MainStay

Marketfield Fund (“Marketfield Fund”) and MainStay High Yield Opportunities

Fund (“HY Opps Fund”), Plaintiffs lack standing to pursue their claims because

those Funds no longer exist. See generally Gallus v. Ameriprise Fin., 497 F. Supp.

2d 974, 978, 985 (D. Minn. 2007) (granting motion for summary judgment

dismissing Section 36(b) claims), aff’d 675 F.3d 1173 (8th Cir. 2012).

BACKGROUND

I. Procedural History

On December 23, 2014, Plaintiffs filed the complaint in this action, alleging

that NYLIM violated Section 36(b) by charging excessive investment advisory

fees to three mutual funds in which they allegedly owned shares—the MainStay

Large Cap Growth Fund (“Large Cap Fund”), the Marketfield Fund, and the

MainStay High Yield Corporate Bond Fund (“HY Bond Fund”). ECF No. 1. The

pleading was amended twice, and it now includes a challenge to the fees of a

fourth fund, the HY Opps Fund. See generally SAC [ECF No. 26].

On October 28, 2015, the Court denied NYLIM’s motion to dismiss the

SAC, after weighing the pleadings with respect to each of the Gartenberg factors.

See generally Opinion. The Court held that two factors—trustee independence and


7

fall-out benefits—weighed in Defendants’ favor and did not consider a third

factor—comparative fees of other funds—because the SAC did not allege any fee

comparisons. Id. at 15-16, 21-24. The Court expressed skepticism, stating that

Plaintiffs’ claims may be “unpersuasive at summary judgment.” Id. at 11, 24.

Following Plaintiffs’ razor-thin victory at the pleading stage, the parties

engaged in extensive fact discovery,

After fact discovery closed, Plaintiffs elected to forego expert discovery and did

not serve any expert report in support of their claims.

II. Summary of Material Facts

A. The Funds and Their Management Structure

Each Fund was a registered investment company under the ICA during the

Relevant Period.8 SUF ¶ 2. As the Supreme Court has noted, “[v]irtually all

mutual funds are structured so that they have no employees of their own; they are

managed, instead, by independent investment advisers.” Lawson v. FMR LLC, 134

S. Ct. 1158, 1171 (2014). The Funds here are no exception. SUF ¶¶ 3-5.

8 References herein to the “Relevant Period” refer to the terms of the parties’ Stipulation regarding the applicable period for claims and damages with respect to each of the Funds. ECF No. 58. That period is December 24, 2013 through May 6, 2016 for the Marketfield Fund, the Large Cap Fund, and the HY Bond Fund; and April 21, 2014 through May 6, 2016 for the HY Opps Fund. Id. at 2.


8

NYLIM is a registered investment adviser that currently serves as the

investment manager and administrator of the MainStay Group of Funds, of which

the Funds are or were a part. SUF ¶¶ 1, 3-4.9 At the time Plaintiffs filed the SAC,

NYLIM served as the investment manager to each of the Funds pursuant to

Management Agreements negotiated with and approved by the Funds’ Independent

Trustees. Id. ¶¶ 4-5; see id. ¶¶ 17, 20. Under the Management Agreements, the

Funds paid NYLIM fees for providing management and administrative services for

the Funds. Id. ¶ 6. Although NYLIM delegated day-to-day portfolio management

and administrative responsibilities to subcontractors, as permitted by the

Management Agreements and consistent with industry practices and the 2007

Exemptive Order, NYLIM retained overall responsibility for management and

administration of the Funds. Id. ¶¶ 7-10, 23-27.

NYLIM delegated the day-to-day portfolio management responsibilities

through subadvisory agreements with registered investment advisers possessing

specialized knowledge and expertise appropriate for each Fund and its unique

investment objectives and strategies. SUF ¶ 10. During the Relevant Period, the

HY Bond and HY Opps Funds were subadvised by NYLIMH’s wholly owned

subsidiary MacKay, NYLIM’s affiliate. Id. ¶¶ 11-14. Subsequently, the HY Opps

Fund ceased operations; on February 17, 2017, it was liquidated and its shares 9 NYLIM is a wholly owned subsidiary of New York Life, one of the largest life insurance companies in the United States. Id. ¶ 11.


9

cancelled, with its shareholders receiving a pro rata distribution of shares in the

HY Bond Fund. Id. ¶¶ 15-17.

The two remaining Funds—the Marketfield and Large Cap Funds—have

been managed by unaffiliated third party subadvisors, Marketfield Asset

Management (“MAM”) and Winslow Capital Management LLC (“Winslow”),

respectively. SUF ¶¶ 18-19. During the Relevant Period, the Marketfield Fund

ceased to exist. Id. ¶ 20. On April 8, 2016, the Fund’s shareholders approved an

“Agreement and Plan of Reorganization,” by which the Marketfield Fund was

reconstituted into a new fund with MAM as adviser. Id. ¶¶ 21-22. Since that date,

NYLIM has not been the manager of the new fund. Id. ¶ 22.

B. NYLIM’s Services Provided to the Funds

Although NYLIM has delegated to other entities certain management and

administrative responsibilities subject to NYLIM’s supervision, NYLIM has

retained significant responsibilities with respect to the Funds and performs

considerable services to benefit the Funds. SUF ¶¶ 28-86.


10

10


11

11


12

C. NYLIM’s Investment Management Fees

For the investment management services it provided to the Funds during the

Relevant Period, NYLIM received a fee from each Fund, calculated as a

percentage of that Fund’s net assets at the end of the preceding month. SUF ¶ 87.

The schedule of fees that NYLIM earned for the services it provided to each Fund

was set forth as part of each Management Agreement and is reviewed, negotiated,

and approved each year by the Board.12 SUF ¶¶ 88, 90. NYLIM’s fees varied

according to the Fund, and the assets in each Fund; breakpoints were in place that

reduced the rate charged as the Funds’ assets exceeded particular dollar amounts.

Id. ¶¶ 89, 92-95. The effective management fee rates13 for the Funds, after taking

into account all breakpoints, fee waivers and caps, were as follows in 2015: HY

12 See p. 21, 25, infra. 13 The effective management fee rate “is the weighted average of the rates paid by a Fund on each level of [Assets Under Management].” Id. ¶ 91.


13

Bond Fund, 0.55%; Large Cap Fund, 0.60%; HY Opps Fund, 0.80%; Marketfield

Fund, 1.40%. Id. ¶ 94. The fees were disclosed in the prospectuses, Statements of

Additional Information, and shareholder reports—shareholders could redeem their

shares at any time to invest in a fund with lower fees. Id. ¶ 99.

Further, the Marketfield Fund charged the same fee (1.40%) (1)

when it was managed solely by MAM prior to its transfer to the Mainstay funds in

2012, (2) when it was managed by NYLIM and subadvised by MAM during the

Relevant Period, and (3) then again after it returned to a single-tier management

structure at MAM on April 8, 2016 to present—i.e. after NYLIM no longer

managed the fund. Id.¶¶ 92-94, 96-98.14 The fact that this Fund charged the same

fees regardless of whether it was under a single-tier or two-tier management

structure undermines Plaintiffs’ theory that NYLIM’s fees are an excessive “mark-

up.” See SAC ¶ 7.

During the Relevant Period, when NYLIM acted as manager for the Funds,

NYLIM generally paid half of the total management fee it received to the relevant

Subadvisor. SUF ¶¶ 100-03. 14


14

D. The Funds’ Board of Trustees’ Independence and Conscientiousness

As an investment adviser registered with the SEC, NYLIM is subject to a

complex regulatory structure for mutual fund governance designed to safeguard the

interests of fund shareholders. The ICA requires a mutual fund to have a board of

trustees, which serves as the “watchdog” of the fund and adviser’s relationship.

The Funds’ Independent Trustees Are Independent and 1.Well-Qualified.

A board of eight trustees negotiates and then enters into the Management

Agreements on the Funds’ behalf. SUF ¶¶ 5, 101-10. Only one Trustee is

affiliated with NYLIM (an “interested person” under the ICA); the other seven are

independent. Id. ¶¶ 111-12. This far exceeds the statutory requirement that 40%

of a board must be independent.15 This supermajority also exceeds the

recommendation of the Mutual Fund Directors Forum (“MFDF”) that 75% of a

board must be independent.16 Id. ¶ 111. The Funds’ Board Chairperson is

independent, consistent with industry best practices articulated by the MFDF and 15 See ICA § 10(a), 15 U.S.C. § 80a-10(a). 16 The MFDF is “an independent, non-profit organization that serves independent directors of U.S. mutual funds. The Forum enhances the governance of mutual funds by educating independent directors. . . .” Id. ¶ 111.


15

the Investment Company Institute (the “ICI”).17 Id. ¶¶ 114-15.

Each of the Funds’ Trustees who served during the Relevant Period has

considerable experience serving in senior-level positions in finance, business and

law. SUF ¶¶ 113-36. Peter Meenan, who served as the Funds’ Board Chair during

the Relevant Period, has held a number of positions in 40 years in the fund

industry, including head of Global Funds at Citicorp and general counsel of several

major investment advisory firms. Id. ¶¶ 115-17. Mr. Meenan served as the chair

of the Independent Directors’ Council (“IDC”) Task Force on Director Self-

Evaluation and was nominated for 2014 Trustee of the Year. Id. ¶¶ 118-19. Susan

B. Kerley, who served as the Board’s Contracts Committee Chair during the

Relevant Period, has over 25 years of experience in the mutual fund industry,

including as a trustee for the board of another large fund complex. Id. ¶¶ 120-21.

She is a former member of the Board of Governors and the Executive Committee

of the ICI, and is the former chair of the Governing Council of the IDC. Id. ¶ 122.

Ms. Kerley was named 2009 Trustee of the Year. Id. ¶ 123.

17 The ICI is a “leading global association of regulated funds, including mutual funds, … in the United States, and similar funds offered to investors in jurisdictions worldwide. ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers.” Id. ¶ 118.


16

The Board Established Standing Committees, Consistent 2.With Industry Best Practices.

The Funds’ Board does much of its work in committees, consistent with

MFDF best practices. SUF ¶¶ 156-65. During the Relevant Period, the Funds’

Board had six standing committees, each chaired by an Independent Trustee:

• Contracts: Oversaw the evaluation of new contracts, reviewed existing


17

contracts, and made recommendations to the Board regarding contracts affecting the Funds; responsible for coordinating the Board’s review of the Funds’ management and subadvisory agreements.

• Investment: Oversaw the Funds’ portfolio management, performance, and brokerage practices.

• Risk and Compliance Oversight: Oversaw policies and procedures related to managing fund risks and compliance matters.

• Alternative and Closed-End Funds Oversight (“ACE”): Oversaw

closed-end funds or funds that invested significantly in alternative investments or that presented unique or complex challenges,

• Audit: Oversaw the Funds’ processes for accounting, auditing, financial reporting, and related internal controls, and regulatory compliance.

• Nominating and Governance: In addition to the responsibilities

discussed above, made recommendations to the Board on Board effectiveness, Board compensation, and committee structure, membership, and chairmanship.

Id. The Board also established the Funds’ Valuation Committee, which oversaw

implementation of the Funds’ valuation procedures and made fair value

determinations on the Board’s behalf. Id. ¶¶ 166-67. These various committees

held approximately thirty formal meetings per year combined. Id. ¶ 175.

The Board Met Extensively Throughout the Year 3.

The Funds’ Board met more frequently than the SEC’s guidance of four

times per year and the industry average of six to nine times per year. 17 C.F.R.

§ 270.01(a)(7)(vi); SUF ¶¶ 168-75.


18


19

The Independent Trustees Engaged Independent Experts 4.


20

E. The Independent Trustees Considered Extensive Information Relating to Each Gartenberg Factor in Approving the Investment Management Contracts and Fees

Under Section 15(c) of the ICA, 15 U.S.C. § 80a-15(c), the Independent

Trustees are responsible for reviewing the written management contracts of the

manager annually and approving its compensation.18

18 Section 15(c) of the ICA requires approval of an adviser’s management contract and compensation by a majority of disinterested trustees, and it requires fund trustees to request and evaluate information from the adviser as may be reasonably necessary to evaluate the terms of the proposed contract. Jones I, 559 U.S. at 348.


21

19


22

The Board’s Assessment of the Nature and Quality of 1.Services Provided to the Funds

The Board’s Assessment of Fees and Expenses of 2.Comparable Funds


23

The Board’s Assessment of Economies of Scale 3.

20

21


24

22 Breakpoints are preset asset levels, which trigger lower fees for assets above the breakpoint. Id. ¶ 271. 23


25

During the Relevant Period, the Funds’ fee structures provided for NYLIM

to share economies of scale, to the extent they existed, with shareholders in the

following ways:

• Marketfield Fund: Breakpoints at $7.5 billion and $15 billion and a voluntary fee waiver approved by the Board in December 2013, and an expense cap;

• Large Cap Fund: Seven breakpoints, three at asset levels at or below $1 billion, and both voluntary and contractual fee waivers, including an additional contractual fee waiver implemented in December 2014;

• High Yield Corporate Bond Fund: Three breakpoints; and

• High Yield Opportunities Fund: A breakpoint at $3 billion added in December 2013, a fee waiver, and an expense cap.

SUF ¶¶ 277-83.

For instance, with respect to the Marketfield Fund, which


26

had no breakpoints when NYLIM acquired it from Marketfield,

NYLIM

added two breakpoints, one at $7.5 billion and the other at $15 billion, plus a

voluntary fee waiver at $22.5 billion. Id. ¶ 279.

The Board’s Assessment of the Funds’ Profitability 4.

24


27

The Board’s Assessment of Fall-Out Benefits 5.

A manager or its affiliates may receive direct or indirect benefits resulting

from a relationship with a fund in addition to the management fee, known as fall-

25


28

out benefits.26

LEGAL STANDARDS

Summary judgment is the time in a case where the Court goes “beyond the

paper allegations of the pleadings . . . . The time has come . . . ‘to put up or shut

up.’” Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir. 2000) (quoting

Fleming James, Jr. & Geoffrey C. Hazard, Jr., Civil Procedure 150 (2d ed.1977)).

26


29

Summary judgment is warranted where, as here, “the movant shows that there is no

genuine dispute as to any material fact and the movant is entitled to judgment as a

matter of law.” Fed. R. Civ. P. 56(a). Under Third Circuit law, “[w]hen the

nonmoving party will bear the burden of proof at trial, the moving party may meet

its burden by showing that the nonmoving party has not offered evidence sufficient

to establish the existence of an element essential to its case.” Orson, Inc. v.

Miramax Film Corp., 79 F.3d 1358, 1366 (3d Cir. 1996); see also Gallus, 497 F.

Supp. 2d at 983 (granting summary judgment for defendant adviser in Section

36(b) action “after weighing all of the Gartenberg factors”).

Congress has placed a heavy burden of proving a Section 36(b) claim on

plaintiffs. 15 U.S.C. § 80a-35(b)(1); Jones I, 559 U.S. at 347. To prevail,

plaintiffs must prove that the challenged fee was “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.” Jones I, 559 U.S. at 346. No plaintiff has

ever succeeded in overcoming this high hurdle. That no plaintiff has obtained a

judgment on a Section 36(b) claim underscores Plaintiffs’ burden, which they

cannot meet here, given the thoroughness of the Board’s process, and the

reasonableness of the fees in light of the overall services. Plaintiffs effectively

conceded summary judgment by failing to obtain any expert testimony,


30

Given that each of the Gartenberg factors requires application of the factual

record within the context of a complex regulatory framework and industry

standards and best practices, plaintiffs in virtually every Section 36(b) case that has

proceeded to summary judgment relied on expert evidence to support their

claims.27 Plaintiffs’ failure to provide any expert testimony to rebut the informed

decision-making of the Funds’ Trustees, to whom the Supreme Court has afforded

substantial deference, warrants summary judgment in NYLIM’s favor. See

Mercedes-Benz USA, Inc. v. Coast Auto Grp., Ltd., 362 F. App’x 332, 335 (3d Cir.

2010) (affirming summary judgment in the absence of expert testimony to support

the “naked contention” that “allocation method was unfair”).

ARGUMENT

I. Plaintiffs Have Not Met Their Burden of Overcoming the Independent Trustees’ Business Judgment

In reviewing Section 36(b) claims, “the court is not authorized to substitute

its business judgment for that of a mutual fund’s board of directors in the area of

management fees.” Gartenberg, 694 at 928. Specifically, Section 36(b) “does not

allow a court to assess the fairness or reasonableness of advisers’ fees; the goal is

27 McKenney Decl. Appendix A; see AXA, 2016 WL 4487857, at *12 (“[T]he credibility of the other witnesses, particularly [p]laintiffs’ experts, had a significant impact on the outcome of the case.”).


31

to identify the outer bounds of arm’s length bargaining and not engage in rate

regulation.” Jones v. Harris Assocs. L.P., 611 F. App’x 359, 360 (7th Cir. 2015)

(“Jones II”). Courts have also made clear that under Section 36(b), the trustees are

not required to negotiate the lowest possible fees or the “best deal possible.”

Krinsk, v. Fund Asset Mgmt., Inc. 875 F.2d 404, 409 (2d Cir. 1989). In evaluating

a Section 36(b) claim, the test is “whether the fee schedule represents a charge

within the range of what would have been negotiated at arm’s-length in the light of

all of the surrounding circumstances.” Gartenberg, 694 F.2d at 928.

Here, there is no genuine issue of material fact that warrants overturning the

Independent Trustees’ decision to approve the challenged fees. The Board

satisfied the first Gartenberg factor to act independently and conscientiously when

considering fees, given the qualifications of the Independent Trustees and the

thorough process they followed to analyze the investment management contracts.

In connection with Defendants’ motion to dismiss, this Court concluded that this

Gartenberg factor “weighs in Defendants’ favor” based upon NYLIM’s SEC

filings reflecting “that the Board did not simply react passively to information

provided by NYLIM.” Opinion at 23-24.

The evidentiary record developed through discovery has confirmed and

enhanced the Court’s observations from the public record concerning the Board’s

conscientiousness.


32

; Schuyt v. Rowe

Price Prime Reserve Fund, 663 F. Supp. 962, 984 (S.D.N.Y. 1987) (giving weight

to evidence that “the independent directors . . . actively questioned the Adviser and

requested additional information when they needed it”). The Court should give

substantial deference to the Independent Trustees’ business judgment when

approving the Funds’ fees.28

II. The Independent Trustees Carefully Considered Each of the Gartenberg Factors

A. The Independent Trustees’ Assessment of the Nature and Quality of Services Provided to the Funds is Entitled to Deference

28 The evidentiary record here is even stronger than in other Section 36(b) cases in which courts have concluded that the board independence factor weighs in the defendant adviser’s favor. For instance, in AXA, the Court concluded that the board of trustees was “impartial, diverse, and independent” despite having an interested chairperson. 2016 WL 4487857, at *28. Here, the Funds’ Board Chair and the chairs of each Board committee are disinterested. SUF ¶ 114.


33

Plaintiffs have no factual support or expert testimony to support their

threadbare allegation that the subcontractors are performing the same or similar

services as NYLIM—indeed, HY Opps and HY Bond Fund were, effectively,

managed internally without any external subadvisor.29 See Gallus, 497 F. Supp. 2d

at 980 (finding for adviser on this factor because of “detailed descriptions of the

services provided by [d]efendants to the [f]unds and the shareholders”); see also

AXA, 2016 WL 4487857, at *17 (plaintiffs relied upon expert testimony

concerning the services provided by the advisor and subcontractors). The Supreme

Court held that simply pointing out that similar services could be obtained for

lower fees does not state a violation of Section 36(b): “[e]ven if the services

provided and fees charged to an independent fund are relevant, courts should be

mindful that the Act does not necessarily ensure fee parity between mutual funds

and institutional clients contrary to petitioners’ contentions.” Jones, 559 U.S. at

350. Thus, there is no basis to second-guess the Independent Trustees’

29 NYLIM’s services alone are substantial. However, because Plaintiffs’ claim challenges the total fee paid by the Funds, the Court should look to the total services performed by NYLIM, the Subadvisors, and the Sub-administrator for that total fee. See Hartford, 2017 WL 773880, at *19 (D.N.J. Feb. 28, 2017). The combined services performed more than justify the total fee. SUF ¶¶ 10, 28-86.


34

determination of the value of those services.

B. Plaintiffs Have Not Alleged Any Fee and Expense Comparisons to Comparable Funds

As the Court has already recognized, Plaintiffs have the burden at summary

judgment to challenge the “total” fee charged by NYLIM. Opinion at 10.

Plaintiffs’ have not adduced any facts that could support this Gartenberg factor.

See Gallus, 497 F. Supp. 2d at 976-77 (granting summary

judgment in favor of advisor where Board considered comparative fee data

provided by third-party source Lipper).

See Paskowitz v.

Prospect Capital Mgmt. L.P., 232 F. Supp. 3d 498, 505, 509 (S.D.N.Y.

2017) (dismissing 36(b) claims where the fee charged was above average but less

than the top rate paid by comparable groups). There is no dispute of fact—and no

expert testimony on Plaintiffs’ behalf—sufficient to second-guess the business

judgment of the Board.


35

C. The Independent Trustees’ Assessment of Economies of Scale is Entitled to Deference

Plaintiffs cannot establish that economies of scale existed in the Funds,

particularly where three of the Funds’ asset levels declined for at least part of the

Relevant Period.30 SUF ¶ 284. Even if they could show that economies of scale

existed—which they cannot—Plaintiffs cannot demonstrate that such economies

were not adequately shared. Plaintiffs acknowledge the Funds had multiple

breakpoints but claim that the breakpoints were set at the wrong levels. ECF No.

34, at 17-19. At the motion to dismiss stage, the Court expressed skepticism that

“Plaintiffs’ ‘Goldilocks’-type claims about the breakpoints may not be enough to

prove a breach of fiduciary duty at summary judgment.” Opinion at 20. Plaintiffs

have no evidence at all that the breakpoints were inappropriate, nor did they elect

to retain an expert to provide any guidance to the Court in this regard.

It is undisputed that each Fund had at least one breakpoint and a structure in

which the Fund’s fees declined as asset levels increased. See p. 25, supra.

30 To meet its burden on proving economies of scale existed, a plaintiff must show “the actual transaction costs at issue and whether the costs per investor increased or decreased as the assets under management grew.” Hoffman v. UBS-AG, 591 F. Supp. 2d 522, 540 (S.D.N.Y. 2008).


36

; In re Am. Mut. Funds Fee Litig., 2009 U.S.

Dist. LEXIS 120597, at *139-40 (C.D. Cal. Dec. 28, 2009) (“Economies of scale

can be shared with fund shareholders in a number of ways, including breakpoints,

fee reductions and waivers. . . .”). Plaintiffs cannot credibly dispute the adequacy

of the Funds’ breakpoints without an expert opinion, which they have failed to

obtain. See AXA, 2016 WL 4487857, at *57 (noting that plaintiffs’ experts failed

to “quantif[y] a dollar amount for [the defendant’s] savings achieved by

economies of scale , nor how much should have been shared with investors”). In

order to conclude that this factor weighs in Plaintiffs’ favor, the Court would need

to engage in precisely the sort of second-guessing and precise calculations that the

Jones Court cautioned that “courts are not well suited to make.” Jones, 559 U.S. at

353; Gallus, 497 F. Supp. 2d at 982 (economies of scale factor weighed in

adviser’s favor where plaintiffs did not establish why breakpoints were

insufficient).

D. The Independent Trustees’ Assessment of the Funds’ Profitability, Supported by the Opinion of an Industry Expert, is Entitled to Deference


37

Gallus, 497 F. Supp. 2d at

981 (defendants “provided detailed reports on [their] profitability to the Board”).

See Gallus, 497 F. Supp. 2d at 981 (noting lack of expert support for

plaintiffs’ contention that “the Board should have had different information than

what the Board was provided”).

there can be no serious dispute

of fact that would justify second-guessing the Board’s evaluation of the

profitability factor.

To the extent Plaintiffs contend, without factual support, that NYLIM “just

plain made too much money,” courts have routinely rejected such contentions.


38

Kalish v. Franklin Advisers, Inc., 742 F. Supp. 1237, 1250 (S.D.N.Y. 1990)

(dismissing Section 36(b) claims); see also Krinsk, 875 F.2d at 410 (high

profitability alone does not support a finding that a fee is excessive).

Hartford, 2017 WL 773880, at *22-23 (“Looking to the case

law, pre-tax margins (like these) as high as 77.3% have been affirmed [in § 36(b)

cases].”) (citing Schuyt, 663 F. Supp. at 972). In light of these uncontroverted

facts, there is no basis to disturb the Board’s business judgment.

E. Plaintiffs Failed to Allege Any Facts Regarding Fall-Out Benefits

Plaintiffs likewise cannot overcome the substantial deference that should be

afforded to the Independent Trustees’ consideration of potential fall-out benefits.

In its motion to dismiss decision, this Court found that the fall-out benefits factor

weighed in NYLIM’s favor because Plaintiffs did not allege any such benefits

accrued by NYLIM. Since then, no evidence has been developed showing any

such fall-out benefits.

31

Hartford, 2017 WL 773880, at *12-16, 22-23; AXA, 2016 WL 4487857, at *49-56.


39

Thus, this Gartenberg factor still weighs in

NYLIM’s favor. See AXA, 2016 WL 4487857, at *59-64 (plaintiffs demonstrated

the existence of fall-out benefits but judgment for the defendant based upon the

Board’s consideration of those fall-out benefits).

III. Plaintiffs Lack Standing Since Two Funds No Longer Exist

In addition to Plaintiffs’ inability to satisfy Jones I and Gartenberg, their

claims as to two Funds, the Marketfield and HY Opps Funds, also fail because

those Funds no longer exist. See pp. 8-9, supra. As a result, Plaintiffs are no

longer “security holder[s],” which precludes maintenance of their suit. See 15

U.S.C. § 80a-35(b) (authorizing Section 36(b) suits only by the SEC or “security

holder” in fund). In the context of derivative suits, including Section 36(b) claims,

plaintiffs are required to hold “continuous ownership” in the entity on whose

behalf they are filing suit. See Santomenno v. John Hancock Life Ins. Co., 677

F.3d 178, 184-85 (3d Cir. 2012) (affirming dismissal of Section 36(b) claims based

on lack of continuous ownership where plaintiff no longer held any interest in the

at-issue funds after filing lawsuit). This requirement makes sense because

Plaintiffs’ claims are derivative in nature, but any recoveries could no longer be

distributed to those Funds. See Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 535

n.11 (1984) (holding that Section 36(b) claims are derivative).

In other derivative actions, plaintiffs’ claims have been dismissed where the


40

entity on whose behalf the claims were brought ceases to exist, such as through a

merger or corporate dissolution. See Kolancian v. Snowden, 532 F. Supp. 2d 260,

262-63 (D. Mass. 2008) (derivative plaintiff lost standing under “continuous

ownership” rule after company merged); Billings v. GTFM, LLC, 867 N.E.2d 714,

720-24 (Mass. 2007) (derivative plaintiff lost standing where “he no longer had

any interest” because “the company had dissolved”). This principle applies with

equal force to the reorganization and liquidation, respectively, of the Marketfield

Fund and High Yield Opportunities Fund, and Plaintiffs’ claims as to those Funds

should be dismissed for lack of standing.

CONCLUSION

For the foregoing reasons, NYLIM respectfully requests that this Court enter

an Order granting its Motion for Summary Judgment and dismissing Plaintiffs’

claims with prejudice.

Dated: December 15, 2017

Respectfully submitted,

s/ Liza M. Walsh Liza M. Walsh Katelyn O’Reilly WALSH PIZZI O’REILLY FALANGA

LLP One Riverfront Plaza 1037 Raymond Boulevard, Suite 600Newark, NJ 07102 (973) 757-1100


41

James O. Fleckner (pro hac vice) Katherine G. McKenney (pro hac vice) David Rosenberg (pro hac vice) GOODWIN PROCTER LLP 100 Northern Avenue Boston, MA 02210 Tel.: (617) 570-1000 Gabrielle L. Gould GOODWIN PROCTER LLP The New York Times Building 620 Eighth Avenue New York, NY 10018 (212) 813-8800 Attorneys for Defendant New York Life Investment Management LLC


Documents

UNITED STATES DISTRICT COURT DISTRICT OF NEW …investorscoalition.com/sites/default/files/Redus-Tarchis v NY Life... · WALSH PIZZI O’REILLY FALANGA LLP ... Case 2:14-cv-07991-WHW-CLW