UNITED STATES DISTRICT COURT SOUTHERN …investorscoalition.com/sites/default/files/Pirundini v. J.P. Morgan... · 8/4/2017 · Case 1:17-cv-03070-GBD Document 25 Filed 08/04/17 Page

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK JOAN PIRUNDINI, Plaintiff, v. J.P. MORGAN INVESTMENT MANGAGEMENT INC., Defendant.

No. 17 Civ. 3070 (GBD) ORAL ARGUMENT REQUESTED

PLAINTIFF’S MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT’S MOTION TO DISMISS

Ira M. Press Andrew M. McNeela KIRBY McINERNY LLP 825 Third Avenue, 16th Floor New York, NY 10022 Tel: (212) 371-6600 Fax: (212) 751-2540 Email: [email protected]

[email protected]

Dated: August 4, 2017

Case 1:17-cv-03070-GBD Document 25 Filed 08/04/17 Page 1 of 32

mailto:[email protected]


i

TABLE OF CONTENTS

TABLE OF AUTHORITIES ......................................................................................................... iii

TABLE OF ABBREVIATIONS ................................................................................................... vi

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

STATEMENT OF FACTS ............................................................................................................. 2

A. The Fund ................................................................................................................. 2

B JPMIM Extracted Excessive Fees From the Fund .................................................. 4

1. JPMIM Charged Fees Far in Excess of the Average Fees Paid By Comparable Funds for Similar Services ..................................................... 4

2. JPMIM Monopolized Economies of Scale ................................................. 6

3. Nature and Quality of JPMIM’s Services to the Fund ................................ 7

4. The Fund Was Very Profitable to JPMIM .................................................. 8

5. Defendant’s Substantial Fall-Out Benefits ................................................. 8

6. The Board Did Not Exercise Care or Conscientiousness in Approving JPMIM’s Fees ............................................................................................. 9

ARGUMENT – JPMIM’S ADVISORY FEES WERE EXCESSIVE AND VIOLATED SECTION 36(b) ........................................................................ 10

A. Standard ................................................................................................................ 10

B. Law Governing Section 36(b) Claims .................................................................. 11

C. The Gartenberg Factors Establish the Excessiveness of JPMIM’s Fees .............. 13

1. Comparative Fee Structures Show that the Fund Paid Excessive Fees .... 13

i. The JPM Equity Fund ................................................................... 13

ii. The PSF Subadvised Fund ............................................................ 16

iii. Bloomberg’s Large-Cap Blend Fund Index .................................. 18

2. Plaintiff Has Plausibly Alleged that JPMIM Did Not Sufficiently Share Economies of Scale ................................................................................... 18


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3. The Quality of JPMIM’s Services Did Not Justify the Exorbitant Fees .. 22

4. Plaintiff Adequately Pleads the Fund’s Profitability to JPMIM ............... 23

5. JPMIM’s Fall-Out Benefits....................................................................... 23

6. The Board’s Lack of Care and Conscientiousness ................................... 24

CONCLUSION ............................................................................................................................. 25


iii

TABLE OF AUTHORITIES

Cases

Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338 (2d Cir. 2006).............................................................................................. 17, 23

Ashcroft v. Iqbal, 556 U.S. 662 (2009) ................................................................................................................ 11

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ................................................................................................................ 11

In re Blackrock Mut. Funds Advisory Fee Litig., No. 14 Civ. 1165, 2015 WL 1418848 (D.N.J. Mar. 27, 2015) ........................................ passim

Burks v. Lasker, 441 U.S. 471 (1979) ................................................................................................................ 11

Chill v. Calamos Advisors LLC, 175 F. Supp. 3d 126 (S.D.N.Y. 2016).............................................................................. passim

Curd ex rel. Sei Int’l Equity Fund v. Sei Invs. Mgmt. Corp., No. 13 Civ. 7219, 2015 WL 4243495 (E.D. Pa. July 14, 2015) ............................................. 21

Curran ex rel. Principal Funds, Inc. Strategic Asset Mgmt. Balanced Portfolio v. Principal Mgmt. Corp., LLC, No. 09 Civ. 443, 2010 WL 2889752 (S.D. Iowa June 8, 2010).............................................. 20

Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984) ................................................................................................................ 11

In re Davis N.Y. Venture Fund Fee Litig., No. 14 Civ. 4318, 2015 WL 7301077 (S.D.N.Y. Nov. 18, 2015) ................................... 14, 16

In re Federated Mut. Funds Excessive Fee Litig., No. 04 Civ. 352, 2009 WL 5821045 (W.D. Pa. Sept. 30, 2009) ...................................... 22, 23

Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982)................................................................................................ 1, 12

Goodman v. J.P. Morgan Inv. Mgmt. Inc., No. 14 Civ. 414, 2015 WL 965665 (S.D. Ohio Mar. 4, 2015) ................................... 17, 19, 24


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Hoffman v. UBS-AG, 591 F. Supp. 2d 522 (S.D.N.Y. 2008)............................................................................... 12, 16

Jones v. Harris Assocs., L.P., 559 U.S. 335 (2010) ...................................................................................................... 1, 11, 12

Kasilag v. Hartford Inv. Fin. Servs., No. 11 Civ. 1083, 2012 WL 6568409 (D.N.J. Dec. 7, 2012) ................................................. 21

Kenny v. Pac. Inv. Mgmt. Co., No. 14 Civ. 1987, 2015 WL 10635505 (W.D. Wash. Aug. 26, 2015) ............................ passim

Krantz v. Fidelity Mgmt. & Research, Co., 98 F. Supp. 2d 150 (D. Mass. 2000) ...................................................................................... 23

Lynn M. Kennis Trust v. First Eagle Inv. Mgmt., LLC, No. 14 Civ. 585, 2015 WL 5886178 (D. Del. Oct. 8, 2015) ............................................ passim

N. Valley GI Med. Grp. v. Prudential Invs. LLC, No. 15 Civ. 3268, 2016 WL 4447037 (D. Md. Aug. 23, 2016) .............................................. 19

Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86 (2d Cir. 2010)................................................................................................ 10, 11

Paskowitz v. Prospect Capital Mgmt. L.P., 232 F. Supp. 3d 498 (S.D.N.Y. 2017)............................................................................. 1, 2, 17

Redus-Tarchis v. N.Y. Life Inv. Mgmt. LLC, No. 14 Civ. 7991, 2015 WL 6525894 (D.N.J. Oct. 28, 2015) .......................................... 14, 21

Reso ex rel. Artisan Int’l Fund v. Artisan Partners Ltd. P’Ship, No. 11 Civ. 873, 2011 WL 5826034 (D. Wisc. Nov. 18, 2011) ................................. 19, 20, 23

In re Scudder Mutual Funds Fee Litig., No. 04 Civ. 1921, 2017 WL 2325862 (S.D.N.Y. 2007) ......................................................... 18

Sins v. Janus Capital Mgmt., LLC, No. 04 Civ. 1647, 2006 WL 3746130 (D. Colo. Dec. 15, 2006) ...................................... 19, 21

Strougo v. BEA Assocs., No. 98 Civ. 3725, 2000 WL 45714 (S.D.N.Y. Jan. 19, 2000) ............................................... 13

Wacker v. JP Morgan Chase & Co., 678 Fed. Appx. 27 (2d Cir. 2017) ........................................................................................... 14


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Zehrer v. Harbor Capital Advisors, Inc., No. 14 Civ. 789, 2014 WL 6478054 (N.D. Ill. Nov. 18, 2014) ........................................ 19, 21

Zoidis v. T. Rowe Price Assocs., No. 16 Civ. 2786, 2017 WL 1196585 (D. Md. Mar. 31, 2017) ............................ 16, 19, 20, 24

Statues and Regulations

15 U.S.C. § 80a-1 .......................................................................................................................... 11

15 U.S.C. § 80a-35(b), .............................................................................................................. 1, 11


vi

TABLE OF ABBREVIATIONS

Abbreviation Definition/Description

AUM Assets under management

Board Board of Trustees overseeing all of the funds within the JP Morgan Trust

Def. Br. Memorandum of Law in Support of Defendant’s Motion to Dismiss the Complaint

IAA Investment Advisory Agreement

ICA Investment Company Act of 1940

JP Morgan Trust JPMorgan Trust I

JPM Equity Fund JP Morgan U.S. Equity Fund

JPMC JPMIM and JPMorgan Chase & Co.

JPMDS J.P. Morgan Distribution Services, Inc.

JPMIM J.P. Morgan Investment Management Inc.

Plaintiff Joan Pirundini

PSF Pacific Select Fund

PSF Subadvised Fund Long/Short Large Cap portfolio of the PSF Select Fund

The Fund JP Morgan U.S. Large Cap Core Plus Fund


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PRELIMINARY STATEMENT

Plaintiff Joan Pirundini (“Plaintiff”), respectfully submits this memorandum of law in

opposition to the motion of Defendant J.P. Morgan Investment Management Inc. (“JPMIM” or

“Defendant”)) to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil

Procedure. As discussed below, the Complaint states a claim for excessive fees under Section

36(b) of the Investment Company Act of 1940 (“ICA”), 15 U.S.C. § 80a-35(b), in connection

with the JP Morgan U.S. Large Cap Core Plus Fund (the “Fund”).

As discussed herein, the Complaint easily pleads a Section 36(b) claims pursuant to the

factors established by the Second Circuit in Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694

F.2d 923 (2d Cir. 1982), and adopted by the Supreme Court in Jones v. Harris Assocs., L.P., 559

U.S. 335 (2010). In particular, the Complaint plausibly alleges, inter alia, that JPMIM charged

fees that were among the highest charged to similarly-sized funds, despite JPMIM’s mediocre

performance as an investment advisor, and that it reaped substantial fall-out benefits and

economies of scale, which it failed to adequately share with the Fund.

As the innumerable cases Plaintiff cites demonstrate, post-Jones, district courts have

routinely denied motions to dismiss Section 36(b) claims premised on similar allegations.

Indeed, it is telling that Defendant is able to muster just one post-Jones case in support of its

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

2017). But Paskowitz did not even involve a mutual fund – the investment vehicle at issue was a

business development corporation (“BDC”) – and that case turned primarily on the fact that the

plaintiff admitted that the fee at issue fell within a range of fees that were the product of arm’s-


2

length negotiations.1 Plainly Paskowitz is inapt; but to paraphrase the familiar saying, when all a

defendant has is a hammer, all problems start to look like nails.

Defendant’s arguments – in addition to relying on stale authority – primarily raise factual

disputes that are simply inappropriate for resolution at the dismissal phase. For example,

Defendant challenges the applicability of Plaintiff’s three comparative-fee benchmarks, and

claims that its modest fee waiver shared sufficient economies of scale with the Fund, despite the

fact that since the Fund’s inception its fee grew nearly 30-fold, while the work required to

manage the Fund grew at a far slower pace. But as numerous courts have held, a defendant’s

confidence that it will prevail on these issues does not make them any less fact-intensive or any

more appropriate for resolution at this stage of the litigation.

For these reasons, and for the additional reasons stated herein, the Court respectfully

should reject the motion to dismiss in its entirety.

STATEMENT OF FACTS

A. The Fund

The Fund is one of dozens of open-ended mutual funds within the JPMorgan Trust I (“JP

Morgan Trust”), which was created by JPMIM and JPMorgan Chase & Co. (“JPMC”). (¶¶ 37-

38). All of the funds within the JP Morgan Trust are overseen by the same Board of Trustees

(“Board”). (¶ 56). The Board is primarily responsible for reviewing and approving various

contracts and fee arrangements. (¶ 56). Since its inception in 2005, the Fund’s net assets have

skyrocketed from below $1 billion to exceed $10 billion. (¶ 66). 1 Paskowitz, 232 F. Supp. at *505 (“Furthermore, Prospect’s effective fee rate lies within the range of fee rates paid by internally-managed BDCs (which the complaint alleges are free from the disabling lack of true arm’s-length negotiations in contracting for . . . services,”) which place it within, and not outside of, the outer bounds of arm’s-length bargaining.”) (emphasis added) (internal quotation marks omitted).


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Like any mutual fund, the Fund has no employees of its own, but instead carries out its

operations through an array of external service providers. (¶ 40). For example, JPMIM serves as

the Fund’s investment adviser pursuant to an Investment Advisory Agreement (“IAA”). (¶ 41).

In that capacity, JPMIM is primarily responsible for researching potential investments, selecting

the investments comprising the portfolio, and managing the portfolio on an ongoing basis (the

“Portfolio Selection Services”). (¶¶ 41, 57). The Fund’s portfolio is managed by three of

JPMIM’s managing directors. (¶ 66). These three portfolio managers, in turn, utilize “research

ideas [from] a team of 27 career research analysts.” (¶ 67). JPMIM also serves as the Fund’s

Administrator, for which it was separately compensated pursuant to an Administration

Agreement. (¶¶ 46, 57-59).

Other entities provide the Fund with the remainder of the services necessary for it to

function, including substantially all “back office,” administrative, regulatory, and shareholder-

facing services. (¶ 43). Boston Financial Data Services, Inc., is the Fund’s transfer agent and is

responsible for, inter alia, maintaining the Fund shareholders’ accounts and handling all fund

shareholder transactions. (¶ 44). J.P. Morgan Chase Bank, N.A. is the Fund’s Custodian and

Accounting Agent, and provides an array of custodial services as well as portfolio accounting,

administrative, reporting and compliance services. (¶ 45). Finally, J.P. Morgan Distribution

Services, Inc. (“JPMDS”), serves as the Distributor for the Fund. (¶ 50). As Distributor, JPMDS

is responsible for certain “shareholder services,” as well as soliciting and accepting purchases of

fund shares. (¶¶ 50-52).

The Fund’s investment strategies include an asset-class focus on equities, a geographic

focus on the United States, and a market-capitalization focus on large capitalization securities. (¶

62). The Fund also employed what is known as a “130/30 strategy,” meaning that the Fund


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could take long exposures equal to 130% of net assets, offset by short exposures totaling 30% of

net assets. (¶ 63).

Pursuant to the IAA, the Fund pays JPMIM an annual investment advisory fee of .80% of

the Fund’s average daily net assets. (¶ 73). That fee rate does not include any breakpoints (i.e.,

progressively lower fee rates assessed on progressively higher ranges of Fund net assets”), but

instead asses a uniform .80% rate against all Fund assets. (¶ 74). JPMIM and JPMDS entered

into a fee waiver agreement with the JPMC Trust, which covers the Fund. (¶ 75). Under that

agreement, JPMIM recently waived $4.542 million in investment advisory fees. (¶ 78(c)).

Notwithstanding the fee waiver, JPMIM’s investment advisory fee for the period July 1, 2016

through December 31, 2016 was over $35 million. (¶ 83).

B. JPMIM Extracted Excessive Fees From the Fund

1. JPMIM Charged Fees Far in Excess of the Average Fees Paid By Comparable Funds for Similar Services

The investment advisory fee JPMIM charged the Fund was substantially higher than: (i)

the fee JPMIM charged another JPMC mutual fund, known as the JPMorgan U.S. Equity Fund

(the “JPM Equity Fund”); (ii) the fee JPMIM charged as subadvisor to the Pacific Select Fund

(“PSF”) Long/Short Large Cap portfolio of the PSF Select Fund (the “PSF Subadvised Fund”);

and (iii) the investment advisory fee rates paid by other similar mutual funds. (¶ 85). In each

case, the services that JPMIM or the other investment advisors provided was substantially similar

to the services JPMIM provided to the Fund. (¶ 86-87).

The JPM Equity Fund: Like the Fund, the JPM Equity Fund was housed within the

JPMC Trust, had JPMIM as its investment advisor, and was serviced by BDFS, Chase, and

JPMDS. (¶ 89). In fact, the Fund and the JPM Equity Fund had the same IAA, which described

the same investment advisory services, and shared the same three portfolio managers (the JPM


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Equity Fund also had a fourth manager), and used the same “team of 27 career analysts.” (¶

89(b), (e)). The two funds also had identical investment objectives (¶ 89(c)), and had nearly-

identical principal investment strategies. (¶ 89(d)). Both funds were focused on large

capitalization U.S. equities and sought to match the S&P 500 Index’s sector allocations. (¶

89(d)).

In fact, the only real difference between the two funds is that the Fund was able to make a

limited number of short investments (not to exceed 30% of net assets), in addition to its long

investments. (¶ 89(d)). Nonetheless, the funds shared effectively identical sector allocations, a

similar number of long positions, and seven of their top ten holdings were the same. (¶ 89(f)(i),

(ii)). Thus, the JPM Equity Fund is essentially a reproduction of the Fund minus the Fund’s

short positions. (¶ 90). Nonetheless, the Fund’s advisory fee was .80%, while the fee for JPM

Equity Fund was only .40%, despite the fact that the JPM Equity Fund required the work of four

portfolio managers while the Fund only required three portfolio managers. (¶ 93).

The PSF Subadvised Fund: PSF is a registered investment company, which retained

JPMIM to provide sub-advisory services for a fund referred to as the PSF Subadvised Fund. (¶

95). The sub-advisory services that JPMIM provided were in large part identical to the

investment advisory services it provided to the Fund. (¶¶ 96-97). This included being managed

by the same personnel, having the same investment objectives, having identical investment

strategies, including the ability to take short positions, and having strikingly similar investment

portfolios. (¶¶ 97(c)-(g)).

In essence, the PSF Subadvised Fund was a clone of the Fund. (¶ 98). The exception

being that the services JPMIM owed to the PSF Subadvised Fund were broader than the services

JPMIM owed to the Fund, and included extensive administrative, compliance and reporting-


6

related services. (¶ 97(b)). Nonetheless the fee that JPMIM charged the PSF Subadvised Fund

was .60% or, 33% less than what it charged the Fund. This differential is explained by the fact

that while the Fund is a captive entity, the fee rate paid by the PSF Subadvised Fund was

negotiated at arm’s-length. (¶¶ 100-103).

Fees Paid by Other Mutual Funds for Similar Services: Finally, a comparison to other

similar mutual funds with comparable investment strategies demonstrates that JPMIM’s fees are

excessive. (¶ 104). Specifically, Bloomberg Finance L.P. categorizes the Fund as a U.S. equity

large-cap blend fund. (¶ 106). There are 291 “Large Cap Blend Mutual Funds,” with an average

investment advisory fee of 0.54%. (¶ 107). When those 291 funds are further limited to include

only those funds with over $1 billion in assets, like the Fund, the fee differential is even more

stark. (¶ 108). Those 92 larger funds have an average investment advisory fee of only 0.36%.

(¶ 108). In fact, among the 92 U.S. large-cap blend mutual funds with net assets over $1 billion,

the Fund pays the highest advisory fees of all. (¶ 111).

2. JPMIM Monopolized Economies of Scale

In the context of advisory services, the concept of economies of scale recognizes that as

assets under management (“AUM”) increases, the marginal cost of providing advisory services

for such AUM decreases. (¶ 118). Mutual fund advisors, however, often fail to pass along such

savings to fund investors by continuing to charge high investment advisory fees despite the

growth in AUM. (¶ 122). To address this issue, mutual funds now commonly employ a

declining rate structure, pursuant to which there are graduated declines in the fee rate as AUM

grows. (¶ 123).

Here, the Fund did not sufficiently share economies of scale with investors. The Fund

grew rapidly between 2006 and 2016, increasing from $69.2 million to $9.86 billion in AUM. (¶


7

126). During the same time period, JPMIM’s fee – which was a fixed percentage of AUM –

grew nearly 30-fold, from $2.7 million in 2007 to $77.5 million in 2016 (post fee-waiver). (¶¶

129, 140-44). At the same time, however, the work performed by JPMIM grew at a far slower

rate. (Id.). For example, in fiscal year 2007 when the Fund’s AUM was approximately $1.4

billion, it held 212 different stocks in its portfolio. Nine years later, in fiscal year 2016, when the

Fund’s AUM was approximately $9.9 billion, the fund held 319 investments. (¶ 129). In other

words, while AUM grew by over 600% the number of investments JPMIM managed for the

Fund grew by only 50%. (Id.).2 Additionally, the Fund’s portfolio turn-over rate as well as its

investments goals and strategies have remained relatively constant since its inception. (¶¶ 130-

33). Similarly, the fund has featured only two portfolio managers from 2006 through 2015

despite the dramatic increase in AUM. (¶ 135). Thus, as the Fund’s AUM skyrocketed,

JPMIM’s fees similarly skyrocketed, despite the modest increase in the amount of work

necessitated by the increase in AUM. (Id.).

3. Nature and Quality of JPMIM’s Services to the Fund

As previously noted, the bulk of the services JPMIM provided to the Fund consisted of

Portfolio Selection Services. (¶¶ 41, 57, 146). And, as stated in the Fund’s SEC filings, the

quality of those services was the primary metric by which the Board judged JPMIM’s

performance as investment advisor. (¶ 149-52). However, the Fund’s performance versus other

mutual funds was middling. (¶¶ 152-53). Specifically, the Fund’s performance was in the third,

third and fourth quintiles for the preceding one-year, three-year, and five-year periods,

respectively. (¶ 153). 2 Relatedly, a substantial portion of the growth in the Fund’s AUM was attributable to an increase in value of the securities already held within the portfolio (i.e., market appreciation), rather than new investments, and therefore required little if any additional work. (¶ 137).


8

4. The Fund Was Very Profitable to JPMIM

As a wholly owned subsidiary of JPMC, JPMIM does not disclose its financial results,

and therefore there is no public reporting concerning JPMIM’s general profitability, or the

profitability of the Fund specifically. (¶ 155). Despite this information being solely in

Defendant’s position, there a number of facts providing circumstantial evidence that the Fund

was highly profitable to JPMIM. (¶ 156).

First, the Fund pays fees twice as high as the fees paid by the JPM Equity Fund, even

though JPMIM actually uses more personnel – which translates into a higher cost – to manage

the JPM Equity Fund verses the Fund. (¶ 157). Second, the Fund’s fees grew at a rate that far

outstripped the amount of work JPMIM performed. (¶ 130-38, 158). Third, the Funds advisory

fee rate was higher than every other mutual fund that pursued a similar investment strategy and

that had an AUM in excess of $1 billion. (¶ 159). Finally, the Fund’s advisory fee rate was the

highest of any JPMC equity-focused mutual fund with at least $3 billion in AUM. (¶ 160).

5. Defendant’s Substantial Fall-Out Benefits

JPMIM and affiliates also experienced substantial fall-out benefits by virtue of the fact

that the Fund is a captive entity. First, by virtue of the Fund’s relationship with JPMIM, it

engaged JPMIM and its affiliates to provide numerous other services in addition to advisory

services, for which JPMIM and affiliates received substantial additional fees under separate

service agreements. (¶ 162). Those fees, which were paid to JPMIM as Administrator and

JPMDS as Servicing Agent, totaled approximately $11.5 million after fee waivers for the six

month period ended December 31, 2016, or $23 million annualized. (¶¶ 163-64).

Additionally, JPMIM experienced substantial fall-out benefits because the PSF

Subadvised Fund was essentially a clone of the Fund. (¶¶ 165-66). Thus, JPMIM was able to


9

piggy-back off of its work for the Fund at minimal additional cost, in managing the PDF

Subadvised Fund’s portfolio. (¶¶ 165-68). The annual value of this fall-out benefit to JPMIM

was $4.792 million. (¶ 168). Accordingly, the total fall-out benefits that accrued to JPMIM and

its affiliates were $28 million. (¶ 169).

6. The Board Did Not Exercise Care or Conscientiousness in Approving JPMIM’s Fees

The Board is comprised of 12 persons, who serve as Trustees for the Fund, as well as all

153 other captive JPMC funds. (¶ 176). Each Trustee receives a base compensation of $340,000,

while the Board’s chairman receives an additional $225,000 annually (plus monthly expense

reimbursements of $4,000). (¶ 177). Once nominated and elected to the Board, the Trustees

never stand for re-election, but instead enjoy “indefinite” terms that can last as long as the

Trustee’s 78th birthday. (¶ 178).

The Board’s fee approval process was deficient with respect to the information

considered as well as the manner in which it considered that information. (¶ 173). The Fee

approval summaries provided in the Fund’s SEC filings essentially repeated verbatim the same

considerations and conclusions every year for the past five years. (¶ 188-89). This boilerplate

was not aimed at explaining the substance of the Board’s decision making process, but rather

was a collection of conclusory statements addressed to a checklist of Gatenberg factors. (¶¶ 186-

87). In fact, the Board’s lack of conscientiousness is typified by the following examples:

• Fee Comparisons: Although the Board claimed it considered fees paid by comparable funds – and observed that the Fund’s fees were higher than the JPMIM charged for similar services as a subadvisor and that JPMIM’s fees were in the top 20% paid by similar mutual funds – the Board nonetheless concluded the fees were reasonable. (¶¶ 191-206). The Board reached its counterfactual conclusion based on misinformation provided by JPMIM. Among other errors, the Board dismissed the lower fees paid by JPMIM’s sub-advisory clients on the ground that the services provided to the Fund were


10

broader, when, in fact, the services JPMIM provided to the PSF Subadvised Fund were broader. (¶¶ 196-206).

• Economies of Scale: The Board stated that it believed that the fee waiver adequately shared economies of scale with the Fund, but did not state that it was provided with or considered any data estimating the size of the economies of scale or that the fee waiver was large enough to adequately confer those economies of scale onto the Fund’s shareholders. Moreover, the Board did not consider data concerning the amount of work necessitated by the growth in the Fund’s AUM and whether it justified a fee that was an unchanging, fixed percentage of AUM. (¶¶ 207-14).

• Nature and Quality of JPMIM’s Services: Despite acknowledging that the Fund’s performance essentially ranked in the middle of the pack, it nonetheless concluded that such middling performance justified the Fund’s fees. (¶¶ 217-18). The Board, however, did not provide any specific basis whatsoever for reaching that counterfactual conclusion. (¶¶ 218-19).

• The Fund’s Profitability to JPMIM: First, the information the Board considered was not in the form of audited, independently-verified financial statements, but was merely JPMIM’s own self-serving determination of the Fund’s profitability. (222). Second, the Board erroneously considered the expenses of JPMIM’s affiliates – even though they did not render any advisory services – in its profitability analysis. (¶ 223). Lastly, JPMIM’s allocation methodology artificially understated the Fund’s profitability. (¶ 223).

• Fall-out Benefits: The Board claims it considered the additional fees paid to JPMIM as Administrator as JPMDS as Distributor, but did not reach any conclusion as to the propriety of such fall-out benefits. (¶ 226). Additionally, the Board did not consider any information pertaining to the fees JPMIM received for essentially reproducing the Fund’s portfolio for certain sub-advisory clients. (¶¶ 227-28).

At bottom, the Board’s purported fee approval process was merely a smokescreen to

make it appear that the Board’s approval of JPMIM’s funds was not a fait accomplit. (¶¶ 229-

35).

ARGUMENT

JPMIM’S ADVISORY FEES WERE EXCESSIVE AND VIOLATED SECTION 36(b)

A. Standard

“The Court accepts all well-pleaded allegations in the complaint as true, drawing all

reasonable inferences in the plaintiff’s favor.” Operating Local 649 Annuity Trust Fund v. Smith


11

Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir. 2010). In order to survive a motion to

dismiss, a complaint must only “allege a plausible set of facts sufficient ‘to raise a right to relief

above the speculative level.’” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).

A claim is facially plausible “when the plaintiff pleads factual content that allows the court to

draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v.

Iqbal, 556 U.S. 662, 678 (2009).

B. Law Governing Section 36(b) Claims

The ICA, 15 U.S.C. § 80a-1, et seq., regulates investment companies. “Congress adopted

the [ICA] because of its concern with the potential for abuse inherent in the structure of

investment companies.” Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 536 (1984) (internal

quotation marks omitted) (internal citation omitted). Typically, an investment company (also

referred to as a fund) is created by “an investment adviser, which selects the fund’s board [of]

trustees, manages its investments, provides administrative services, and markets the fund to

shareholders, all in exchange for various fees paid out from the assets of the fund itself.” Chill v.

Calamos Advisors LLC, 175 F. Supp. 3d 126, 128 (S.D.N.Y. 2016) (citing Jones, 559 U.S. at

338). “Since the investment adviser is integral to the fund’s existence and selects the fund’s

board, the fund often ‘cannot as a practical matter sever its relationship with the adviser.

Therefore the forces of arm’s-length bargaining do not work . . . as they do in other sectors of the

American economy.’” Id. (quoting Burks v. Lasker, 441 U.S. 471, 481 (1979)).

The ICA was enacted in response to this structural conflict of interest, and imposes, inter

alia, a fiduciary duty on investment advisers “‘with respect to the receipt of compensation for

services, or of payments of a material nature,’ paid by mutual funds or their investors ‘to such

investment adviser or any affiliated person of such investment adviser.’” Operating Local 649


12

Annuity Trust Fund, 595 F.3d at 94 (quoting 15 U.S.C. § 80a-35(b)). That fiduciary duty –

which requires that fee agreements be negotiated and approved by a majority of a fund’s

disinterested trustees – is enforceable by fund investors via a private right of action under

Section 36(b).

In determining whether an investment advisor’s fees are excessive, courts look to all

pertinent circumstances, including the factors this Court set forth in Gartenberg, and adopted by

the Supreme Court in Jones, 559 U.S. at 344–46. Those factors include: (i) the nature and

quality of the services provided to the fund shareholders; (ii) the profitability of the fund to the

investment advisor; (iii) fall-out benefits; (iv) economies of scale; (v) comparative fee structures;

and (vi) the independence and conscientiousness of the trustees. See Gartenberg, 694 F.2d at

929-32; see also Jones, 559 U.S. at 344-346 (adopting Gartenberg analysis).

“‘At the pleading stage a court need not consider whether all six factors are met, but

rather only determine whether the facts as alleged would meet the basic standard as articulated in

Gartenberg.’” Chill, 175 F. Supp. 3d at 131 (quoting Hoffman v. UBS-AG, 591 F. Supp. 2d 522,

539 (S.D.N.Y. 2008)); see also In re Blackrock Mut. Funds Advisory Fee Litig., No. 14 Civ.

1165, 2015 WL 1418848, at *4 (D.N.J. Mar. 27, 2015) (same principle). “In other words, a

plaintiff may state a § 36(b) claim by alleging any combination of facts that plausibly support an

inference that a particular fee, given all of the surrounding facts and circumstances, is

disproportionately large to the services rendered in exchange for that fee.” In re Blackrock, 2015

WL 1418848, at *4 (emphasis added) (internal quotation marks omitted).


13

C. The Gartenberg Factors Establish the Excessiveness of JPMIM’s Fees

1. Comparative Fee Structures Show that the Fund Paid Excessive Fees

As discussed below, the Complaint adequately alleges that JPMIM’s fees were excessive

in relation to three distinct benchmarks, any one of which is individually sufficient to establish

this Gartenberg factor: (i) the JPM Equity Fund; (ii) the PSF Subadvised Fund; and (iii)

Bloomberg’s Index of Large Cap Blend Mutual Funds. See Chill, 175 F. Supp. 3d at 131 (fact

that fund paid fees higher than most other comparable funds supported § 36(b) claim); Strougo v.

BEA Assocs., No. 98 Civ. 3725, 2000 WL 45714, at *7 (S.D.N.Y. Jan. 19, 2000) (same).

i. The JPM Equity Fund

The Complaint explains that – even post-fee waiver – JPMIM’s fee was nearly double

what it charged to the JPM Equity Fund (0.72% vs. 0.40%). The Complaint further explains that

the Fund and the JPM Equity Fund: (i) were subject to the same IAA, which described the same

investment advisory services; (ii) utilized the same three portfolio managers (with the JPM

Equity Fund also using a fourth) and team of 27 career analysts; (iii) had identical investment

objectives, and nearly identical principal investment strategies; (iv) were both focused on large-

cap U.S. Equities and sought to replicate the S&P 500 Index’s sector allocations; and (v) had

seven of their top ten holdings in common. (¶ 89).

In response, JPMIM argues that the nearly 100% increase in the fee that they charged the

Fund was justified by the fact that the Fund, unlike the JPM Equity Fund, also employed a short-

strategy, which required more work because the portfolio was larger and the turn-over rate was

higher. See Memorandum of Law in Support of Defendant’s Motion to Dismiss the Complaint

(“Def. Br.”) at 11-12. As an initial matter, JPMIM’s bid to pin the fee differential on additional

work occasioned by the Fund’s short strategy fails because the Complaint makes clear that,


14

notwithstanding these limited differences, the JPM Equity Fund actually required more work

because it utilized four portfolio managers (three of whom it shared in common with the Fund),

while the Fund only required three (and until 2016, only two). (¶¶ 66, 89, 93, 97). In this

connection, JPMIM does not argue that the personnel who worked on the two funds spent any

more time working on the Fund versus the JPM Equity Fund in explaining the remarkably higher

fee JPMIM charged the Fund vis-á-vis the JPM Equity Fund. See Def. Br. at 21.

In any event, JPMIM simply posits a merits argument: JPMIM asks this Court to

conclude as a matter of law that despite the alleged similarities between the funds – which

JPMIM does not dispute – the limited differences JPMIM identifies wholly explain the massive

fee differential, and renders the JPM Equity Fund an improper benchmark. But this argument is

manifestly inappropriate on a motion to dismiss. See Wacker v. JP Morgan Chase & Co., 678

Fed. Appx. 27, 30 (2d Cir. 2017) (“District Court engaged in impermissible fact-finding by

objecting to Plaintiffs’ use of . . . a benchmark” because “our precedents caution against

assessing the choice of a benchmark at the pleading stage because it involves an inherently fact-

intensive inquiry . . . .”); In re Davis N.Y. Venture Fund Fee Litig., No. 14 Civ. 4318, 2015 WL

7301077, at *5 (S.D.N.Y. Nov. 18, 2015) (“Although Defendants may ultimately be able to

demonstrate that Plaintiffs’ . . . fee benchmark is inapt, the issue is not ripe for resolution on the

pleadings.”).3

3 See also Redus-Tarchis v. N.Y. Life Inv. Mgmt. LLC, No. 14 Civ. 7991, 2015 WL 6525894, at *5 (D.N.J. Oct. 28, 2015) (“courts have held . . . that a defendant’s claim that it provides the Funds with extensive [additional] investment services . . . even if convincing . . . is a merits argument that is more appropriate at summary judgment”) (internal quotation marks and citations omitted); Kenny v. Pac. Inv. Mgmt. Co., No. 14 Civ. 1987, 2015 WL 10635505, at *5 (W.D. Wash. Aug. 26, 2015) (“Whether or not these allegations are true is a question of fact not before the Court at this juncture.”).


15

JPMIM also argues that “an advisory fee higher than the 0.40% charged to the” JPM

Equity Fund is not necessarily excessive because the 0.60% fee JPMIM charged the PSF

Subadvised Fund was negotiated at arms-length. See Def. Br. at 13. This argument fails for at

least two reasons. First, JPMIM has not established that the services it provided to the PSF

Subadvised Fund were similar to the services it provided to the JPM Equity Fund. Rather, the

Complaint explains that: (i) JPMIM provided a host of additional administrative and

compliance-related services to the PSF Subadvised Fund, that it was not required to provide to

the Fund under the IAA; and (ii) the Fund and the JPM Equity Fund were governed by the same

IAA. (¶¶ 89, 97). Thus, JPMIM provided the PSF Subadvised Fund with non-investment

advisory services for which it was compensated as part of its fee, that it did not provide to either

the Fund or the JPM Equity Fund.

Second, even assuming that JPMIM’s fee for advising the PSF Subadvised Fund was

based on the same services as its fee to the JPM Equity Fund, JPMIM’s argument only makes

sense if the fee JPMIM charged the Fund was the same 0.60% fee it charged the PSF Subadvised

Fund. But as the Complaint makes clear, and as explained below, the Fund’s fees were

excessive vis-á-vis the PSF Subadvised Fund, and therefore were also excessive vis-á-vis the

even smaller fees paid by the JPM Equity Fund.

In short, “[a]lthough [JPMIM] disputes whether the comparison with the [JPM Equity

Fund] is relevant, and questions whether important distinctions . . . may be overlooked in the

complaint, the ultimate weight of the comparisons is not before the court.” Lynn M. Kennis

Trust v. First Eagle Inv. Mgmt., LLC, No. 14 Civ. 585, 2015 WL 5886178, at *6 (D. Del. Oct. 8,

2015); Kenny, 2015 WL 10635505, at *4 (crediting fee disparity allegations and allegation that


16

defendant “performs substantially the same services for these different funds,” and noting that

“[w]hether or not the services are the same is a question of fact not addressed at this juncture”).

ii. The PSF Subadvised Fund

The Complaint also shows that the investment advisory fee JPMIM charged the Fund was

excessive compared to the fee it charged as sub-advisor to the PSF Subadvised Fund, which was

essentially a clone of the Fund and utilized a similar long-short strategy. (¶¶ 96-100, 166).

JPMIM does not dispute that, post-fee waiver, the fee it charged the Fund was 20%

greater than the fee it charged the PSF Subadvised Fund. Instead, JPMIM argues – based on a

single pre-Jones authority – that the comparison to the PSF Subadvised Fund is inapt, because

“‘investment advisers and sub-advisers perform distinct services.’” Def. Br. at 15 (quoting

Hoffman, 591 F. Supp. 2d at 540). Putting aside that the Complaint affirmatively alleges that

JPMIM provides the Fund and the PSF Subadvised Fund with the same advisory services (¶¶ 96-

97), numerous courts have held – including several post-Hoffman cases in this district – that such

comparisons are entirely apt at the motion to dismiss phase, even if the services provided were

not identical.4 Indeed, JPMIM recently raised this exact argument in Goodman v. J.P. Morgan

4 See, e.g., Chill, 175 F. Supp. 3d at 133-34 (crediting allegations that “the investment services that [defendant] provided to subadvisor clients . . . were substantially similar or identical to the services provided to the Fund, notwithstanding the higher fees charged to the latter”); In re Blackrock, 2015 WL 1418848, at *5 (fee appropriate comparison apt where substantially similar services were provided to fund); Goodman v. J.P. Morgan Inv. Mgmt. Inc., No. 14 Civ. 414, 2015 WL 965665, at *5 (S.D. Ohio Mar. 4, 2015) (sustaining subadvisory comparison, as “it is the work done and not the label’); In re Davis N.Y. Venture Fund Fee Litig., 2015 WL 7301077, at *5 (crediting plaintiff’s comparison of defendants’ fees charged to fund to fees charged to subadvisor clients, despite argument that advisor “has a wider range of responsibilities and potential liabilities.”); Zoidis v. T. Rowe Price Assocs., No. 16 Civ. 2786, 2017 WL 1196585, at *3-4 (D. Md. Mar. 31, 2017) (crediting plaintiff’s fee comparison to subadvised funds and finding that such allegations plausibly supported argument that defendant’s fees were beyond range that would result from arms-length bargaining); Lynn M. Kennis Trust, 2015 WL 5886178, at *4 (crediting plaintiffs’ allegations where comparison was based on sub-advisory fees).


17

Investment Management Inc., which the court rejected, noting that the plaintiff satisfied this

Gartenberg factor by alleging a “disparity in the fees” between the subject funds and “the

subadvised fund[], while concurrently pleading that the services provided to and resources

involved in all of the funds are substantially the same.” No. 14 Civ. 414, 2015 WL 965665, at *5

(S.D. Ohio Mar. 4, 2015).

Finally, JPMIM argues that the 20% increase in fees it charges between the Fund and

PSF Subadvised Fund is too insubstantial as a matter of law. See Def. Br. at 13. JPMIM’s

argument, however, is not supported by the facts or the law. First, JPMIM ignores that a direct

comparison to the PSF Subadvised Fund actually understates the size of the mark-up it charged

to the Fund. Specifically, the Complaint details that the 0.60% fee JPMIM charged the PSF

Subadvised Fund included substantial administrative and compliance-related services that it did

not provide to the Fund under the IAA. Thus, if those additional services were stripped away –

as well as the portion of the 0.60% fee attributable to those services – the fee differential would

be even greater. See Lynn M. Kennis Trust, 2015 WL 5886178, at *5 (“the court cannot make

factual findings regarding [defendant’s] contention that the [comparator fund] is not sufficiently

comparable to the [fund at issue] at this stage of the proceedings.”).

Second, none of the authorities JPMIM cites support its position. In Paskowitz v.

Prospect Capital Management L.P., the district court rejected the plaintiff’s fee comparison

allegations because the complaint admitted that the fee at issue fell within the range of arms-

length negotiated fees. See 232 F. Supp. at *505. Similarly, in Amron the Second Circuit’s

decision had nothing to do with the purported size of the fee differential, but turned on the fact

that the plaintiff “failed to allege any facts pertinent to the relationship between fees and

services.” Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338, 344 (2d Cir. 2006)


18

(emphasis added). Finally, the portion of the decision in In re Scudder Mutual Funds Fee

Litigation that JPMIM cites concerned the economies of scale factor, not the comparative fee

structures factor. See In re Scudder Mutual Funds Fee Litig., No. 04 Civ. 1921, 2017 WL

2325862, at *17 (S.D.N.Y. 2007); see also Lynn M. Kennis Trust, 2015 WL 5886178, at *7

(distinguishing In re Scudder).

iii. Bloomberg’s Large-Cap Blend Fund Index

Notably, JPMIM does not specifically address the Complaint’s last benchmark: namely,

Bloomberg Finance L.P.’s large-cap blend fund category, which includes the Fund. (¶¶ 105-07).

An analysis of the 291 funds falling within this category reveals an average investment advisory

fee of 0.54%. (¶ 107). When those 291 funds are further refined to include only those funds

with AUMs in excess of $1 billion, like the Fund, the average fee rate is only 0.36%. (¶ 108). In

fact, of all U.S. large-cap blend funds of this size, the fee charged by JPMIM to the Fund is the

absolute highest. (¶¶ 110-11).5

2. Plaintiff Has Plausibly Alleged that JPMIM Did Not Sufficiently Share Economies of Scale

The Complaint plausibly alleges that JPMIM failed to adequately pass along substantial

economies of scale to the Fund. (¶¶ 125-45). Specifically, the Complaint alleges that between

2006 and 2016, as the Fund’s AUM ballooned in size, JPMIM’s fee grew 30-fold, but was not 5 As part of its argument that Plaintiff’s three benchmarks are inapt, JPMIM contends that the Court should look instead to the cherry-picked universe of comparator funds that the Board considered in rubberstamping JPMIM’s fees. See Def. Br. at 13-14 (arguing that fees were in the lower quintile of specific funds considered by the Board). Whether JPMIM’s preferred benchmark is superior, however, is not an issue that can be resolved on a motion to dismiss. See Lynn M. Kennis Trust, 2015 WL 5886178, at *5 (“the court cannot make factual findings regarding [the adviser’s] contention that the [benchmark] is not sufficiently comparable to the Subadvised Fund at this stage of the proceedings”); In re Blackrock, 2015 WL 1418848, at *5 (“disagreements over the degree of relevancy of a fee comparison should not be decided at the pleadings stage”).


19

accompanied by a proportionate increase in cost or work. (¶¶ 140-43). Numerous courts have

held that such allegations are sufficient to plead this Gartenberg factor. 6 Further still, the

Complaint alleges that JMIM’s fee structure did not employ breakpoints, which is an industry

standard way of ensuring that economies of scale are passed along to mutual fund investors. See

Chill, 175 F. Supp. 3d at 141 ([T]here is a recent slew of cases in which federal courts have

found allegations similar to those here as sufficient, including allegedly inadequate

breakpoints.”) (collecting cases).7

In response, JPMIM makes the fact-intensive argument that – despite the explosive

growth in its fees – it sufficiently shared economies of scale with the Fund, because it reduced its

6 See In re Blackrock, 2015 WL 1418848, at *6 (finding plausible plaintiffs’ allegations that “the increase in investment advisory fees paid by the Fund was not accompanied by a proportionate increase in the work or cost by BlackRock.”); N. Valley GI Med. Grp. v. Prudential Invs. LLC, No. 15 Civ. 3268, 2016 WL 4447037, at *9 (D. Md. Aug. 23, 2016) (“Plaintiffs have plausibly alleged that Defendant’s responsibilities have not increased in quality or quantity as AUM increased; thus, a plausible inference arises that an increase in fees is not justified.”); Goodman, 2015 WL 965665, at *3-4 (allegations that economies of scale were generated as AUM grew sufficient at 12(b)(6) stage); Zehrer v. Harbor Capital Advisors, Inc., No. 14 Civ. 789, 2014 WL 6478054, at *4 (N.D. Ill. Nov. 18, 2014) (allegation that defendant “received ‘economies of scale’ benefits as the Fund grew that were not passed on to the Fund” sufficient); Reso ex rel. Artisan Int’l Fund v. Artisan Partners Ltd. P’Ship, No. 11 Civ. 873, 2011 WL 5826034, at *9 (D. Wisc. Nov. 18, 2011) (plaintiff’s “strongest allegations relate to the economies of scale factor” which asserted that defendant’s fee was “reduced only slightly over the course of amassing a large amount of assets, but that [defendant] does not suffer significant additional expenditures over the course of that expansion”). 7 See also Zoidis, 2017 WL 1196585 at *4 (allegation that break points utilized were deficient pleaded economies of scale factor); Lynn M. Kennis Trust, 2015 WL 5886178, at *7 (finding sufficient allegation that “[t]he Funds’ investment advisory fee schedules did not include any breakpoints to reduce the Funds’ fee rate as AUM increased and ensure that the benefits of economies of scale would accrue to investors.”); Kenny, 2015 WL 10635505, at *4 (allegations concerning lack of breakpoints supported economies of scale factor); Sins v. Janus Capital Mgmt., LLC, No. 04 Civ. 1647, 2006 WL 3746130, at *3 (D. Colo. Dec. 15, 2006) (crediting allegations that increase in fund assets without breakpoints showed disproportionality).


20

contractual fee rate by 20% in 2015, and also employed a discretionary fee waiver. See Def. Br.

at 17-18. JPMIM’s argument is meritless and should be rejected.

As an initial matter, JPMIM’s claim that the 20% fee reduction was related to economies

of scale is sheer ipse dixit. Indeed, as the Fund’s SEC filings make clear, the 20% reduction –

unlike the fee waiver – was not specifically mentioned or considered by the Board as a means of

passing along economies of scale. (¶ 185). Thus, the 20% reduction is likely explained by the

fact that JPMIM’s advisory fee was facially exorbitant in light of JPMIM’s mediocre

performance, irrespective of any economies of scale considerations. But even accepting

JPMIM’s argument, the fact remains that a plaintiff “need not establish that [defendant fund

adviser] failed to pass along economies of scale at this stage of the proceedings; rather,” a

plaintiff need only “to allege sufficient factual content to draw a reasonable inference that

[defendant] failed to do so.” In re Blackrock, 2015 WL 1418848, at *7 (emphasis added); Kenny,

2015 WL 10635505, at *4 (same). And JPMIM’s argument raises at most a factual issue that

cannot be resolved at this stage of the litigation.

Additionally, JPMIM is wrong that JPMIM’s voluntary fee waiver – which was

considered by the Board as part of its economies of scale analysis – establishes that JPMIM

sufficiently shared economies of scale with the Fund as a matter of law. Rather, numerous courts

have held that a plaintiff has satisfied this Gartenberg factor where it has alleged that any shared

economies of scale were inadequate.8 And here, even crediting JPMIM’s arguments, the point

8 See Zoidis, 2017 WL 1196585, at *4 (economies of scale factor satisfied, despite fee agreement’s use of breakpoints to lower fees as AUM grew, where plaintiffs “allege that the spacing of the breakpoints and the amounts of fee reductions are grossly inadequate”); Reso, 2011 WL 5826034, at *9 (allegation that fee was “reduced only slightly over the course of amassing a large amount of assets,” but that the defendant did “not suffer significant additional expenditures over the course of that expansion” sufficient); Curran ex rel. Principal Funds, Inc.


21

remains that the Complaint alleges that any diminution in fees was not proportional to the growth

in AUM and the corresponding work required. See Kenny, 2015 WL 10635505, at *4 (fund

growth not matched by a “proportional decrease in fees” satisfied economies of scale factor at

pleading stage).

Defendant is also wrong that Plaintiff cannot plead economies of scale based on, inter

alia, AUM growth prior to the one-year statute of limitations period. See Def. Br. at 19-20.

Rather, “courts have accepted economies of scale allegations based on AUM growth outside the

one-year statutory period.” Redus-Tarchis, 2015 WL 6525894, at *8. 9 In fact, in Chill v.

Calamos Advisors, LLC, Judge Ramos recently denied this exact argument. See 175 F. Supp. 3d

at 136-37; see also id. at 140 n.10 (“Calamos here again revives its argument that Plaintiffs

cannot rely on facts dating from prior to a year before the complaint was filed . . . . The Court

has already rejected this argument . . . .”).10

Finally, JPMIM’s argument that there can be no economies of scale because the Fund’s

AUM decreased from $11.9 billion in June 2015 to $9.7 billion in December 2016, is a non-

Strategic Asset Mgmt. Balanced Portfolio v. Principal Mgmt. Corp., LLC, No. 09 Civ. 443, 2010 WL 2889752, at *8 (S.D. Iowa June 8, 2010) (finding that the plaintiffs had adequately pled the “economies of scale” factor where breakpoints to fees were “immaterial”); Kasilag v. Hartford Inv. Fin. Servs., No. 11 Civ. 1083, 2012 WL 6568409, at *6 (D.N.J. Dec. 7, 2012) (holding Plaintiffs “sufficiently alleged that [defendant’s] breakpoints did not give shareholders meaningful benefits from the economies of scale enjoyed by the Funds”). 9 See also In re Blackrock, 2015 WL 1418848, at *4-6 (plaintiff adequately alleged economies of scale by showing growth in AUM over several years prior to one-year limitations period without proportionate increase in costs); Lynn M. Kennis Trust, 2015 WL 5886178, at *2 (same); Curd ex rel. Sei Int’l Equity Fund v. Sei Invs. Mgmt. Corp., No. 13 Civ. 7219, 2015 WL 4243495, at *4-5 (E.D. Pa. July 14, 2015) (same); Zehrer, 2014 WL 6478054, at *1 (same); Sins, 2006 WL 3746130, at *3 (same). 10 Defendant’s argument essentially confuses a limitation on the damages that are recoverable – here only those damages preceding the filing of the action by one year – with the evidence that can be adduced to establish those damages. See Chill, 175 F. Supp. 3d at 136-37.


22

sequitur. See Def. Br. at 19. JPMIM’s argument only makes sense if Plaintiff alleged that the

entirety of the economies of scale that JPMIM failed to share arose as AUM grew from $9.7

billion to $11.9 billion. But that is not what is alleged. At most, JPMIM argues that a fraction of

the economies it failed to share dissipated with the decrease in AUM, which at most raises a non-

dispositive factual issue.

3. The Quality of JPMIM’s Services Did Not Justify the Exorbitant Fees

The Complaint also plausibly alleges that – despite charging significant advisory fees –

the Fund’s financial performance was mediocre at best, which is sufficient to establish this

Gartenberg factor. (¶¶ 153, 217-18).11 JPMIM’s argument that a fund’s financial performance

is a relatively insignificant factor is incorrect: “courts typically consider allegations of

underperformance when determining whether a plaintiff has pleaded sufficient facts about a

fund’s service quality” because “it seems axiomatic that a mutual fund’s persistent

underperformance vis-á-vis its peers is the best barometer of the services it receives.” Chill, 175

F. Supp. 3d at 143 (emphasis added). Additionally, JPMIM’s argument that a fund’s

performance, in relation to the fees charged, is only relevant if it is significantly below average

rather than average, manufactures a pleading requirement that is unsupported by any of the cases

it cites. See Def. Br. at 20-21. For example, the Second Circuit’s decision in Amron stands for

the unremarkable proposition that underperformance alone – without any of the other

11 See, e.g., Chill, 175 F. Supp. 3d at 142 (plausibility of § 36(b) claims supported by allegations that mutual fund “underperformed all three of its critical benchmarks . . . consistently over the course of one-year, three-year, five-year, and ten-year periods.”); In re Federated Mut. Funds Excessive Fee Litig., No. 04 Civ. 352, 2009 WL 5821045, at *6 (W.D. Pa. Sept. 30, 2009) (sustaining allegations that services were poor based on performance comparison to “similar and related groups of funds”).


23

Gartenberg factors being satisfied – is insufficient to establish a § 30(b) claim. Amron, 464 F.3d

at 344 (noting that fund’s performance was a relevant inquiry).

4. Plaintiff Adequately Pleads the Fund’s Profitability to JPMIM

The Complaint also alleges that the Fund was highly profitable to JPMIM, because

JPMIM charged the Fund fees far in excess of those it charged to the JPM Equity Fund and the

PSF Subadvised Fund, despite the latter funds requiring more work. Specifically, the JPM

Equity Fund had more portfolio managers than the Fund and the PSF Subadvised Fund required

administrative and compliance services that JPMIM was not required to provide the Fund under

the IAA. (¶¶ 93, 97). Courts have sustained allegations where the link between the investment

advisor’s profits and the fund at issue is far less direct than it is here.12

5. JPMIM’s Fall-Out Benefits

The Complaint also plausibly alleges that JPMIM and its affiliates reaped substantial fall-

out benefits. (¶¶ 163-69). JPMIM’s argument that Plaintiff’s allegations regarding the PSF

Subadvisory Fund “do not suffice to establish . . . ‘but for’ causality,’” is as novel as it is

unsupported by any authority. See Def. Br. at 22-23.

JPMIM’s argument that the fees it and its affiliates received as Administrator and

Distributor/Service Agent cannot constitute a fall-out benefit because those services ultimately 12 See, e.g., In re Federated Mutual Funds, 2009 WL 5821045, at *5-7 (sustaining complaint based in part on allegation that fund was “the most profitable equity mutual fund in the Federated Mutual Fund Complex,” and noting that the advisor’s consolidated financial reporting “mask[ed] the fact that a large fund with higher fees [] may be providing disproportionate compensation for the lower fees and/or lower profitability of smaller mutual funds within [defendant’s] Fund Complex.”); Reso, 2011 WL 5826034, at *9 (allegation that “the funds in this case account for a larger portion of [defendant’s] profits than the respective share they account for of [defendant’s] total managed assets” adequately established that advisor “reaps too great a benefit from the funds in this case.”); see also Krantz v. Fidelity Mgmt. & Research, Co., 98 F. Supp. 2d 150, 159 (D. Mass. 2000) (generalized profitability allegations adequate as “defendants are not publicly owned corporations and more specific financial information is not available prior to discovery.”).


24

would have had to be performed by someone, is meritless. See Def. Br. at 22-23 (citing

Paskowitz). The Board itself expressly considered those fees to be fall-out out benefits, in

considering whether to approve JPMIM’s advisory fee. (¶¶ 185, 225-28).

More fundamentally, fall-out benefits concern the benefits obtained by the adviser by

virtue of the captive-relationship, not the cost to the Fund of those benefits. Thus, regardless of

the fact that these services would had to have been provided by third-parties if they were not

provided by JPMIM and its affiliates, the point remains that the service providers would have

done so at a profit, and here JPMIM and its affiliates get to reap that profit. This is true even if

the third-parties charged the same exact fees that JPMIM and its affiliates charged.

Finally, JPMIM and, respectfully, the district court in Paskowitz, fail to grasp the point

that if the Administrative and Distributor/Service Agent services were provided by third-party

entities, then those fees would have been negotiated at arms-length, rather than being the product

of a captive relationship.

6. The Board’s Lack of Care and Conscientiousness

The Complaint explains that the Board essentially rubber-stamped JPMIM’s proposed

advisory fee, and in so doing ignored relevant, contrary information or swept-aside facts that did

not support its decision to approve JPMIM’s fee. (¶¶ 229-35). Such allegations sufficiently

demonstrate the insufficiency of the Board’s fee approval process. 13 JPMIM’s only argument –

13 See Goodman, 2015 WL 965665, at *5 (“Although the complaint contains relatively few details regarding the level of oversight afforded the approved fee rates, factual allegations of rubber-stamping for an affiliated fund are there.”); see also Zoidis, 2017 WL 1196585, at *5 (finding adequate plaintiff’s allegations that trustees “did not make adequate independent assessments, and approved the fees on the terms proposed rather than negotiating more favorable terms”); In re Blackrock, 2015 WL 1418848, at *7 (allegation that board should “not have solely relied upon information and analyses that were prepared by Blackrock or designed to support


25

that a deficient approval process does not, by itself, establish that an advisor’s fees are excessive

– simply states an uncontroversial truism. See Def. Br. at 23-25. Indeed, as Plaintiff has alleged,

the Board’s lack of care and conscientiousness is one the Gartenberg factors, which, when

viewed in chorus, establish the excessiveness of JPMIM’s fees. Cf. Kenny, 2015 WL 10635505,

at *4 (rejecting defendants’ attempt “to review the plausibility of each of Plaintiff’s factual

allegations in isolation, not the plausibility of Plaintiff’s two causes of action taking all factual

allegations as true.”).

CONCLUSION

For the foregoing reasons, the Court should deny the Defendant’s motion to dismiss in its

entirety.

Dated: August 4, 2017 New York, New York

Respectfully submitted,

KIRBY McINERNEY LLP

By: /s/ Ira M. Press Ira M. Press Andrew M. McNeela 825 Third Avenue, 16th Floor New York, NY 10022 Tel: (212) 371-6600 Fax: (212) 751-2540 Email: [email protected]

[email protected]

BlackRock’s rationalization for the advisory fees charged to the Fund” were “sufficient . . . [to] allow for an inference of rubber-stamping by the Boards.”).




Documents

UNITED STATES DISTRICT COURT SOUTHERN …investorscoalition.com/sites/default/files/Pirundini v. J.P. Morgan... · 8/4/2017 · Case 1:17-cv-03070-GBD Document 25 Filed 08/04/17 Page