175 F. Supp. 3d 126
S.D.N.Y.2016Background
- Plaintiffs Saul and Sylvia Chill are shareholders in the Calamos Growth Fund (the Fund), advised by Calamos Advisors LLC (Calamos); Calamos Financial Services LLC (CFS) is the Fund’s distributor. Plaintiffs allege breach of fiduciary duty under Section 36(b) of the Investment Company Act of 1940 (ICA) for excessive advisory and distribution (12b-1) fees.
- Calamos manages a multi-fund complex; the Fund is the flagship and a large share of Calamos’ advisory revenue and AUM, creating an alleged incentive to keep Fund fees high.
- Plaintiffs allege facts across the Gartenberg factors: (1) comparative fee evidence showing the Fund pays higher advisory fees than Calamos’ institutional/sub-advised clients and many peer mutual funds; (2) underperformance of the Fund versus benchmarks and peers; (3) limited pass-through of economies of scale and weak breakpoints; (4) fall-out benefits and high profitability to Calamos; and (5) Trustees’ alleged failure to meaningfully negotiate or critically assess fees.
- Plaintiffs also challenge Distribution Fees (12b-1/service fees), alleging they are tied to AUM rather than actual distribution activity, pay for duplicative or non-existent services, and were rubber-stamped by the Trustees.
- Defendants moved to dismiss under Rule 12(b)(6). The Court denied the motion, finding the complaint plausibly alleged excessive advisory and distribution fees under §36(b) when the Gartenberg factors are viewed together.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether advisory fees are actionable under §36(b) as excessive | Fund pays disproportionately high advisory fees vs. (a) Calamos’ institutional/sub-advised clients and (b) peer mutual funds; services are poor (persistent underperformance); Trustees failed to negotiate or consider key facts; Calamos profits and fall-out benefits support claim | Comparisons to institutional/sub-advised clients are inapt or untimely; performance and economy-of-scale allegations are insufficient; Trustees reviewed fees so deserve deference | Denied dismissal: complaint plausibly alleges excessive advisory fees when Gartenberg factors are considered together (comparative fees, poor performance, and trustee conduct especially persuasive) |
| Use and weight of comparative-fee evidence (institutional/sub-advised and peers) | Comparisons show near-identical services for lower fees elsewhere, supporting inference that Fund fees are outside arm’s-length range | Such comparisons are legally weak unless differences in services are excluded; some comparator evidence predates the one-year damages window | Court: Comparisons are permissible and sufficiently pleaded at pleading stage; weight determined later in discovery/trial |
| Economies of scale / breakpoints: failure to pass savings to shareholders | AUM growth produced scale savings not reflected in fee reductions; breakpoints are cosmetic or ineffective | Historical fee-rate changes undermine claims; lack of transaction-level cost data weakens economy-of-scale allegations | Court: Economy-of-scale allegations add only modestly to plausibility; not decisive alone but may support claim combined with other factors |
| Whether Distribution (12b‑1) fees are excessive under §36(b) | Distribution Fees are AUM‑based, fund non‑existent or duplicative distribution services (e.g., discontinued share classes still pay fees), and Trustees failed to justify fees | Fees comply with regulatory caps and Trustees reviewed the plan; factual disputes about value and allocation of services | Denied dismissal: complaint plausibly alleges Distribution Fees may be excessive and Trustees did not adequately justify them at pleadings stage |
Key Cases Cited
- Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010) (§36(b) requires that adviser fees not be so disproportionately large as to bear no reasonable relationship to services; courts evaluate all pertinent circumstances)
- Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982) (sets core multi‑factor test for excessiveness: nature/quality of services, profitability, fall‑out benefits, economies of scale, comparative fees, and trustees’ independence/conscientiousness)
- Burks v. Lasker, 441 U.S. 471 (1979) (describing mutual fund/adviser relationship and limits of arm’s-length bargaining)
- Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984) (discusses mutual fund governance and role of directors under ICA)
- Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338 (2d Cir. 2006) (addresses sufficiency of allegations re: fee comparisons and fund performance in §36(b) claims)