232 F. Supp. 3d 498
S.D.N.Y.2017Background
- Prospect Capital Corporation (Prospect) is a publicly traded business development company (BDC) with no employees that contracts with Prospect Capital Management L.P. (PCM) for investment advisory services and with Prospect Administration LLC (PA) for administrative services; PCM created Prospect and Prospect is PCM’s only client.
- Plaintiff Susan Paskowitz is a Prospect shareholder who sued under Section 36(b) of the Investment Company Act, alleging PCM and PA charged excessive advisory and administrative fees and seeking restitution on behalf of Prospect.
- PCM receives a 2.00% annual base management fee on gross assets plus an incentive (income) fee; Prospect paid PCM approximately $225 million in fiscal 2015. PA (wholly owned by PCM) is reimbursed for administrative costs; Prospect reimbursed PA about $21.9 million in fiscal 2015.
- Plaintiff’s theory compared Prospect’s effective fee rate to averages for internally-managed and externally-managed BDCs in the Wells Fargo BDC Index and alleged at least $54.4 million of fees were excessive. Complaint also alleged deficiencies under Gartenberg factors (service quality, profitability, fall-out benefits, economies of scale, comparative fees, and board independence/conscientiousness).
- Defendants moved to dismiss for failure to state a claim; the district court evaluated the complaint under the Section 36(b) standard derived from Gartenberg and Jones and dismissed the complaint for failing to plausibly plead fees outside the range of arm’s-length bargaining.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether fees were "so disproportionately large" under §36(b) | Fees exceed industry averages and therefore are excessive; specific elements (cash included in gross assets, payment-in-kind, lack of lookback cap) inflate fees | Fee rates fall within the range paid by comparable BDCs and could result from arm’s-length bargaining; board approval and market context weigh against judicial rate-setting | Dismissed — fees not pleaded to be outside the range arm’s-length bargaining could produce |
| Comparative-fee analysis (BDC Index comparisons) | Prospect’s effective fee (6.68% of net assets) is above averages and comparable to top rates, showing excess | Being above average is insufficient; fee lies within range of comparable funds including internally-managed BDCs so not disproportionate | Dismissed — comparative data alone does not plausibly show §36(b) liability |
| Quality of services / underperformance | Prospect underperformed benchmarks over multiple horizons, indicating poor advisory services | Underperformance alone is not a Gartenberg factor and plaintiff alleges no specific deficient services or misconduct | Dismissed — underperformance allegations insufficient to show breach |
| Gartenberg factors: board independence and process | Board rubber‑stamped fees; directors listed on PCM website undermines independence | Statutory presumption of disinterested directors applies; plaintiff fails to rebut with particularized facts | Dismissed — no plausible allegation that board process produced fees impossible from arm’s-length bargaining |
Key Cases Cited
- Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010) (Section 36(b) requires fees be so disproportionately large they could not result from arm’s-length bargaining)
- Gartenberg v. Merrill Lynch Asset Mgmt., 694 F.2d 923 (2d Cir. 1982) (articulated multi-factor test for §36(b) review)
- Amron v. Morgan Stanley Inv. Advisors, Inc., 464 F.3d 338 (2d Cir. 2006) (Gartenberg factors and pleading standards applied at dismissal stage)
- Krinsk v. Fund Asset Mgmt., Inc., 875 F.2d 404 (2d Cir. 1989) (plaintiff must allege specific transaction-cost or per-unit cost facts to show economies of scale)
- Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984) (Congress rejected courts’ role as rate-setters in investment company fee disputes)