309 F. Supp. 3d 156
S.D. Ill.2018Background
- Plaintiff Joan Pirundini filed a § 36(b) shareholder suit on behalf of the JP Morgan U.S. Large Cap Core Plus Fund (the Fund) alleging JPMIM charged excessive advisory fees (.80% of AUM) in breach of fiduciary duty.
- The Fund is a no-employee mutual fund housed in JPMorgan Trust I; JPMIM is the investment adviser and also provides other administrative services and affiliates provide additional services (distributor, custodian, etc.).
- The Fund grew dramatically (under $1B to >$10B between 2005–2015) and had limited changes in portfolio staffing and holdings; JPMIM reduced its fee from 1.00% to .80% in 2015 and executed periodic fee waivers tied to overall expense caps.
- Plaintiff relied on Gartenberg factors, emphasizing comparative fee comparisons (other JPMIM funds and Bloomberg peer group), alleged economies of scale not shared with investors, middling performance, high profitability and fall-out benefits to JPMIM, and purported deficiencies in the Board’s review.
- JPMIM moved to dismiss under Rule 12(b)(6); the court evaluated the complaint under Twombly/Iqbal plausibility standards and applied Jones/Gartenberg factors and granted the motion to dismiss for failure to state a § 36(b) claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the advisory fee was so disproportionate to services to violate § 36(b) | Fee (.80%) is excessive relative to fees paid by similar funds and JPMIM’s other clients; economies of scale were realized but not shared; adviser profited and received fall-out benefits | Fee is within arm’s-length range; comparisons to broad peer group are inapt; Board process was adequate; plaintiff lacks cost/profit particulars | Dismissed — plaintiff failed to plausibly allege fees outside arm’s-length range |
| Validity of comparative-fee evidence | Comparison to JPM Equity Fund and PSF sub-advised fund shows higher fee for Fund; Bloomberg peer averages show Fund above industry mean | Comparisons to dissimilar funds (especially Bloomberg group) are inapt; single- or few-fund comparisons insufficient | Comparison to JPM Equity Fund permitted at pleading stage, but overall comparisons did not plausibly show a § 36(b) violation |
| Existence and sharing of economies of scale | Fund’s large asset growth created economies of scale that JPMIM failed to share (no breakpoints; limited increases in staff/services) | Plaintiff did not plead actual transaction or per-unit cost data; JPMIM reduced fees and waived fees, indicating sharing | Dismissed — plaintiff failed to plead the required cost/transaction detail to show economies of scale went unshared |
| Board process and independence | Board approval summary was insufficient and possibly inaccurate; process may have been deficient | Public disclosures show Board retained independent consultant, reviewed independent data, counsel provided guidance, and held meetings before approval | Dismissed — absent allegations that material information was withheld or process was deficient, court deferred to Board’s reasoned approval |
Key Cases Cited
- Jones v. Harris Associates L.P., 559 U.S. 335 (Sup. Ct. 2010) (§ 36(b) requires fees not be so disproportionate to services that they could not be arm’s-length; courts consider Gartenberg factors)
- Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982) (multi-factor test for assessing excessiveness of advisory fees under § 36(b))
- Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338 (2d Cir. 2006) (allegations of underperformance alone insufficient to state § 36(b) claim)
- Migdal v. Rowe Price-Fleming Int’l, Inc., 248 F.3d 321 (4th Cir. 2001) (economies-of-scale concept and legislative purpose behind § 36(b))
- Krinsk v. Fund Asset Mgmt., Inc., 875 F.2d 404 (2d Cir. 1989) (plaintiff must allege substantive facts about transaction costs to show economies of scale)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (Sup. Ct. 2007) (plausibility standard for pleading)
- Ashcroft v. Iqbal, 556 U.S. 662 (Sup. Ct. 2009) (court need not accept conclusory allegations; apply plausibility test)