Ingenhutt et al v. State Farm Investment Management Corporation
Filing
51
ORDER AND OPINION entered by Chief Judge James E. Shadid on 4/17/2017. For the reasons stated above, Defendant's Motion to Dismiss and Motion to Strike are DENIED. The Plaintiffs' jury demand is STRICKEN. SEE FULL WRITTEN ORDER AND OPINION. (JS, ilcd)
E-FILED
Tuesday, 18 April, 2017 09:56:04 AM
Clerk, U.S. District Court, ILCD
IN THE
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
PEORIA DIVISION
AMY L. INGENHUTT and TERESA L.
ODELL,
Plaintiffs,
Case No. 1:15-cv-01303-JES-JEH
v.
STATE FARM INVESTMENT
MANAGEMENT CORPORATION,
Defendant.
ORDER AND OPINION
This matter is before the Court on the Defendant’s Motion to Dismiss (Doc. 37) and Motion
to Strike Declaration of Steve Pomerantz, Ph.D. (Doc. 39). For the reasons set forth below, the
Motion to Dismiss (Doc. 37) and Motion to Strike (Doc. 39) are DENIED.
BACKGROUND
This action is for breach of fiduciary duty under Section 36(b) of the Investment
Company Act of 1940, 15 U.S.C. § 80a-35(b) (the “ICA”). Defendant, State Farm Investment
Management Corporation (“SFIMC”) is the investment adviser for a group of target date mutual
funds, known as the “LifePath Funds” (the “Funds”). Target date mutual funds are designed to
provide a certain level of risk/return based on the date the investments are expected to be needed
for retirement. As the target date approaches, the investments should adjust to become more
conservative over time. Plaintiffs Amy Ingenhutt and Teresa Odell bring this action derivatively
1
on behalf of the Funds in which they have invested, 1 alleging that SFIMC breached its fiduciary
duties to the Funds by collecting excessive management fees. As a result, the Funds and the
shareholders in the Funds have suffered losses.
The following facts are taken from the Plaintiff’s Second Amended Complaint and the
briefs. The Funds do not invest directly in stocks, bonds, or money market funds. Instead, each
of the Funds is a feeder into a “master-feeder” arrangement, investing all of its assets in a
corresponding separate portfolio called a Master Portfolio. Each Master Portfolio is itself one of
a series of funds contained within an unaffiliated fund known as the Master Investment Portfolio
or Master Fund. The Master Fund then invests in a combination or subset of approximately 12
underlying funds. The Master Fund and each of the Master Portfolios were sponsored or
launched by BlackRock, Inc., and are managed by Black Rock Fund Advisors (“BFA”), a private
investment management company unaffiliated with SFIMC. Thus, BFA is the investment
adviser for each of the Master Portfolios, as well as the underlying funds in the Master Fund in
which the Master Portfolios invest. SFIMC relies on BFA to provide portfolio allocations
among the asset classes offered through the underlying funds in managing the Funds.
The fees paid by the Funds include management fees, distribution and/or service fees and
other expenses and fees, including administrative fees. Only the management fees received by
SFIMC are at issue here. These management fees are for the purpose of compensating SFIMC
for its services as the manager or investment advisor to the Funds and are paid as a percentage of
the assets under management. As of 2015, the management fees for the Funds ranged from 102
1
Ingenhutt is a shareholder in the LifePath 2050 Funds, while Odell is a shareholder in the
LifePath 2030 Funds.
2
basis points 2 (1.02%) to 110 basis points (1.1%). The management fees paid by the Funds are
alleged to include the management fees charged by SFIMC for services provided to the Funds,
the fees charged by BFA for its services in managing the underlying funds, and the fees charged
by BFA for its services in managing the Master Portfolios. However, due to its status as advisor
at both the Master Portfolio and underlying funds levels, BFA has contractually agreed to waive
its management fees at the Master Portfolio level in an amount equal to the management fees and
administrative fees its affiliate receives from each investment company in which the Master
Portfolios invest. SFIMC has also contractually agreed to waive its management fees in an
amount required to keep the Fund’s Total Annual Operating Expenses at or below a specified
amount for each share class. As reported in the 2015 Prospectus, the fee waivers for the Funds
ranged from 41 basis points (.41%) to 48 basis points (.48%), causing the net management fee
for each fund to be consistently 62 or 63 basis points (.62% or .63%).
In layman’s terms, this arrangement translated into management fees ranging from
$1,361,772 to $11,738,532 among the five Funds and totaling $39,232,034 in 2014. 3 The total
fees were then apportioned between SFIMC and BFA, with SFIMC receiving $17,495,659 (or 28
basis points) and BFA receiving $21,736,375 (or 34 basis points). According to Plaintiffs, the
net management fee in excess of $17,000,000 that SFIMC receives is approximately 44% of the
total fee even though BFA provides virtually all of the investment advisory and portfolio
management services. Thus, they maintain that the fees retained by SFIMC are so
2
For purposes of this Order, a basis point equals .01%.
3
The funds at issue are two of the five “LifePath” funds.
3
disproportionately large that they bear no reasonable relationship to the services rendered in
exchange for those fees, and could not have been negotiated through arm’s-length bargaining.
PROCEDURAL HISTORY
Plaintiffs brought this action under the ICA claiming excessive or unfair fees under §
36(b) of the Act. 15 U.S.C. § 80a-35(b). On June 22, 2016, the Court granted the Defendant’s
Motion to Dismiss. (Doc. 34). The Plaintiffs subsequently filed a Second Amended Complaint
(“SAC”). (Doc. 35). The Defendant now moves to dismiss the Plaintiffs’ SAC. (Doc. 37, 38).
The Defendant also filed a Motion to Strike the Declaration of Steve Pomerantz, Ph.D. (Doc.
39). The matter is fully briefed, and this Order follows.
LEGAL STANDARD
Courts have traditionally held that a complaint should not be dismissed unless it appears
from the pleadings that the plaintiff could prove no set of facts in support of her claim which
would entitle her to relief. See Conley v. Gibson, 355 U.S. 41 (1957); Gould v. Artisoft, Inc., 1
F.3d 544, 548 (7th Cir. 1993). Rather, a complaint should be construed broadly and liberally in
conformity with the mandate in Federal Rules of Civil Procedure 8(f). More recently, the
Supreme Court has phrased this standard as requiring a showing sufficient “to raise a right to
relief beyond a speculative level.” Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007).
Furthermore, the claim for relief must be “plausible on its face.” Id.; Ashcroft v. Iqbal, 129 S.Ct.
1937, 1953 (2009). For purposes of a motion to dismiss, the complaint is construed in the light
most favorable to the plaintiff; its well-pleaded factual allegations are taken as true, and all
reasonably-drawn inferences are drawn in favor of the plaintiff. See Albright v. Oliver, 510 U.S.
266, 268 (1994); Hishon v. King & Spalding, 467 U.S. 69 (1984); Lanigan v. Village of East
4
Hazel Crest, 110 F.3d 467 (7th Cir. 1997); M.C.M. Partners, Inc. v. Andrews-Bartlett & Assoc.,
Inc., 62 F.3d 967, 969 (7th Cir. 1995); Early v. Bankers Life & Cas. Co., 959 F.2d 75 (7th Cir.
1992).
ANALYSIS
Defendant seeks dismissal of the Amended Complaint on the grounds that Plaintiffs have
failed to state a claim for breach of fiduciary duty. Section 36(b) of the ICA imposes a fiduciary
on the investment managers of mutual funds with respect to their receipt of compensation for
services:
[T]he investment adviser of a registered investment company shall
be deemed to have a fiduciary duty with respect to the receipt of
compensation for services, or of payments of a material nature, paid
by such registered investment company, or by the security holders
thereof, to such investment adviser or any affiliated person of such
investment adviser. An action may be brought under this subsection
. . . by a security holder of such registered investment company on
behalf of such company, against such investment advisers, or an
affiliated person of such investment adviser . . . for breach of
fiduciary duty in respect to such compensation or payments paid by
such registered investment company or by the security holders
thereof to such investment adviser or person.
15 U.S.C. § 80a-35(b).
To state a claim under § 36(b), Plaintiffs must plausibly allege that the investment
advisor charged a fee that “is 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
v. Harris Associates L.P., 559 U.S. 335, 346 (2010). The court’s function is to use “the range of
fees that might result from arm’s-length bargaining as the benchmark for reviewing challenged
fees” and “identify the outer bounds of arm’s length bargaining.” Id.; Jones v. Harris Associates
L.P., 611 Fed.Appx. 359, 360 (7th Cir. 2015) (“Jones II”). In applying the Jones standard, courts
employ the Gartenberg test, which takes into account “all relevant circumstances.” Jones, 559
5
U.S. at 1420 (citing Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir.
1982)). These factors include:
(1) The nature and quality of the services provided to the fund and shareholders;
(2) The profitability of the fund to the adviser;
(3) Any “fall-out financial benefits,” those collateral benefits that accrue to the
adviser because of its relationship with the mutual fund;
(4) Comparative fee structure (meaning a comparison of the fees with those paid
by similar funds); and
(5) The independence, expertise, care and conscientiousness of the board in
evaluating adviser compensation.
Jones, 559 U.S. at 1426, n.5 (citing Gartenberg, 694 F.2d at 929-932).
The Defendant argues that the Court should dismiss the Second Amended Complaint
because the Plaintiffs once again fail to state a plausible claim for excessive fees under § 36(b) of
the ICA. In particular, they argue that the Plaintiffs fail to establish a basis for comparability to
other mutual funds and to define a relevant bargaining range to establish excessive fees. The
Defendants also argue that the Plaintiffs make baseless assertions that SFIMC provides only
minimal services. According to the Defendant, the Plaintiffs also fail to provide necessary facts
to support the other Gartenberg factors—economies of scale, profitability, and independence and
conscientiousness of the board.
Finally, the Defendant argues that because the Plaintiffs fail to state a plausible claim
under § 36(b), they are not entitled to rescission under § 47(b), nor can they ask for a jury trial
when § 36(b) is an equitable claim. The Defendant separately moves to strike the declaration of
Steve Pomerantz, Ph.D. (Doc. 43), which the Plaintiffs cite in support of their allegations. The
Court will address each of the Defendant’s arguments in turn.
I.
Motion to Strike the Pomerantz Declaration
As an initial matter, the Court will address the Declaration of Dr. Pomerantz, and
specifically the Defendant’s Motion to Strike the Declaration. The Plaintiffs incorporated the
6
Declaration of Steve Pomerantz, Ph.D. in their Second Amended Complaint, in hopes to support
their factual allegations and survive another Motion to Dismiss. The Defendant makes a number
of arguments in the Motion to Dismiss that pertain to Pomerantz. Accordingly, the Court will
address the Declaration before reaching the § 36(b) analysis.
Dr. Pomerantz is an “investment management consultant” retained by the Plaintiffs, who
provides an opinion on portions of the relationship between SFIMC and the Funds. The
Defendant, however, argues that the Pomerantz Declaration is devoid of facts and contains legal
opinions that should be reserved for the Court to determine.
The Defendant also argues that the Court should strike all opinions and conclusions
stated in the Declaration, particularly his legal opinion the SFIMC’s compensation is
disproportionate to the services rendered and not negotiated through arms-length bargaining.
Good Shepherd Manor Found., Inc. v. City of Momence, 323 F.3d 557, 564 (7th Cir. 2003). This
includes his interpretation of the underlying service contracts, the SFIMC Advisory Agreement
and the BFA Advisory Agreement. (Doc. 39, p. 6, citing Delta Mining Corp. v. Big Rivers Elec.
Corp., 18 F.3d 1398, 1402 (7th Cir. 1994)). Questioning his background in the industry, the
Defendant also contends that Pomerantz lacks knowledge and makes speculative assumptions.
Finally, the Defendant argues that the Declaration is not properly part of the SAC because it is
not a written instrument pursuant to Rule 10(c) nor does it not satisfy Fed. R. Civ. P. 702,
concerning testimony by expert witnesses.
In their Opposition to the Motion to Strike, the Plaintiffs argue that the Defendant is
improperly imposing Daubert-like barriers to Pomerantz at the pleading stage. Instead, the
Plaintiff describes Pomerantz’s experience in support of his ability to give his opinion and frame
the facts of the case. Additionally, the Plaintiff argues that the Pomerantz Declaration contains
7
assertions of fact, and these are expressly incorporated by reference into the SAC. His statements
are based upon publicly available information as the basis of the facts he presents about the costs
of the services, not contract interpretation, as the Defendant argues.
These claims in the SAC are supported by reference to the Pomerantz Declaration. (Doc.
35-1). The Plaintiffs respond that their factual allegations support their claim that SFIMC’s
services differ from investment advisory services and perform business-management services
that are mostly ministerial in nature. For instance, Pomerantz opines that the non-asset
management services provided by SFIMC are not identified and considered a part of the
administrative service, and therefore the services provided by investment advisors are
insignificant. (Doc. 35-1, ¶¶12, 21). Additionally, the SAC states that the services provided are
independent of the size of the underlying fund and are fixed costs, citing to Pomerantz. Id. at
¶17. The Plaintiffs argue that they cannot be required to plead information they could only obtain
through discovery, citing Runnion ex rel. Runnion v. Girl Scouts of Greater Chicago & Nw.
Indiana, 786 F.3d 510, 529 (7th Cir. 2015) (citing Bausch v. Stryker Corp., 630 F.3d 546, 561
(7th Cir. 2010)) (a plaintiff need not “plead information she could not access without
discovery”). Instead, they contend that the Declaration is properly incorporated to support their
assertions.
The purpose of a 12(b)(6) motion to dismiss is “to test the legal sufficiency of a
complaint, not the merits of the case.” Blau v. Harrison, 2006 WL 850959, at *4 (N.D. Ill. Mar.
24, 2006). “The issue is not whether a plaintiff will ultimately prevail but whether the claimant is
entitled to offer evidence to support the claims.” Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).
Courts must be careful to avoid turning a 12(b)(6) motion into a Rule 56 motion for summary
judgment, and accordingly must exclude matters outside the pleadings from its consideration of
8
whether the Plaintiff has stated a claim. The Court should consider why a plaintiff attached the
documents, who authored the documents, and the reliability of the documents attached to the
pleading. N. Indiana Gun & Outdoor Shows, Inc. v. City of S. Bend, 163 F.3d 449, 455 (7th Cir.
1998). The court should not accept every word in an attached written instrument as true without
regard to the intent of the party attaching the exhibit. Id.
Rule 10(c) provides that “[a] copy of any written instrument that is an exhibit to a
pleading is a part of the pleading for all purposes.” Fed. R. Civ. P. 10(c). This does not mean that
a document attached to a complaint is automatically admissible in trial for any purpose.
American Skandia Life Assur. Corp. v. McCarty, 2008 WL 3009850, *2 (C.D. Ill. August 1,
2008). An affidavit attached to a complaint constitutes a written instrument under Rule 10(c).
Warrentech Auto., Inc. v. Heritage Warranty Ins. Risk Retention Grp., Inc., 2008 WL 4876936,
at *8 (N.D. Ill. Aug. 12, 2008), citing Northern Ind. Gun, 163 F.3d at 453 n. 4 (7th Cir.1998);
Schnell v. City of Chi., 407 F.2d 1084, 1085 (7th Cir.1969). See N. Indiana Gun & Outdoor
Shows, Inc. v. City of S. Bend, 163 F.3d 449, 453, n.4 (7th Cir. 1998) (“[T]he broader
interpretation comports with the traditionally generous nature in which we view pleadings.”). A
fact affidavit, therefore, is a “written instrument” within the meaning of Rule 10(c).
Accordingly, the Court holds that Dr. Pomerantz’s Declaration qualifies as a “written
instrument” within the meaning of Rule 10(c), and therefore the Defendant’s Motion to Strike
the Pomerantz Declaration is DENIED. The Plaintiffs’ intent for including the Declaration was
to address the Court’s concerns in its previous Order dismissing the FAC, and to cite general
industry knowledge about the bargaining range.
The Court has considered the statements incorporated within specific paragraphs in the
SAC to determine whether the Plaintiffs have met the pleading standard. This does not guarantee
9
that the Declaration attached to the SAC will be admissible at trial, American Skandia Life Assur.
Corp. v. McCarty, 2008 WL 3009850, *2 (C.D. Ill. Aug. 1, 2008); rather, at this juncture the
Court only considers whether the allegations in the Complaint are sufficient to survive a motion
to dismiss. Thus, the Court does not yet need to determine whether Pomerantz is a qualified
expert or if his opinions will be admissible. Consequently, the Court will not strike the portions
of the SAC that were derived from the non-conclusory and non-speculative statements in the
Declaration. It appears that the Plaintiffs have revealed one expert ahead of discovery. Later in
the proceedings, the Defendant may wish to bring an objection to Pomerantz as an expert, and
the Court will then consider arguments about the expert’s qualifications and credibility. Such
arguments are more adequately addressed at the summary judgment stage rather than the
pleading stage.
II.
Judicial Notice of Documents
The Defendant requests the Court to take judicial notice of the documents attached to the
Declaration of Robert A. Skinner in support of the Motion to Dismiss pursuant to Fed. R. Evid.
201. (Doc. 37-1). According to the Defendant, the exhibits in question are incorporated by
reference into the SAC and are therefore properly considered in their entirety. The Defendant
argues that these documents are subject to judicial notice because they are directly referenced in
the SAC and are public records whose authenticity is not in dispute. The Plaintiffs object, and
argue that these documents are generally improper on a Rule 12(b)(6) motion and even the
documents that fall within the exception of documents which can be considered on a motion to
dismiss may not be judicially noticed for the truth of their statements. The Plaintiffs also argue
that the documents are not central to their claims.
10
When ruling on a motion to dismiss, courts may properly consider documents attached to
the motion to dismiss or a response. Metz v. Joe Rizza Imports, Inc., 700 F.Supp.2d 983 (N.D. Ill.
2010). These documents are part of the pleadings if they are referred to in the complaint and
central to the plaintiff’s claim. Solis v. Caro, N.C., No. 11 C 6884, 2012 WL 1409558, at *3
(N.D. Ill. Apr. 23, 2012). A court may also take judicial notice of a matter of public record,
which also fall into this exception. Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d
1074, 1080-81 (7th Cir. 1997). Pursuant to Fed. R. Evid. 201, the Court can make judicial notice
of a fact that is not subject to reasonable dispute because it is generally known or “can be
accurately and readily determined from sources whose accuracy cannot reasonably be
questioned.” Fed. R. Evid. 201(b); Henson v. CSC Credit Servs., 29 F.3d 280, 284 (7th Cir.
1994). See also, Menominee Indian Tribe of Wis. v. Thompson, 161 F.3d 449, 456 (7th Cir. 1998)
(“Judicial notice of historical documents, documents contained in the public record, and reports
of administrative bodies is proper.”). A court may take judicial notice of SEC filings “for the
purpose of showing what statements the documents contain, but not for the proof of the facts
stated therein.” George v. Kraft Foods Global, Inc., 674 F.Supp.2d 1031, 1044 (N.D. Ill. 2009)
(quoting Riggs Partners, LLC v. Hub Group, 2002 WL 31415721, at *1 (N.D. Ill. Oct. 25,
2002)).
It is not necessary for the Court to judicially notice these documents for the purposes of
the Motion to Dismiss. The Court may consider documents incorporated in and referenced by the
pleadings. However, because the documents contain facts the Plaintiffs claim are subject to
reasonable dispute, the Court refrains from taking judicial notice. The parties will have an
opportunity to discuss or dispute the significance of the contents of these documents at later
11
stages of the litigation, including summary judgement. Next, the Court will address the § 36(b)
claims as alleged in the SAC.
III.
Section 36(b) Claims
The Defendant argues that the Plaintiffs fail to establish a basis for comparability to other
mutual funds and to define a relevant bargaining range to establish excessive fees, and make
baseless assertions that SFIMC provides only minimal services. The Defendant avers that this is
insufficient to show the challenged fees are beyond the range of arm’s-length bargaining. The
Defendant further argues that the Plaintiffs fail to provide necessary facts to support the other
Gartenberg factors: economies of scale, profitability, and independence and conscientiousness of
the board.
First, the Defendant argues that the Plaintiffs fail to specify how the Comparators are
similar to the Funds in regards to services or costs, and rely on their retained expert, Pomerantz.
Therefore, the Defendant argues that the Plaintiffs have failed to identify the bounds of arm’slength bargaining. See Jones, 611 F. App’x at 360. Mainly, the Defendant argues that the Plaintiffs
improperly compare the Funds to the other purported comparators because they are too dissimilar
for an apt comparison, and the comparative fees presented in the SAC are misleading because they
omit acquired funds fees.
The SAC alleges that SFIMC does not provide active or passive investment management
services. The Plaintiff responds that SFIMC is incorrect, because the management fees in the
comparisons should not be combined with acquired fund fees and expenses/fees received by
BFA. The Plaintiffs acknowledge that the Funds’ master-feeder arrangement differs from the
“fund of funds” comparators, the latter of which perform more services. The Plaintiffs argue that
SFIMC does not manage underlying funds; the acquired fund fees and expenses amount includes
12
costs paid to an investment adviser for managing underlying funds. Because SFIMC does not
manage underlying funds, the Plaintiffs argue, the combined fees comparison is inaccurate. (Doc.
38, p. 5-6).
In Jones, the Supreme Court cautioned that courts should be wary of “inapt comparisons”
where “services rendered are sufficiently different.” Jones v. Harris Assocs. L.P., 559 U.S. 335,
350 (2010). Such a comparison is not probative. Id. The Court previously found that the
Plaintiffs did not present a sufficient foundation to find that these Comparators are similar
enough or provide similar services. In the SAC, the Plaintiffs cure this deficiency. They assert
that mutual fund complexes provide similar services and cost a fraction of what SFIMC charges.
(Doc. 35, ¶ 59-60). “Accordingly, the management fee collected by the adviser directly from the
target date fund is in exchange for precisely the same types of management services as SFIMC
provides to the LifePath Funds . . . .” Id. at ¶ 62. The facts presented in the SAC, if true, show
that the services rendered are not sufficiently different. Thus, the Court finds that the Plaintiffs
have adequately stated which fees are compared and why the fees paid to comparators are not
inapt comparisons. Id. at ¶¶ 62-63. An inference can be made from the facts pleaded in the SAC
that the fees paid to SFIMC do not fall within the arm’s-length bargaining range when
considering the fees charged by comparators.
Second, the Defendant argues that the Plaintiffs make baseless allegations that SFIMC
provides minimal services to establish the fees are beyond the range of arm’s-length bargaining.
The Plaintiffs describe the services as limited in scope and ministerial. Id. at ¶¶ 49, 50, 58. The
Plaintiffs make an attempt to provide factual support by listing the same facts they stated in the
FAC and rearranging them in the SAC. See Doc. 19, ¶¶ 51, 75 and Doc. 35, ¶ 55. However, the
Plaintiffs also provide additional facts that lay a foundation to their claim that SFIMC’s services
13
are not extraordinary and SFIMC’s business needs are not more substantial or costly for the
Trust here than for other trusts. (Doc. 35, ¶ 56, 58). These facts have been added at behest of the
Court’s last Order, which pointed out the dearth of factual support and citations to factual or
legal authority in the FAC. (Doc. 34, p. 6-7). Specifically, the Court found that the Plaintiffs
failed to adequately support their claim that the actual investment services were delegated to and
performed by BFA, and cost much more than the services performed by SFIMC. Here, the
Plaintiffs, albeit minimally, add citations to Pomerantz in order to further contrast the fees and
services of other mutual funds with those of the Funds. (Doc. 35, ¶¶ 56-58).
The Court notes that the primary difference between these allegations in the FAC and
SAC is that the latter cites to the Pomerantz Declaration for factual support. The Defendant
argues that this is improper. However, without restating the Court’s analysis above, the citations
to Pomerantz are not improper as they are incorporated into the SAC. The elaborations of the
duties that SFIMC and BFA perform, combined with the specific allegations that other mutual
funds provide similar services for much lower fees, are enough to allow an inference that the fees
are outside of the arm’s-length bargaining range.
The Defendant argues that Pomerantz’s statement that all mutual fund advisers
necessarily provide the same or similar services “says nothing about the worth or cost of those
services.” (Doc. 38, p. 22; Doc. 35-1, ¶ 15). 4 The Plaintiffs, however, respond that the
4
The Defendants argue that Pomerantz’s statement that BFA performs more or all of the
investment advisory services is improper because it is interpreting a contract. The Plaintiffs
respond that Pomerantz is not interpreting a contract but rather states what services the adviser
actually performs. The Court finds that as stated in the SAC, the Plaintiffs merely cite Pomerantz
to lend support to the claim that SFIMC performs the same services that other mutual fund
advisers perform but receives significantly higher compensation, although these services are less
costly. Doc. 35-1, ¶15. Thus, the Plaintiffs do not rely on his legal interpretation in the SAC, nor
does it appear here that he is giving a legal opinion. Rather, Plaintiffs appear to be relying on his
industry knowledge.
14
Agreement between SFIMC and State Farm Mutual Fund Trust (Doc. 37-21, p. 3-6) (“Trust
Agreement”) differentiates between Management Services provided by SFIMC and Investment
Management Services performed by BFA. Further, they argue that the master-feeder fund
arrangement and comparison between the subadvisory agreement and Trust Agreement supports
this assertion. The Court finds that the insufficiencies in the FAC regarding this factor have been
sufficiently addressed in the SAC. The facts as stated support a claim for a breach of fiduciary
duty; that is, SFIMC charges disproportionately higher fees for the same or similar services
offered by comparator funds, some of which provide more services than SFIMC, particularly
funds that provide more services.
The Defendant argues that the services described by the Plaintiffs are extensive and are
not ministerial and are misnamed business services. There is, however, no way for the Court to
determine the exact nature of these services or reach the merits of the case prior to discovery. It
may be that at after discovery, SFIMC’s duties may be actually quite extensive. However, at the
motion to dismiss stage, the Court determines whether or not a Plaintiffs have stated a claim.
Further, the parties argue over what the public documents state and whether or not these
documents contradict allegations in the SAC. However, “simply presenting the Court with an
alternative version of events does not establish that [the plaintiff] has failed to state a claim.”
Izsak v. Draftkings, Inc., 191 F. Supp. 3d 900, 906 (N.D. Ill. 2016). As alleged, the Plaintiffs
have stated a plausible claim sufficient to survive the Motion to Dismiss.
Next, the Defendant argues that the Plaintiffs fail to allege that there were cost savings as
the assets increased and these assets were not shared with shareholders—the economies of scale
factor. The Defendant argues that the increase does not establish that the benefits from the
15
economies of scale were not passed along to the investors. In general, the Plaintiffs argue that the
fees should not have simultaneously increased with the increase in the size of the funds.
The Plaintiffs attempt to remedy the lack of factual basis for the economies of scale
factor by referencing Pomerantz in the SAC. (Doc. 34-1, ¶ 17). Pomerantz stated that the tasks
and services remain the same no matter the size of the fund. In their response, the Plaintiffs
expand upon their argument, stating that the tasks “do not become more complex or resourceintensive as the assets under management grow in size.” (Doc. 42, p. 12-13). The Plaintiffs
respond that the services do not contribute to the Funds’ value or performance, and are
performed generally for all of the State Farm Mutual funds.
Although the Plaintiffs merely cite to their expert restating the same allegation, the SAC
does not fail for not meeting one of the Gartenberg factors. Kasilag v. Hartford Inv. Fin. Servs.,
LLC, 2012 WL 6568409, at *2 (D.N.J. Dec. 17, 2012) (“The plaintiff need not address all of the
Gartenberg factors to survive a motion to dismiss if, when taken as a whole, the complaint
demonstrates a plausible claim for relief under § 36(b).”). In Kasilag, the court considered the
sufficiency of the § 36(b) claim as a whole, “through the lens of the Gartenberg factors,” and
determining whether the Gartenberg factors weighed in plaintiff’s favor. Id. at *2, 6. The district
court in Reso used similar reasoning in evaluating the Gartenberg factors. Reso ex rel. Artisan
Int'l Fund v. Artisan Partners Ltd. P'ship, 2011 WL 5826034, at *5 (E.D. Wis. Nov. 18, 2011)
(“[S]everal other district courts have allowed complaints to survive dismissal when the alleged
facts did not show each of the six Gartenberg factors.”). Here, the Court will not dismiss because
the complaint as a whole sufficiently states a claim, and the Plaintiffs adequately support the
economies of scale factor in their response.
16
Next, the Defendant argues that the Plaintiffs failed to allege that the Funds’ profitability
indicates the fees are excessive. Although the Plaintiff spends little time on this factor, the facts
alleged throughout the SAC, and specifically for the economies of scale factor, tip this factor into
the Plaintiffs’ favor. The SAC bolsters the services and economies of scale factors and sets forth
facts to support an inference that the fees SFIMC collects are so large scale that there are less
profits passed on to shareholders. The Plaintiffs need not plead all the facts necessary to support
their claim, but need to allege facts sufficient to make the claim plausible on its face. Iqbal, 556
U.S. at 678.
Finally, the Defendant argues that the Plaintiffs have not supported the allegation that the
Board lacked independence, conscientiousness, and adequate information. The Court found that
the FAC was conjectural. The SAC adds the following: “the Board looks at the overall expense
ratio of the funds. It does not separately evaluate the portion of the management fees paid to and
retained by SFIMC and compare those fees to the services actually provided by SFIMC to
determine whether SFIMC’s fees are disproportionate to the services it renders.” (Compare Doc.
35, ¶ 94 with Doc. 19, ¶ 93). The Plaintiffs do not address this allegation, which remains
speculative. The Plaintiffs argue that the Defendant’s exhibits, Docs. 37-7 and 37-8, demonstrate
that the Board did not consider all of the relative facts or expenses in approving the fees. These
arguments, however, present questions of fact and are best reserved for summary judgment.
Although the Plaintiffs do not add additional support for this factor, as discussed above,
combined with the other facts as alleged, the Plaintiffs have alleged enough facts to survive the
Motion to Dismiss. See Zehrer v. Harbor Capital Advisors, Inc., 2014 WL 6478054, at *4 (N.D.
Ill. Nov. 18, 2014) (“Although these allegations alone may not be sufficient to survive a motion
to dismiss, they support Zehrer’s claim that the fees are disproportionate to the services rendered
17
and are not the product of arm’s length bargaining.”). See also, Sivolella v. AXA Equitable Life
Ins. Co., 2016 WL 4487857, at *4 (D.N.J. Aug. 25, 2016) (“These factors are guides for the
Court to follow; and not all of them need to favor Plaintiffs to impose liability.”).
As stated above, the Plaintiffs’ failure to provide support for one factor does not require
dismissal. While this factor has not been met, the Plaintiffs have addressed the deficiencies in the
FAC and dismissal is not warranted. In viewing the Complaint in the light most favorable to the
Plaintiff, the Plaintiff makes a plausible claim under § 36(b) of the ICA, 15 U.S.C. § 80a-35(b).
The Defendant raises the issue that the Plaintiffs are unable to support their claims that the fees
were excessive. This issue may very well be an issue for summary judgment, depending upon
facts uncovered during discovery. However, for purposes of the Motion to Dismiss, the Second
Amended Complaint sufficiently states a plausible claim under §36(b) and gives the Defendant
fair notice of the claim.
IV.
Rescission and Jury Trial
Finally, the Defendant argues that because the Plaintiff fails to state a plausible claim
under § 36(b), they are not entitled to rescission under § 47(b), nor can they ask for a jury trial
when § 36(b) is an equitable claim. Also, the Defendant argues that § 47(b) is only available to a
party to the contract, i.e., SFIMC and State Farm Mutual Fund Trust. The Plaintiffs did not
respond.
First, Section 36(b) claims have been held to be equitable in nature, and there is no right
to jury trial. See Kamen v. Kemper Fin. Servs., Inc., 908 F.2d 1338, 1351 (7th Cir. 1990),
reversed on other grounds, 500 U.S. 90 (1991). See also, Sivolella v. AXA Equitable Funds
Mgmt., LLC, 2013 WL 4096239, at *6 (D.N.J. July 3, 2013), R&R adopted, 2013 WL 4402331
(D.N.J. Aug. 15, 2013) (equitable restitution is not triable to a jury). Additionally, rescission is
18
an equitable remedy. Goldberg v. 401 N. Wabash Venture LLC, 755 F.3d 456, 463 (7th Cir.
2014). Thus, the demand for jury trial is stricken. If the Plaintiffs seek to amend at a later time
and add legal claims which do entitle them to a trial by jury, the Court will revisit the issue.
Second, the Court will not strike the Plaintiffs’ request for rescission before a violation of
§ 36(b) established. See Zehrer v. Harbor Capital Advisors, Inc., No. 14 C 789, 2014 WL
6478054, at *4 (N.D. Ill. Nov. 18, 2014):
[§ 36(b)] does not, however, explicitly foreclose other equitable remedies, such as
injunctive relief or rescission. Because it is unsettled whether rescission under §
47(b) is an appropriate remedy if Zehrer is able to make out a violation of § 36(b),
the court will not strike Zehrer's alternate request for rescission at this stage.
Although the matter is not yet settled in this Circuit, the Plaintiffs, if they prove their claim, may
have rescission available as a remedy. See Id.; Jacobs v. Bremner, 378 F. Supp. 2d 861, 869
(N.D. Ill. 2005). Other courts have held that § 47(b) provides a remedy for a violation of the
ICA, but that there is no separate § 47(b) claim. See Tarlov v. Paine Webber Cashfund, Inc., 559
F. Supp. 429, 438 (D. Conn. 1983). See also, Smith v. Franklin/Templeton Distributors, Inc.,
2010 WL 2348644, at *7 (N.D. Cal. June 8, 2010) (“Courts that have considered the issue have
concluded that a plaintiff can seek relief under § 47(b) only by asserting a violation of some
other section of the ICA.”). Therefore, the Court will reserve ruling on whether rescission under
§ 47(b) is an available remedy if a § 36(b) violation is established. If the matter of rescission as a
remedy does come before the Court, the Court will also address the issue of standing to seek
rescission at that time.
V.
Supplemental Authority
The Defendant filed a Notice of Supplemental Authority in Support of Motion to Dismiss
(Doc. 49), citing the case Paskowitz v. Prospect Capital Management L.P., 2017 WL 375682
(S.D.N.Y. Jan. 24, 2017). According to the Defendant, the Court should adopt the reasoning in
19
Paskowitz, where the court dismissed the complaint because it failed to allege an adequate claim
under § 36(b). Paskowitz, 2017 WL 375682, *5. The Court has reviewed Paskowitz as persuasive
authority, and finds that the claims in that case are distinguishable from the case at hand.
Specifically, the facts in that case focused on underperformance of the funds.
CONCLUSION
I.
In the wake of Twombly and Iqbal, to survive a motion to dismiss, a plaintiff must
provide “enough detail to give the defendant fair notice of what the claim is and the grounds
upon which it rests, and, through his allegations, show that it is plausible, rather than merely
speculative, that he is entitled to relief.” Tamayo v. Blagojevich, 526 F.3d 1074, 1082-83 (7th
Cir. 2008); Reger Dev., LLC v. National City Bank, 592 F.3d 759, 763 (7th Cir. 2010).
The Court, considering the Gartenberg factors, finds that the SAC sets forth facts that
create a plausible inference that the fees paid to SFIMC are disproportionately large in relation to
the services rendered, and fall outside of the range of what arm’s-length bargaining could
produce. Construing the Complaint in the light most favorable to the Plaintiffs, and accepting as
true all well-pleaded facts alleged, and drawing all possible inferences in the Plaintiff’s favor, the
SAC states a plausible claim under § 36(b). Hecker v. Deere & Co., 556 F.3d 75, 580 (7th Cir.
2009).
II.
For the reasons stated above, Defendant’s Motion to Dismiss and Motion to Strike are
DENIED. The Plaintiffs’ jury demand is STRICKEN.
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April
Signed on this ______ day of _____________, 2017.
s/ James E. Shadid
______________________________
James E. Shadid
Chief United States District Judge
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