SIVOLELLA v. AXA EQUITABLE LIFE INSURANCE COMPANY et al

Filing 302

OPINION filed. Signed by Judge Peter G. Sheridan on 8/25/2016. (mmh)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

MARY ANN SIVOLELLA, GLENN D.
SANFORD, BRIAN A. SANCHEZ, et al.
Plaintiffs,

Civil Action No.: l l-cv-4194 (PGS)(DEA)
OPINION

v.
AXA EQUITABLE LIFE INSURANCE
COMPANY, et al.
Defendants.
GLENN

D: SANFORD, et al.
Plaintiffs,

v.

RECEIVED
AUG ,2- 5 2016
AT 8:30
WILLIAM T. WALSH
CLERK

M

AXA EQUITABLE LIFE INSURANCE
COMPANY, et al.
Defendants.

This case arises under§ 36(b) of the Investment Company Act of 1940, 15 U.S.C. § 8a35(b) ("ICA" or "36(b)"). Plaintiffs bring this consolidated, derivative 1 action on behalf of
mutuai fund investors who are contract holders to variable annuity products with Defendants
AXA Equitable Insurance Company ("AXA") and AXA Equitable Funds Management Group,
LLC ("FMG").
The Court conducted a 25-day, non-jury trial beginning on January 6, 2016 and

1

The two cases were consolidated because both emanate from the same factual background, and are brought against
the same Defendants. This is a derivative suit because Plaintiffs, as mutual fund investors, seek damages on behalf of
all investors in the funds in question, plus attorney's fees.

concluding on February 25, 2016. Findings of Fact and Conclusions of Law were thereatler
submitted. ECF Nos. 247, 248, 275, 276, 279, 290, 283, 284, 285. Closing arguments were
heard on June 1, 2016.
Plaintiffs allege that the Board of Trustees (the ''Board") for the EQ Advisors Trust
("EQAT" or the "Fund"), a mutual fund complex, breached its fiduciary duty by approving
service contracts that charged excessive management and administrative fees. The thrust of the
trial focused on Plaintiffs' claim that FMG charged investors exorbitant fees for mutual fund
investment and administrative duties, and then delegated those same duties to sub-advisers and
sub-administrators for nominal fees. Plaintiffs allege: (a) FMG's fees were so disproportionally
high when compared to the fees of sub~advisers and sub-administrators, and therefore some, if
not all, of FMG's fees should be reimbursed to the mutual fund rather than enriching FMG; (b)
the allegedly independent Board breached its fiduciary duty by authorizing such disproportionate
fees; and (c) FMG manipulated the Board meeting materials and duped the Board by providing
misleading and unreliable materials in the fee approval process. In sum, Plaintiffs contend that
FMG's compensation under the investment management and administrative agreements ''could
not have been the product of arm's-length bargaining." ECF No. 276, Plaintiffs' Response to
Defendants' Proposed Findings of Fact ("PRDFOF"), il 3.
Pursuant to FED. R. CIV. P. 52(a), and after careful consideration of the entire record in
this case and the applicable law, the Court concludes that Plaintiffs have failed to meet their
burden to demonstrate that Defendants breached their fiduciary duty in violation of§ 36(b) of the
ICA or have shown any actual damages. At odds with that conclusion is that the filing of the
lawsuit, as opposed to the substance of the proofs, has been the impetus to improve the quality of

2

the Board's decision-making, facilitating enhancements to the Board materials and changes in
the Board's composition.

Legal Standard
A.

Statutory Cause of Action
By way of background, Congress enacted the ICA because it understood that mutual fund

products were different from stock of an individual company. Generally, H[a] mutual fund is a
pool of assets, consisting primarily of [a] portfolio [of] securities, and belonging to the individual
investors holding shares in the fund." Burks v. Lasker, 441 U.S. 471, 480, 99 S.Ct. 1831, 60
L.Ed.2d 404 (1979) (citing Tennenbaum v. Zeller, 552 F.2d 402, 405 (2d Cir. 1977)). A mutual
fund is often created by an investment adviser who selects the fund's board of trustees, manages
its investments, provides administrative services and markets the funds in exchange for fees paid
out of the assets of the fund. Jones v. Harris, L.P., 559 U.S. 335, 338, 130 S.Ct. 1418, 176
L.Ed.2d 265 (2010); see also Burks, 441 U.S. at 480, 99 S.Ct. at 1838.
Obviously, the investment adviser has superior control over the Board of Trustees than
the individual investors do, like the Plaintiffs in this case, a teacher (Sivolella) and a police
officer (Sanchez). As such, "the forces of arm's length bargaining do not work in the mutual
fund industry in the same manner as they do in other sectors of the American economy." Jones,
559 U.S. at 338, 130 S.Ct. at 1422 (internal citation omitted). As a result, the relationship
between a fund and its investment adviser is considered to be "fraught with potential conflicts of
interest ... " Id. at 339 (citing Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 536-38, 104 S.Ct.
831, 78 L.Ed.2d 645 (1984)).
Congress adopted the ICA "because of its concern with the potential for abuse inherent in
the structure of investment companies." Jones, 559 U.S. at 339. Hence, the Act declared its
purpose:
3

to mitigate and, so far as is feasible, to eliminate the conditions
enumerated in this section which adversely affect the national public
interest and the interest of investors.
15 U.S.C. §80a-l. When initially enacted, the ICA imposed a "scheme that regulates most
transactions between investment companies and their advisers." Daily Income Fund, 464 U.S. at
536 (citing 15 U.S.C. §80a-l 7). It limited the number of persons affiliated with the adviser who
may serve on the mutual fund's board of directors (15 U.S.C. § 80a-10), and required that fees
for investment advice and other services be governed by a written contract that the mutual fund's
board must approve (15 U.S.C. § 80a-15(c)). Daily Income Fund, 464 U.S. at 536-37. Under
the ICA's original scheme, a shareholder seeking to challenge an investment adviser's fee under
state law was required to demonstrate "common-law standards of corporate waste, under which
an unreasonable or unfair fee might be approved unless the court deemed it 'unconscionable' or
'shocking,'" and "security holders challenging adviser fees under the [ICA] itself had been
required to prove gross abuse of trust." Jones, 559 U.S. at 340 (quoting Daily Income Fund, 464
U.S. at 540, n.12)).
In response to the growth of mutual funds in the 1950s and 1960s, Congress amended the
Act in 1970 to bolster the protections afforded to mutual funds and their shareholders. Jones,
559 U.S. at 339; see also Daily Income Fund, 464 U.S. at 537-38. The amendment "required
that no more than 60 percent of a fund's directors be 'persons who are interested persons,' e.g.,
that they have no interest in or affiliation with the investment adviser." Jones, at 339-40
(quoting 15 U.S.C. § 80a-10(a); § 80a-2(a)(l9)). This "was designed to place the unaffiliated
directors in the role of 'independent watchdogs."' Burks, 441 U.S. at 484 (quoting Tannenbaum,
552 F.2d at 406). In serving as "independent watchdogs," unaffiliated directors are to ensure that
"mutual funds ... operate in the interest of all classes of their securities holders, rather than for

4

the benefit of investment advisers, directors, or other special groups." Tannenbaum, 552 F.2d at
406.
The amendment also added Section 36(b), which imposes a "fiduciary duty" on
investment advisers and their affiliates, ""aiming to give shareholders a stronger remedy ... to
bring actions to challenge a fee that was not 'reasonable' .. ."Jones, 559 U.S. at 340; see also
Daily Income Fund, 464 U.S. at 538. Section 36(b) states that ""investment company advisers

owe shareholders in investment companies a fiduciary duty with respect to determining and
receiving their advisory fees." Green v. Fund Asset Management, L.P. 286 F.3d 682, 685 (3d
Cir. 2002) (citing 15 U.S.C. § 80a-35(b)).
Furthermore, the Act allows for a private cause of action for breach of this fiduciary duty
by shareholders in an investment company, ""provided that they own shares at the time the action
is initiated and continue to own shares throughout the pendency of the litigation." Redus-Tarchis
v. New York Life Insurance Management LLC, 2015 WL 6525894 at* 4 (D.N.J. Oct. 28, 2015)

(citing Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co. (USA), 677 F .3d
178, 182-83 (3d Cir. 2012)).
The Act imposes additional statutory requirements when bringing an action for breach of
fiduciary duty under Section 36(b ). Specifically, Congress: (a) limited the period of damages so
that "[ nJo award of damages shall be recoverable to any period prior to one year before the
action was instituted"; (b) directed that the amount of any award be limited "to the actual
damages resulting from the breach of fiduciary duty"; (c) required that "[n]o such action shall be
brought or maintained against any person other than the recipient of such compensation or
payments," i.e. the defendant must be either an investment adviser or an affiliated person to the
investment adviser. 15 U.S.C. § 80a-35(b)(3); see also In re Salomon Smith Barney Mut. Fund

5

Fees Litigation, 441 F. Supp. ·2d 579, 598-99 (S.D.N.Y. 2006). Finally, the Act provides that the
board of directors' approval of compensation, payments, or contracts '"shall be given such
consideration by the court as is deemed appropriate under all the circumstances.'' 15 U.S.C. §
80a-35(b )(2).
However, the "fiduciary duty imposed by § 36(b) is significantly more circumscribed
than common law fiduciary duty doctrines ... [T]he plaintiff has the burden of proving a breach
of fiduciary duty [under § 36(b )] in contrast with the common law rule that requires a fiduciary
to justify its conduct." Green, 286 F.3d 682 at 685 (internal citations omitted).

B.

Case Law
In addition to the Act's statutorily imposed requirements, there are primarily two cases

that explain the standard for determining whether a breach of fiduciary duty occurred: Jones,

supra, and Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982). Both
Jones and Gartenberg teach that Section 36(b) liability requires proof that '~the adviser-manager
[to] charge 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 arms-length bargaining." Gartenberg,
694 F.2d at 928. To determine whether a disproportionate fee was approved ot a breach of
fiduciary duty has occurred, one considers the often referred to Gartenberg factors. Id. at 929-30
(internal citation omitted). They are: ( 1) the nature and quality of the services provided by the
advisers to the shareholders; (2) the profitability of the mutual fund to the adviser; (3) "fall-out"
benefits; (4) the economies of scale achieved by the mutual fund and whether such savings are
passed on to the shareholders; (5) comparative fee structures with other similar funds; and (6) the
independence and conscientiousness of the mutual fund's Board of Trustees. Gartenberg, 694
F.2d at 929-30; see also In re Salomon, 441 F. Supp: 2d at 599; Krinsk v. Fund Asset Mgmt. Inc.,
875 F.2d 404, 409 (2d Cir.), cert. denied, 493 U.S. 919 (1989).
6

These factors are guides for the Court to follow; and not all of them need to favor
Plaintiffs to impose liability. The Court weighs all of the evidence present_ed and the gravity of
each factor to adjudicate the case. Gartenberg, 694 F.2d at 929-32; see also In re Davis N. Y.
Venture Fund Fee Litig., 2015 WL 7301077 at *4, n.3 (S.D.N.Y. 2015).

The Supreme Court in Jones adopted the Gartenberg factors as the appropriate criteria to
consider when assessing breach of fiduciary duty under the Act. Jones, 559 U.S. at 347-48. As
Justice Alito noted, "[t]he Gartenberg approach fully incorporates this understanding of the
fiduciary duty ... and reflects§ 36(b)(l)'s imposition of the burden on the plaintiff ...
Gartenberg's approach also reflects §36(b)'s place in the statutory scheme and, in particular, its

relationship to the other protections that the Act affords investors." Id.
The Jones Court indicated that, H[ w ]here a board's process for negotiating and reviewing
investment-adviser compensation is robust, a reviewing court should afford commensurate
deference to the outcome of the bargaining process.'' Jones, 559 U.S. at 351 (citing Burks,_ 441
U.S. at 484). A court should not be second guessing informed board decisions. See Jones,

~59

U.S. at 352. When a court is reviewing investment adviser fees, it should not hone in on the
amount of the fees, but focus on whether the Board or the adviser fulfilled their fiduciary duties
by acting in a manner consistent with their independent judgment. As such, the Supreme Court
held that the Gartenberg factors are an appropriate manner and measure of the Board's duty.
Jones, 559 U.S. at 336-37. Therefore, "if the disinterested directors considered the relevant

factors, their decision to approve a particular fee agreement is entitled to considerable weight,
even if a court might weigh the factors differently." Id. at 351. However, "where the board's
process was deficient or the adviser withheld important information, the court must take a more
rigorous look at the outcome. When an investment adviser fails to disclose material information

7

to the board, greater scrutiny is justified because the withheld infonnation might have hampered
the board's ability to function as an independent check upon the management.'' Id. at 351-52
(internal citations omitted).
In sum, for Plaintiffs to prove a breach of fiduciary duty under the ICA, they carry the
burden to establish the following elements by a preponderance2 of the evidence:
1. Plaintiffs owned shares at the time the action was initiated and have continued to own
shares throughout the pendency of the litigation;
2. Defendants are either investment advisers or a board of trustees;
3. The application of the Gartenberg factors demonstrates that FMG' s fees were so
disproportionately large that they bore no reasonable relationship to the services rendered
and could not have been the product of anns-length bargaining, thus constituting a breach
of fiduciary duty;
4. As a result of the breach, there was an injury or damages; and
5. The amount of actual damages related to the breach of fiduciary duty that occurred.

Standard of Proof
Plaintiffs have the burden of proving their case by the preponderance of the evidence.
The Court adopts the definition in the Model Jury Instructions:
That means Plaintiffs have to prove that their claims are more likely
than not ... To say it differently, if one puts the evidence favorable
to Plaintiffs and the evidence favorable to Defendants on opposite
sides of the scales, Plaintiffs would have to make the scales tip
somewhat to their side. If Plaintiffs fail to meet this burden, the
verdict must be for Defendants. 3

2

Gartenberg, supra, 694 F.2d at 933.
Both Plaintiffs' and Defendants' counsel largely agree that the preponderance of evidence is the standard.
Tl37:22-138:9 (Lakind Closing Argument); Tl39:9-15 (Murphy Closing Argument). Plaintiffs' counsel argues that
it is different with "regard to allocated costs when Krinsk put that on defendant." Tl38: 1-2 (Lakind Closing
Argument). The Court does not see such an exception in Krinsk.

3

8

See Model Jury Charge 1.10, ''Preponderance of the Evidence," available at

http://www.ca3.uscourts.gov/model-civil-jury-table-contents-and-instructions (July 2015).
Role of the Court

In this case, the Court has three roles. First, as trier of fact, the Court's duty is to decide
the facts from the evidence that was heard and seen in court during the trial. The second duty is
to apply the law to the facts. The third role is to clearly explain the facts and the legal principles
underpinning the Court's decision.
Like any jury, the Court performs these duties fairly and impartially. The Court will not
allow sympathy, prejudice, fear, or public opinion to influence its decision. The Court will not
be influenced by any person's race, color, religion, national ancestry or gender. Here, all the
parties stand on equal footing, despite the ''Main Street v. Wall Street" perception. See Model
Jury Charge 1.1, "Role of the Jury." Since the Court's decision is based upon evidence4 seen, and
heard in the courtroom, the Court followed the same guidelines as a jury would in determining
the evidence and what weight should be given to it.
The Court considered t~o types of evidence. · One type of evidence is called "direct
evidence." An example of "direct evidence" is when a witness testifies about something that the
witness knows through his own senses -

something the witness has seen, felt, touched, heard or

did. Another form of direct evidence is an exhibit where the fact to be proved is its existence or

4

One of the Court's roles is to act as gatekeeper on what testimony and documents are admitted into evidence.
There were two issues that require clarification. First, on an in limine motion, the Court admitted all of the Board of
Trustees' meeting materials into evidence on a wholesale basis as relevant to the Board's approval of the contracts at
issue in this case for a five year period, over Plaintiffs' objection. ECF No. 196, T44:25-46: 14. The Court did so
with the understanding that the parties would later identify and admit separately individual documents that were of
particular importance to the case. Within this Opinion, the documents marked separately are referenced. Second,
Plaintiffs' use of hostile witnesses, such as Joenk, in laying the foundation of the case sometimes led to imprecise
questioning, and the responses were often evasive and truncated. The Court found this to be cumbersome in the
beginning of the trial, but over time the testimony flowed smoothly.

9

current condition. The other type of evidence is "circumstantial evidence." "Circumstantial
evidence" is proof of one or more facts from which one could find another fact.
The Court considered both direct and circumstantial evidence that was presented. The
law makes no distinction in the weight to be given to either direct or circumstantial evidence. See
Model Jury Charge 1.6. For example, the Court did not let rumors, suspicions, or anything else
that it may have seen or heard outside of the court to influence its decision in any way. 5 The
evidence in this case consists of the testimony of the witnesses; documents and summary charts;
and any fact or testimony that was stipulated. See Model Jury Charge 3 .1. In order to assess the
evidence, the Court used common sense, and considered it in light of everyday experience with
people and events. As such, the Court has given the evidence whatever weight it believed it
deserved. See Model Jury Charge 1.5.

The Parties
A.

Plaintiffs
Plaintiffs are Mary Ann Sivolella ("Sivolella"), Glen Sanford ('~Sanford"), Mary and

Robert Cusack, Patricia Lynn ("Lynn"), William Tucker ("Tucker"), and Brian Sanchez
("Sanchez"). Only one Plaintiff, Sanchez, testified at trial. None of the other Plaintiffs testified
or attended the trial. Aside from Sivolella, a teacher (T36: 16 (Plaintiffs' Opening)), and
Sanchez, a retired police officer (T36: 14-18 (Sanchez)), there were very few personal facts

presented about the other Plaintiffs or their reason for bringing the suit, except for those facts set
forth in the stipulations of the parties.
Plaintiffs are parties to variable annuity contracts with AXA. Court Ex. 1, Joint
Stipulation of Facts (Jan. 12, 2016) ("JSOF") ~~ 1, 8-13. A variable annuity is a contract

5

From time to time at social gatherings of public employees (teachers), the high fees of variable annuities/mutual
funds arose as part of a retirement discussion. Since such a topic would be a rumor, the Court did not consider said
comments in this opinion.

10

between an individual or entity and an insurance company, which allows Plaintiffs, as contractholders, to convert gains from an investment into annuity payments over some period of time. P125 at Bates 8840, 8876-78. Under these contracts, contract-holders contribute money and then
allocate these monetary contributions to one or more investment options offered within the
variable annuity. JSOF ~ 2. Mutual funds are one such investment option. A mutual fund is a
professionally managed pool of stocks, bonds, or other investments. JSOF il 3.
Plaintiffs have allocated contributions to their variable annuities to one or more of the
following twelve ( 12) mutual funds, all of which are part of EQAT:
1)
2)
3)
4)

EQ/Common Stock Index Portfolio;
EQ/Core Bond Index Portfolio;
EQ/Equity 500 Index Portfolio;
EQ/Equity Growth PLUS Portfolio. (In 2014, the assets of this Furid were
acquired by the EQ/Large Cap Growth PLUS Portfolio, renamed the AXA Large
Cap Growth Managed Volatility Portfolio);
5)
EQ/GAMCO Small Company Value Portfolio;
6)
EQ/Global Bond PLUS Portfolio;
7)
EQ/Global Multi-Sector Equity Portfolio. (In 2014, the EQ/Global Multi-Sector
Equity Portfolio was renamed the AXA Global Equity Managed Volatility
Portfolio);
8)
EQ/Intermediate Government Bond Index Portfolio. (In 2012, renamed the
EQ/Intermediate Government Bond Portfolio);
9)
EQ/Large Cap Value PLUS Portfolio. (In 2014, the EQ/Large Cap Value PLUS
Portfolio was renamed the AXA Large Cap Value Managed Volatility Portfolio);
10)
EQ/Mid Cap Value PLUS Portfolio. (In 2014, renamed the AXA Mid Cap Value
Managed Volatility Portfolio);
11) . EQ/PIMCO Ultra Short Bond Portfolio; and
12)
EQ/T.Rowe Price Growth Stock Portfolio.

JSOF if 4.
Sivolella allocated contributions to her variable annuity to the EQ/Common Stock Index
Portfolio, the EQ/Equity 500 Index Portfolio, the EQ/Equity Growth PLUS Portfolio, the
EQ/GAMCO Small Company Value Portfolio, the EQ/Global Multi-Sector Equity Portfolio, the

11

EQ/Intermediate Government Bond Index Portfolio, the EQ/Large Cap Value PLUS Portfolio,
and the EQ/Mid Cap Value PLUS Portfolio. JSOF

~

8.

Sanford allocated contributions to his variable annuity to the EQ/GAMCO Small
Company Value Portfolio, the EQ/Global Multi-Sector Equity Portfolio, the EQ/Large Cap
Value PLUS Portfolio, and the EQ/T.Rowe Price Growth Stock Portfolio. JSOF if 9.
Mary and Robert Cusack allocated contributions to their variable annuity to the EQ/Core
Bond Index Portfolio, the EQ/Large Cap Value PLUS Portfolio, and the EQ/Mid Cap Value
PLUS Portfolio. JSOF if 10.
Lynn allocated contributions to her variable annuity to the EQ/GAMCO Small Company
Value Portfolio, the EQ/Global Bond PLUS Portfolio, the EQ/Mid Cap Value PLUS Portfolio,
and the EQ/PIMCO Ultra Short Bond Portfolio. JSOF ~ 11.
Sanchez allocated contributions to his variable annuity to the EQ/Global Multi-Sector
Equity Portfolio and the EQ/Large Cap Value PLUS Portfolio. JSOF if 12.
Tucker allocated contributions to his variable annuity to the EQ/GAMCO Small
Company Value Portfolio and the EQ/T.Rowe Price Growth Stock Portfolio. JSOF if 13.

B.

Defendants
FMG administers and manages mutual funds offered by AXA's variable annuity

products. JSOF if 14. FMG is a registered investment adviser under the ICA. JSOF if 15. FMG
was previously an internal business unit within AXA, but became a separate legal entity and
wholly-owned subsidiary of AXA in 2011. JSOF ir~ 16-17. On May 1, 2011, FMG contracted
with EQAT and became the investment manager and administrator to the Funds. ECF No. 276,
PRDFOF ~ 10. At issue in this case are two distinct service agreements between FMG and
EQAT: (1) the Investment Management Agreements (the "Management Agreements") (J-3; J-4);
and (2) the Mutual Funds Service Agreement (the "Administrative Agreement") (P-405).
12

AXA markets variable annuities to employers and individuals. ECF No. 285-2,
Defendants' Corrected Response to Plaintiffs' Findings of Fact ("DCRPFOF"),

if 1.

AXA is an

insurance company, and served as the investment manager and administrator to EQAT prior to
FMG assuming these roles in 2011. JSOF if~ 14-15. Defendants contend that, although FMG
became the investment manager and administrator, AXA continued to provide services to Funds,
including legal, compliance, accounting, and treasury services as FMG's parent corporation.
ECF No. 276, PRDFOF, if 12. Plaintiffs dispute the nature and quality of these services, which
are set forth in detail, infra at p. 56.
C.

Board of Trustees
Although not a party to these actions, the EQAT Board of Trustees plays a significant

role in this case. Aside from Steven Joenk ("Joenk"), discussed infra at p. 15, the trustees on the
EQAT Board are not employed by FMG or AXA. JSOF if 67. Since July 2010, the trustees have
included:
NAME

TIME PERIOD

Theodossios Athanassiades

March 2000 to February 2014

Jettie Edwards

March 1997 to March 2015

Donald E. Foley

January 2014 to date of Stipulated Facts

-

David Fox

May 2000 to December 2012

William Kearns, Jr.

March 1997 to December 2014

Christopher Komisarj evsky

March 1997 to date of Stipulated Facts

H. Thomas McMeekin

January 2014 to date of Stipulated Facts

Harvey Rosenthal

March 1997 to date of Stipulated Facts

Gary Schpero

May 2000 to date of Stipulated Facts

Kenneth Walker

January 2012 to date of Stipulated Facts

Caroline Williams

January 2012 to date of Stipulated Facts
13

JSOF ~ 68. The Board holds five regularly scheduled meetings each year, including four
quarterly meetings and an annual contract renewal meeting in July ('415(c) meeting"). JSOF

~

70. Pursuant to§ 15(c) of the ICA, it is the duty of the Board to Hrequest and evaluate ... such
information as may be reasonably necessary to evaluate the terms of any contract" that provides
investment advisory services to the fund. 15 U.S.C. § 80a-15; ECF No. 267, PRDFOF, ~ 141.
Specifically, at issue in this case is whether the Board breached its fiduciary duty in approving
contracts that awarded excessive fees to FMG and AXA for investment services that were then
delegated to sub-advisers for a much lesser fee.

Damages Period6
The relevant time period for Plaintiffs' excessive fee claims depends on the particular
fund and the particular type of claim. Sivolella filed the original complaint in this matter on July
21, 2011, alleging that the management fees charged to eight of the Funds were excessive. See
Complaint, ECF No. 1. In light of the one-year statute of limitation in§ 26(b), 15 U.S.C.
35(b)(3), Plaintiffs' original claim is limited to the management fees charged to the eight original
Funds after June 20, 2010 (i.e. one year prior to the Sivolella Complaint). T2910:24-2911 :6
(Joenk).
On January 15, 2013, Plaintiffs filed a separate complaint alleging that FMG charged
excessive management fees to four of the eight original Funds, as well as four additional Funds
not included in the Sivolella Complaint. 7 See Sanford Complaint, ECF No. 37. Therefore, the

The parties agree to the relevant time period. See ECF No. 276, PRDFOF, ~~ 43-46.
The four additional funds are: (1) EQ/Core Bond Index Portfolio, (2) EQ/Global Board PLUS Portfolio; (3)
EQ/PIMCO Ultra Short Bond Portfolio; and (4) EQ/T.Rowe Price Growth Stock Portfolio.

6

7

14

claims in Sanford relating to the four additional Funds are limited to management fees charged
after January 14, 2012. See Time Period Stipulation, ~ 6; ECF No. 56-1.
On April 15, 2013, Plaintiffs amended their complaint to allege that FMG charged
excessive administrative fees to the Funds. See Amended Complaint, ECF No. 56. These claims
are limited to the administrative fees charged to the funds after April 14, 2012. See Time Period
Stipulation ,-r,-r 5-6, ECF No. 56-1.

Trial Witnesses
A.

Plaintiffs' Witnesses
Plaintiffs presented the testimony of one Plaintiff, five employees of FMG, and four

expert witnesses.
The only Plaintiff to testify at trial was Sanchez, a retired police officer who purchased an
AXA-sponsored variable annuity product in December 2007, and placed some of his investment
into some of the mutual funds at issue. Tl40:1-7 (Sanchez). Sanchez has little experience in
investing. Tl 41: 16-18 (Sanchez). Other than taking advice from investment representatives in
the past, he occasionally reads investment literature. Tl 41: 16-18 (Sanchez).
Plaintiffs called the following FMG employees, who were treated as adverse witnesses:
Steven M. Joenk ("Joenk"), Alwi Chan ("Chan"), Xavier Poutas (HPoutas"), Brian Walsh
("Walsh"), and Patricia Louie ('~Louie").
Both Plaintiffs and Defendants called Joenk as a fact witness. Joenk is the President and
Chief Executive Officer ("CEO") of FMG. Tl 77: 13-19 (Joenk). Joenk is responsible for FM G's
operations and also serves as Chairman of the Board of Trustees of the EQAT. Tl 77:13-19;
Tl81 :25-182:4; T3385:10-15 (Joenk). Joenk received a Bachelor of Science in Chemical
Engineering and a Master's in Business Administration from Washington University, and is in

15

the process of receiving a Doctorate in Finance. T2575:7-l 3 (Joenk). Prior to joining FMG,
Joenk worked in fund administration at a number of banks, holding companies, and mutual
funds. T2575:25-2576: 10 (Joenk). Joenk is resp_onsible for, among other things, overseeing
FMG's operations and strategic planning. Tl 81 :25-182:4 (Joenk). In his role as Chairman of
the Board of EQAT, Joenk makes presentations to the Board and apprises the Board of the
funds' performance and other pertinent information. T301 l :25 (Joenk).
Chan is a Senior Vice President and Deputy Chiefinvestment Officer of FMG. T868:4l 0 (Chan). Chan manages a team responsible for portfolio analysis and management. T883 :2-16

(Chan).
Poutas is a Senior Director of AXA, a portfolio manager at FMG, and leads the Asset
Allocation Group. T95 l :3-952:5 (Poutas). The Asset Allocation Group is primarily responsible
for trading Exchange-Traded Funds {' ETFs") and for managing "AXA's Tactical Manager"
4

Strategy ("ATM Strategy"). T952:9-12; T978:14-25 (Poutas).
Walsh is a Senior Vice President ofFMG. T1048:3-9 (Walsh). Walsh is the head of
FMG's Fund Administration Group, which handles various operational and accounting matters
relating to the Funds. T1049:10-15; Tl050:3-7 (Walsh).
Both Plaintiffs and Defendants called Louie as a fact witness. Louie worked as an
attorney for the SEC and with the Investment Company Institute prior to joining AXA in 1999.
Tl 090: 16-22; Tl 144:24-25 (Louie). At AXA, Loqie currently serves as Managing Director and
Assistant General Counsel. Tl090:4-10 (Louie). In addition to her position with AXA, Louie
holds the position of Executive Vice President and General Counsel with FMG. TI 090:4-10
(Louie). At FMG, Louie heads the Legal and Compliance unit, which is primarily responsible
for various legal, compliance, and Board process matters relating to the Funds. Tl 093:20-22;

16

Tl 108:3-1109:2 (Louie). She also currently serves as Vice President and Secretary of the
EQAT. Tl 191 :20-21 (Louie).
Plaintiffs also offered four expert witnesses: Kent E. Barrett (HBarrett"), Dr. Phillip F.
Goldstein ('~Goldstein''), Dr. Steven Pomerantz ("Pomerantz"), and Richard W. Kopcke
("Kopcke").
Barrett is licensed as a Certified Public Accountant and holds a certificate as a Certified
Fraud Examiner from the American Institute of Certified Public Accountants. Tl 284:21-23;
Tl287: 16-23 (Barrett). He is employed by Veris Consulting, and has been a senior managing
director at the company for thirteen years. Tl284: 17-20; Tl285:8-9 (Barrett). He received both
his Bachelors and Masters in Accountancy from Brigham Young University. T1285:13-15
(Barrett). The majority of his work concerns litigation support. Tl290:2-15 (Barrett). Barrett
was qualified to testify as an expert in the field of accounting, and offered opinions re~ated to: (I)
the nature and quality of services provided by FMG; (2) FMG's profitability; and (3) calculations
related to "fall-out" benefits. Tl 299: 17-24; Tl32 l :3-1322:4 (Barrett).
Plaintiffs called Goldstein as an expert witness in the areas of the nature and quality of
services; the independence, care, and conscientiousness of the Independent Trustees; and
management fees. T2118:24-2119:3; T2143:16-25 (Goldstein); ECF No. 285-1, Defendants'
Corrected Findings of Fact ("DCFOF"), ~ 66. Goldstein holds a Bachelors in Civil Engineering
from the University of Southern California, and a Masters in Engineering from City College of
New York. T2099:5-10 (Goldstein). Goldstein became an investment adviser in 1999, and is
currently an owner and principal with Bulldog Investors. T2099: 11-21; T2099:22-25
(Goldstein). He sits on the boards of three closed-end mutual funds. T2112:10-14 (Goldstein).

17

Plaintiffs called Pomerantz as an expert in the areas of mutual funds and investments.
T1788:18-20; Tl829:16-1830:13 (Pomerantz). He received a Bachelor of Arts from Queens
College at City University in 1981, and a Doctorate in Mathematics in 1986 from the University
of California, Berkeley. Tl 773 :6-9 (Pomerantz). His experience in the mutual fund industry has
included positions with Bank of America, Citibank, and Weiss Peck and Greer. T 1773: 15-20
(Pomerantz). He is employed as a professional expert witness. Tl985:8-10 (Pomerantz).
Pomerantz has testified in approximately two-dozen § 36(b) excessive fee cases against mutual
fund advisers. Tl 985: 16-18 (Pomerantz).
Kopcke holds a Bachelor of Arts in Economics from the University of Michigan, and a
Doctorate in Economics from Harvard University. T2265:25-2266: 11 (Kopcke). Kopcke is an
economist and Chartered Financial Analyst, and is currently employed as an intermittent advisor
with the U.S. Treasury in the Office of Technical Assistance. T2260:9-19 (Kopcke). He was a
chief monetary policy economist at the Federal Reserve. T2270: 15-17 (Kopcke). Kopcke was
on two task forces and was with the National Association of Insurance Commissioners to
develop regulations for variable insurance products and variable annuities. T2273-2274
(Kopcke ). Kopcke was qualified as an expert to testify in economics, financial markets, and
financial institutions, including investment management, administrative services, financial
analysis, and economies of scale. T2286: 18-24 (Kopcke). Kopcke offered opinions as to: (l) the
services provided by FMG as manager and administrator (T2303:25-2313:23); (2) FMG's
revenue, costs, and profitability (T2322:1-2362:13); (3) economies of scale (T2370-2374); (4)
FMG's risks associated with managing the Plaintiffs' Funds (T2366: 18-2367: 17); and (5)
comparative fees (T2363: 14-2366: 17).

18

B.

Defendants' Witnesses
Defendants called two FMG employees, Joenk and Louie, the Lead Independent Trustee

for the EQAT, Gary S. Schpero ('"Schpero"), and three expert witnesses.
Schpero is the Lead Independent Trustee serving on the Board. T308l:15-16 (Schpero ).
He joined the Board in 2000, and has been the Lead Independent Trustee since September 2011. 8
T287:7-12; T287:19-20 (Joenk). Prior to joining the Board, Schpero practiced law at Simpson
Thacher & Bartlett LLP for 22 years, where he was the managing partner of the Investment
Management and Investment Company Practice Group, which represented mutual funds,
independent directors, and investment advisers. T3379:13-3382:2 (Schpero ). Schpero offered
testimony on the nature of the services provided by the Board.
Defendants offered Dr. William Holder ("Holder") as expert in the areas of financial,
managerial, and cost accounting. Holder has a Bachelor of Science in Business Administration
from Oklahoma State University, and a Masters in Accountancy and Doctorate in Business
Administration, both from the University of Oklahoma. T3908:20-25 (Holder). Holder is the
Dean of the Leventhal School of Accounting at the University of Southern California, and is a
Certified Public Accountant in California and Oklahoma. T3908: 15-18; T392 l :20-21 (Holder).
He is also the co-author of a widely used accounting textbook. T39ll:11-20 (Holder).
Dr. Russell Wermers ("Wermers") is an expert in the ai:-eas of mutual fund performance
and investment management services. T4325:9-25 (Wermers). Wermers holds a Masters in
Business Administration and a Doctorate in Finance from the University of California, Los
Angeles. T4316:17-24 (Wermers). Wermers is a professor of finance at the Smith School of
Business at the University of Maryland, where he teaches investment management, portfolio

8

Schpero assumed this role after the filing of the Complaint in this matter, which occurred on July 21, 2011. See
ECFNo. 1.

19

performance, and empirical methods. T4315:16-4316:2; T4316:25-4318:5 (Wermers). He has
authored and published a number of scholarly articles and works on fund performance and
investment management. T4320:5-432 l :8 (Wermers). Wermers previously worked as a
consultant to the U.S. Department of Treasury concerning those practice areas. T4322:10-20
(Wermers).
Dr. Christopher M. Jam es

('~Jam es")

served as Defendants' expert in the areas of

economies of scale, comparative fees, and investment manager risk. T4071 :3-5 (James). James
has a Bachelor of Arts in Economics from Michigan State University, a Masters in Business
Administration and Finance from the University of Michigan, and a Doctorate in Economics
from the University of Michigan. T4043:10-15 (James). James is a professor of finance with
appointments at Cambridge University and the University of Florida, where he serves as the
William H. Dial Eminent Scholar in Finance. T4042:25-4043 :4 (James).

C

Deposition Read-Ins
Deposition testimony was read-in for six individuals: Jettie Edwards ("Edwards"), Martin

Jennings ("Jennings"), Harvey M. Rosenthal ("Rosenthal"), Gary Schpero, Russell Warren
("Warren"), and Harvey Rosen ("Rosen").
Edwards is a member of the EQAT Board, participating in the review of management and
administrative service contracts. T4450: 13-20 (Edwards Dep. Read-In). She served as an
elected Board member since 1997 and is an independent trustee. JSOF ~ 68. She spends less
than 60 days annually working for AXA. T4453:23-25 (Edwards Dep. Read-In). In her
deposition, Edwards testified that she did not understand some of the specifics or technicalities
of the cost allocation method, including net technical margin, and DAC capitalization. T4472:614; T4473:17-4474:3 (Edwards Dep. Read-In). She spoke about the Board's annual meeting to

20

determine fees and its review of a 14,000 page Hboard doc." T 4456: 11-17 (Edwards Dep. ReadIn).
Jennings is a 30(b)(6) witness and has been an employee at PricewaterhouseCoopers
("PwC") since.1981. T4508:3-l l (Jennings Dep. Read-In). He currently holds the position of
Hengagement partner on the AXA funds." T4508: 19-20 (Jennings Dep. Read-In). Jennings is a
Certified Public Accountant. T4508: 19-20 (Jennings Dep. Read-In). His deposition read-in
concerned cost allocation methodologies and profitability. T4509: 1-8 (Jennings Dep. Read-In).
Rosenthal is an independent trustee of the EQAT Board who meets in-person with the
Board four times a year, and over the phone roughly ten times. T4526:5-7; T4527:24-4528:2
(Rosenthal Dep. Read-In). In his deposition, Rosenthal testified that the fees for the EQAT are
made up of variable and direct expenses. T 4523: 16-17 (Rosenthal Dep. Read-In). He also
testified that the Board does not review the six Gartenberg factors, though the Board overall
viewed fees that "others charge for similar services." T4530:15-24; T4557:6-13 (Rosenthal Dep.
Read-In). Rosenthal acknowledged that he had never seen an actual sub-administrator
agreement until preparing for his deposition. T4536: 17-18; T4540: 1-2 (Rosenthal Dep. ReadIn).
In addition to his testimony at trial, Plaintiffs introduced a portion of Schpero's
deposition. In his deposition, Schpero discussed the "day-to-day" management of a portfolio
(T4574:20-4575:25), as well as the Board's review of fee allocation methods. T4568-4569
(Schpero Dep. Read-In). Schpero also evaluated the Board's treatment of fallout benefits.
T4580:8-4581 :14 (Schpeto Dep. Read-In).

21

Warren is an employee of JP Morgan Chase ("JP Morgan"). T4599:20-22 (Warren Dep.
Read-In). He testified to the services JP Morgan has performed for AXA since 2010. T4604:204642:21 (Warren Dep. Read-In).
Rosen is the global head of fund accounting at JP Morgan. T 4643: 4-10 (Rosen Dep.
Read-In). He testified to the services and pricing that JP Morgan provides. T4643: 12-651 :21
(Rosen Dep. Read-In).
Credibility Assessments
With respect to the witnesses appearing at trial, the Court heard all of their testimony and
observed their demeanors. Having done so, the Court has made certain credibility
determinations, as well as determinations relating to the appropriate weight to accord their
testimony. In its role as the trier of fact, the Court is the sole judge of the credibility of the
witnesses. Model Jury Charge 1. 7. Credibility refers to whether a witness is worthy of belief.

Id. In order to assess credibility, the Court applied the following factors:
( 1) The opportunity and ability of the witness to see or hear or know
the things about which the witness testified;
(2) The quality of the witness's knowledge, understanding, and
memory;
(3) The witness's appearance, behavior, and manner while testifying;
(4) Whether the witness has an interest in the outcome of the case or
any motive, bias, or prejudice;
(5) Any relation the witness may have with a party in the case and any
effect the verdict may have on the witness;
(6) Whether the witness said or wrote anything before trial that was
different from the witness's testimony in court;
(7) Whether the witness's testimony was consistent or inconsistent
with other evidence that the Court believes; and

22

(8) Any other factors that bear on whether the witness should be
believed.
Id.

Notably, the testimony of the FMG employees, aside from Joenk and Louie, mainly
concerned the services FMG provides and the roles of its employees. However, this testimony
did little to determine whether the Board breached its fiduciary duty. The same is true of the
deposition read-ins. Although the read-ins augmented other information about the Board
members and the Board's process, the testimony by itself was of little assistance in assessing the
merits of the case. As such, the credibility of the other witnesses, particularly Plaintiffs' experts,
had a significant impact on the outcome of the case. Those credibility determinations are
discussed below.

A.

Joenk 's Credibility
Joenk testified as a witness for several days and was directly examined by both parties.

His testimony was credible and substantive. However, the Court notes that because of his
position at FMG, his answers may be biased or skewed.
Joenk is a businessman and President and CEO of FMG. Tl 77: 13-19 (Joenk). As such,
Joenk is not an independent trustee because he is employed by the investment adviser, FMG.
The Court finds that, based on his employment, he is biased as to the profits of FMG and AXA.

T178:15-16 (Joenk). Even Schpero indicated that he "know[s] that [Joenk] has a goal [for
fees.]" T3872:25-3873:1 (Schpero). However, Scbpero said, "that is [Joenk's] goal, not ours."
T3873:1-2 (Schpeto). Therefore, Joenk is motivated to obtain higher fees from the Funds on
behalf of FMG, not what is best for investors, and his testimony must be analyzed from that
perspective.

23

Joenk also serves as Chairman of the Board. T3385:10-15 (Schpero). As such, he is
responsible for presenting pertinent materials relating to the Funds to the Board, including
presentations regarding the Gartenberg factors. Those presentations often included a description
of some of the factors, as well as an analysis on the company's compliance with them. T444:3-10
(Joenk). For example, Joenk spoke about P-128, which he defined as '''two different sections
from the Board materials ... from the meeting in July of2013." T443:16-18 (Joenk). Joenk
stated that one section is a copy of "the agenda pages, and the other is a presentation that I would
review with the Board." T443:20-22 (Joenk). According to Joenk, the purpose of the document
was to "lay out what [they were] going to discuss throughout the process; put in some context
about the litigation environment, what the Gartenberg factors are and things like that, and where
those materials would appear." T444:6-l 0 (Joenk). Sometimes Joenk makes the presentations to
the Board, while sometimes Louie does. T444: 17 (Joenk).
On a number of occasions during his testimony, Joenk noted he was aware of the
Gartenberg factors and how they related to FMG' s business. First, Joenk stated he was "aware
that profitability is one of the Gartenberg factors," and that "margin was one of the profitability
factors." T602:1-7 (Joenk). Joenk also stated he was aware fallout benefits "are one of the
Gartenberg factors," and that FMG reports those fallout benefits to the Board. T657:8-12
(Joenk). Joenk explained that these benefits would be laid out for the Board "in the 15(c) memo
relating to contract renewal, and a list of potential fallout benefits is included." T657: 13-18
(Joenk).
In reviewing Joenk's testimony, the Court finds that Joenk is motivated to ensure that
FMG receives higher fees because he serves as the CEO, rather than to protect the interest of
investors. This calls into question whether he made accurate statements and presentations to the

24

Board regarding the Gartenberg factors. This potential bias requires careful evaluation of the
accuracy and quality of the information that Joenk relayed to the Board.

B.

Barrett's Credibility
Although Barrett, based on his experience and education, was proffered as an expert to

demonstrate inappropriate accounting methods utilized by FMG, his testimony was often
inconsistent with his earlier deposition, and his answers were evasive. The Court gives his
testimony little weight. Presented below are examples of his inconsistent statements.
•

Barrett was asked whether he would look to "custom and practice as a sort of starting
point" to determine how to allocate costs. Tl 589:24-159?:2 (Barrett). Barrett said, he
does not "think he necessarily would," but that he would instead look at the specific
circumstances. Tl599:3-7 (Barrett). However, during his deposition, Barrett was
asked the same question, and he answered ''sure." T 1599: 11-1 7 (Barrett).

•

On cross, Barrett was questioned about the cost of a disaster recovery program.
Tl 616: 21-23 {Barrett). Barrett stated that he "would [say] it's relatively inexpensive
... in terms of the percentage of overall AXA expenses." Tl617:8-10 (Barrett).·
However, in his deposition, Barrett responded that he "would assume that it's
relatively expensive," but the cost would then get spread across "an organization with
thousands of employees." Tl618:12-15 (Barrett).

•

On cross, Barrett was asked if he was aware of the insurance cost for an investment
adviser managing mutual funds. Tl623:7-1 l (Barrett). Barrett replied that he
''[knows] it's typically a very small portion of the total expenses." Tl 623: 18-21
(Barrett). At his deposition, he answered the same question by replying "no."
Tl 623 :24-1624:4 (Barrett).

25

•

On cross, Barrett was presented with a list (P-210) regarding management and
administration of the funds, and asked: "there's nothing on this list that you believe ..
. is unrelated to that management or administration of the funds, correct?" T1624:912 (Barrett). Barrett equivocated by noting that relatedness "depends on how [one]
interprets some of the items [on the list.]" Tl 624: 13-18 (Barrett). At his deposition,
Barrett responded "no" to the same question. T 1625: 11-12 (Barrett).

•

Moreover, the Court finds that Barrett's testimony regarding the split of services
between FMG and sub-advisers is suspect because he never had any "day-to-day
responsibilities" for mutual funds, and he never served on a mutual fund board.
Tl654:16-22 (Barrett). Moreover, Barrett conceded that his testimony was based on
the agreements, but then he added that he "would not characterize himself as an
expert in contract interpretation." Tl 660: 1-16 (Barrett).

It is difficult to assess what is true, half-true, or not true from his various inconsistent
statements. As such, the Court gives Barrett's testimony little weight.
C

Pomerantz 's Credibility
In assessing the credibility of Pomerantz, the Court gives little weight to his testimony

due to inconsistencies, oversimplifications, and his sarcastic demeanor.
Pomerantz was at times unprofessional and sarcastic during testimony before the Court
and in his deposition. Regarding FMG's practices for hiring new managers, Pomerantz said in
his deposition that, "it seems like they just open up the Sunday business section of the New York

Times basically and identify well-known managers." T 1991 :9-17 (Pomerantz). Pomerantz also
mocked the services that FMG contributes to the sub-advisers and sub-administrators during his
deposition, sarcastically accusing FMG of "not really doing anything" beyond providing sub-

26

advisers with "some office space and some coffee cups." Tl 987:8-24 (Pomerantz). In both
instances, Pomerantz later contradicted himself during testimony by claiming that there are
"plenty of other things that they [FMG] do as part of their due diligence" beyond reading the
Sunday Times (Tl 991 :2-6), and he admitted that FMG is "responsible for printing a prospectus,"
a service that he did not mention in his deposition. Tl987:23 (Pomerantz). However, his
sarcasm about providing "some coffee cups" and reading the Sunday Times demonstrates a
negative bias, rather than an objective professional opinion.
Another inconsistency involved Pomerantz's description of his own experience.
Pomerantz testified that he has "certainly been involved in compliance." Tl813:20-24
(Pomerantz). He continued in detail:
I mean, if I'm managing assets I have to ... act in accordance with
the guidelines of the portfolios; I have to deal with general counsel
who might approach me about the assets that are being held in
portfolios.
Tl813:24-1814:4. Pomerantz conditioned the above by testifying that he did not know how
defense counsel was "defining compliance." Tl814:3-4 (Pomerantz). Confronted by his
deposition in the Hartfor~ case, wherein he indicated that he had "no'' experience in
compliance, Pomerantz then changed his testimony from "certain involvement" in compliance to
"no" involvement in "compliance work that is pursuant to a legal responsibility." Tl814:7-15;

T1815:8-12 (Pomerantz).
Pomerantz also provided conflicting testimony regarding sub-administrator JP Morgan
and AXA's pricing of securities. Pomerantz explained during his testimony that JP Morgan, as

9

Barrett, Pomerantz, and Goldstein all served as Plaintiffs' experts in a separate case in this District, Kasilag, et al.
v. Hartford Investment Financial Services, LLC, et al, l 1-cv-1083 and 14-cv-1611. Moreover, both Plaintiffs' and
Defendants' counsel in this case represent the Plaintiffs and Defendants, respectively, in the Hartford matter.
Therefore, throughout the trial, the parties utilized deposition transcripts and videos from Hartford for impeachment
purposes.

27

the sub-administrator, performs "a lot of compliance - responsibilities," but cautioned that "there
are other items that fall under the rubric of compliance." T2000:20-2001: 1 (Pomerantz). In fact,
he would not testify that

--an compliance for the fund is done by JP Morgan" without having

defense counsel define what "compliance" meant. T2001 :4-5 (Pomerantz). Yet when asked
during his deposition whether his "understanding is that JP Morgan is providing all of the
compliance service," he responded "yes" without any hesitation or a request for clarification.
T2002: 12-17 (Pomerantz). Similarly, Pomerantz contradicted himself when questioned about
AXA's role in pricing securities. He testified that he did not think that any employees at AXA
were capable of pricing securities, but during his deposition he acknowledged that AXA knows
how to price a security that is "difficult to price." Tl 995: 16-1996:2 (Pomerantz).
Pomerantz earned a Doctorate in Mathematics from the renowned institution of the
University of California, Berkeley. Despite same, he made mathematical errors in his
calculations related to fees and damages. His calculations of administrative fee damages owed
by FMG "exceed the amount of administrative fees" that FMG was even paid. ECF No. 276,
PRDFOF, ~ 499. For example, in his damages calculations, Pomerantz found that Plaintiffs
were entitled to $4,851,516 in damages from the Common Stock Index Portfolio based on a 39
percent profit margin - which "excludes sub-advisory fees as an expense." P-l 5lj; T203l:10-11
(Pomerantz). Yet, when calculating the "amount of the admin fee retained" Pomerantz found
that FMG was only paid $4.478 million in administrative fees from the Common Stock Index
Portfolio. T2032:2-4 (Pomerantz). In other words, Pomerantz calculated negative damages that
would result in FMG returning more money than it received. T2034:3-17 (Pomerantz).
Pomerantz testified that he "would have to check the calculations that [he] did, it would appear
that there's something wrong." T2032: 14-23 (Pomerantz). From the Court's

28

pe~spective,

the

mathematical error showed a lack of proper prior preparation on a critical point in this case. It
undermines his credibility on all issues.

D.

Goldstein's Credibility
Goldstein testified as an expert on mutual fund governance. He lacked credibility on a

number of pertinent issues such as sub-advisers, mutual fund performance, and profitability,
among others. Some examples are illustrated below.
Most notably, Goldstein half-heartedly prepared his opinion. For example, Goldstein did
not thoroughly review documents presented to the Board to analyze if the Board acted
conscientiously. Goldstein acknowledged that he "took a very cursory look at them, but ...
didn't review them in any significant detail." T2 l 28:8- l 2 (Goldstein). More specifically, when
questioned about Board minutes, Goldstein admitted he did not examine them carefully. He
stated, "I took a quick glance at the board minutes ... I determined that it was not productive to
review board minutes." T2145:1-3 (Goldstein). Not only did Goldstein fail to review pertinent
information, he also failed to consider in-depth deposition testimony of the Board members. He
perused or "skimmed" the testimony of only three trustees. T2 l 86:5-25 (Goldstein). Goldstein
further acknowledged, "I wouldn't say I read everything because, you know, I'm a pretty good
skimmer." T2 l 86:20-25 (Goldstein).
In addition to not reading the testimony, Goldstein was also "not aware" of FM G's cost
allocation methodology, which was the subject of much testimony in this case. T2202:8- l l
(Goldstein). Another issue involved analysis of the investment management agreements and the
administration contracts, which Goldstein "did not bother reviewing." T2146:17-1S (Goldstein).
Finally, when asked exactly what documents he did review, Goldstein replied, "I don't recall the
actual documents, I think there were -- there were reports provided to the board that I looked at."

29

T2167:22-24 (Goldstein). Tellingly, Goldstein admits he did nothing to assess or review the
performance of the twelve at-issue Funds. T2197:24-2198:1 (Goldstein).
Although he has approximately twenty years of experience in the mutual fund business,
including sitting on various mutual fund boards, he does not have experience with open-end
funds, which are the types of fund at issue here. T2099: 17-2101: 10 (Goldstein). Furthermore,
he has limited involvement as a director with mutual funds that employ a sub-advisory structure,
which are at issue here. T2 l l 5:2-25 (Goldstein). For these reasons, the Court gives Goldstein's
testimony very little weight.

E.

Kopcke 's Credibility
Kopcke was honest in his conclusions, but his testimony deserves little weight due to his

lack of direct experience managing mutual funds and his reliance on broad principles and limited
facts, rather than specific methodologies, when teaching his opinions. Kopcke was hired to
evaluate the written agreements themselves, as opposed to the everyday responsibilities of FMG.
T238l:1-10 (Kopcke). In reaching his conclusions, he relied exclusively on the Management
Agreement, the Administration Agreement, and Warren's deposition testimony. T2380-2381
(Kopcke). Kopcke was not familiar with the daily activities of FMG and he did not review any
of the deposition testimony of any FMG employee. T2383:16-2384:21 (Kopcke). He further
admitted that he did not conduct an actual investigation. T2389:4-12 (Kopcke).
In the Court's opinion, it was difficult to accept Kopcke's opinions when he did not
thoroughly review the underlying facts. For example, he opined that "JP Morgan and the subadvisors do the day-to-day work, and FMG retained a lot of the supervisory and ... the oversight
responsibility... '' and found FMG to be "well paid." T2383:4-10 (Kopcke). However, he
offered no evidence showing that he considered the broader scope of FM G's duties beyond the

30

contracts, and did not indicate whether FM G's broader responsibilities would affect his "'well
paid" opinion. T2357:21-23 (Kopcke).
In another instance, Kopcke compared FMG's received fees and the sub-adviser fees, and
noted that, "the discrepancy in the ratios for the division of fees is extraordinary." T2357: 13-14
(Kopcke). He concluded that, "FMG's received fee, either in dollars or in basis points, either
way, is sixteen and a half times its reported direct expenses." T2357:21-23 (Kopcke). Kopcke
explained that this means "FMG was extraordinarily well paid for its work." T2357:25-2358: 1
(Kopcke). He then compared FMG's fees to other companies "like Xerox, IBM, Microsoft,
Apple Computer when they were young ... ''. T2361:11-4 (Kopcke ). However, these
comparisons have little merit because FMG is more appropriately compared to other investment
advisers that are in the mutual fund management industry.
Kopcke's economies of scale analysis also fell short. Kopcke did not conduct an
independent investigation and relied upon conclusory evidence regarding the amount of savings
FMG realized and where economies of scale were actually achieved. T2371-2372 (Kopcke).
Kopcke had no formula or methodology to determine whether the fees were exorbitant, and he
did not quantify, with a total number, the savings achieved through economies. T2426:21-2427:l
(Kopcke).
Lastly, Kopcke excluded sub-advisory and sub-administrative fees as costs and only
listed "direct expenses." T2415-2416 (Kopcke). For example, Kopcke testified, "FMG's
received fee of 21.32 [basis points] is quite large compared to the FMG's direct expenses[] that
is reported for providing ... management services to the Equity 500 Index Fund." T2347:232348: 1 (Kopcke). Because Kopcke analyzed an under-inclusive set of expenses on behalf of

31

FMG, his testimony on this subject should be given little weight. See T24l5:18-2416: 18
(Kopcke).
The Court finds Kopcke to be credible, but gives his testimony less weight than
Defendants' experts because he was not familiar with the everyday facts surrounding FMG's
activities, and he failed to utilize reliable methodologies in reaching his conclusions.

F.

Schpero 's Credibility
Schpero testified for several days, and the Court finds that Schpero is a credible witness.

His testimony was generally consistent, thorough, and accurate.
Plaintiffs attempted to undermine Schpero' s credibility by pointing out contradictions in
his testimony. Plaintiffs allege Schpero was ambivalent regarding a comparison between fees of
small funds with few investors to the fees of much larger funds. ECF No. 285-2, DCRPFOF il
782. Plaintiffs point to Schpero's testimony, where he stated that it was not helpful to simply
compare the fees of a fund with large assets to a fund that has much smaller assets: "If you're
just going to look at a fund at what its rate is at 68 million versus a fund that's 7 billion alone, I
would certainly agree that is not sufficient information to do an analysis.'' T3796:8-l l
(Schpero).
Schpero was reluctant to answer the question of whether the comparison between fees of
small and much larger funds is unreasonable because "statistical analysis" is not an area in which
he claimed to have any expertise. T3784:15-3786:5 (Schpero). Although he later testified that
such a comparison between funds "is not helpful," this does not present a direct contradiction as
Plaintiffs suggest. T3796:1-2 (Schpero ). His conclusion that the comparison provides an
insufficient analysis is a far cry from describing his testimony as "inappropriate, misleading, and

32

irresponsible," (ECF No. 285-2, DCRPFOF, ~ 318) as Plaintiffs would have it. T3784: 15-22
(Schpero).
Plaintiffs also allege Schpero offered conflicting testimony regarding his concerns over
the sub-advisers' ability to pay a judgment if a fund needs to be made whole. ECF No. 276,
DRPFOF ~ 783; T3578:4-8; T3579:6-24 (Schpero). Schpero said that "in many cases the subadvisors do not have the financial viability" to make a fund whole. T3578:4-8 (Schpero ). He
further explained:
... So if there's a significant problem and you can have a fund that
grows significantly in assets, conceptually the sub-advisor may be
on the hook, but if there's an inability to pay it the Board is going to
be looking to FMG; and reputationally [sic] it's going to be AXA
and FMG's name which is going to be everywhere. And I would
argue the regulators are going to look to FMG, because that's the
party that has the direct contract relationship, and that's where the
significant money's going to be.
T3579:16-24 (Schpero). Here, Plaintiffs frame Schpero's testimony as concern over the subadvisers' ability to pay a judgment; however, Schpero is only stating that the Board will first
look to AXA and/or FMG for liability. He does not imply the sub-advisers should be more
solvent than they already are, or that the investors are at significant risk. He merely states the
Board's first action would be against FMG and AXA.
Moreover, Plaintiffs assert Schpero's credibility is undermined by his inaccurate answers.

For instance, Plaintiffs assert Schpero "does not believe that FMG delegates day-to-day
investment management services of the funds to the sub-advisors." T3571:15-3572:7 (Schpero);
ECF No. 247, PFOF, ~ 211. Plaintiffs' witness Goldstein asserted the Board - including Schpero
- "exhibited a fundamental misunderstanding of FM G's role" because "substantially all of
FMG's services are performed by sub-advisor firms." T3572:8-l l (Schpero). As will be
explained in upcoming sections, FMG has far greater duties than those described in the cont~acts.
33

Schpero also provided credible testimony regarding the Board's composition, training,
and decision-making process in analyzing FMG's fees. The Board annually reviews and
approves the sub-advisory agreements and approves the fees to be paid by the Funds' subadvisers. T3572:14-21 (Schpero). Thanks to Schpero's own efforts, he and the Board directly
receive ''information regarding the amount of the management fee that's retained by FMG after

°

payment of the sub-advisors" using the HGary 1 Charts." 11 T3753: 19-25 (Schpero). Contrary to
Plaintiffs' allegations, Schpero was proactive about tracking FMG's and the sub-advisers'
respective services and the fees they each retain in return:
-I early on in joining the board had thought it was important that
we would receive information very specific to the amount of fee that
FMG was retaining, and so those charts have evolved over the years,
but this was generated quite- quite a long time ago.
T3528:9-13 (Schpero). In sum, the Court finds that Schpero's testimony was credible and
reliable. Moreover, Schpero was the only Board Member to testify, and provided the most
significant information regarding the Board's contract and fee approval process.

G.

Plaintiffs' Credibility
Aside from Sanchez, no other Plaintiffs testified or attended the trial. The Court finds that

this lack of attendance demonstrates that Plaintiffs had little interest in the trial or its impact upon
them. Conversely, Joenk, the CEO of FMG, attended the trial nearly all twenty-five days of its

duration. Louie also attended the trial regularly. In the Court's view, this juxtaposition between
the parties' respective attendance demonstrates that Plaintiffs may not have had a significant
issue at stake.

10
11

Schpero's first name is Gary.
This too serves as another example of improvements made to the Board process after the filing of the Complaint.

34

H.

All Other Witnesses' Credibility
The Court finds the remainder of the witnesses to be credible, including Defendants'

experts, James, Wermers, and Holder.
Although Plaintiffs criticized James for not quantifying risk to ass(!ss FMG's
management duties, James explained that industry practice for evaluating board activities was
qualitative rather than quantitative, and that he did not think that the EQAT Board's activities
differed from industry standards. T42 l 9:5-4220:9 (James). Plaintiffs further questioned the
reliability of the EQ Common Stock Index Portfolio because it was not compared to all nonvariable annuity funds. However, James explained that he included all multi-cap core funds and
used variable annuity funds in his analysis. T4170: 10-4171 :5 (James).
The Court finds that Wermers provided thorough descriptions of the individual funds,
and that he effectively explained the difference between active, pactive, and index (passive)
funds. T4345-4360 (Wermers). Wermers also pointed out flaws in the testimony provided by
Plaintiffs' expert Pomerantz; Thanks to Wermers, the Court found that Pomerantz's findings
suffered from incorrect dates, untimely benchmarks, and calculation errors. T436 l-4380
(Wermers).
Holder was also a reliable and credible witness. After presen.ting his findings on the eight
indicator factors for gross revenue reporting, Holder persuasively argued that sub-advisory and
sub-administrative fees should be categorized as expenses rather than reductions in revenue.
T394 l :20-25; 3942: 1-6 (Holder). Although Plaintiffs attempted to undermine Holder's
credibility on the issue of whether the authority relied upon was applicable to investment
companies, this attempt fell short. T4026: 19-4033:22 (Holder). Specifically, Holder indicated
that he also reviewed "the investment company's accounting and auditing guide, and . . . the

35

insurance company's accounting and audit guide ... and [he] did not find guidance for this kind
of transaction in those guides." T4033: 13-22. Therefore, Holder relied upon other reliable
authorities as guidance for whether it is appropriate to treat sub-advisory fees as expenses.
Holder also thoroughly explained his analysis of FM G's three-step cost allocation methodology.
T395l:20-3957:18 (Holder). The Court finds that Plaintiffs' attempts to impeach Holder for his
role in compiling his expert report were unsuccessful. T3970-3987 (Holder). 12
The Court finds Defendants' experts to be credible, in that they provided direct answers,
and relied on comprehensive and reliable materials in reaching their conclusions.
The EQAT Fund

The EQAT is a Delaware statutory trust, registered as an investment company under the
lCA, and its shares are registered with the SEC under the Securities Act of 1933. JSOF

~

5. The

EQAT is comprised of a number of mutual funds or portfolios. As of May 1, 2010, the EQAT
had 65 distinct portfolios, and as of May l, 2015, EQAT had 86 portfolios. JSOF

~

6. Each

Fund is a portfolio ofEQAT. JSOF ~ 7.
A mutual fund is a "professionally managed pool of stocks, bonds, or other investments."
JSOF ~ 3. Mutual funds are "very highly regulated." T2627:22-23 (Joenk). In terms of
managing a mutual fund, it is a "very common" practice to use sub-advisers in the variable
annuity space. T2638:2-4 (Joenk). This delegation of management duties is often referred to as
the "manager of managers" structure. T2639:45 (Joenk). The manager of managers structure is
a "way to offer different styles of management through an insurance product ... not only a
different asset class offering, but you can hire experts in those asset classes to provide that

12
The Court notes that even if Holder lacked credibility, it is Plaintiffs' burden to demonstrate that Defendants
failed to utilize the appropriate accounting methods. Plaintiffs did not meet their burden in demonstrating this point.

36

service in - those portfolios." T263 8: 8-12 (Joenk). The structure also offers ""different brands
through insurance products that may not be available." T2638: 12-14 (Joenl<).
As of May 2015, investors had placed about $800 billion in sub-advised funds used in
variable annuities industry-wide. T2637:16-2638: 1 (Joenk). In this case, Plaintiffs' twelve
Funds fall into three general categories: four index funds or passive funds, three actively
managed funds, and five hybrid ("pactive") funds. ECF No. 285-2, DCRPFOF, ~ 6.

A.

Active Funds
Three of the twelve funds - EQ/GAMCO Small Company Value Portfolio, EQ/PIMCO

Ultra Short Bond Portfolio, and EQ/T.Rowe Price Growth Stock Portfolio - are actively
managed funds. ECF No. 285-2, DCRPFOF, ~ 10. Active funds use benchmarks, "hypothetical
[indexes] of securities, whether it's stocks in the case of a stock fund, bonds in the case of a bond
fund." T4326:12-14 (Wermers). A benchmark is used to measure a fund's returns. T4326:10l6 (Wermers). Although an actively managed fund may have a benchmark, "it's not attempting
to match the returns of the benchmark; instead it's trying to take bets away from the benchmark
in an effort to beat the returns of the benchmark." T4326:6-9 (Wermers). The manager of an
actively managed fund seeks to outperform a benchmark in the fund's prospectus "by exercising
investment discretion about what securities to buy, hold, and sell within the Fund's investment
objective." ECF No. 276, PRDFOF,

B.

~

28.

Index Funds
Four of the funds - EQ/Common Stock Index Portfolio, EQ/Core Bond Index Portfolio,

EQ/Equity 500 Index Portfolio, and EQ/Intermediate Government Bond Index Portfolio - are
index funds. T885:25-886:3 (Chan). An index is a "basket of securities that an index provider

37

basically come[s] up with to represent the specific segment of the market." T974:16-18 (Poutas).
Index providers include Standard & Poor's, NSCI, and Russell. T974: 19-21 (Poutas).
Unlike actively managed funds, index funds "do not seek to outperform their
benchmarks." ECF No. 276, PRDFOF,

~

24. Rather, index funds "attempt to match their

benchmark as closely as possible, they don't take bets away from it." T4327:2-8 (Wermers).
Wermers indicated that if he saw any four of these index funds "consistently outperforming its
benchmark either on a net or gross of fee basis," (T4356:5-6 (Wermers)) he would sell the index
fund, '"because that means the index fund is not trying to track the index, it's trying to take risks
away from the index~ I would say that it's a poor index fund." T4356:7-10 (Wermers). All of
the index funds in this case "have [a] state[d] investment objective ... in that they seek to match
a benchmark- before expenses." T4328:8-12 (Wermers). For example, the EQ/Common Stock
Index Portfolio '"seeks to achieve a total return before expenses that approximates the total
performance of - the Russell 3000, including reinvestment of dividends, at a risk level consistent
with that of the [Russell] 3000 index.'' T4327:20-24 (Wermers).
Prior to December 2008, three of the four index funds at issue in this lawsuit (Common
Stock Index Portfolio, Core Bond Index

Portfolio~

and Intermediate Government Bond Index

Portfolio) "had been actively managed.'' ECF No. 276, PPRDFOF, ~ 26. However, these Funds
were converted by FMG from actively-managed to index funds in late-2008 and early-2009 "as a
response to the financial crisis," in which "the Board, working with FMG, approved many
changes to the funds." T3543:17-25 (Schpero).
Plaintiffs characterize index funds as "passively managed funds." ECF No. 285-2,
DCRPFOF, iJ 9. However, FMG provides passively managed index funds with as many services

38

as actively managed funds. T2747:6-14 (Joenk). Furthermore, sub-advisers have ""far less work
to do in a passive fund." T2747: 15-20 (Joenk).
C.

Pactive Funds
There are five pactive funds - the EQ/Global Bond PLUS Portfolio, the Equity Growth

PLUS Portfolio, the Global Multi-Sector Equity, the Large Cap Value PLUS Portfolio, and the
Mid Cap Value PLUS Portfolio. T975:20-24 (Poutas). Prior to 2007, all of the pactive Funds at
issue in this lawsuit were purely actively managed funds. ECF No. 276, PRDFOF, if 30. Pactive
funds are a hybrid of active and passive (index) funds.
In response to the financial crisis, FMG converted these funds to a hybrid structure
between 2007 and 2009, remaking them with "active portfolio and index managed portfolios."
T3543:18-25 (Schpero). An active fund that "would have been in place in 2008 or 2009" might
look very different because ·""FMG ... might have proposed ... that the fund be restructured by
perhaps - replacing the active manager." T3544: 11-16 (Schpero ). At the very least, restructuring
an actively managed fund involves "entering into new sub-advisory agreements with other
parties[,] where typically in hybrid structures it would change, so that 60 or 70 percent of the
fund would be passive[ly] managed ... to match the index." T3544:16-20 (Schpero). That
would leave twenty percent of the fund "as an active portfolio," creating a pactive fund's hybrid
structure. T3544:20-23 (Schpero ).

The Gartenberg Factors
A.

The Board's Independence and Conscientiousness
Plaintiffs disputed the impartiality, diversity, care, and conscientiousness of the EQAT's

Board of Trustees. This claim relates to the Gartenberg factor that requires the Court to consider
the independence and conscientiousness of the Board. Plaintiffs primarily raised three issues
relating to the Board: (1) Joenk's potential conflict as both CEO of FMG and Chairman of the
39

Board; (2) a lack of diversity of Trustees, in that all are '"Wall Street" types; and (3) FMG as the
furnisher of information to the Board, and the Board's failure to corroborate this information
through third-party, independent consultants. This section first discusses the enumerated, chief
concerns about the Board's independence and diversity. It then explains the Board's general
processes, including meetings, preparation, and compensation.
The EQAT Board is comprised of "a supermajority of Independent Trustees." ECF No.
276, PRDFOF, ~ 111. All but one of the Trustees, Joenk, is by statutory definition, independent
of FMG and AXA. Id. Schpero testified that "there are nine trustees on the Board, there's one
insider and that's Mr. Joenk, who is the chairman of the Board." T3385:13-15 (Schpero).
Therefore, the Board's composition complies with the ICA's requirement that 60 percent of the
Board be unatliliated with FMG. 15 U.S.C. § 80a-10(a); § 80a-2(a)(l9).
Plaintiff's own expert, Goldstein, agreed in his deposition that the independent trustees
"'are highly qualified and experienced," and that "the trust's board is overwhelmingly
independent." T2191: 12-2191: 16 (Goldstein). The Board has "extensive experience" in
accounting, financial services, and investment advisory business. ECF No. 276, PRDFOF, ~ 113.
1.

J oenk as Chairman

However, despite FM G's compliance with the letter of the law, the Court inquired about
Joenk's role as both CEO ofFMG and Chairman of the Board. The Court was particularly
concerned because Joenk gives presentations to the Board on the Gartenberg factors, and
generally controls the information contained in the presentations.
Schpero admitted that it was fair for Plaintiffs and the Court to question why Joenk was
the Chairman of the Board when "the relationship between FMG and the Board should be at
arm's length." T3664:5-6 (Court). Initially, Schpero indicated that "there's two ways you

40

address it; you either have a lead independent trustee, which we do, and others have an
independent chair. Both of those I think the regulators clearly consider perfectly appropriate and
best practice approaches." T3664: 11-15 (Schpero ). Schpero went on to state, "I don't mean to
demean in any way Mr. Joenk, because he plays an important role, but in my mind his role is as .
. . FMG. I mean there's a reason for the last two days [of testimony] that I told you that when I
talk about the Board, I'm not really talking about Mr. Joenk." T3664:16-20 (Schpero).
Although Schpero noted that Joenk, as chairman, ''sits there and runs the meeting[,]" this
is because "it's FMG that needs to provide all the information" that the Board must consider in
the 15(c) meeting. T3664:24-25 (Schpero). Schpero clarified that, although Joenk provides the
information, it is the independent trustees that:
... run this Board. There is nothing that happens at the Board session
that's [sic] we don't bless; we without hesitation say we don't want
certain people, we want tO change things. On night one[,] before day
two [of a meeting,] I could call Mr. Joenk and tell him, you know, we're
changing half of the next day; the calendar is only run on the basis of
what we decide at the end of the ... day.
T3665:2-8 (Schpero). Schpero added, "[i]t is not a cozy relationship ... It is an arm's-length
relationship, it is a professional relationship." T3662:23-3663 :2 (Schpero ).
The Court finds that Schpero's credible testimony adequately addresses any potential
conflict posed by Joenk serving as both Chairman of the Board and CEO of FMG.

2.

Diversity of the Board

The Court also inquired about the diversity of the Trustees. Their qualifications and
experience are as follows:
Gary Schpero, tl?-e Lead Independent Trustee since 2011, is a former partner of Simpson,
Thacher & Bartlett LLP (Managing Partner oflnvestment Management and Investment

41

Company Practice Group)
PRDFOF, if

114~

~nd

a current Trustee of three Blackstone funds. ECF No. 276,

DX-2064.

David Fox, Lead Independent Trustee until September 2011, is a former CEO of the
Northern Trust Company, former Chairman of the Chicago Stock Exchange, former Director of
Miami Corp, and former Director of USG Corp. Id.
Theodossios Athanassiades formerly served as Vice Chairman, President and COO of
Metropolitan Life Insurance Company, as well as Director of Atlantic Bank of New York. Id.
Thomas Brock is former CEO of Salomon Brothers Asset Management and Former CEO
of Stone Harbor Investment Partners. Id.
Jettie M. Edwards is a former partner and consultant of the business and marketing
consulting firm Syrus Associates and former director of Old Mutual Funds. Id.
Donald E. Foley is former Chairman of the Board and CEO of Wilmington Trust Corp.
and former Treasurer and Director of Tax of ITT Corp. Id.
William M. Kearns is President ofW.M. Kearns & Co., Inc., a private investment
company, as well as chairman of Keefe Ventures, LLC. He formerly served as Vice Chairman of
Keefe Managers, Inc., a money management firm. Id.
Christopher P.A. Komisarjevsky is former CEO and president of public relations firm
Burson-Marsteller Worldwide and Burson-Marsteller USA, as well as former Senior Counselor
for communications consulting firm APCO Worldwide. Id.
Harvey Rosenthal is former president and COO of Melville Corp., fonner CEO of the
CVS Di vision of Mel ville Corp. and former Director of LoJ ack Corp. Id.

42

H. Thomas McMeekin is former CIO of SunAmerica Financial Group and United
Guaranty Financial Group, former senior managing director of AIG Asset Management, and
former managing director of Prudential Investment Management, Inc. Id.
Kenneth L. Walker is former president of a subsidiary of investment advisory firm T.
Rowe Price Associates and former partner of investment advisory firm Capital Management
Corp. Id.
Car~line

L. Williams is former Managing Director of investment bank Donaldson, Lufkin

& Jenrette, former CFO and CIO of Nathan Cummings Foundation, former director of HearstArgyle Television, former Director of Playcore, Inc., and former Director of Morse Shoe, Inc.

Id.
The Court questioned Schpero regarding the Board's diversity, indicating that '"[the
Court] didn't see any ... person that was a regulator type person; someone that would have.
overseen the industry and know the requirements that government mandates. Do you have such
a person?" T3657:22-25 (Court). Schpero stated that he is that Board member because he ''spent
22 years working with the SEC weekly ... [T]he nature of my practice was working with SEC
examiners, working with the person who headed the division of investment management,
representing investment managers in this industry." T3658:1-9 (Schpero). The Court finds that
Schpero overstates the similarities between government-based regulatory work, and being an
attorney who complied with SEC regulations. Nonetheless, the Court finds that Schpero was
honest in his answers. Moreover, Schpero stated that the Board also has independent counsel,
"who similarly has that kind of [regulatory] experience." T3659:3-4 (Schpero).
The Court also inquired as to the Wall Street leanings of the Board: "all [the Trustees]
come from the same kind of perspective. And do you think that adequately represents ... a fair

43

deal for the investors who live all over the country?" T3659: 12-19 (Court). Schpero indicated
that:
I do think it's a pretty diversified Board. I look at somebody like
Mr. Komisarjevsky, who's the head of our governance committee;
he's not a Wall Street person at all. He[] ... was the head of a large
public relations firm, but he really has no background in the
financial world. And in fact, it's interesting that [the Court] raise[s]
it from that perspective, because I've always thought that Chris was
in many ways one of the more helpful trustees, because he does look
at things from a very different perspective.
T3660:9- l 9 (Schpero ). Schpero added, HMs. Edwards is about as far from a Wall Street person
as you can get. Her background ... she worked with [a] consulting firm, I don't think any of
them were in New York ... So I think that's another person who plays kind of a different role."
T3660:23-366 l :8 (Schpero ). Although Schpero conceded that the Board lacks the perspective of
an activist, like Goldstein, Schpero concluded:
I can only represent to you what I see, and what I see are eight men
and women who I have lived with for a long time, and who none of
them need to do this; this isn't their living, this is something they do
that they find interesting, that they bring different areas of expertise
in. And I see tremendous integrity. I see only an interest in looking
out for the investors. I see only people who are interested in an arm'slength relationship; none of these are people who are socializing with
FMG and AXA ... [T]his is a very professional relationship, it's
always been that way. And it's a demanding Board. I mean there
have been times where we've had difficult relationships with FMG
because it is so demanding, because we are so demanding. And there
have been good years and bad years from that perspective. And I
think that's retlective of the Board and I think it's reflective of me
quite frankly; I don't need to do this ... do something where I'm
basically just trying to get in bed with managers. There's no reason
I would do that. I have only one interest, and that is having spent
many years learning this industry and understanding the fiduciary
duties of the Board, I saw this as a great opportunity to be an
independent trustee, and to be as good an independent trustee as I
thought I could be. And I think I've done that.
T3661: 16-3662:16 (Schpero).

44

3.

FMG as Furnisher of Information to the Board

Schpero also pushed against the notion that he and the Board placed too much faith in the
information provided by FMG, explaining that the Board receives Hdirect information quite
frequently from our counsel." T3718:15 (Schpero). Schpero personally receives direct mailings
and e-mails from the Investment Company Institute and the Independent Directors Council "two of the periodicals that cover on a daily basis or weekly basis the industry." T3718:10-19
(Schpero). Schpero also takes part in the Board's general education sessions, heeding the advice
of "outside experts who can discuss with the Board developments in the industry, and further
review with the Board areas that were of particular interest." T3402:23-25. Schpero continued:
... usually each winter we would over several Board meetings discuss
with our counsel what are the developments in the industry, what are the
areas that we think are raising particular issues in the fund complex,
where we would benefit from going beyond just listening to the people
at FMG, and just listening to our immediate advisors and, you know,
and what can we do in terms of getting outside consultants and experts
who could come in and discuss it with us.
T3402:20-3403: 13 (Schpero).
Schpero noted that:
[I]t's important that we look to outside consultants where it's our
judgment that could be helpful ... I've worked with Lipper for many
years, and as I testified earlier ... I do believe they are the premiere
provider of analysis of fee type information, and that they are
extraordinarily independent. I have seen any number of investment
managers try respectfully to convince Lipper to present things
differently, and they won't do it.
T3669:20-3670:5 (Schpero ). Moreover, Schpero indicated that the Investment Company
Institute is "a major provider of information" (T3670: 14) and the Independent Directors Council
is "a tremendous service to independent directors and.trustees, with constant flows of

45

information." T3670: 18-19 (Schpero ). In sum, Schpero testified that the Board supplements the
materials it received from FMG, and also confers with counsel on important issues.

4.

EQAT Board Meetings

In addition to these chief concerns regarding the Board's independence, there was also
substantial testimony and evidence regarding the regular practices and procedures of the Board.
Up until 2016, the full Board met five times a year, with two-day meetings for each session;
however, the June and July meetings often stretched to three days. T4526:20-4527:6 (Rosenthal
Dep. Read-in). Rosenthal explained that the trustees are "physically present at meetings" about
12 to 15 days a year, and hold "several telephonic Board meetings in the course of a year."
T4527:8- l l; T4527: 18-19 (Rosenthal Dep. Read-in). According to Schpero, there has been
nearly one-hundred percent trustee attendance at these full meetings. T3437:7-3438:1 (Schpero).
He provided one anecdote where one member "came to the meeting notwithstanding a serious
illness in his family." T3437:15-l 7 (Schpero).
However, the Board maintains a policy that "really substantive new type issues" should
not be handled at a single meeting, and rather should be dealt with in a special telephone meeting
between the trustees. T3435:12-14 (Schpero ). Schpero provided an example in his testimony:
If ... FMG is going to propose a new fund or they're going to
propose merging a fund or liquidating a portion of a fund, the
Board's view is that's not something we're prepared to do at a single
meeting; we would want notice and discussion.
T3435:8-23 (Schpero). The Board also has a "pre-Board telephonic meeting of the Board" and
the Board's counsel about a month before each quarterly Board meeting. T4527: 18-23
(Schpero ). The trustees participate in a total of about ten telephonic meetings per year, lasting
for one and a half to two hours each. T4527:18-4528:4 (Schpero).

46

Compliance is an important aspect of full Board meetings. The trustees discuss ''any
compliance issues that came up during the quarter." T3434: 16-17 (Schpero ). Schpero discussed
the Board's compliance considerations in detail:
... there's always a full report and extensive discussion of all of the
issues surrounding valuation and trading of all of the funds; there's
always a report at every meeting from FMG's administrative team
on accounting and financial developments and budgetary
developments; there's a review of all of the different contlict[s]
associated with procedures ... there's reports on code of ethics
violations that might have occurred at different sub-advisors.
T3434: 19-3435:3 (Schpero). In preparation for these meetings, the Board consults a ''special
review list" prepared by FMG, which allows the Board to "identify funds that have particular
issues that are considered problematic." T3556:5-7 (Schpero ); DX-138.10, Tab 20. These issues
are not limited to the performance of individual funds, but may also extend to personnel changes
affecting the funds - "it could be an investment manager where there has been a significant
announcement with respect to their operations; where· there's been major news about major
personnel leaving." T3556:5-11 (Schpero ). In past responses to special review lists, the Board
has directed FMG to add funds that "were not on here" and "should be on here." T3556:2-3
(Schpero).

5.

Board Committees

The Board is further divided into several committees on which the trustees themselves
serve- an audit committee, a governance committee, and two investment committees. See DX503. All Independent Trustees are members of the audit committee and the governance
committee, and one of the two investment committees. T3436:8-12 (Schpero).
The audit committee, which meets three times a year, is responsible for "supervising the
financials of the funds, of the investment companies, and for reviewing the audited financials, as

47

well as the semi-annual report, and maintaining the important relationship with the independent
public accountant, [PwC]." T3438:4-9 (Schpero).
The investment committees were designed with the intent to split the Board in half for
each Board meeting so that the Trustees could work effectively in smaller groups and meet with
more sub-advisers, which is important for approving the Board's sub-advisory contracts and for
"approving FMG and its role ... with respect to managing sub-advisors." T3420:2 l-3421 :2;
3421: 12-3422:3; 3422: 12-13 (Schpero ).
The governance committee, which meets twice a year, is chaired by Komisarjevsky and
''handles the nomination and recommendation to the full Board, of all the members of the Board,
but in particular the independent trustees." T3440:25; T3440:20-23 (Schpero ). The governance
committee also governs the Board's self-evaluation process, "'continually reviews governance
matters in terms of setting up new committees," (T3440:8-16 (Schpero)), reviews the
independence of the Board's independent counsel, and reviews the Independent Trustees' and
COO's compensation. T3440:8-l (Schpero); ECF 276, PRDFOF, ~ 133.

6.

Trustee Compensation

Komisarjevsky determines independent trustee compensation by taking data from the
Investment Company Institute and Management Practice. T3430: 11-25 (Schpero ). The
Investment Company Institute does a "'very extensive annual study of compensation of
independent trustees," and Management Practice provides Komisarjevsky with data
documentation. T3430: 19-21 (Schpero ). According to Schpero, Komisarjevsky reviews the data
from these sources and generally makes sure that trustee compensation is "somewhere in the
50th to 75th percentile" of trustee compensation in the industry. T3431:1-4 (Schpero).
Komisarjevsky then works with Morgan Lewis, the Board's independent counsel, to produce a
memorandum outlining trustee responsibilities and other considerations that are compiled in a
48

presentation of recommendations. T343 l :4-11 (Schpero ). Each independent trustee receives
these recommendations prior to governance committee meetings and votes on the
recommendations themselves. T343 l :7-15 (Schpero).
Schpero justified trustee compensation at the industry's 50th to 75th percentiles by
emphasizing the importance of retaining talent on the Board. T343l:1-4 (Schpero ). When
scouting for new independent trustees, the Board looks at the "same people who typically
Fortune 500 companies are looking at [to] serve on the boards.'' T3432:9-10 (Schpero). For
example, the Board recently went through a

'~major

search where one of our top choices" was

"'lost to another complex." T3432: 19-21 (Schpero).
Schpero's compensation from the Board is $325,000, which is three times the amount he
earns as a trustee for the Blackstone funds. T3732:20-25 (Schpero); ECF 285-2, DRPFOF, ir
779. Plaintiffs argue that Schpero derives "a pecuniary incentive to acquiesce to FMG's point of
view" from his annual compensation. Id. In addition to scrutinizing the dollar amount that
Schpero annually receives, Plaintiffs characterized Schpero's efforts as

~~part

time work" and

ignored the totality of Schpero's personal efforts to manage the Trust beyond attending the
Board's six full annual meetings. Id. Schpero assists with the Board's comprehensive training
regimen for Board newcomers. T3406:7-l 7 (Schpero ). Schpero also personally assists with
"mini sessions." T34l0:11-20 (Schpero ). Schpero sets up additional meetings between the new
trustees, the Board's counsel, and relevant personnel at FMG in order to answer the newcomers'
questions following the Board's formal training session. T3410:7-24 (Schpero). Schpero
contributes to this process in order to move the new trustees "further up the curve," which
ultimately benefits the Trust and its investors. T34 l 0:20-24 (Schpero ). Therefore, Plaintiffs'

49

claim that Schpero's work is part-time is unfounded, as the credible evidence demonstrates that
Schpero performs extensive work for the compensation he receives as Lead Trustee.

7.

Trustee Selection & Training

The Board's Governance Committee retained an executive search firm to identity
candidates. T3441: 19-3442:24 (Schpero ). The process of "identitying, vetting and ultimately
electing" new trustees to the Board is overseen by Komisarjevsky, and "'in each case he has
retained an outside firm Higdon [Partners] which is a firm that specializes in the recruitment of
independent trustees in particular." T3441: 19-3442: 13 (Schpero ). Schpero described the
process as the trustees "hiring their own replacements" because the Board goes through an
interview process in which the current trustees identify the final candidates whom they wish to
hire. T414:20-23 (Joenl<). The Board is required to "'do a shareholder vote to elect the new
trustees." T415:3-6 (Joenk). Following selection by the governance committee and before
officially joining the Board as trustees, new Independent Trustees work for the Board as
consultants for a yea_r "so that they just sit through the Board meetings, learn how things operate
before they have authority on the Board." T414:24-415:2 (Joenk).
While the addition of new trustees to the Board is infrequent (two pairs have been added
in the last four years), the Board has a comprehensive training regimen for newcomers.
T3406:7-3407:25 (Schpero). Schpero called it a ''full day series of presentations that run from A
to Z covering all aspects of the mutual fund world, and obviously the specific EQAT complex."
T3406: 15-17 (Schpero ). The new trustees received "an overview of the industry itself that was
produced by Mr. Alexander from K&L Gates." T3407 :9-10 (Schpero ). Ms; Copenhefer from
Morgan Lewis provides "an overview of kind of the nature of the board dynamics." T3407:8-15
(Schpero ). Louie provides a presentation on the 15(c) process "in terms of the approval of ...
the investment management contract and related contracts, as well as relevant historical and
50

ongoing litigation,'' in addition to a presentation on the Trust, various portfolios, "'and other key
arrangements, including the code of ethics obligations." T3407: 15-25 (Schpero ). The incoming
trustees also meet with FM G's Chief Compliance Officer, Mr. Paolo, for an overview of the "due
diligence that FMG engages in, with respect to various sub-advisors," as well as a presentation
from FMG on the ''relationship between the fund and those who are marketing the fund and the
kind of information that's delivered in that process." T3409:6-19 (Schpero ).
Trustees are provided with a hard-copy reference manual, which is "to allow each trustee
to have at home in hard copy all of the essential documents that are related to the ... Trust."
T3411: 11-16 (Schpero ). The manual contains general trust documents, samples of the annual
questionnaires the Board uses to ensure independence, and "key charters from the major
committees." T3412: 12-17 (Schpero ). The manual also includes, in a second book, the "actual
forms of sub-advisory a!,'Teements for the other sub-advisers, the memorandum that is delivered
periodically from K&L Gates about the trustees' fiduciary responsibilities ... the distribution
agreements," and "all of the procedures that are SEC mandated under the Investment Company
Act.'' T3412:18-3413:3 (Schpero).
The Board also enables new trustees, who "naturally have additional questions" after
attending a few meetings, to engage the Board's counsel and "relevant personnel at FMG" in
"mini sessions." T3410:21-23 (Schpero ). As noted earlier, Schpero intends these meetings to
bring the new trustees "further up the curve." T34 l 0:9-24 (Schpero ).

8.

The Board's External Education & Self-Evaluation

For its external education program for the trustees, the Board uses general education
sessions to "bring in outside experts who can discuss with the Board developments in the
industry and further review with the Board areas that were of particular interest." T3402:20-25

51

(Schpero ). These sessions are a chance for the Board to receive and consider input from sources
in the industry other than FMG. T3403:1-13 (Schpero).
Schpero cited a presentation delivered by Mr. Donahue, then head of the SEC's division
of Investment Management, who was "responsible for the regulatory regime for investment
companies." T3403 :20-21 (Schpero ). Hosting a speaker like Donahue was a big deal for the
Board because "some boards ... have been reluctant to have the SEC come in."' T3403 :22-23
(Schpero). The Board had an ''open, frank discussion" with Donahue regarding the "SEC's
expectations of what boards do" and the Board's particular responsibilities. T3403:25-3404:2
(Schpero).
The general education sessions are part of the Board's overarching process of information
gathering and self-evaluation. T34 l 9:8-3420: I (Schpero ). The Board's yearly self-evaluation is
done on a formal basis mandated by the SEC, but the Board further uses the process to "do a full
overview of all aspects of the governance process to ensure that there aren't things that require ..
. either evaluation or change.'' T3419: 15-25 (Schpero ). According to Schpero, the overview
includes a close look at the way the Board runs the governance process, the relationship between
the Board and FMG, the relationships among the trustees, the relationship with the Board's
counsel, the Board's committee structure, the number of funds that the Board governs, and the
type of information received by the Board. T3419: 15-3420: I (Schpero ).

9.

Board's Relationship with Counsel and the 15(c) Process

K&L Gates, as counsel to EQAT, handles "day-to-day matters'' of the Funds. T3425:2

(Schpero). K&L Gates ''interact[s] daily with FMG" and are "heavily involved in drafting the
[Fund's] registration statement and [for updating] ... the document." T3425: 5- 7 (Schpero ).
Moreover, K&L Gates carries the ''[heavy] load alongside of FMG's in-house counsel"

52

regarding compliance issues. T3425:6-9 (Schpero). According to Schpero, K&L Gates is
representing the Trust while "also having a relationship with FMG, and [he believes] with
AXA." T3425: 18-22 (Schpero).
To guard against the potential "inherent conflicts" that these relationships may create, the
Board retains Ms. Copenhefer of Morgan Lewis as its own independent counsel. T3425: 14-25
(Schpero ). In choosing Copenhefer for the role, Schpero selected about twelve or fifteen lawyers
at major firms with representations in the industry, narrowed the pool down to about four or five,
and conducted "many conflict checks and other issues to make sure ... not only the experience
was there, but there wouldn't be conflict issues." T3415:9-11 (Schpero). Using Schpeto's
recommendation, the Board chose Copenhefer out of the final field of four. T3414:17-3416:18
(Schpero). In its role as the Board's independent counsel, Morgan Lewis (through Copenhefer)
attends every Board meeting, participates in all of the Board's executive sessions, engages in the
15(c) process, and reviews investment management and administrative contracts. T3417:8-21
(Schpero).
The independent trustees, in a year-round process, "evaluate and approve [the Trust's]
management and administrative fees." T3445:12-17 (Schpero). Their contract review meeting is
in July, and then the 15(c) process begins as early as August each year, when Schpero does an
"annual call with each of the trustees ... separate from each of them ... to give them an
opportunity to discuss lots of aspects of the funds." T3445:19-23 (Schpero). During its
September meeting, the Board holds "an executive session" where it begins "the discussion of
the next year's review" and brings Joenk into the discussion. T3446:13-15 (Schpero). Soon
after the Board's September meeting, Joenk "brings in one or two of his colleagues to again have
a discussion of what's just taken place in June and July, and talk about what changes and

53

improvements [the Board] might make in the year going forward looking to the next July."
T3445:12-3446:10 (Schpero). During the following spring, the Board authorizes Morgan Lewis
to prepare a 15(c) memo for FMG, which "schedules all of the documentation that we are going
to require for ... that July's contract approval process." T3446:23-3447:3 (Schpero). The
Board reviews that memo and then, at the March meeting, identifies the funds that it thinks "'have
one or more issues associated with [them], whether it's performance or compliance or specific
fee issues, or [their] assets have grown significantly," and then begins identifying those issues.
T3447:7-l 7 (Schpero). The Independent Trustees make final considerations and vote on the
Trust's contractual arrangements in July- a year after initiating the contract approval process.
T3446: 18-3447:25 (Schpero ).
Schpero testified that the Board is "extremely focused on the ultimate goal here, which is
to make sure the fee is fair and reasonable, and in the exercise of our business judgment ... is
going to be satisfactory to the investor." T3574:23-3575: l (Schpero). However, it is not the .
Board's goal to ensure a fee that is also fair and reasonable to FMG. T3715:22-23 (Schpero).

10.

Goldstein on the Board

Goldstein also testified on this topic. However, Goldstein did not review the Board
materials thoroughly. Goldstein indicated that he "took a very cursory look at them, but [he]
didn't ... review them in any significant detail." T2190: 11-12 (Goldstein). Goldstein indicated
that he "took a quick glance at the Board minutes" but ultimately "determined that it was not
productive to review Board minutes." T2145:1-3 (Goldstein). Moreover, Goldstein testified that
he only reviewed three out of the eleven trustee depositions. T2 l 90:9- l 1 (Goldstein). In fact,
Goldstein stated that "I've read the - let me see; get the names. The - Schpero, I - I couldn't say
I read everything because, you know, I - I'm a pretty good skimmer; Jettie Edwards, Rosenthal,
those are the primary ones. A part of Joenk - is that how you pronounce the name?" T2 l 86:2054

25 (Goldstein). For the reasons already stated in the '~Credibility" portion of the Opinion, supra
at p. 22, the Court gives Goldstein's testimony very little weight.

11.

Conclusion on the Independence and Conscientiousness of the Board

The Court finds that the Board's makeup is sufficiently diverse and independent, and the
procedures it followed demonstrates that the Board robustly reviewed FMG's compensation.
Although the Board is comprised mainly of individuals with backgrounds in financial services,
and Joenk chairs the Board, the Board is "independent" of FMG and takes care to provide quality
services to shareholders of the EQAT. Defendants adequately addressed Joenk's role as
Chairman of the Board, and dispelled any indication that he undermines the Board's obligation
to act independently. 13 Schpero's testimony was very credible on the issue of Joenk's role as
Chairman, and the Board's independent efforts to ensure that they are receiving the most
comprehensive and accurate materials. Although Plaintiffs contend that these materials were
inaccurate, they do not dispute that the Board received materials generally, either from Joenk or
external entities. Moreover, Plaintiffs' challenges to the· Board materials were unsubstantiated at
trial. Thus, the Court finds that the Board was impartial, diverse, and independent based on the
testimony of Schpero. Hence, FMG complied with the letter of the law to ensure the Board was
not affiliated with FMG. The Board was also careful and conscientious in performing its duties,
as outlined supra. Therefore, the Plaintiffs failed to meet their burden in proving that the Board
lacked independence, and was not careful and conscientious in executing its duties to the EQAT
Fund.

13

The fact that Joenl<, an insider of FMG, acts as Chair presents a transparency issue; but when reviewing the fact,
the Board acts professional and independently to counteract this issue.

55

B.

The Nature and Quality of the Service Provided by F1tlG
Because EQAT is not an operating company and has no employees in the traditional

sense, it relies on third-party service providers to invest fund assets and carry out many other
activities required to operate a mutual fund. T4276:24-4277: 18 (Louie); DX-142.2 at Bates
4113. In this case, EQAT entered into several service contracts with FMG or its affiliates; two of
which are the subject of this litigation: ( 1) Investment Management Agreements between EQA T
and FMG (the '"Management Agreements") (e.g. J-3 and J-4); and (2) the Mutual Funds Service
Agreement between EQAT and FMG (the HAdministrative Agreement") (e.g. P405). The Board
of Trustees approved these contracts as part of the 15(c) meeting each July.
Both the Management and Administrative Agreements contemplate FMG's retention of
sub-advisers and sub-administrators to assist in performing the relevant services under each
agreement. J-4 at Bates 4028-29; P-405 at Bates 9852. The thrust of Plaintiffs' allegations is that
FMG delegated all of its duties to these sub-advisers and sub-administrators, yet retained an
exorbitant fee. ·
Plaintiffs contend that the plain language of the agreements controls. Specifically,
Plaintiffs assert that when comparing the Investment Management Agreement to the SubAdvisory Agreement, and the Administrative Agreement to the Sub-Administrative Agreement,
the language is identical, which demonstrates that FMG delegated all of its duties to the subs.
Defendants counter that, while the agreements are accurate in outlining the duties of FMG and its
sub .. advisers and sub-administrators, FMG performs a host of other services to the Funds beyond
those expressly enumerated in the contracts. Defendants assert that to rely solely on the wording
of the contracts "elevates form over substance" and overlooks crucial evidence demonstrating
that FMG retained a substantial amount of work for the Funds. ECF No. 285, DCRPFOF, if 349.

56

In this section, the Court first outlines and analyzes the contract language of the
agreements at issue. Thereafter, the services provided by FMG and AXA in carrying out their
contractual duties are explained.
l.

The Investment Management Agreements

Prior to May 1, 2011, AXA had two Investment Management Agreements with EQAT
relating to the Funds. JSOF

if 19.

One of the AXA Investment Management Agreements

applied to three of the Funds 14 and the other AXA Investment Management Agreement applied
to the remaining nine Funds. 15 JSOF if 19.
Since May 1, 2011, FMG has had two Investment Management Agreements (as
amended) with EQAT pertaining to the Funds at issue ("Investment Management Agreements").
JSOF if 18. One such Investment Management Agreement applies to three of the Funds 16 and the
other Investment Management Agreement applies to the other nine funds. 17 JSOF if 18.
The Investment Management Agreement gives FMG "overall supervisory responsibility."
J-4, 2(B). As such, FMG will have "full discretion to select new or additional [sub-]Advisers for
each portfolio." J-4, 2(B)(ii). FMG has "full discretion to terminate and replace any [sub]adviser." J-4,2(B)(iv). FMG has "full investment discretion to make all determinations with
respect to the investment of a Portfolio's assets ... " J-4, B(v).

14

EQ/GAMCO Small Company Value, EQ/PIMCO Ultra Short Bond, and EQ/T.Rowe Price Growth Stock
Portfolios.
15
EQ/Common Stock Index, EQ/Core Bond Index, EQ/Equity 500 Index, EQ/Equity Growth PLUS, EQ/Global
Bond PLUS, EQ/Global Multi-Sector Equity, EQ/Intermediate Government Bond Index, EQ/Large Cap Value
PLUS and EQ/Mid Cap Value PLUS Portfolios.
16
EQ/GAMCO Small Company Value, EQ/PIMCO Ultra Short Bond, and EQ/T.Rowe Price Growth Stock
Portfolios.
17
EQ/Common Stock Index, EQ/Core Bond Index, EQ/Equity 500 Index, EQ/Equity Growth PLUS, EQ/Global
Bond PLUS, EQ/Global Multi-Sector Equity, EQ/Intermediate Government Bond Index, EQ/Large Cap Value
PLUS and EQ/Mid Cap Value PLUS Portfolios.

57

In connection with these responsibilities, FMG "will assess each Portfolio's investment
focus and will seek to implement decisions with respect to the allocation and reallocation of each
Portfolio's assets among one or more current or additional advisers ... as [FMG] deems
appropriate." J-4, 2(B). FMG must "monitor compliance of each [sub-]Adviser with the
investment objectives, policies and restriction of any Portfolio ... " Id. FMG will "furnish, or
cause the appropriate [sub-]Adviser(s) to furnish ... such statistical information, with respect to
the investments that a Portfolio ... may hold or contemplate purchasing ... " Id. FMG will
"apprise, or cause the appropriate [sub-]Adviser( s) to apprise ... important developments
materially affecting each Portfolio ... "' Id. Furthermore, FMG will "furnish ... to the Trustees
of the Trust such periodic and special reports as the Trustees of the Treat may reasonably
request." Id. FMG "agrees to cause the appropriate [sub-]Adviser to furnish to third-party data
reporting services all currently available standardized performance information and other
customary data." Id.
The Agreement also provides that FMG will furnish to the Trust office space and
personal necessary for the performance of clerical and other office functions. J-4, 2(C)(i)-(ii).
FMG will "provide other information and services ... required in connection with the preparation
of all registration statements and [p ]rospectuses, prospectus supplements, SA Is, all annual, semiannual, and periodic reports to shareholders of the Trust, regulatory authorities, or others ... "J-4,
2(C)(iii).
2.

Sub-Advisory Agreements

For all years at issue in this action, Defendants contracted with third parties called subadvisers. JSOF

~

21. For ease of comparison, the May 2011 sub-advisory Agreement between

FMG and BlackRock Investment Management LLC (J-16) will act as a stand-in for all of the

58

sub-advisory agreements to compare with the main Investment Management Agreement between
FMG and the EQAT.
In examining the contract language of the sub-advisory agreement, the majority of
FMG's duties are delegated to the sub-advisers. For instance, the sub-advisers assume FMG's
duty to "'formulate and implement a continuous investment program for the Portfolio." J-16,
3(B)(ii). Moreover, the sub-adviser must '"take whatever steps are necessary to implement the
investment program ... by arranging for the purchase and sale of securities and other
investments." J-16, 3(B)(iii). The sub-advisers must also provide statistical information
regarding the portfolio's performance. J-16, 3(B)(i).
FMG delegates its duty to apprise the Trust of important developments affecting each
portfolio and "furnish to third-party data reporting services all currently available standardized
performance information and other customary data." J-16, 3(B)(iv). The sub-adviser must also
file all required forms with the SEC. J-16, 3(1).
Another of FMG's duties delegated to the sub-advisers involves calculating "the net asset
value per share of each Portfolio, including the cost of any equipment or services to obtain price
quotations." J-16, 3(B)(v).

3.

Comparing the Investment Management and Sub-Advisory Agreements

The Investment Management and sub-advisory contracts speak broadly in terms of the
services contemplated within the agreements. As such, based solely on the wording of the
Agreements, Plaintiffs' assertion that the agreements are the same, on their faces, is essentially
correct. The only non-managerial duties retained by FMG, and not delegated to sub-advisers,
relate to filing the EQAT's taxes, providing the Trust with office space and office personnel, and
giving the Trust various reports. See J-4, 2(A), 2(C)(i)-(iii) and J-4, 3.

59

However, the Investment Management Agreement gives FMG "overall supervisory
responsibility," and sole discretion over the sub-advisers. J-4, 2(B). Accordingly, FMG must
"monitor compliance of each Adviser with the investment objectives, policies and restrictions of
any Portfolio or Portfolios" and then report to the Board on the performance of each sub-adviser.
J-4, 2(A).
For instance, FMG performs the managerial task of assessing each portfolio's investment
focus and allocating portfolio assets among the sub-advisers. J-4, 2(B)(5). The sub-advisers are
then tasked with forming and carrying out those investment programs, as well as arranging for
the purchase and sale of securities and negotiating with brokers and dealers. J-16, 3(B)(ii);
3(B)(iii)); 3(F). However, the sub-advisers must then provide statistical information regarding
the Portfolio's performance to FMG. J-16, 3(B)(i)).
Moreover, FMG must prepare "registration statements, [p ]rospectuses, prospectus
supplements, SAis, all annual, semi-annual and periodic reports[,]" which are sent to
shareholders and filed with regulatory authorities. J-4, 2(C)(iii). The sub-advisers develop the
performance information to create those documents, and further file the required forms with the
SEC. J-16, 3(B)(vi); 3(1).
Therefore, while the language of the agreements may suggest that the sub-advisers
perform a majority of the investment management services on behalf of FMG, FMG must
continuously coordinate with the sub-advisers, and is responsible for overall supervision.

4.

Administrative Agreement

From May I, 2000 to May 1, 2011, AXA had a Mutual Funds Service Agreement with
EQAT relating to the Funds (the "Administrative Agreement"). JSOF ~ 36. The Administrative

60

Agreement between the EQAT and FMG outlines administrative duties to be performed by FMG
in relation to the Trust's Funds. P-405.
On and after May l, 2011, FMG had a Mutual Funds Service Agreement ('"FMG
Administrative.Agreement") with EQAT relating to the Funds. The FMG Administrative
Agreement was amended and restated as of April 1, 2015. JSOF ~ 35.
The Administrative Agreement holds FMG responsible for the oversight of the Trust's
administrative operations. P-405, 4(a). FMG must provide the Trust with facilities, equipment,
and personnel required with respect to the services under the Agreement. P-405, 4(b)(i)(iii)(iv).
FMG must also provide individuals to serve as officers of the Trust. P-405, 4(b )(ii).
The remaining obligations under the Administrative Agreement may be broken into three
main categories: administration (Schedule B), compliance (Schedule B), and accounting
(Schedule C).

Administration
Generally, FMG must coordinate and manage the work relationships among all service
providers to the Trust. P-405, Schedule B(l)(A). FMG must also manage and monitor the
performance of the vendors who provide services for the Trust. P-405, Schedule B(l)(A)(B).
FMG must propose and carry out policies in the area of operational problem-inquiry and
resolution, such as compliance violations, valuation of complex securities or those trading in
problematic markets, and Trust share valuation errors. P-405, Schedule B(l)(C). FMG is further
required to arrange for and monitor the payment of the Trust's and each Portfolio's expenses. P405, Schedule B(V)(D).

61

Compliance
FMG must monitor each Portfolio's compliance with investment restrictions listed in the
prospectus and SAI, the requirements of the Internal Revenue Code, and other applicable
Treasury Regulations or Board Directives. P-405, Schedule B(III)(A)(B)(C). Further, FMG
must '"prepare, distribute, and utilize in compliance training sessions, comprehensive compliance
materials, including compliance manuals and checklists ... and develop or assist in developing
guidelines and procedures to improve overall compliance .. .'' P-405, Schedule B(IIl)(F). FMG
must also prepare, review and file amendments to the Trust's registration statement and
supplements as needed. P-405, Schedule B(IV)(A).
FMG must provide consultation on regulatory matters relating to portfolio management,
Trust operations, and any potential changes in each portfolio's investment policies, operations or
structure. P-405, Schedule B(IV)(L). FMG must provide support for

r~gulatory

examinations or

investigations, and work closely with the Trust's legal counsel in response to non-routine
regulatory matters. P-405, Schedule B(IV)(I). Moreover, FMG shall maintain awareness of
regulatory and legislative developments which may affect each Portfolio, and update the Board
accordingly. P-405, Schedule B(IV)(M). FMG has the responsibility for preparing and updating
charter documents, by-laws, and foreign qualification filings. P-405, Schedule B(IV).
FMG is also required to maintain a corporate calendar and provide assistance with
planning both Board and shareholder meetings. P-405, Schedule B(IV)(J)-(K). FMG must
prepare and file proxy materials, as well as prepare agendas and distribute all materials needed
for the meetings. P-405, Schedule B(IV)(B)(C). Additionally, FMG must prepare minutes,
make reports and recommendations regarding the perfonnance of the investment advisers and
other service providers, and follow up on matters raised during Board meetings. P-405,

62

Schedule B(IV)(D)(E). FMG is required to ""review and monitor the fidelity bond and errors and
omissions insurance coverage and the submission of any related regulatory filings." P-405,
Schedule B(IV)(G).
FMG is responsible for financial and tax reporting. P-405, Schedule B(II). FMG must
prepare financial information for the Trust's reports, proxy statements and other communications
sent to shareholders, and arrange for the printing and mailing of such reports. P-405, Schedule
B(II)(I).

Accounting
Under Schedule C, FMG is responsible for "'maintenance of the books and records for the
Trust's assets, including records of all securities transactions." P-405, Schedule C(I). FMG is
also required to transmit each Portfolio's or class' net asset value to NASDAQ and other entities
in accordance with the Trust's prospectus. P-405, Schedule C(I)(B). FMG accounts for
dividends and interest received, coordinates with the Trust's auditors, and consults with the
Trust's officers, and independent public accounts. P-405, Schedule C(I)(C)(D)(E).

5.

Sub-Administrative Agreements

Like the Investment Management Agreement, the Administrative Agreement
contemplated a Sub-Administration Agreement. P-405, 4(c). There were two such contracts,
one signed with Chase Global Funds Services Company ("Chase") in 2000 and the other signed
in 2011 with JPMorgan Chase Bank N.A. ("JP Morgan"). J-26 and J-27. Each Agreement is
substantially similar in terms of services provided. For ease of comparison, the latter contract (J27) will be used to compare with the main Administrative Agreement between FMG and the
EQAT.

63

Like the main Administrative Agreement, the obligations under the Sub-Administration
Agreements are broken into the same three categories.

Administration
Generally, the Sub-Administration Agreement provides that, "subject to the control,
direction, and supervision of FMG ... J.P. Morgan will provide" sub-administration,
compliance, and trust accounting. J-27, 4(a). Although FMG retains some general
administration duties for itself, it also delegates duties to the sub-administrator. FMG delegates
to the sub-administrator its duty to "prepare Trust, Funds or class expense projections, establish
accruals ... including expenses based on a percentage of average daily net assets ... and
expenses based on actual charges annualized and accrued daily." J-27, Schedule B(IV)(A). For
any new Portfolios and classes, FMG requires the sub-administrator to obtain Employer or
Taxpayer Identification Numbers, estimate organizational costs, and monitor against actual
disbursements. J-27, Schedule B(IV)(B). Moreover, FMG delegates the duty to coordinate all
communications and data collection with regard to any regulatory examinations and yearly audits
by independent accountants. J-27, Schedule B(IV)(C).

Compliance
The sub-administrator is given the duty to "assist with monitoring and periodically testing
each Fund's compliance with investment restrictions ... listed in the current prospectuses and
Statement(s) of Additional Information, although the primary responsibility for such compliance
shall remain with the Trust's investment advisers or FMG LLC." J-27, Schedule B(II)(A). The
sub-administrator -'assists with monitoring and periodically testing" certain Treasury regulations.
J-27, Schedule B(Il)(B)(C). Moreover, the sub-adviser is responsible for mailing quarterly

64

requests for

·~securities

Transaction Reports" to the Trustees and other ""access persons" under

SEC regulations. J-27, Schedule B(Il)(E).
The sub-administrator must also provide support regarding collection of quarterly
materials for Board meetings and routine regulatory examinations or investigations of the Trust.
J-27, Schedule B(III)(A)(B). JP Morgan must also prepare Rule 24f-2 Notices and file same
with the SEC, and prepare and distribute updates to the Trust's compliance manual. J-27,
Schedule B(IIl)(C)(D).

Accounting
!he sub-administrator is responsible for: ( 1) maintenance of the books and records for the
Trust's assets, including records of all securities transactions (J-27, Schedule C(l)(A)); (2)
calculation of each Fund's net asset value in accordance with the Trust's Prospectus (J-27,
Schedule C(I)(B)); (3) accounting for dividends and interest received and distributions made by
the Trust (J-27, Schedule C(I)(C)); and (4) coordinating with the Trust's independent auditors
with respect to the annual audit (J-27, Schedule C(l)(D)).

6.

Comparing the Administrative and Sub-Administrative Agreements

The Administration Agreements are much more explicit in terms of services to be
performed than the Investment Management Agreement. As such, it is easier to determine, when
examining the language of the agreements, that FMG retains significant administrative duties.
As an initial matter, like the Investment Management and Sub-Advisory agreements,
FMG retains supervision over the sub-administrator. The sub-administrator only assists with
monitoring for compliance with the various investment restrictions listed in the prospectus, the
Internal Revenue Code and other applicable Treasury Regulations or Board Directives. P-405,
Schedule B(IIl)(A)-(D); J-27, Schedule B(A)-(D). Further, while the sub-administrator prepares

65

and distributes updates to the Trust's compliance manual, FMG must '4prepare, distribute, and
utilize in compliance training sessions, comprehensive compliance materials, including
compliance manuals and checklists ... and develop or assist in developing guidelines and
procedures to improve overall compliance ... " P-405, Schedule B(IIl)(F); J-27, Schedule
8(111). FMG retains primary responsibility for such compliance issues.
Moreover, FMG retains the duty to propose and enact policies, particularly in the area of
operational problem inquiry and resolution, which includes compliance violations, valuation of
complex securities or those trading in problematic markets, and Trust share valuation errors. P405, Schedule B(I)(A)-(C).
FMG, not the sub-administrator, performs the duty to update the Board on regulatory and
legislative developments, which may affect each Portfolio. P-405, Schedule B(IV)(M).
Additionally, the responsibility for preparing and updating charter documents, by-laws, and
foreign qualification filings remains with FMG. P-405, Schedule B(IV)(H).
FMG also retains many duties pertaining to Board materials. For example, FMG must
maintain a corporate calendar and assist with planning both Board and shareholder meetings. P405, Schedule B(IV)(J}. (K). FMG prepares and files proxy materials, prepares agendas, collects
information, and prepares and distributes all materials needed for the meetings. P-405, Schedule
B(IV)). Further, FMG must prepare minutes, make reports and recommendations regarding the
performance of the investment advisers and other service providers, and follow up on matters
raised during Board meetings. P-405, Schedule B(IV). The sub-administrators merely assist
with the collection of quarterly materials for Board meetings. J-27, Schedule B(III). All other
duties related to the Board meetings remain with FMG.

66

FMG retains a number of tax and accounting duties for itself. FMG prepares financial
information for the Trust's semi-annual and annual reports, provides proxy statement and other
communications required or sent to shareholders, and arranges for the printing and mailing of
such reports and communications. P-405, Schedule B(Il)(I). Additionally, although the subadministrator must calculate each Fund's net asset value, FMG is required to transmit each
Portfolio's or class's net asset value (HNA V") to NASDAQ and other entities in accordance with
the Trust's prospectus. P-405, Schedule C(I); J-27, Schedule C(I). Finally, FMG retains the
duty to consult with the Trust's independent auditors regarding the annual audit. P-405, Schedule
C(l)(E).

7.

Conclusion Regarding the Contract Language

Plaintiffs' assertion that essentially all investment management duties are delegated to
sub-advisers is correct, when examining only the contract language. However, in reviewing the
administrative contracts, it is clear that FMG retains many of these obligations. Moreover, the
trial testimony demonstrated that both FMG and AXA perform a number of services beyond
those expressly outlined in the agreements. Therefore, the Court is unpersuaded by Plaintiffs'
insistence that the contract language itself controls. In disputing the services that FMG and AXA
perform, Plaintiffs simply point to contract provisions from the various agreements. However, to
adopt Plaintiffs' position would ignore voluminous testimony of credible witnesses, which
explained the duties that FMG undertakes related to the Funds. Therefore, to the extent Plaintiffs
dispute FMG's services based on contractual language, the Court finds that the analysis must
consider all duties, whether enumerated in a contract or undertaken in a manner to carry out the
contractual duties. 18

18

There is one other, unrelated contract, the Shared Services Agreement, which is discussed in the "Profitability"
section, infra at p.99. It is an intercompany agreement between FMG and AXA for services provided by AXA in

67

8.

Fees Under the Agreements

The fee schedules for all the above agreements are listed in the parties' Joint Statement of
Facts, and are provided in the Appendix to this Opinion. See

Appendix~

JSOF ~iI 20, 37, 41, 54.

However, these fee schedules do not provide a dollar amount paid to FMG for its investment
management and administrative services. Instead, the fee schedules list percentages to be paid
based on the assets under management in a given portfolio. Moreover, Plaintiffs failed to admit
into evidence a comprehensive breakdown of the fees that FMG retained compared to those paid
to the sub-advisers and sub-administrators. At trial, Plaintiffs offered the testimony of
Pomerantz on this issue. Pomerantz prepared P-151 a, which purports to compare the investment
management fees retained by FMG with those paid to the sub-advisers on a fund-by-fund basis
for 2012. Pomerantz also prepared P-151 e, which provides the same comparison for the
administrative fees retained by FMG with those paid to the sub-administrators in 2012. Plaintiffs
did not admit additional exhibits for any other year besides 2012.
In their post-trial findings of fact, Plaintiffs submitted a number of tables (e.g. Tables 1,
2, 3, 10 and 12), purporting to compare the fees retained by FMG to those paid to sub-advisers
and sub-administrators. These tables, however, differ from P-15la and P-151e. For example,
Chart 2 in the Post-trial Findings of Fact (ECF No. 285-2, DCRPFOF, iI 37) supposedly contains
HFMG's Retained Investment Management Fees, Sub-Advisory Fees, and the Fee Ratio,"
allegedly the same information as P-151a. However, pursuant to Table 2, in 2012 for the
EQ/Common Stock Index, FMG retained $8,082, 177 and the sub-adviser was paid $2,390,873.
Conversely, in P-151 a, for the same Fund in the same year, FMG was paid $14,261,272.31 and
the sub-adviser was paid $2,390,872.60. P-151 a notes that the difference between

supporting FMG for the benefit of the Funds. It is not provided to the Board for approval as part of the 15(c)
process, nor does it require the Board's approval as the Investment Management and Administrative agreements do.

68

$14,261,272.31 and $2,390,772.60 is $11,870,399.71. Even if the Court were to accept that the
""difference," i.e. the approximately $11.8 million, is the fee retained to FMG, this amount differs
from the approximately $8 million figure contained in Table 2. The only number that remains
the same is the amount paid to the sub-adviser, which was stipulated between the parties in in the
Joint Statement of Facts. JSOF ~ 42. This is just one 19 example of the inconsistencies between
Plaintiffs' post-trial calculations and those that were admitted at trial. It is also important to note
that both P-15la and Table 2 claim to use P-52b as the source document in reaching these
calculations. See Tl 845:2-4 (Pomerantz). Despite using the'same source for the calculations in
Table 2 and P-151 a, Pomerantz reached different results.
Moreover, Pomerantz failed to provide calculations for the amount of fees retained by
FMG for all of the other years in question-2010, 2011, 2013, and 2014. Therefore, the Court
cannot even cross-reference these new, post-trial calculations against any information admitted
into evidence. Most importantly, no witnesses testified as to these post-trial submissions, and
Defendants were deprived of the opportunity to cross-examine any witness on the accuracy of
same. 20
Detendants admitted the "Gary Charts" (DX-144.18), which set forth a breakdown of the
fees retained by FMG on a fund-by-fund basis. 21 However, these charts are difficult to follow
without a foundational understanding of the Funds and working knowledge of the financial
industry. Therefore, although the Court was deprived of a clear and reliable breakdown of the

19
In fact, for all twelve at-issue funds for 2012, the numbers contained in Chart 2 differ from P-15 la as to the
amounts purportedly retained by FMG. Put another way, the tees supposedly retained by FMG for each fund in
2012 differ depending upon which of Plaintiffs' calculations-P-15 la or Table 2-is accepted.
20 To Plaintiffs' credit, P-15le and Chart 3 align in terms of the amount of administrative fees retained by FMG and
those fees paid to the sub-advisers. However, Plaintiffs only offered one year of calculations into evidence-2012.
Therefore, Defendants were similarly deprived of the right to cross-examine witnesses on the administrative fee
calculations for 2010, 2011, 2013, and 2014.
21
As previously noted, these charts were only given to the Board after this suit was filed.

69

fees paid to the sub-advisers and retained by FMG, it is clear that the Board received information
regarding the amount FMG was paid, despite its use of sub-advisers and sub-administrators.
Moreover, the Board would likely possess the foundational understanding that the Court lacks in
deciphering these charts.
Therefore, the only reliable information regarding the amount of fees paid in this case are
those numbers to which the parties stipulated-the fees paid to sub-advisers and subadministrators. The table below provides a comprehensive and easy to understand chart of the
sub-advisory and sub-administrative fees paid for each fund for the entire damages period-2010
until 2014. However, the Court notes that while it is clear how much the subs were paid for all
years in question, it remains unknown how much FMG retained in fees. This makes the Court's
ultimate decision in this case nearly impossible. Without competent evidence demonstrating
how much FMG was paid, it cannot be determined whether the fee ''so disproportionately large
that it bears no reasonable relationship to the services rendered and could not have been the
product of arms-length bargaining." Gartenberg, 694 F.2d at 928.

70

Fees Paid to Sub-Advisers and Sub-Administrators per the JSOF
Fund
Common Stock

Index

2010

2011

2012

2013

2014

Advisory Fees

$2,421,062

$2,449,890

$2,390,873

$2,625,765

$2,832,443

Administrative
Fees

$415,018

$416,791

$405,492

$439.049

$468.276

JSOF iii! 42-53; 55-66.
71

9.

Services Provided by FMG to the Funds

The Court finds that Plaintiffs' position that the contract language delegated all of FM G's
duties to the subs is unsubstantiated. Instead, the Investment Management Agreement gives
FMG overall supervisory and man~gement powers over the sub-advisers. Although this
authority under the contracts is broad and vague, the trial testimony demonstrated that FMG
performs a variety of services to the Funds in order to carry out their contractual duties under the
Investment Management and Administrative Agreements. These services are explained below.
FMG 's Supervision and 1Wanagement of Sub-Advisers
Initially, FMG researches, selects, interviews, and hires the sub-advisers. T869:4-l 0,
870:16-21 (Chan); T2620:21-2621:12 (Joenk); T2376:12-17 (Kopcke) (admitting FMG selects
sub-advisers); Tl816:1 l-13 (Pomerantz); Tl663:20-23 (Barrett); DX-142.2 at Bates 4382; ECF
No. 276, PRDFOF, ~ 223. FMG's sub-adviser selection process is designed to identify subadvisers that will be capable of adding value to the Funds. DX-142.2 at Bates 4118; ECF No.
276, PRDFOF, if 224. Once a potential sub-adviser has been identified, FMG examines the subadviser's organization, performance history, and reputation. DX-142.2 at Bates 4118; ECF No.
276, PRDFOF, if 224. FMG will investigate the potential sub-adviser's track record of consistent
performance for the asset class being considered, as well as its reputation for quality in
operations, compliance, and ethical matters. DX-142.2 at Bates 4118; ECF No. 276, PRDFOF, if
224. Additionally, FMG will send fifty page questionnaires covering compliance, operational,
and legal matters to the sub-advisers. T938: 19-939: 10 (Chan); ECF No. 276, PRDFOF, if 225.
FM G will also conduct performance and risk analyses on the potential sub-advisers over time to
evaluate whether the sub-adviser has the potential to improve Fund performance. T3059:7-20
(Joenk); ECF No. 276, PRDFOF, if 255.

72

After hiring a sub-adviser, FMG monitors them to: (a) confirm their compliance with
investment strategies and policies; (b) track their performance in carrying out their portfolio
management responsibilities; (c) ensure adherence to legal and compliance procedures; (d)
determine whether there have been any organizational changes at the sub-adviser that could
impact the sub-adviser's overall business continuity; (e) check for any litigation, enforcement, or
regulatory matters relating to the sub-adviser; and (t) evaluate the sub-adviser's brokerage
practices and trade execution quality. DX-142.2 at Bates 4119-20, 4383-86; T2625:24-2626:15
(Joenk); T870:16-21 (Chan); T2376:12-17, 2377:6-12 (Kopcke); T1663:20-23 (Barrett); ECF
No. 276, PRDFOF, ~ 229. FMG monitors reports and information about the sub-advisers on a
daily, monthly, and quarterly basis. DX 142.2 at Bates 4120; ECF No. 276, PRDFOF, ~ 234.
Additionally, FMG performs periodic on site due-diligence meetings with the subadvisers. P-373 at Bates 8151; T945:2-7 (Chan); T2376:21-2377:5 (Kopcke); Tl 190:23-1991:6
(Pomerantz); ECF No. 276, PRDFOF, il 30. FMG also runs monthly performance attribution
analyses on the Funds, analyzes other performance data, and evaluates market data re_lating to the
sub-advisers. T879: 14-24 (Chan); T943:6-944: 17 (Chan); ECF No. 276, PRDFOF, ~ 232.
FMG monitors the performance of the sub-advisers in order to make strategic decisions
about whether to retain or replace a sub-adviser, with the goal of replacing sub-advisers if
needed. T3055:4-3059:6 (Joenk); ECF No. 276, PRDFOF, ~ 235. FMG evaluates whether the
sub-advisers have performance or other issues that warrant placing the adviser on a "watch list"
provided to the Board. T916:9-20, 917:20-922:2 (Chan). Where necessary, FMG will also
manage the transition process when sub-advisers are hired, terminated or replaced. DX 142.2 at
Bates 4382; T2377:6-12 (Kopcke); ECF No. 276, PRDFOF, ~ 237.

73

FNJG Portfolio Investment Services

In addition to its supervisory and management duties pertaining to the sub-advisers, FMG
provides a number of portfolio investment services, ranging from risk management to fund
creation. Defendants assert that those services are predominantly handled by FMG, with the subadvisers and sub-administrators ••merely assist[ing]." ECF No. 285-1, DFOF ~~ 367-368.
Plaintiffs contend that the services detailed by the Defendants are not actually rendered by FMG,
but are delegated to sub-advisers and sub-administrators, while FMG still collects a large fee. A
comprehensive chart discussing all of FMG's portfolio investment services was provided to the
Board during the July 8-9, 2013, Board Meeting in Book 1 Section 15(c). DX-142.2 at Bates
4380-87.
Construction and Restructuring of Portfolios

In the Board Meeting Book 1, under the heading "Reorganization and Restructuring of
Existing Portfolios," it states that FMG is responsible for, "continually assess[ing] existing
portfolios for continued viability and propos[ing] substitution, reorganization or restructuring, as
appropriate." DX-142.2 at Bates 4381. Under the "sub-advisers" heading, there are no such
responsibilities listed in regards to construction and restructuring. DX-142.2 at Bates 4381. As
such, this task was retained by FMG. 22
Setting Benchmarks

It is undisputed that FMG selects the Funds' benchmarks "[w]ithin which the Subadvisers may select and trade securities, including the Funds' risk parameters." T2622:5-12
(Joenk). Barrett conceded that FMG does develop investment guidelines (i.e. benchmarks) for

22

However, the Board did not receive this chart until after the lawsuit was filed.

74

the Funds and further admitted that this was an ""important" service with regards to Fund
performance. Tl 662:22-1663:6 (Barrett).
Furthermore, Chan testified about benchmarks in relation to FMG's responsibilities.
Chan described what benchmarks are and how they are chosen in the following testimony:
[T]he information that we basically think it's - it's a good fit for this
portfolio and is being bandied about in discussion with the Board,
and we basically put a rationale behind picking out this benchmark,
and the Board has to basically get comfortable with this benchmark.
T892:9- l 4 (Chan). He further indicated that FMG is responsible for "proposing" the
benchmarks and the Board must approve them, though Chan himself does not take a leading role
when selecting benchmarks within FMG. T892: 15-893:24 (Chan).

Structural Changes to EQAT Funds
Defendants assert that FMG continuously evaluates the structure of the EQAT funds and
has restructured them when necessary. ECF No. 276, PRDFOF

~

208. On direct examination,

Joenk testified, " ... the services under this rubric [DX-2055] 23 would include construction and
building of a portfolio, including restructuring, if necessary.... " T2620:22-25 (Joenk). Joenk
further testified to an example of restructuring that FMG undertakes:
Well, one of the at-issue funds is Core Bond Index ... [it] was an
actively managed portfolio, and the active manger was
underperforming tremendously, so we terminated the manager,
restructured the portfolio, converted it to an index fund, lower[ ed]
the fees and hired a sub-advisor to execute an index strategy.
Another type of restructuring would be creating a volatility overlay,
tor instance, which is in a number of the at-issue portfolios, which
· reduces volatility of the funds in periods of high volatility.

23

DX-2055 is "a graphic of the services that are provided to the EQAT funds, not by organization, but more by type
of service." T2620:15-17 (Joenk).

75

T262l:17-2622:4 (Joenk). On cross-examination, Joenk testified again about restructuring and
indicated that two ways that FMG can restructure a fund is by terminating the sub-adviser or
merging the fund. T3203:24-3204:1-4 (Joenk). Plaintiffs assert that JP Morgan, as the subadministrator, predominantly handles restructuring. ECF No. 276, PRDFOF ~~ 208-209.
However, Joenk clarified the roles of FMG and JP Morgan in this process, and stated that, '" ...
when we restructure a portfolio depending on the size of the portfolio, we may hire a transition
manager to move the assets ... JP Morgan as custodian has got to be involved with it because
they are custodian for the assets." T3204:5-14 (Joenk). Plaintiffs established through Joenk's
testimony that, "'JP Morgan is solely accountable for all aspects of the transition." Id. However,
the Court finds that FMG retains some responsibility for the initial decision to undertake a
restructuring and JP Morgan assists in the transition. As such, FMG has not delegated this duty
entirely.
Defendants assert that FMG also restructured certain Funds by converting them from
active to hybrid (pactive) funds, and by adding.a ""volatility overlay" (i.e. the ATM Strategy,
discussed infra at p. 79) to some of the Funds' investment strategies. ECF No. 276, PRDFOF, ~
209. Joenk testified,

'~[a]nother

type of restructuring would be creating a volatility overlay, for

instance, which is in a number of the at-issue portfolios, which reduces volatility of the funds in
periods of high volatility." T262 l :25-2322:3 (Joenk).
Plaintiffs contend the restructuring of five at-issue Funds from ._active" to ""hybrid"
occurred between 2007 and 2009, which is outside the relevant time period for this case. ECF
No. 276, PRDFOF,

~

209. Nonetheless, the Court finds that this is an ongoing duty that, when

required, FMG performs, as opposed to the sub-adviser.

76

Formulating Investment Strategy
FMG is responsible for ''[d]evelop[ing] and implement[ing] investment strateg[ies] for
each Portfolio, or allocated portions of a Portfolio." DX-142.2 at Bates 4381. The different
strategies discussed in this section include the Traditional Strategies (i.e., active, passive, equity,
fixed income), the Hybrid Strategies (e.g., combination of active and passive), Allocation
Portfolios (e.g., funds-of-funds), and Unique Strategies (e.g., volatility managed). DX-142.2 at
Bates 4381.
FMG performs research in selecting and monitoring appropriate sub-advisers for existing
and new portfolios. DX-142.2 at Bates 4382. On the sub-adviser side, their delegated
responsibilities include "'[ c]oordinat[ing] investment and reinvestment of allocated assets in
conformity with designated investment strateg[ies] prescribed by the investment manager (i.e.
FMG)." DX-142.2 at Bates 4382. FMG also manages the investment "operations and
composition of each Portfolio, or allocated portion of a Portfolio[,]" whereas the sub-advisers
will "research individual companies or industries, the securities of which are included in the
Portfolio." DX-142.2 at Bates 4382. FMG further performs the ''overall supervisory
responsibility for the general management and investment of each Portfolio's assets" while the
sub-advisers ''communicate with the Investment Manager (and Board, as appropriate) material
information relating to the investment of the Portfolio's assets." DX-142.2 at Bates 4382.
Kopcke testified to this service and indicated that determining the Funds' investment
strategies is a "[v]ery important" service provided by FMG. T2376:6-l l (Kopcke). Plaintiffs
assert that an expert witness like Kopcke cannot testify to establish facts. ECF No. 276.
PRDFOF if 205. In this case, Kopcke was merely testifying to a standard in the industry that

77

formulating investment strategies are typically important services rendered by investment
managers.
The Court finds that the sub-advisers carry out the investment strategy that FMG first
determined. As the creator of the Funds themselves, FMG set the investment strategy, and
subsequently hired the sub-advisers to implement same.
Managing ETF Strategy

Plaintiffs assert that FMG delegated the responsibility to manage the ETF 24 to the subadviser. Specifically, the Investment Management Agreement provides that FMG:
contract[ ed] with one or more investment advisers [i.e. sub-advisers]
to manager the investment operations and composition of each and
every Portfolio of the Trust and render investment advice for each
and every Portfolio, including the purchase, retention, and
disposition of the investments, securities and cash contained in each
Portfolio ...
J-4 at Bates 4028-29. Defendants counter that FMG provides direct portfolio management
services to the Funds, including managing ETFs for certain Funds. ECF No. 276, PRDFOF, ~
211. However, it is undisputed that FMG purchased and managed ETFs in small amounts for
two of the Funds: the EQ/Mid Cap Value PLUS Portfolio and the EQ/Large Cap Value PLUS
Portfolio. T977: 17-978: 10 (Poutas). The services that FMG provides for these particular Funds
include: "determining the strategy for the sleeves, selecting and trading the ETFs, analyzing the
performance of the sleeves, and reporting to the Board on the sleeves." T977:6-10 (Poutas).
Furthermore, FMG uses the ETF sleeves to "obtain exposure" and to "diversify" the
Funds' investments. T985: 16-23 (Poutas). Poutas testified to the meaning of exposure and
di versification:

24

ETF stands for·Exchange Traded Funds. T48: 19 (Plaintiffs Opening).

78

So, exposure meaning access to a particular segment of the market,
and there are plenty of ETFs that ... are basically tracking a specific
segment.of the market, meaning large cap, mid cap or by style; and
diversification is a risk management technique basically
combin[ing] several type of assets on to one portfolio in order to
reduce the risk.
T985: 18-23 (Poutas). Plaintiffs dispute this characterization of the services provided through the
ETF sleeves because, in addition to the two ETF funds, FMG's approximately 68 employees
service nearly 123 other funds. ECF No. 276 PRDFOF if 212; Tl80:24-181 :2 (Joenk); Tl84:20185:7 (Joenk). Plaintiffs assert that because there are so few employees for so many furtds, FMG
could not have performed "a host of services'' to the at-issue Funds. ECF No. 276, PRDFOF if
212. There is no proof to support that contention.
The Court finds that FMG provided investment management services regarding
the ETF sleeves. The testimony demonstrates that this management service was retained
by FMG and was not passed along to the sub-advisers.
Fund ATM Strategy

The Fund ATM strategy25 is disputed by the parties because Plaintiffs assert that this
strategy only applies to four out of the twelve at-issue Funds. ECF No. 276, PRDFOF, ~ 217.
Defendants assert that FMG manages the ATM strategy generally in regards to the "Fund" (i.e.
all of the Funds). ECF No. 276, PRDFOF, ~ 217.
The ATM strategy was created by FMG and is a "patented volatility management
strategy that is designed to reduce a Fund's equity exposure to markets in periods of high
volatility, in order to produce better risk-adjusted returns for investors." T978:24-979:6
(Poutas). Poutas testified that the day-to-day management of the ATM strategy involves

15

"ATM" stands for AXA Tactical Manager. T757:13 (Joenk).

79

monitoring "'[t]he volatility level, for the various asset classes on a daily basis, so we do that for
large cap, mid cap and international." T980:5-9 (Poutas).
The Court finds that this service was performed by FMG, and not sub-advisers. Again,
although Plaintiffs do not classify the service as being "'extensive," it is undisputed that FMG
performed the service.
Moreover, Defendants contend that in managing the ATM strategy, FMG monitors prices
for various asset classes on a daily basis to determine whether volatility (price fluctuations in the
market) has exceeded thresholds that FMG has established for each asset class. ECF No. 276,
PRDFOF, ~ 218; T979: 19-20 (Poutas). Defendants assert that if a certain price threshold is met,
it is FMG that determines whether and to what extent a Fund should be "de-equitized," and then
FMG instructs the sub-advisers to de-equitize. ECF No. 276, PRDFOF, ~ 218. Mainly,
Defendants maintain that FMG closely manages the sub-advisers during this process. Id.
Defendants assert that the only involvement of the sub-advisers in the price monitoring within
the ATM strategy is that the sub-advisers execute the trades as instructed by FMG. However, the
sub-advisers do not manage the strategy. Id. at ~ 219.
Plaintiffs do not dispute that FMG both monitors the prices for the Funds and determines
the extent to which the Funds should be "de-equitized." ECF No. 276, PRDFOF, ir 218.
Poutas noted that FMG monitors the ATM strategy, and that four of the Funds at issue in

this case have had an ATM strategy associated with them. T978:25-979:25 (Poutas).
Specifically, he stated that: '"[i]f volatility exceeds certain threshold[s] we [FMG] will then
instruct - we would come up with basically what we call beta, which is the level of investment
for each of the various strategy ... We're looking for volatility level that would exceed the
threshold that we set for each of those various asset classes." T979: 10-980:25 (Poutas). In

80

relation to price monitoring, if a threshold is met, Poutas explained that "\ve're [FMG] going to
decide how much exposure we would be effectively taking out, for the various strategies that are
impact[ ed]," which is referred to as "de-equitizing." T981 :2-4 (Poutas).
The "de-equitizing" is achieved through the use of futures trades. T982:3 (Poutas).
Poutas concluded: "And at that point once we reach that decision we will instruct the subadvisor to implement the trade, and there will be a series of communication between the subadvisers and ourselves." T979:13-16 (Poutas). Poutas also said the sub-adviser is instructed by
FMG as to when and how much to "de-equitize." T982:8-13 (Poutas).
ln addition, Wermers also added that FMG "totally run[s]" the ATM strategy. T4334: 1819 (Wermers).
Therefore, the credible testimony demonstrates that FMG, not sub-advisers, perform this
task.
Asset Allocation/Rebalancing
Defendants assert that for Funds with multiple sub-advisers, FMG determines what
percentage of the Funds' assets should be allocated to each individual sub-adviser and rebalances
those allocations based on the sub-advisers' respective performance. ECF No. 276, PRDFOF, ,-r
221. This service involves FMG "[h]iring [a] sub-advisor, monitoring a sub-advisor's
performance, [to determine if] ... they doing what they're hired to do, which is done through
this portfolio analytics service that we provide where we '11 analyze ... the performance ... "
T2620:25-262 l :4 (Joenk).
Plaintiffs admit that for Funds with multiple sub-advisers, FMG determines what
percentage of assets should be allocated to each sub-adviser. However, only five of the twelve
Funds at issue in this case have multiple sub-advisers. ECF No. 276, PRDFOF, ~ 221. Those

81

Funds are: the EQ/Equity Growth PLUS Portfolio; the Global Multi-Sector Equity Portfolio; the
Mid Cap Value PLUS Portfolio; the Large Cap Value PLUS Portfolio; and the Global Bond
PLUS Fund. JSOF ~~ 23-34. Although Plaintiff disputes that FMG's services ate extensive in
this area, the Court finds that asset allocation and rebalancing is a service that FMG retains.
Valuation ofDisputed Securities

Plaintiffs assert that the bulk of the valuation services are performed by the subadministtator. However, the credible testimony demonstrates that, while the sub-administrator,
JP Morgan, performs certain valuation services, FMG also retains some of this responsibility.
The Board has established a Valuation Committee, which determines the fair values of
the Fund's securities for which market quotations are not readily available. T2624:9-13 (Joenk);
T3540:6-8 (Schpero); DX-142.2 at Bates 4121, ECF No. 276, ~ 261. The valuation committee
meets once a day and is responsible for valuing hard-to-value securities held by the Funds.
T816:24-25-T817:1, T817:2-5, T2624:8-13 (Joenk); Tl078:1 l-21 (Walsh). HThe valuation
committee is responsible for coming up with that price, whether they use input from a subadviser or multiple sub-advisers because they can have conflicting input or other pricing sources
or Bloomberg, the valuation committee takes that information and then makes a valuation
decision." T8l9:1-6 (Joenk). The committee also meets regularly Hto go over the
determinations and all the reports ... and just kind of go over any stale prices, any fair value
prices that have been fair valued for a while." Tl 079:23-1080: 1-5 (Walsh). FMG also prepares
Valuation Committee minutes and the Board reviews and ratifies them. ECF 276, PRDFOF ~
265.
Joenk also discussed the valuation of hard-to-value securities. Sometimes "there are
stocks and securities that are thinly traded." T2626:23-25 (Joenk). When there are problems, "it

82

goes to the valuation committee and compliance is represented on the valuation committee,
actually the secretary for the valuation committee." T2627:3-5 (Joenk). There were times when
sub-advisers would disagree about a price, and therefore Hit is FMG[ ], in that case[,] the
valuation committee's responsibility to determine the method and which security price will be
used ... for valuing all of those securities." T2627:1 l-14 (Joenk).
Plaintiffs experts confirmed that certain valuation functions are retained by FMG.
According to Pomerantz, pricing of securities is mainly an administrative task, but if there were
conflicts or difficult securities, FMG would ultimately be responsible. T 1993 :22-1994:2
(Pomerantz). According to Barrett, '"the pricing is done by the sub-administrator, except in cases
where there's an issue or if someone needs to sort of take a special look at something that's
unusual." T 1690: 1-4 (Barrett). Moreover, Barrett indicated that the pricing process was a
significant effort. Tl691 :7-9 (Barrett). Some securities are more difficult to price because
"'[p ]ublicly traded securities are usually sort of automated in terms of getting the values, but most
portfolios would also have some private placements or other things that would be relatively more
difficult to value." Tl 692: 17-21 (Barrett).
Therefore, the Court finds that the pricing of securities is a task undertaken by both the
sub-administrator and FMG. As such, Plaintiffs did not meet their burden in demonstrating that
this task was delegated in its entirety to the subs.

FMG'sRisk
Defendants contend that FMG faces substantial risk as the Fund's investment manager
and administrator, which is costly and, in part, justifies the fees charged to investors. See ECF
No. 276, PRDFOF, n.23. Plaintiffs assert that, pursuant to the language of the investment
management and administrative agreements, FMG did not bear any risk, and even if it did, the

83

Board breached its fiduciary duty in approving the fees under these agreements because FMG
did not quantify the risk. Id. As such, Plaintiffs contend there was no basis to approve fees for
FMG's assumption of risk without allocating a specific cost to that risk. Id.
Types of Risk

Jam es gave an overview of the risks that fund and asset managers face. James noted that,
generally, FMG faces business risk and market risk. Market risks involve the "'volatility in the
marketplace," and the market's effects on the company's earnings. T4 l 07:3-7 (James).
Business risks, also referred to as ""operational risks," are the "risks associated with potential
losses due to ... operational errors or mistakes; issues regarding litigation or regulatory risks" as
well as litigation, reputational, and entrepreneurial risks. T4107:8-25 (James). James gave an
example of a business and operational risk in his testimony. He explained:
One example is if there's an error in the computation of the net asset
value of a fund, net asset is the price which a fund holder ... holder
can buy or sell on a particular day, it's based on the value of the
underlying securities in a mutual fund; that's calculated every day,
and to the extent that there's an error in the calculation, which
sometimes occurs, that can lead to ... significant costs because what
typically happens in those circumstances is that anybody that bought
at a NAY that is not the NAY as reflected in the underlying
portfolio, is going to be made whole typically through the fund
manager.
T4110:21-41l1:10 (James).
Schpero described entrepreneurial risk that an entity encounters when ""starting up the
fund and in sponsoring the funds.'' T3576:24-25 (Schpero). Schpero explained that the risk that
companies face in starting funds are the costs involved, the uncertainty of the successfulness of
the fund, and the "expense caps" that need to be put in place to make the fund "viable at an early
stage." T3577: 1-7 (Schpero ). According to Schpero, business and operational risks include
"compliance and reputational problems[,]" financial issues with the funds themselves, viability
84

of the funds in the market, and the vulnerability and risk to the advisers and sub-advisers to the
fund in the event of a problem. T3577:8-14 (Schpero). Schpero noted that ""if there is a problem
with [the Funds], contract or no contract. the party that [he is] going to look to make the fund
whole will be FMG." T3577: 15-18 (Schpero).
Joenk discussed the risks involved in creating funds, and how those risks are
communicated to the Board. J oenk stated that the various teams would report to him, among
other things, the risk profile and risk parameters involved with starting the new fund. T364: 18-25
(Joenk); T365:1-20 (Joenk). Joenk explained that he and the leaders of those teams would then
present to the Board the financials, issues, and risks involved with creating the fund, as well as a
profitability and expense analysis of the proposed fund. T364: 18-25 (Joenk); T365: 1-20 (Joenk).
Litigation and regulatory risks "essentially address the possibility of FMG being sued or
having regulatory issues." T4 l 49:3-5 (James). James explained that the litigation risk concerns
the Hfrequency with which there's litigation" and the "'amount of the litigation" in the mutual
fund industry. T4 l 49:9- l 8 (James). The regulatory risks include governmental and agency
stipulations and regulations that may affect the performance or behavior of the funds.
James gave an example of litigation and regulatory risks. He stated that "there was ...
litigation regarding market timing in the fund ... [a]nd I think [the fund] paid a hundred million
dollars in a fair fund settlement, which was out of the fund manager's pocket for the rapid
trading in the funds." T4 l 09:6-11 (James). James also mentioned that there is a "'Litigation
Tracker" that keeps track of the litigation in the mutual fund industry. T4109:12-18 (James).
Both Schpero and James testified as to the risks that FMG specifically encounters. On
cross-examination, Schpero was asked ifhe "associate[s] any entrepreneurial risk with any of the
existing funds." T3800:7-8 (Schpero). Schpero responded "no ... I think at this point if they're

85

15 years old, I don't see significant entrepreneurial risk." T3800: 10-11 (Schpero ). However, he
did testify that FMG encounters some of the enterprise risks described above. T3800: 12-18
(Schpero ). Schpero noted that none of the entrepreneurial risks, if there were any, would be
passed on to the sub-advisers. However, he noted that enterprise risks would affect the subadvisers. T3579:2- l 0 (Schpero ). He stated that if the sub-advisers could not pay for the adverse
effects of the enterprise (business) risks, the "Board is then going to be looking to FMG".to pay,
which would likely come from the Funds. T3579:6-24 (Schpero ). When asked ifthere is a way
the Board could secure this risk, Schpero stated: "I don't think as a practical matter there's a way
to secure it ... " T3580:2-6 (Schpero).
Next, the Court asked James to explain the risks that FMG bears, noting that he had given
examples and definition of the risks, but had not specifically mentioned the types that FMG
faces. T4l 12:3-6 (James). James stated that FMG is definitely facing "litigation and
reputational risks" associated with managing mutual funds, as well as operational and business
risks associated with volatility and the market. T4112:7-25; T4113:1-3 (James). Therefore,
James agreed with Schpero that FMG faces a high amount of"enterprise risk" as manager of the
Funds. When the Court asked James if FMG encounters entrepreneurial risk, he stated that
because the Funds have been around for twenty years, there is most likely not any
entrepreneurial risk, but that there might be some particular aspects of entrepreneurial risk that
may surface even though the funds are relatively old. T4114:2-8 (James).
The Court finds that the testimony of Schpero and James demonstrate that FMG faces
little to no entrepreneurial risk, but does encounter a large amount of enterprise risk. This
enterprise risk emanates from litigation and reputational risks, operational and business risks, and
the risk that FMG and the Funds may have to pay the sub-advisers in the event of legal action.

86

The Court finds that FMG bears some risk that would justify a portion of the fees charged to
investors.
Risk Management Techniques

Barrett was questioned regarding a presentation given to the EQA T Board regarding risk
management techniques. P-105-A at Bates 0735. Barrett discussed the risk management
techniques that protect investors in the Accumulator product, which is an FMG product that
contains a number of the Funds at issue. He explained that:
... the Accumulator product contains some features that basically
say if the money that's put into the mutual funds, [and] if those
mutual funds perform really badly [and] the market tanks .. AXA
agrees that they will make up some of that for the policy holder [and]
they will contribute additional money to the policy holder, [to make
it] it as though the market hadn't tanked so badly.
T1502:17-1503:1 (Barrett). Barrett refers to the technique as a "secondary guaranty," and notes
that it is a technique designed to "hedge the risks." Id. Barrett further explained that AXA's
possible liability for that "secondary guaranty" changes with the volatility in the stock market.
Because AXA is subject to that volatility, Barrett explained that AXA makes a number of
investments in "derivative hedges" in order to "hedge the risks." T 1503 :6-8 (Barrett). Barrett
noted that risk hedging protects AXA, because "if the market goes [in] one direction, and that
causes a big increase in AXA's liability which would be part of the results of the wrapper ...
[then] the derivative hedges are designed to produce a gain when the market behaves that way."
Tl503:8-13 (Barrett). As a result, the gain from the hedges will offset the loss on the product.
Tl 503: 13-14 (Barrett). Barrett explained that this hedging method is an essential part of the way
that AXA manages its exposure. T1503: 15-16 (Barrett).

87

Joenk was also asked about the hedging method. Joenk was questioned regarding how

hedging relates to the product wrapper2 6 fees, and asked to explain how the Accumulator product
is hedged. He explained, "''if the company loses money on its hedge, that reduces not so much
the wrapper fee, but it reduces the net technical margin, which is the other component of the
wrapper fee.'' T3046: 12-19 (Joenk). Joenk further noted that AXA hedges to protect itself~ but
that it can either gain or lose on the hedges, and those gains and losses are ""part of the product
wrapper.'' T3047:2-10 (Joenk). Therefore, the Court finds that FMG undertook certain
measures to manage the risk it faces, which, in part, justifies its fee.

Quant(fYing Risk
Plaintiffs claim that it was necessary to quantify the risk in order to justify FMG's fees.
The Court finds that the Board nonetheless considered the risk that FMG faces, even though
there was no specific cost assigned to it. Schpero noted that the EQAT Board did not seek to
quantify the.risks ,posed to FMG, but Hcertainly discussed the concept." T3801 :2-3 (Schpero ).
He said there had not been any "'specific quantification," and he was not sure how the risk would
actually be quantified. T3801 :3-4 (Schpero). He noted that there are a number of ways to
mitigate risk, including purchasing insurance and keeping sufficient capital. T3802:1-2; T3803:1
(Schpero ). Schpero stated that he specifically knows of only one type of insurance FMG holds:
""D&O and E&O insurance ... that jointly covers the [F]unds and FMG." T3802:9 (Schpero).
However, Schpero further noted that he was not aware of any specific amount or quantity of
capital or insurance that was kept or used. T3803 :4-20 (Schpero ). Also, Schpero stated th_at he
believed it was not necessary for the Board to know the specifics of the insurance or amount of
sutftcient capital. T3804:8- l 2 (Schpero ).

26

Product wrappers were not adequately explained during the trial. See "Fall-Out Benefits," infra, p. 121.

88

James also testified as to quantifying risk. He explained that he would '"have the ability
to quantify the risk incurred by an investment manager such as FMG," but he did not do so
because he was not specifically asked to quantify the risks as they pertain to FMG or AXA.
T4146:12-16; T4147:9-12 (James). James testified, similar to Schpero, that the EQAT Board
was aware of and discussed quantifying the risks, but there was never an actual quantification.
T 4147:18-24 (James). Jam es also noted that he did not see any specifics regarding sufficient
capital, insurance, or quantification of the risks, but only saw discussion about those topics.
T4148:7-19 (James).
James testified that the risks faced by FMG should be considered in evaluating the fees
that FMG charges to the Funds as a cost. T41 l l:l l-19 (James). However, James did not
quantity the risks that he found important to consider:
Q.

A.
Q.
A.
Q.
A.
Q.
A.

And you view risk as a crucial component of the
assessment of whether or not a fee is reasonable; is that
correct?
I think it's an important component.
And you devoted a large part of your expert report to the
issue of risk; correct?
Yes.
And you have not quantified or made any effort to quantify
the risk; is that correct?
That is correct, I wasn't asked to specifically quantify the
risks as it pertains to FMG or AXA.
Did you propose at any point that that be done?
No.

T4147: 1-14 (James).
However, after being asked by the Court if it was necessary to quantity the risks to assess
FMG's management, James explained:

I don't think the EQAT Board activities are different than what I've
observed in the industry, in that we're just now at the stage where
people are thinking about quantifying these risks in a way to get a
hard number for what potential risk exposure is and adequacy of the
89

capital. Up until now it's really been focused primarily on
qualitative assessment ... I think most firms in the industry, asset
management firms that I've seen[] ... are not engaging in that
activity.
T42 l 9:5-4220:9 (James).
Because the Court finds James' testimony to be credible, the Court concludes that FMG
was not required to quantify the risk in order to justify a portion of its fee. As noted earlier, the
Court gives more weight to James than to Barrett. Barrett's testimony was that hedging
decreases risk to a point that it is of minimal concern. Moreover, risk is only one of many
factors contributing to FM G's fee, and the failure to quantify same is insufficient, in and of itself,
to determine that the Board breached its fiduciary duty. The testimony demonstrates that the
Board considered risk, among other factors, in approving the fees at issue.

Contract Language & Risk
Plaintiffs assert that FMG faces little risk because the EQAT has largely released FMG
from any liability and agreed to indemnify FMG for any liability FMG may incur. PFOF ~ 568;
J-4 at Bates 4030; J-5 at Bates 9821. Specifically, the Investment Management Agreement
requires FMG to "exercise its best judgment in rendering its services to the Trust." J-3, 2(D).
But while it is required to use its best judgment, FMG is not held liable for any "error of
judgment or mistake of law or for any loss suffered" by the Trust in connection with the
Agreement. Id. FMG will only be liable for "willful misconduct, bad faith, gross negligence,
reckless disregard of its duties or its failure to exercise due care in rendering its services to the
Trust ... " Id. The Administrative Agreement provides that FMG will not be responsible for
losses or expenses, except when caused by, resulting from or attributable to "willful misfeasance,
bad faith or negligence" by FMG or its subcontractors or from reckless disregard by FMG or its
subcontractors of its duties or refusal or failure to comply with the terms of the Agreement. P90

405, 6( a). Further, FMG and its subcontractors will not be held liable for any indirect,
incidental, special or consequential losses or damages whatsoever, even if FMG was advised of
the likelihood of such loss or damage and regardless of the form of action. Id.
Plaintiffs, once again, rely on contract language in determining FMG's risk. However,
the credible testimony demonstrates that FMG confronts risk in a number of ways that cannot be
I

mitigated through these contractual provisions. Initially, entrepreneurial and reputational risks
are not covered by the contracts. T3578: 19-24; 3579:20-21 (Schpero ). Moreover, Schpero
indicated that, notwithstanding the contract language, which is standard in the industry, both the
Board and regulators would ultimately hold FMG liable for any issues that impact the Funds or
investors. 27 T3849:18-3855:12 (Schpero). James also indicated that even if FMG had a legal
right to seek recourse or indemnification under these contractual provisions, FMG would still
bear the cost of defending any litigation or regulatory action. T4149: 19-4150: 14 (James).
Because the Court finds the testimony of Schpero, Joenk, and James to be credible, and finds
Plaintiffs' sole reliance on the contractual language to be overstated, the Court concludes that the
language of the agreements may mitigate the risk encountered by FMG, but does not eliminate it.

FMG's Compliance and Legal Services
Plaintiffs contend that all compliance duties were delegated to JP Morgan as the subadministrator. However, it is undisputed that FMG's compliance group facilitates and
participates in examinations by the SEC and inquiries, external audits, and AXA internal audits,
as needed. DX-165 at Bates 5634, 5662; DX-142.2 at Bates 4121, 4386. Although JP Morgan
provides support for such examinations, the ultimate responsibility falls on FMG.

27

The Court notes that, while Schpero's testimony was honest and credible on this issue, the Plaintiffs nonetheless
raised a valid issue regarding the contract language and Defendants' risk. Although the Board may insist that FMG
must be held liable for negligence, a Court may find otherwise based on the contract language. The Board should
re-negotiate the terms of this contract.

91

FMG performs certain legal duties for the Funds. FMG retains and manages outside
counsel regarding litigation matters related to the Funds. DX-142.2 at Bates 4386. Moreover,
FMG coordinates with counsel to the Funds and the Independent Trustees' Counsel, Morgan
Lewis, as necessary and appropriate. DX-142.2 at Bates 4387. FMG's legal services to the
Board are part of FMG's responsibility to keep the Board apprised of all developments, despite
the fact that both the Board and the Funds have their own independent counsel. T 1125: 8-19
(Louie).

FMG 's Board Governance Services
Plaintiffs do not dispute that FMG provides numerous and important Board governance
services to the Funds, including preparing certain materials for Board and Committee meetings,
maintaining the books and records for Board meetings, and handling Board meeting logistics.
ECF No. 276, PRDFOF ~ 250; Tl 096:2-23 (Louie); T2627:2 l-2628:3 (Joenk). FMG prepares
the annual 15(c) response to the Board. T439:3-8 (Joenk). These materials are subject to SEC
review, and in fact, the 15(c) materials from 2012 were requested by the SEC. T4252:1-13
(Louie). FMG, with assistance from the Funds' outside counsel, also prepares the package of
orientation materials for new trustees who join the Board. DX-142.2 at Bates 4380. FMG
annually prepares and sends out questionnaires to each of the sub-advisers, which must be
completed and submitted in order to have the sub-adviser's contract reviewed and renewed by
the EQAT Board for an additional year. Tl 202:8-21 (Louie). FMG also handles the annual and
ad hoc independence questionnaires that must be submitted to the Trustees. DX-142.2 at Bates

4380.

92

Conclusion on FlllG 's Services to the Funds
Plaintiffs have failed to meet their burden in demonstrating that FMG delegated all of its
duties. The Court finds that FMG continued to perform significant administrative and
investment management duties, despite the fact that some duties were delegated to subs. The
managerial role that FMG plays in coordinating with sub-advisers and sub-administrators is
extensive. This is especially true as it pertains to organizing materials to be submitted to the
EQAT Board. Without FM G's oversight, organization, and compilation of the raw information
provided by the subs, the EQA T Board would not have access to the materials upon which it
relies in the 15( c) process. Moreover, the full services of FMG, beyond those explicitly outlined
in the written contracts, warrants compensation through a fee. The duties performed by FMG are
far more extensive than Plaintiffs' contention that FMG delegated all of its work to the subs.
It is also important to note that much of the contract language is generic and broad, and

could easily be interpreted differently. It's clear from the trial testimony that FMG performed a
host of duties that may not have been explicitly enumerated in the contracts. It is not uncommon
for sophisticated business entities to come to a more specific understanding of their relationship,
and undertake tasks throughout the course of business that may not have been explicitly outlined
in a fairly boilerplate agreement. To adopt Plaintiffs' position that the contract language alone
controls would be, in Defendants' words, elevating "'form over substance." ECF No. 285-2,
DCRPFOF, ~ 349. It would be unreasonable for the Court to ignore the testimony of FMG
employees, especially Joenk, who has first-hand knowledge of the inner-workings of FMG, in
favor of Plaintiffs' theory that the contracts alone define the scope of the parties' relationship.
There was substantial testimony demonstrating all of the duties that FMG retains. Plaintiffs'
insistence that the contracts control is insufficient to demonstrate that FMG delegated all of its

93

duties. There were duties and responsibilities beyond the contracts. These included, inter alia,
overall supervision and management of sub-advisers and sub-administrators; a number of
portfolio investment services, including construction and restructuring of portfolios, setting
benchmarks, structural changes to Funds, fund conversion, and formulating investment strategy;
legal and compliance work; and Board governance services.
Plaintiffs have not met their burden of proof because they failed to consider these other
services. beyond the contracts, which FMG performs.

10.

Services Provided by AXA in Support of FMG and the Funds

The credible testimony also demonstrated that AXA performs a host of services for FMG
in supporting the Funds, including legal services, disaster recovery, call

centers~

and

infrastructure and support services. A description of these services is discussed below. The
costs associated with these services are discussed in the "Profitability" section, infra, p. 99.

AXA 's Legal Services
AXA provides a number of legal services to the Funds, including handling various
bankruptcy matters that involve securities held by the Funds, and litigation involving the Funds.
T4264:6-l l (Louie). AXA also handles compliance with anti-money laundering laws, and
monitors for violations of these laws by screening deposits by investors and checking
shareholder identities. T4259:5-4260:8 (Louie). If AXA discovers suspicious activity, it
prepares and files a report documenting same. T4259:5-4260:8 (Louie). AXA also conducts the
annual audit of the Funds' anti-money laundering program. T4259:18-21 (Louie). No FMG
employee performs this service. T:2848:2-20 (Joenk).
AXA also handles a number of regulatory filings. For example, AXA is responsible for
filing with each State's insurance department the mandatory "plan[s] of operation" for the Funds,
as well as periodic amendments. T4262: 15-4263:9 (Louie). Moreover, AXA performs certain
94

1934 Act filings relating to the ownership of the Funds' securities. T4264: 1-5 (Louie). AXA
assists with any state filings related to the organization of FMG or the Funds. T4264: 1-5
(Louie). AXA also aids in inquiries from state-level insurance and securities regulators.
T4263:2 l-4264:5 (Louie). Although there was no in-depth description of the precise matters or
cases that were managed by AXA on behalf of the Funds, the Court finds that this service is
performed by AXA in support of FMG and the Funds.

AXA 's Disaster Recovery Services
Although Plaintiffs maintain that the cost of AXA' s Disaster Recovery Services should
be covered by the costs associated with the Shared Services Agreement, Joenk's credible
testimony indicated that the Shared Services Agreement applies only to Hdual-hatted" employees,
who are on loan from AXA to FMG. Pursuant to the Shared Services Agreement, "'AXA
Equitable will maintain back up records, which will be available to FMG in the event of a
disaster. The AXA Equitable disaster recovery site, which it maintains, will be available to FMG
as required. AXA Equitable shall promptly transfer all such records, books and files to ...
FMG upon termination of this Agreement.'' P-273

at~

7. Joenk explained, ''disaster recovery is

required under the regulations" and FMG is required "to have a business continuity program that
is tested on a periodic basis and is well documented." T2629:2-4 (Joenk). Disaster recovery
requirements are specific to mutual funds. T2629:7-9 (Joenk).· According to Joenk, if the
systems go down, shareholders still need to be able to call in and make trades. T2629: 10-11
(Joenk). He expounded, "'[a]nd if you're unable to execute those trades, when you [later] can
execute those trades[,] you have to go back and re-process what should have occurred on the
days when you weren't able to [do so]." T2629:12-15 (Joenk). Joenk was asked, "[a]nd who's

95

going to pick up the tab if there's a discrepancy?" T2629: 16-17 (Joenk). Joenk replied, H[ w]ell,
up to date it's been ... AXA Equitable or whoever caused the issue." T2629: 18-19 (Joenk).
The Court finds that this a service provided by AXA, the cost of which is not explicitly
provided for under the Shared Services Agreement. Moreover, Plaintiffs only disputed the cost
associated with this service (i.e. that it should have been subsumed by the costs of the Shared
Services Agreement), not whether AXA performs this task. Therefore, the Court finds that AXA
performs this service to support the Funds.

AXA 's Call Centers
Joenk explained service centers as "the interface group between the transfer agent and the
shareholder activity systems" or ~'call centers." T2625: 15-23 (Joenk). FMG uses call centers for
"interacting with clients" in order to address client questions and requests regarding their
insurance policies with AXA. T352: 15-17 (Joenk). There are three call centers, located in
Charlotte, North Carolina, Syracuse, New York, and Harmon Meadows, New Jersey (T554:2124 (Joenk)) employing roughly one thousand people total. T2839:25 (Joenk). All employees of
the call centers are employees of AXA, not FMG. T2859: 1-2 (Joenk).
The call centers provide services beyond "any support that might be offered with respect
to investment management services or administrative services provided by FMG." T555: 1-3
(Joenk). The call centers neither employ registered salespeople nor make outgoing sales calls
T2836: 1-14 (Joenk). They usually answer questions only after a contract has been purchased "[t]hey do answer questions if an agent or a broker ... has a client that has a question on a
contract, but they're not the sales desk." T555:5-l 0 (Joenk).
Joenk does not receive reports that indicate whether the calls are made with respect to an
existing contract, as opposed to a contract that AXA is trying to sell. T555:14-18 (Joenk).

96

However, the centers typically address a limited set of client questions and concerns, such as
'"what are my balances; can you change my address; can I move money from one fund to another
fund; what is my benefit base up to; can I get a copy of the annual report; can I get another copy
of my statement; I don't understand this can you explain it to me; things like that." T2836: 15-20
(Joenk). The 300,000 unlabeled calls in DX-73.3 28 were not actual transactions - "some of the
others might be [asking for a] fund's annual report or prospectus [to be] mailed ... [or] a
performance number; those are all things that don't ... create confirms back to a client or a
shareholder." T324l:13-16 (Joenk).
Joenk decided to "allocate the service centers to the distribution fees as opposed to the
fees that Plaintiff pays to FMG" (i.e. investment management and administration fees) in the
profitability analysis that he gives to the Board. T56l:12-16 (Joenk). The only revenue included
in distribution profitability is the l 2b- l fee revenue, which is "paid to the distributors for ...
marketing support and distribution of service ... " T2829:25-2830:7 (Joenk). In other words,
Joenk does not include the cost of maintaining the call centers in his calculation of FMG 's
profitability. Joenk discussed with the Board that he believed this to be "a conservative
allocation," and agreed that if he had "moved those expenses into management or administration,
it would decrease the profitability." T2839:21-23 (Joenk). In terms of the magnitude of change
in profitability that would occur if the call center costs were placed under
management/administrative costs, the $308 million in allocated expenses in P-52a would move
by "a sizeable number.'' T2840: 1-3 (Joenk).
Joenk cited the Harmon Meadows call center as a pertinent example because "the EQAT
Funds are part of the servicing that gets done" (T3236:16-l 7 (Joenk)) at the location's

28

This exhibit is a copy of the presentation to the EQAT Board given by a representative of the Harmon Meadows
call center.

97

"'retirement service center." T3236: 17 (Joenk). That particular center fielded 769,000 calls in
20 l 0, which were '"calls from shareholders directly to the call center." T286l:1-4 (Joenk); see
DX 73.3. Of those 769,000 calls, 96,000 were client requests to move money from one Fund to
another, which Joenk considers "shareholder activity." T286 l :9-14 (Joenk). Shareholder activity
is considered an allocated cost, and therefore is considered in Joenk's analysis of FMG's
profitability. Fund transfers and re-allocations processed are examples of shareholder activity.
However, the other 769,000 calls were not transfers, but rather for other services such as
'"information requests, for documents to be sent to them, or for performance requests or balance
requests or address changes.'' T2861 :22-25 (Joenk). Joenk categorizes all of these as
distribution costs.
According to Joenk, the ''front end" of a call (the Hreception of a call") is considered a
distribution expense, Hincluding all the employees that pick up the phone'' who get the transfer
process going. T2862:25-2863:3 (Joenk). However, once the call goes into the system and it
gets processed, any expenses incurred are included "in the 49 million" in allocated costs,
discussed infra, p. 107. T2862:25-2683:7 (Joenk). 29 Regardless of the accounting, the Court
finds that this is a service provided by AXA in support of the Funds.

AXA 's Infra~·tructure and Support Services to FMG
AXA also provides infrastructure and support services to FMG, including human
resources ("HR") treasury, and account payable functions. T2845:9-15 (Joenk); T2485:20-25

29

Although Plaintiffs contend in their post-trial findings of fact that Defendants were attempting to utilize transfer
agency services as the "primary basis for the [$49] million in annual AXA allocated expenses." Joenk's testimony is
to the contrary. ECF No. 285-2, DCRPFOF il 760. As stated, the front end of the call is considered a distribution
expense, and only if the call is processed in the system does it become part of the $49 million in allocated costs.
T2862:25-2863:7 (Joenk). Therefore, Plaintiffs' contention that transfer agency became a central component of the
trial in order to justify $49 million in allocated costs is without merit. Although Joenk was questioned at length
regarding transfer agency, the Court did not find this testimony pertinent. As such, to the extent that transfer agency
arose in the trial, the Court finds that it had little bearing on whether the fees under the investment management and
administrative contracts were excessive.

98

(Joenl<). For example, AXA's HR department handles pension, health and other benefits for
FMG employees. T2852:7-8 (Joenl<); T340:22-341: 11 (Joenk). AXA's treasury department
deals with FMG's cash management, including bill payment and seed capital loans. T339: 18340:7 (Joenk); T285l:12-21 (Joenk). Therefore, this is another service provided by AXA in
support of FMG.

Conclusion Regarding AXA 's Services
Regardless of the accounting associated with these services, the credible testimony
demonstrated that AXA performed a number of services in supporting both FMG and the Funds.

C.

Profitability
In addition to claims about the nature and quality of the services FMG and AXA provide,

and about the Board's independence and conscientiousness, Plaintiffs assert that FMG's
profitability is far higher than reported to the Board. This allegedly occurred because the
methodology used to determine profitability, an accounting procedure utilized by FMG,
improperly excluded certain expenses, which artificially lowered FMG's profitability numbers
that were presented to the Board. The expenses that Plaintiffs challenge are: (1) FMG's
accounting treatment of sub-advisory and sub-administration expenses; and (2) approximately
$50 million in so-called "Allocated Expenses" charged by AXA to FMG for services rendered in
supporting the Funds. Plaintiffs claim that FMG should have excluded both of these expenses
from its profitability calculations, and if it had done so, its profit margins would have been
exorbitant. Each is discussed below.
1.

Defining Profitability

The crux of the case concerns FM G's Hprofitability" and the accounting underlying same.
Generally speaking, profit is the summation of gross sales/revenues/earnings less expenses and

99

taxes, which equates to net income/profit. Gartenberg, 694 F.2d at 931 n.4. This is presented in
financial documents, specifically the income statement. T571: 16-23 (Plaintiffs' Opening).
In order to estimate its profitability for the Board, FMG uses a process in which it
apportions joint and common costs to its function of operating the Funds. T36l0:1-12 (Schpero ).
The costs are broken down into: ( 1) '"direct expenses" that are incurred directly by FMG as the
investment manager and administrator of the EQA T Funds; and (2) "allocated expenses,, billed
4

by AXA to FMG for services provided to FMG in support of FMG's responsibility to act as
manager/administrator to the Funds. T284l:11-2844:9 (Joenk); T609:25-6l0:12 (Joenk); P-210 ·
at Bates 6732-75; P-52a at Bates 4137. Overall, these expenses are:

Category of
Expense

2009

2010

2011

2012

2013

FMG Direct
Expenses

$7,195,000 $11,464,000 $12,267,000 $11,419,000 $15,915,000

AXA
Expenses
Allocated to
EQAT Funds

$48,881,000 $52,041,000 $46,864,000 $49,454,000 $61,872,000

DX-2051. Plaintiffs dispute FMG's direct expenses and AXA's allocated expenses. More
specifically, Plaintiffs dispute the direct expenses because they include sub-adviser and subadministrator costs in breach of accounting rules. Plaintiffs dispute the allocated expenses for
because the allocation method is allegedly in violation of accounting standards because it uses
revenue as a cost driver, and/or should be limited to the costs associated with the Shared Services
Agreement. Generally, Plaintiffs contend that if Defendants had properly calculated their
profitability by excluding sub-advisory and sub-administration fees from direct costs, and
reworked the allocated cost methodology or limited those expenses under the Shared Services

100

Agreement, FMG's profitability margins would rise dramatically and exceed 90 percent, far
above industry norms. T2361 :2-9 (Kopcke).

2.

FMG's Treatment of Sub-Advisory and Sub-Administration Fees as
Expenses

FMG classified payments made to sub-advisers and the sub-administrator as '"an expense
to FMG" on its profitability reports to the Board. ECF No. 285-2, DRPPFOF, ~ 287. Plaintiffs
argue that the classification as expenses is improper and should be excluded from the calculation
because the sub-advisers and sub-administrators are paid directly from the EQAT's bank
account, not FMG's. The wire transfers to the subs do not originate from FMG's bank account,
but are sent from "another bank account, associated with the EQAT Fund." T377:2-3 (Joenk);
T376:14-377:3 (Joenk). By including the subs' expenses as an FMG expense within the
profitability analysis, FMG is significantly lowering its profit margin by the total amount of the
wire transfer.
Joenk justified the fees as an expense to FMG because FMG has the responsibility to pay
those subs and supervise their work. Joenk noted:
You know, when we terminate a sub-advisor part of their contract is
that they get 30 or 60 days of termination pay. So if we terminate a
sub-advisor and they're no longer managing the portfolio, FMG
pays that termination fee.
T2934: 11-16 (Joenk). Joenk furthered that payment directly to the subs from EQA T was for

"operational efficiency[,]" so that the wire transfer only occurred once, rather than a two-step
process-one transfer from EQAT to FMG and another from FMG to the subs. T2933 :232934:7 (Joenk).
Schpero explained that industry accounting practice did not require that these expenses be
noted as a reduction in revenue, which he verified through discussions with the Board's

101

independent counsel. T3605: 18-3606:2 (Schpero). Furthermore, he testified that the Board's
two independent accounting firms did not require that the fees be considered a reduction in
revenue. T3605: 18-3606:5 (Schpero ).
Plaintiffs offered Barrett's testimony on this issue. However, Barrett lacked credibility
because his testimony was inconsistent on whether sub-advisory fees should be properly treated
as an expense to FMG. First, Barrett opined that the sub-adviser and sub-administrator fees
should not be considered expenses because the amount of these fees was never subtracted or paid
from FMG's account. Tl377:3-1379:14 (Barrett). However, on cross examination, Barrett
admitted that treatment of these fees as expenses was consistent with the industry and
specifically with cases in which he had worked. Tl 597: 15-1598:9 (Barrett). Hence, his
testimony was muddled, and as mentioned earlier (see pages 25-26, supra), the Court gives his
opinion little weight.
Moreover, Holder testifi~d that "the classification as expenses ... was perfectly
appropriate." T3925:22-23 (Holder). Holder also testified that treating sub-adviser and subadministrator fees as expenses, which was done on FMG's financial statements, is appropriate
because "those financial statements were audited by PricewaterhouseCoopers ... I take comfort
from and influence by the accounting treatment that was attributed there, and PwC's unqualified
or clean opinion on those ... financial statements." T3938: 10-15 (Holder). Holder concluded
that under principles of managerial accounting, it was appropriate for FMG to classify subadvisory and sub-administrative fees as expenses. T3940: 14-17 (Holder).
The Court finds that reporting sub-adviser and sub-administrator fees as expenses is
within ordinary accounting principles. The Court finds Holder's testimony to be more credible
than Barrett's testimony.

102

3. AXA's Allocated Costs to FMG and Fl\IG's Subsequent Allocation to the Funds
The allocated cost issue is more complex than the one previously mentioned above. In
broad terms, Plaintiffs contend that the cost allocation methodology ("CAM") of FMG is
inconsistent with accounting standards; and alternatively, if found to be consistent with
accounting standards, then these "allocated costs" should be limited to those costs associated
with the Shared Services Agreement between AXA and FMG. The CAM is presented first, and
subsequently the Shared Services Agreement is discussed.
Barrett defined cost allocation as "assigning costs to certain things; it could be certain
activities, it could be different companies, it's the process of splitting up costs based on some
objective.'' T 1398:20-25 (Barrett). According to Barrett, common costs are allocated based on
cost drivers. Barrett testified that when allocating costs "you have to use some basis for the
allocation, something logical ... something that has a cause and effect relationship." Tl455:811 (Barrett). For example, when allocating costs for facilities, a logical cost driver would be the
cost per square foot of those facilities. Tl 715:22-1716:2 (Barrett). Barrett testified that such a·
methodology has a "fair and reasonable basis" for allocating costs. Tl 385:22 (Barrett).
FMG chose revenue as its cost-driver. FMG determined that 97 percent of its revenues
are derived from three sources-investment portfolios, general account spread, and wrapper fees.
FMG then determined the percentage of revenue from each of those three sources. 30 Barrett

opined that the cost allocation method based on revenue is contrary to accounting principles.
Barrett testified that FM G's allocation of its expenses based on revenue is unreasonable because

30

AXA's Cost Allocation Method ("AXA CAM") and the subsequent allocation by FMG ("FMG CAM") has a
three-step process (A, B, and C), as seen in chart P-210 in the Appendix to this Opinion. P-210 was often referred to
during trial as an easy depiction of how the AXA CAM and FMG CAM operated. To non-accountants, like the
Court, it is difficult to follow. Due to its frequent use at trial, it is described in the Appendix.

103

revenue is not an appropriate cost driver, as it does not relate the allocated amount to the
behavior of the expenses. Tl465: 11-24 (Barrett). He characterized using revenue as a costdriver as a ·~self-fulfilling prophesy" because ""the more revenue-the higher rate [FMG]
charge[ s] ... the more expenses they allocate." T 1466: 15-18 (Barrett). In short, there is no
nexus (no rational cost driver) between this allocated amount and the actual expenses. Barrett
contends that since this allocation methodology is in error, the profitability is also incorrect.
ln reaching his opinion, Barrett relies upon the cost allocation methodology used by AXA
(AXA-CAM) as a good example of how to allocate costs. Barrett testified that "AXA CAM is
actually quite a robust, relatively sophisticated methodology ... I believe they have costs broken
down into about 1,500 cost centers, and within each cost center they have identified cost drivers
that allow them to allocate each cost center's cost to various cost objects, products, or
departments or something like that." Tl440:7-13 (Barrett). To Barrett, when allocation is based
on sensible cost drivers, it is an appropriate allocation. Although Barrett did not know the
precise cost-drivers used within the AXA CAM, he was satisfied that due to the large number of
cost centers ( 1,500), that the AXA CAM had appropriate precision.
Barrett's testimony was inconsistent. On cross-examination, Barrett stated that it was
"'absolutely not" reasonable and it was "completely inappropriate" to use revenue as a method to
allocate expenses. Tl 534: 13-20 (Barrett). Thereafter, Barrett admitted that in his rebuttal
report, he wrote that allocating costs based on revenues is Ha generally accepted cost accounting
measure [where] circumstances [show] specific cost records [are] not available." Tl536:7-12
(Barrett). Barrett tried to minimize this inconsistency by noting that using revenues to allocate
costs is an appropriate measure "under extraordinary circumstances." T1536:16-18 (Barrett).

104

Barrett indicated that accountants would not look to Generally Accepted Accounting
Principles ("GAAP") for guidance in preparing profitability reports. T 1558: 11-14
(Barrett). Yet, when confronted with his video deposition, he acknowledged that accountants
"might" look to GAAP in the situation to see what it would require. Tl 558:22-25 (Barrett). Due
to this inconsistency, Barrett said that he '"perhaps .... mistook" the previous question and
changed his earlier response to say "'you might look to [GAAP] as one consideration." Tl 558;
Tl 559:3-11 (Barrett).
Barrett was asked if "'it is correct that cost accountants allocate costs based on revenue
when they don't have something better available, almost as a fall-back." T1537:10-12. Barrett
responded that this is "not correct." Tl537:13-14 (Barrett). However, his deposition testimony
differed, where he noted that cost allocation methodology based on revenues is appropriate if
you '"don't have something better." T 1538:9-10 (Barrett).
Holder disagreed with Barrett's conclusion that using revenue is arbitrary and irrational.
Holded stated that:
I don't think it's either [arbitrary or irrational.] I certainly
understand that in this instant case cost drivers were really not
available to make this allocation. Again, if the overarching desire is
to estimate the costs that are incurred in generating in this case these
revenue streams, that some process of allocation of those costs to
those revenue streams is going to be necessary.
T3958: 10-16 (Holder).
Joenk also testified as to FMG's cost allocation methodology. Joenk stated that FMG
asked PwC to '"help us figure out a profitability mechanism so that we can evaluate the
profitability of the management and administrative contracts to the manager.'' T610:9-12.
(Joenk). He stated that "'Pricewaterhouse was hired to help develop this methodology, back in

105

2000, since it was the first year we were doing profitability." T609:5-7 (Joenk). Joenk testified
that FMG uses revenue as a cost allocation driver, explaining:
Allocation is an art so there are many ways you can do it. We use
revenue under the theory that I spoke about that evidence is spent
where the greatest return is. So if the wrapper has a bigger revenue
contribution than the funds, most people will spend their time
focusing on the insurance product or the wrapper.
T2796: 17-24 (Joenl<). Joenl< also testified that FMG has employed the same cost allocation
method every year so that it could be tracked year to year and identify changes. T282 l :7-16
(Joenk).
Lastly, Barrett did not opine as to a different cost driver that could be used. Barrett was
asked what other methodology FMG should have used to allocate expenses. Tl540: 11-14
(Barrett). Although Barrett did not specifically identify a method, he testified that "it's not that
difficult to do[,]" but he could not do so without FMG's expenses. Tl 540:25
(Barrett). Previously, Barrett posited differently. He stated that it would be "very difficult,"

a~d

"'that's why they used revenue[s]" here. Tl 541: I 0-15 (Barrett). Moreover, Ernst & Young and
PwC were involved in creating FMG's methodology for allocating expenses based on revenue.
Tl546:12-15 (Barrett). Barrett did not locate any documentation suggesting that either Ernst &
Young or PwC thought cost allocation based on revenue was unreasonable. T 1546: 20-14
(Barrett).
In conclusion, the Court gives more weight to the testimony of Holder and Joenk over
that of Barrett. As such, the Court finds that the cost allocation method based on revenue is
consistent with accounting principles.

106

4.

$49 Million in Allocated Costs & the Shared Services Agreement

Barrett testified that $49.42 million of allocated costs for AXA services to FMG is
extraordinary in light of the terms of the Shared Services Agreement. As a preliminary matter,
the Shared Services Agreement is an intercompany agreement between AXA and FMG, and sets
forth the services AXA provides to FMG. P-273. The Agreement was created in 2011, around
· the time FMG became a separate legal entity from AXA. T2913:16-20 (Joenk); Tl324:4-5
(Barrett). The Agreement was signed by Richard Dziadzio, Executive Vice President of AXA,
andJoenk. P-273 il 4; Tl 77:6-178: 12 (Joenk). It was created for legal reporting purposes under
state insurance rules, and AXA has approximately forty or forty-five of these types of
agreements currently in use. T291l:22-25-2912:1-7 (Joenk). Joenk also stated that the
document has been approved and vetted by the New York Department of Financial Services,
which is New York State's banking and insurance agency. T2912:15-l 7 (Joenk).
J oenk testified that the Shared Services Agreement is a Hstandard agreement" AXA uses
to cover the expenses associated with the services of the approximately fifty AXA employees on
4

loan to FMG, which Joenk refers to as the ' business unit." T2914: 12-24 (Joenk). The Shared
Services Agreement, according to Joenk, primarily covers the compensation, office space, and
office supplies, such as telephones and computers, used by FMG's employees. T2919:242920: 1-10 (Joenk). Joenk, however, stated that the Shared Services Agreement does not cover,
for instance, other services provided strictly by AXA's employees who are not part of FMG.
These services include legal services, bankruptcy work, anti-money laundering consulting, or
phone and service centers. T2920: 11-25 (Joenk). These services were discussed infra at page
94.

107

According to the Shared Services Agreement, AXA is to provide FMG with the
following:
... the personnel, property and services reasonably necessary to
perform [FMG's] management, administrative and other noninsurance related functions. The services to be furnished may
include, without limitation, management, corporate finance,
strategic planning, administration, office and general supplies,
financial, treasury and cash management, printing, actuarial,
accounting, tax, auditing, legal and regulatory, human resources,
corporate and financial communications, public relations,
advertising, marketing, risk management, technology and corporate
secretarial services.
P-273 at Bates 9910; Tl89:15 to 190:7; 614:11-16 (Joenk). In consideration for AXA's
provision of these services, Section 4 of the Shared Services Agreement requires that:
FMG shall pay the actual costs (direct and indirect) and expenses
incurred by AXA Equitable in furnishing personnel, property and
services pursuant to this Agreement. Such actual costs and expenses
shall include all direct and indirect expenditures related to the
furnishing of such personnel, property and services, including
related wages, otlice space and overhead, as appropriate.
P-273 at Bates 9911; T614:1 l-16 (Joenk). At the end of each year, AXA calculates the amount
of '"direct" and "indirect" expenses that FMG owes and FMG makes a payment in that amount.
T193:4-12 (Joenk); ECF No. 285-2, DCRPFOF, ~ 504. The total expenses charged to FMG
under the Shared Services Agreement are as follows:

P-88 at Bates 4459; P-89 at Bates 7291; and P-90 at Bates 2042; ECF No. 285-2, ~ 508.
Barrett testified that the expenses under the Shared Services Agreement should cover all
the costs to AXA in supporting FMG. Although Barrett did not dispute the direct costs

108

associated with the Shared Services Agreement, 3 l he stated that if there was another $49 million
worth of expenses, he""[ could not] imagine why it wouldn't have been charged under the [Shared
Services Agreement], if in fact, the true expenses are $49 million higher than the cost of the
[Shared Services Agreement]." Tl484: 19-22 (Barrett).
Barrett stated that P-210 was a chart of services provided by AXA outside of the 51
employees ofFMG. !1605:18-21 (Barrett). Of the services listed, Barrett testified that he was
unaware if these services would be in the $49 million of allocated expenses or included under the
direct expenses. Tl605:22-25 (Barrett). For example, Barrett did not know whether FMG or
AXA' s legal department would handle a bankruptcy case, and therefore did not know whether
this expense would be included as a direct or allocated expense. T 1606: 12-1608:7 (Barrett).
Barrett also stated that he does not ''see anything on [P-21 O] that reasonably would
amount to money of any real significance," (Tl 485: 1-4 (Barrett)); however, he stated that he has
''no basis to say that these [services] aren't already [accounted for] in the[$] 14 million" except
for ""deposition testimony in this matter that ... basically says that these are expenses that aren't
in the[$] 14 million." T1485:4-8 (Barrett). When questioned why these services would not have
been included in the direct expenses, Barrett responded that the "only logical reason I can think
of is that they were so remote in their relationship to FMG, which would be consistent with their
description here, and they were so small, that maybe it just [was not] worth bothering with."
T1485:12-15. Barrett concluded that the $49 million in allocated expenses is ''ridiculous" when
considering the Shared Services Agreement and the inappropriate cost allocation method utilized
by FMG. Tl484:2-18 (Barrett).

31

As depicted, the direct costs associated with the Shared Services Agreement ranged from $13.5 million in 2011 to
$27.1 million in 2014.

109

Goldstein stated that he was aware of the Shared Services Agreement with FMG, but
stated that he believes the Shared Services Agreement is a more accurate representation of the
'"true expenses" that FMG incurred in managing the EQAT Funds. T2 l 76:23-2 l 77:5-7
(Goldstein). Goldstein also testified that he did not read the Shared Services Agreement, but he
reviewed it and has seen it. T2177: 11-13 (Goldstein). Goldstein stated that he was unsure
whether the Agreement was provided to the Board. T2177: 14-16 (Goldstein). Because
Goldstein did not read the Shared Services Agreement, nor did he provide a basis for his
conclusion that it represents the ""true" expenses, the Court gives his testimony very little weight.
Defendants countered Plaintiffs' testimony on the $49 million in allocated costs.
Initially, Joenk indicated that the Shared Services Agreement has no impact in the preparation of
profitability statements for the Board, and does not affect the general services provided to the
Funds at issue in this case. T2917:13-19 (Joenk). Moreover, Joenk testified that the Shared
Services Agreement bears no impact on the fees paid by the Funds to FMG. T29 l 7:20-22
(Joenk). He further stated that costs were allocated from AXA to FMG for a number of years
prior to the existence of the Shared Services Agreement. T29 l 8:4-6 (Joenk); see also DX-2051.
He also stated that the Shared Services Agreement does not impact how costs are allocated for
the profitability statements given to the EQAT Board. T2917:13-16 (Joenk). Ernst & Young also
helped develop the cost allocation methodology, and FMG relied on that advice. T2792:1 l-13
(Joenk).
Joenk testified that the Board did not receive the Shared Services Agreement when it first
became effective in 2011. Joenk believed it was Hirrelevant," because after the Agreement was
created, there were no changes in services to the Board, no change in fees, and FMG was not
planning to use the Agreement for any purpose related to the EQAT. T2928:10-13 (Joenk). He

110

also stated that although the Board was not initially provided a hard copy of the Services
Agreement, the Board was informed that the Agreement existed. T2927:21-25 (Joenk). The
Board was not provided physical copy of the Shared Services Agreement until 2013, sometime
after Joenk was deposed for this case. T615: 10-19 (Joenk). After being provided the
Agreement, Joenk testified that the Board approved the administrative services and management
contracts. T2929:14-18 (Joenk).
Althou~

Barrett characterized the $49 million in allocated expenses as ""ridiculous"

Joenk countered that $49 million amounts to only 2.15 percent of AXA's total expenses that get
allocated to the EQAT Funds' management and administration. T2801: 12-2802:4 (Joenk).
Joenk also testified to the '"Shared Services Slide" (P-210 at Bates 6734), which was presented to
the Board in 2013 and included it in its cost allocation presentation. The right-hand box below
provides a non-exhaustive list of the services provided by AXA to support FMG and the Funds.
Tl 184:2-6 (Louie); T3369:3-l l (Joenk).
··--.-.·---'."'·····-:---···--:-...
...:-"'."'-:-····.. ...- ..'."······-·····-:-··---...-------;
External Departments· Providing Support
to FMGLLC

····-...

AXA EQUITABlE FUNDS MANAGEMENT GROUP, LLC (FMG

:·~~-~:-

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Accou11tingJG..,nerat Ledger
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Cominu1ty Proitram (Bl?)

Communic<Jtion S't>tem
:. Remote 1ogm 1nfra.str~1cture
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IT
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,

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Phone 5Y~em m'l;nten<mce
CompUU!r haHJwa1e and

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and refre'h
'-------------------~··

------

P-210 at Bates 6734.

111

I

ho~

ri:;r>otts an shareholder ho:omg,s (e.i1J., ::;%

l

J

r!andles corporate risk ano msurance

procedures and policies thnt cover f MG LC

(D&O/E&Oi

---·--·

.

Joenk contends that these non-exhaustive services justify the $49 million in allocated
costs. Plaintiffs take issue with this chart on several grounds. Firstly, it was only provided to the
Board in 2013, after the filing of the Complaint in this matter. Secondly, Plaintiffs insist that it"
outlines the same services that are covered by the Shared Services Agreement between FMG and
AXA. As such, Plaintiffs contend that it cannot justify $49 million in allocated costs.
Holder indicated that the language of the Shared Services agreement is Hpermissive" and
describes services that may be provided by AXA, not services that are required to be performed.
T4017:5-6 (Holder). Moreover, Holder stated that this permissive language indicates to him "as
an accountant that not all of the costs necessary to the operation of these funds may be provided
through the operation of this particular ~greement." T3960: 16-3962: 10 (Holder). The Court
finds Holder's "permissive" analysis suspect because he is an accountant rather than an attorney.
The Court agrees that there are other costs, such as ancillary support on legal matters and call
centers. However, Defendants never quantified the costs of these.services, beyond stating that
they amount to $49 million.
The Court finds that Barrett raised a valid point that the $49 million in allocated expenses
is not adequately accounted for, but Plaintiffs failed to offer any credible evidence demonstrating
that these costs were duplicated with those under the Shared Services Agreement. Although
Barrett said it was ''ridiculous" to suggest that AXA could have incurred anywhere near $49
million in expenses to support FM G's provision of investment management and administrative
services to the Funds, Barrett failed to substantiate same in his testmony. Tl484:6 (Barrett).
Barrett did not, for example, indicate what these support services would typically cost an
insurance or mutual fund company, or provide any concrete basis fot his characterization that
$49 million was "ridiculous." Similarly, Defendants failed to illustrate how these costs would

112

amount to $49 million. Therefore, the Court has no reliable evidence to detennine whether these
costs are truly ''ridiculous,'' as Barrett indicated.
On the other hand, $49 million represents only 2.15 percent of AXA's costs. T2807:25
(Joenk). This small percentage demonstrates that AXA's support services to FMG, listed in P210, could be reasonably justified. The Court also finds Joenk's testimony credible because: (1)
the Allocated Costs represented the costs of AXA' s services to the Funds prior to the existence
of the Shared Services Agreement (T2922:5-8 (Joenk)); and (2) the Shared Services Agreement
came into existence in 2011, the same year that FMG became a separate entity from AXA,
demonstrating that the Deparment of Insurance required same. In short, although the scope of
the costs and services under the Shared Serivces Agreement is ambiguous and it appears to have
been drafted in a haphazard manner, there is no substantive proof of any incorrect costs being
assessed. 32

5.

Conclusion on Profitability

Plaintiffs have failed to demonstrate that the accounting methodologies used by FMG and
AXA were improper. As an initial matter, Barrett served as Plaintiffs' expert in this area, and he
lacked credibility. His conclusions regarding FMG's treatment of certain expenses fell short of
establishing that the Board received misleading or improper information on FMG's profitability.
Plaintiffs failed to establish that it was improper for FMG to treat sub-advisory and subadministration fees as an expense when reporting profitability to the Board. The same is true of
using revenue to allocate costs. Barrett conceded that allocating costs based on revenues is "a
generally accepted cost accounting measure [where] circumstances [show] specific cost records
[are] not available." T1536:7-12 (Barrett). Barrett also failed to opine as to a different method

-'

2

In the Court's opinion, this is an issue the Board should review.

113

for FMG to allocate costs. As such, Plaintiffs failed to show that FMG's accounting was
improper. Plaintiffs also failed to meet their burden as to the $49 million in allocated costs.
Joenk's credible testimony explained the Shared Services Agreement and its relationship to the
$49 million in allocated costs. Even if the Court were to discredit Joenk's testimony due to his
bias, it is Plaintiff's burden to prove that FMG's profitability numbers were inaccurate due to
faulty accounting. Here, there were some services provided, and Jones makes clear that the
burden of proof under the IC A for breach of fiduciary duty remains with the Plaintiffs at all
times.
For these reasons, Plaintiffs failed to meet their burden as to profitability.

D.

Economies of Scale
Generally speaking, economies of scale is a condition where the average per-unit cost of

manufacturing a product declines as the total output increases. ECF No. 285-1, DCFOF, ~ 442.
In the mutual fund industry, output is the amount of assets under management. T 4114: 194115: l 4 (James). For example, when a fund increases in size from $2 billion to $4 billion under
management, the overall costs might go up, but the per-unit cost should decrease, benefitting the
fund overall. T 4115 :21-25 (James). Economies of scale present two questions that must be
addressed: ( 1) whether there are economies of scale and (2) to what extent savings resulting from
economies of scale are shared. T4128:6-9 (James). ""Those are two different concepts from an
economic perspective." T4128:6-9 (James). The most common way in which savings resulting
from economies of scale are shared with investors is through breakpoints. In this case,
breakpoints are shown in the fee schedules (see Appendix), which provide that the fees charged
to investors decrease as the assets in the Fund increase. T93:20-25.
Here, it is undisputed that from 2010 to 2014, the assets un.der management ("AUM") in
the EQAT as a whole increased from $72.2 billion to $116.9 billion. ECF No. 285-2, DCRPFOF
114

~

664. Furthermore, from 2010 to 2014, the AUM in the Plaintiff's Funds increased in aggregate

assets. ECF No. 285-2, DCRPFOF

at~

675. All of the at-issue Funds in this case have

breakpoints in their fee schedules. For example, the EQ/Common Stock Index Portfolio had a
fee schedule of 0.350% on the first $4 billion of assets, 0.340% on next $4 billion of assets, and
0.330% thereafter. See Appendix. This decrease in percentage shows that the fees decrease as
the assets increase. Moreover, it is further undisputed that both FMG and the sub-advisers have
breakpoints in their fee schedules. T739: 14-16 (Joenk). However, many of the sub-advisers
breakpoints occur before FMG's breakpoints, and when that occurs, the savings achieved are not
to the investors, but to FMG. T739: 14-22 (Joenk).
Plaintiffs presented Barrett, Kopcke, and Pomerantz on the issue of economies of scale;
but none of the Plaintiffs' experts satisfactorily quantified a dollar amount for FM G's savings
achieved by economies of scale, nor how much should have been shared with investors. ECF
No. 276, PRDPFOF, ~ 449.
Pomerantz, utilizing FMG's direct expenses only, concluded that FMG's costs have been
fairly constant over time. Tl 910:25-1911 :6 (Pomerantz). This is inconsistent with economies of
scale because costs should decrease as assets increase. Pomerantz also found that the Fund saved
$33.2 million due to breakpoints. Tl 915:2-6 (Pomerantz). However, Pomerantz concluded that
$33.2 million was marginal because half of this savings comes from breakpoints in the subadviser's fee schedule, thereby benefitting FMG, rather than investors. Tl916:6-1917:5
(Pomerantz). Additionally, he found that FMG only shared $17 million of the total $33.2 million
in savings, representing 2.4 percent of FMG's total revenue of $600 million (excluding 2015).
Tl916:6-14 (Pomerantz). Conversely, the savings shared by the sub-advisers through
breakpoints was about 8.5 percent of their revenue. Tl 916:6-1918:8 (Pomerantz). Therefore,

115

Pomerantz concluded that FMG did not share the savings achieved by economies of scale with
investors, but instead FMG received benefits from the sub-advisers' breakpoints schedule.
Kopcke analyzed economies of scale by examining the amount of the fee FMG retained
as Fund assets increased. T2317: 12-15 (Kopcke ). Kopcke said that, "while the assets increased,
the direct costs that [FMG] reported for their management and admin services totaled about 11,
12 million." T2373:21-23 (Kopcke). Kopcke concluded that FMG's retained fee schedule
slightly declined and in some cases actually increased. T2317: 19-20 (Kopcke). The fee schedule
shows that the costs of providing services increased as assets increased. T2371:11-20 (Kopcke ).
Like Pomerantz' s analysis, this is inconsistent with economies of scale. Although Kopcke stated
that the fee schedule did not reflect economies of scale and concluded that FMG does not share
economies of scale with investors, he did not provide adequate support for his conclusion.
T2372:4-23 (Kopcke).
Defendants presented Jam es on the issue of whether any savings from economies of scale
were passed on to investors. James analyzed how the breakpoints for the various Funds result in
savings for investors. T4128:6-13 (James). James concluded that the cumulative management
and administrative fee breakpoint savings that shareholders received for the at-issue Funds was
$68.8 million. T4129:15-25 (James). James disagreed with Pomerantz's testimony that FMG's
costs are fairly constant. Rather, James concluded that Pomerantz incorrectly evaluated FMG's
economies of scale because he only looked at direct costs, whereas he should have used total
costs, which include allocated costs from AXA and variable costs such as sub-advisory fees.
T4120:21-4121:16 (James); ECF No. 276, DPFOF ~ 445. James also testified that Kopcke's and
Pomerantz's conclusions were unreliable because they did not measure unit costs, which are the
key markers of economies of scale. T4124:22-25 (James); T4121:4-4122:4 (James). James

116

criticized Kopcke' s findings because Kopcke compared the management fee that FMG received
to hypothetical assets under management, rather than to the true amount of assets under
management. T4125:3-25 (James). Furthermore, James noted that Kopcke did not demonstrate
how FMG shares savings with investors resulting from economies of scale because he did not
show how assets under management are affected by breakpoints. T4126:4-15 (James).
Moreover, extensive evidence demonstrated that the Board received information
regarding economies of scale to prepare it for fee negotiation, and established how FMG shared
potential benefits it received from economies of scale. Initially, Joenk testified that all twelve
Funds have breakpoints at the management and administration fee levels. T2968: 14-1 7 (J oenk).
Joenk also said that breakpoints are frequently discussed by the Board, and that he is responsible
for adding breakpoints into the fee schedule when the Board tells him to do so. T2969:242970:5 (Joenk); DX-269 at Bates 4140; DX-242 at Bates 2269. Moreover, Joenk informed the
Board every year on economies of scale, explaining the ways that FMG shares savings achieved
by economies of scale with fund shareholders. T733:24-734: 13, 2968:3-11 (Joenk). Schpero
noted that the Board. acting as watchdogs for investors, evaluates whether economies of scale are
achieved, and seeks to ensure that FMG shares the benefits from economies of scale with
investors through breakpoints and fee reductions. T3583:25-3584:3 (Schpero). FMG has
provided Schpero and the Board with extensive information to guide their decision-making
process, including: data concerning breakpoints for each Fund, information on the effective fee
levels, comparative data to evaluate breakpoints and effective fees for other Funds, expense cap
information and expense limitations, industry discussions on economies of scale, and added
services that FMG provides over time. T3627:2-22 (Schpero).

117

Defendants admitted into evidence a slideshow presentation on economies of scale that
the Board received. DX-44.16. The slideshow included information regarding: ( 1) different
ways economies of scale can be shared by investment managers with the Fund; (2) breakpoints;
and (3) comparative data on expense ratios. T3628:4-2 l (Schpero ). DX-152 shows an index of
the material that the Board received in preparation for approving management fees. DX-152;
T3465:1-3566:9 (Schpero). For economies of scale, the index shows that the Board received the
fee schedule, relevant breakpoints, the long sheets, and legal analysis of judicial considerations
on economies of scale. T3468:20-3469: 1 (Schpero). The Court finds that James' testimony and
his methodology is more credible than Kopcke's and Pomerantz's testimony. Moreover,
Schpero's credible testimony indicates that the Board conscientiously reviewed economies of
scale. As such, Plaintiffs have failed to meet their burden on proving economies of scale.

1.

Additional Cost-Saving Methodologies

FMG used several other cost-saving methodologies in addition to breakpoints in order to
pass on savings to investors. These cost-saving methods were overlooked by Plaintiffs' experts.
Those cost-saving measures include product cap reimbursements, expense limitation agreements,
pricing to scale, and directed brokerage.
Product cap reimbursements function as waivers, ' not at the [F]und level for all
4

shareholders, [but] ... at the contractual level for only certain people that bought a certain type
of contract." T27 l l :21-23 (Joenk). FMG's product cap reimbursements directly impact the
Common Stock Index, 33 for which there is an agreement that "expenses can't go above a certain
level for that fund." T2712:2-14 (Joenk). If expenses eclipse the predetermined product
reimbursement cap, then the client is reimbursed accordingly. For example; the product cap on

.B

This is the only Fund at issue that is impacted by product cap reimbursements. T2714:5-l 1 (Joenk).

118

the Common Stock was $9 million-had that number been reached through expenses from
management and administrative fees, then the amount of expenses above '"$9 million of the fees
paid wo~ld have been [reimbursed] to shareholders" in one year. T2713:3-10 (Joenk). Over the
last five years, the product cap reimbursement has saved shareholders in the Common Stock
Index Fund about $22.5 million. T3367:7-l l (Joenk). Pomerantz admitted that he did not
include product cap reimbursements in his calculations. Pomerantz claimed that he did not know
what product cap reimbursements were, testi tying that they "might be reimbursements.''
T2028:22~23

(Pomerantz).

FMG also offered expense limitation agreements, which function as fee waivers, but
differ from product cap reimbursements. T300 l :6-10 (Joenk). Those are agreements between the
EQAT and FMG (T3001 :21-24), which reduce fees for the Equity Growth PLUS, Global Bond
PLUS, AXA Large Cap Managed Volatility., AXA Mid Cap Value Managed Volatility,
EQ/PIMCO Ultra Short and EQ/T.Rowe.Price. T3002:5-12 (Joenk).
Similarly, FMG engaged in pricing to scale, which occurs at a fund's inception and seeks
to save investors money before the fund achieves economies of scale. For example, when a fund
is started and its assets under management are low, the expenses associated with managing that
fund "might be very high." T4l92:1-4. Rather than charging investors the high cost of operating
a small fund, FMG anticipates the economies of scale the fund will eventually achieve as its
assets under management grow. By doing so, investors save money because the fees are as if the
fund were already operating at scale. DX 214.11 at Bates 2178. Accordingly, the adviser loses
money in the initial stages of the fund's existence, while the shareholders receive the benefits of
economies of scale. Id. Joenk indicated that it "is a very important way to share economies, by
essentially pre-sharing them before the assets grow." T2975:4-13 (Joenk). Joenk gave an

119

example of how FMG has used pricing to scale with funds that are already in existence to
achieve a similar result:
Well, for instance, the T.Rowe Fund, you know, we lowered the
expense cap on that fund, to make it more competitive; that's a
comparable thing because it was a smaller fund. So not only do we
do it on new funds but we also do it on funds that are shrinking for
some reason, to make them and to allow them to remain competitive.
T2983:7-12 (Joenk).
Advisers can also share benefits with investors by making investments in improved
services, ••such as by creating an enhanced shareholder website or adding headcount or other
resources to the portfolio management team." DX 214.11 at Bates 2178. Examples of
reinvestment in services includes directed brokerage and securities lending. Id.
"Directed brokerage is a program to drive down trading costs." T2900: 15-17 (Joenk).
Joenk explained that a directed brokerage program was implemented for ""all of the funds a
number of years ago[,] instructing the sub-advisors to trade through certain brokers in order to
reduce the cost of those trades." T2900: 18-23 (Joenk). Ultimately, this program saved FMG 's
Funds between $89 and $90 million during its time of operation. T2900:25-290 l :4 (Joenk),
while driving down trading costs from five cents per share to the current cost of just over one
penny pet share. T2904: 1-7 (Joenk). FMG 's directed brokerage program was shut down about
"two years ago" (T2900: 18-2901 :4 (Joenk)) because the trading costs were driven down so low
that it was no longer effective. T2903: 13-21 (Joenk). However, of the $89 million in benefits
from the directed brokerage program, FMG derived no monetary benefit, all of which went
"straight to the funds through lower trading costs." T2902:11-14 (Joenk).
Similarly, FMG used securities lending to cut down costs, engaging with the lending
agent in a process "that would essentially lend out securities of the portfolio to others who
wanted to use them for shorting or dividend recapture or other mechanisms." T2904: 19-23
120

(Joenk). Joenk testified that this program amounted to $150 million in savings to the Funds.
T2908:9-12 (Joenk).
In conclusion, both James and Joenk were credible witnesses, and their analyses on
breakpoints and other saving methodologies were superior to those of Pomerantz and Kopcke.
In addition,

ther~

were other cost saving methodologies employed by FMG, which Plaintiff

largely ignored. Overall, Plaintiff did not meet its burden of proof to show that FMG failed to
adequately employ breakpoints and other cost saving devices.

E.

Fall-OutBenejhs
Plaintiffs contend that the Board did not receive appropriate or accurate information as to

fall-out benefits that FMG receives from its relationship with the mutual funds. Fall-out benefits
are another Gartenberg factor.
As an initial matter, the parties dispute the proper legal standard to be applied in
assessing fall-out benefits. Defendants assert that a '"but for" test must be applied,

whic~

was

enunciated in Krinsk v. Fund Asset Management, 715 F. Supp. 472, 474 (S.D.N.Y. 1988). 34
Defendants define fall-out benefits as ancillary or indirect profits that an investment adviser to a
mutual fund would be unable to generate '"but for" the existence of that fund; in other words, the
profits would not exist if the fund did not exist. T3008:21-3009:15, T3032:9-3034:1 (Joenk).
Plaintiffs assert that the appropriate test is as follows: '"Fall-out benefits are those, which
accrue to the mutual fund adviser as a result of its work on behalf of the mutual fund." See
Hoffman v. UBS-AG, 591 F. Supp. 2d 522, 540, n. 30 (S.D.N.Y. 2008) (citations omitted). Jones

34

The standard to determine fall-out benefits may be different in this case than in Krinsk. In Krinsk, the court was
dealing with a company solely engaged in mutual funds. Here, the investors are purchasing a mutual fund, plus an
annuity. A fall-out benefits may be one that is inextricably related to both products. This is a decision the Court did
not reach.

121

defines fall-out benefits as "'collateral benefits that accrue to the adviser because of its
relationship with the mutual fund." 559 U.S. at 344.
Plaintiffs contend that product wrapper fees, the general account spread, and fees paid to
Alliance Bernstein are all fall-out benefits and therefore should be reported to the Board as such.
ECF No. 276, PRDFOF,

~~

479, 480, 481, 490.

At trial, Joenk was asked how the fall-out benefits are reported and described to the
··Board. He stated that fall-out benefits are described differently-"depends on the type of fallout
benefit; some are ascribed with dollar amounts, some are ascribed with the impact, and some are
just listed as potential fallout benefits." T658:20-22 (Joenk).
Joenk uses the '"but-for" test to determine what constitutes a fall-out benefit. T3017: 1017 (Joenk). Joenk indicated that, "in our view[,] in order for a benefit to be a fallout benefit[,] it
has to pass the but-for test; so but for the funds, the [benefit] would not exist.'' T301 7: 10-12
(Joenk). Joenk belie_ves the appropriate inquiry is "would we get these [benefits] if EQAT didn't
exist essentially." T3017: 14-17 (Joenk). In sum, Joenk defines a fall-out benefit in the
following terms: "'A fallout benefit disappears if the fund disappears[. This] is the simple way I
think of it." T3033 :24-3034: l (Joenk). When asked about the types of fall-out benefits reported
to the Board in the most recent lS(c) process, Joenk stated:
From memory, dividends received deduction, foreign tax credits; I
believe distribution was mentioned as a fallout benefit; affiliated
transactions associated with Bernstein as a broker were listed;
separate account fees [product wrapper fees] were listed as a
conceivable fallout benefit.
T659:5-9 (Joenk).
Schpero ·also testified as to fall-out benefits and how they are reported to the
Board. T4581: 10-12 (Schpero ). He indicated that the information regarding fall-out

122

benefits comes from FMG. T4581:10-12 (Schpero). Schpero explained his understanding
of the subject:
They are other benefits that are received by the manager or its
affiliates in connection with managing the fund. I think usually
there's a- as it's been explained to us by our counsel, there's a butfor test . . . [B]enefits that would not be received but for the
manager's relationship to the fund.
T3636: 17-22 (Schpero).
Plaintiffs offered Barrett, Pomerantz, and Goldstein on the issue of fall-out benefits.
Ultimately, the Court precluded Pomerantz from testifying about fall-out benefits because he had
no specialized knowledge qualifying him to testify on the subject. T 1808:6-15 (Pomerantz).
Goldstein also conceded that he was not an expert in fall-out benefits, noting: HI don't even know
what an expert in fallout benefits is?" T2132:14-24 (Goldstein).
The following sections address product wrapper fees, general account spread, and fees
paid to Alliance Bernstein, which Plaintiffs contend are fall-out benefits.
l.

Product Wrapper Fees

Plaintiffs contend that product wrapper fees should have been reported to the Board as
fall-out benefits. As an initial matter, the term product wrapper fee came up numerous times at
trial, but was never adequately defined. After the post-trial submissions (findings of fact and
conclusions oflaw) failed to adequately define the term, the Court requested that both parties
submit letters defining product wrapper fees, with citations to the transcript. Neither party found
a precise definition in the transcript. ECF No. 294; ECF No. 295. Generally speaking, product
wrappers are contract level fees that investors pay once they enter a variable annuity contract. 35

35

In the role of the Court section, it was noted that the Court would not consider rumors or testimony heard outside
of the court. One rumor was about surrender fees. At trial, Sanchez discussed a surrender fee of $10,000 to
terminate the contract. No other testimony was submitted. It occurred to the Court that such a fee could be a fallout benefit. Without any testimony or briefing, t_he Court did not reach the issue.

123

Id. Throughout the trial, "product wrapper fees" was used interchangeably with the term
''separate account fees." T66 l :7-9

(Joenk)~

but there is no explanation of "separate account fees"

either.
According to Plaintiffs, from 2000 to 2005, FMG reported to the Board that product
wrapper fees were fall-out benefits. T661: 13-24 (Joenk). Joenk acknowledged that product
wrapper fees were "'no longer included in this presentation" (T674: 19-20 (Joenk)); but he said
that "the [product wrapper fees] have been listed as a conceivable fallout benefit in the [Board]
memo for I believe almost the whole time." T679:2-4 (Joenk). Joenk explained that:
not all . . . wrappers are fallout benefits. A wrapper could
conceivably be a fallout benefit if someone is coming to the Trust to
buy a particular fund and the only way to get that fund is to buy an
insurance product; that would be a but-for type of fallout benefit.
T684:9- l 4 (Joenk).
However, Joenk stated that he did not think anyone "comes to buy a fund or so desires a
fund [so much] that they buy an insurance product [just] to own that fund." T685:4-6 (Joenk).
The Court asked Joenk why he did not consider product wrapper fees to be a fall-out benefit.
T669: 13-23 (Joenk). He explained his reasoning by referring to the testimony of Sanchez:
... he bought the contract specifically for the guaranteed six percent
roll-up; that has nothing to do with the funds. So he paid his wrapper
fees to get that six percent roll-up unrelated to the funds completely.
In fact, he could have no funds in there and he would still be paying
the wrapper fees.
T670: 11-16 (Joenk). He further qualified his reasoning:
... [T]hete ate any number of portfolios that are not EQA T based
that are in the product. So they could be some outside fund
companies, it could be my other trusts; these numbers I believe
represent the wrapper for all of the variable products. So the reason
we don't believe these are fallout benefits is it's not a but-for

124

scenario~

I can eliminate all the funds, these revenues would still

exist.
T670: 17-23 (Joenk).
Joenk further explained his take on product wrappers within the context of fall-out
benefits:
Well, there are two ways to look at product wrapper fees; one, that
we do discuss with the Board is it could be a fallout benefit if
someone were to buy a particular fund that we are the only ones that
have. If they really love my volatility overlay and they want to own
a piece of the volatility overlay they would come and buy a fund;
the wrapper on the product that they bought to get that fund would
be considered a fallout benefit. T3012:1-8 (Joenk). The regular
[product wrappers] on all of the products we sell, we don't consider
them to be fallout benefits because if I were to - to close EQA T,
close every fund, AXA would still collect those wrapper fees; in fact
they were collecting those wrapper fees even before EQA T existed.
T3012:9-13 (Joenk).
Joenk testified that the consensus regarding product wrappers within FMG and the Board
is that no one believes these fees to be fall-out benefits. T687:9- l 8 (Joenk). Product wrapper
fees could be considered a "conceivable" fallout benefit if an investor came to FMG and
indicated that '"the only way they could [buy a Fund within the EQAT] is to buy a variable
annuity." T3012:14-19 (Joenk). However, there was no evidence at trial of Plaintiffs, or any
investor, purchasing insurance products for the express purpose of obtaining the underlying
mutual fund in the EQA T.
Schpero testified as to his understanding of wrapper fees and whether or not they should
qualify as fall-out benefits:
So those are the fees that AXA ... receives at the insurance level
for ... selling and marketing and making available the annuities and
various insurance products that are at the upper level before the
funding is received for these particular ... mutual fund complex.
125

T3637:20-3638:1 (Schpero ). We've discussed that subject with our
counsel, I think there's been some discussion of that in some of the
memorandums we receive or references to it. I don't believe that ..
. the wrapper fees meet the but-for test. And I believe that view
based on discussions with counsel is consistent with the industry.
T3638:4-9 (Schpero ).
Barrett also testified on product wrapper fees. T 1516: 17-19 (Barrett). Barrett said that
he understands product wrappers to be fall-out benefits. Tl 517:3-9 (Barrett). Barrett further
testified that it was his '"understanding that in earlier years I think - in earlier years that FMG
included those fallout benefits in its presentation to the Board." Tl 517: 10-12 (Barrett). The
Court allowed Barrett to testify on a methodology for how one could go about calculating fallout benefits, however this was done under the assumption that Plaintiffs would ·put on a another
expert who could opine as to what constituted a fall-out benefit. Tl 964:21-1965: 13 (Pomerantz);
T 1528:21-22 (Barrett). However, this never occurred. Barrett testified that the fall-out benefits
for 2011and2012 were about one billion dollars per year. Tl528:1 l-18 (Barrett). On crossexamination Barrett conceded that he was not an expert on fall-out benefits. T 1703: 16-17
(Barrett). He further indicated that he was not offering an expert opinion as to what did or did
not constitute a fall-out benefit. T 1703: 18-20 (Barrett).
The Court finds that Plaintiffs failed to meet their burden of proot: There was no credible
testimony defining and explaining product wrapper fees in order for the Court to determine what
wrapper fees are. Based on the general discussion, the wrapper fees appear to be associated with
the amount paid to obtain an annuity. More particularly, Plaintiffs did not submit proofs
defining product wrapper fee, nor did they calculate the amount of this fall-out benefit. As such,
Plaintiffs have failed to meet their burden of proof in demonstrating that product wrapper fees
constitute fall-out benefits.

126

2.

General Account Spread36

Plaintiffs' expert, Barrett, stated that the general account spread is a fall-out benefit.
Tl519:1-14 (Barrett). The general account is an investment option that guarantees a fixed
interest every year. T667:6-8 (Joenk). ·The "'general account spread is the difference between
what gets paid to the client if they're [invested] in one of those, and what the general account
would earn." T667:9-11 (Joenk). For example, if FMG earns five percent on the general
account, but pays investors three percent, the two percent that FMG keeps is the general account
spread. Plaintiffs assert that the two percent difference retained by FMG is the hypothetical fallout benefit.
Barrett stated that Exhibit P-300 at Bates 1121 listed "general account spread" as a fallout benefit. Tl 519:4-14 (Barrett). Despite this, Barrett testified that the general account ""was
within the mutual fund product [as] an investment alternative [to mutual funds.]" Tl 704:21-25
(Barrett). He also agreed that the general account and mutual funds ''have nothing to do with
each other" other than the fact that they are both investment alternatives in the same insurance
product. Tl 705: l-6 (Barrett).
Joenk's testimony was different. Joenk noted:
A number of the products will have a guaranteed interest fund or a
general account option or a fixed interest option that are liability of
AXA, they're not funds, they're part of the general account. So the
general account spread is the different between what gets paid to the
client if they're in one of those, and what the general account would
earn.

T667:6- l l (Joenk). Joenk testified that "general account spread is only available on fixed
interest options, none of which are funds." T669:2 l-23 (Joenk). He further explained:

16
·

The General Account spread is different from separate account fees, which is a synonym for product wrapper fees.

127

So you could have an Accumulator contract, put all your money in
a fixed income, a fixed option, and have none of the EQAT
portfolios. So therefore we don't believe that that's a fallout benefit
at all. Because if your money is in one of the EQAT Funds, you do
not get the general account spread.
T669:25-670:5 (Joenk).
Joell< was asked to testify about P-130 and why the general account was not listed as a
fall-out benefit. T687:3-6 (Joell<). He indicated that neither he, nor anyone else within FMG, the
I

Board, or Board Counsel believed the general account spread could even be considered a
conceivable fall,..out benefit. T687:5-l 0 (Joenk). When asked whether or not the general account
spread was included in the materials provided to the Board, Joell< testified that they were not.
T3019: 19-21 (Joell<). His reasoning was,"" ... I think they're mutually exclusive; if you're in
the general account you're not in a mutual fund ... you don't earn a mutual fund fee off of the
general account." T3019:23-3020: l (Joenk). Joenk further stated that ''if you have.... $100,
you can only put $100 in either the general account or the [mutual fund], or $50 and $50 [in
each], but you can't put $100 in both." T3020:6-9 (Joenk).
Schpero agreed that the general account spread does not constitute a fall-out benefit
because it does not meet the but-for test. T3639:9- l 4 (Schpero ).
The Court finds, based on Joenk and Schpero' s testimony, that the general account spread
is not a fall-out benefit. The Court gives little weight to Barrett's testimony, which relied on one
page of a presentation. Moreover, Barrett acknowledged that the general account and the mutual
funds ''have nothing to do with each other." Tl 705: 1-6 (Barrett).
3.

Alliance Bernstein Fees

Plaintiffs contend that Alliance Bernstein fees should be reported as a fall-out benefit,
rather than being reported under profitability. T592:4-T593 :2 (Joenk). Alliance Bernstein is

128

affiliated with AXA. Defendants do not disagree, except to note that the Board considered these
fees in the evaluation of FMG's compensation under the investment management and
administrative agreements.
Joenk testified that fees paid to Alliance Bernstein ~~could [be] consider[ ed] a fallout
benefit." T593:2 (Joenk). He also indicated that Alliance Bernstein is a sub-adviser and that the
cost of hiring them is reported as a "potential fallout benefit.'' T2977: 15-18 (Joenk). Joenk
further testified that the "cleanest example" of a fall-out benefit would be the "brokerage
commissions for trades through Alliance Bernstein's brokerage affiliate Bernstein." T3009:2-6
(Joenk). In Joenk's opinion, Alliance Bernstein fees counted as a fall-out benefit because:
AXA owns Alliance Bernstein; if business from sub-advisors or
from trading is done through an affiliate, meaning the subsidiary of
Alliance Bernstein, there is some benefit to Alliance Bernstein of
those trades going through that broker ... If the funds did not exist
or did not trade with Bernstein, that fallout benefit would not exist.
T3009:8-12; T3009:13-15 (Joenk).
Joenk further stated that Alliance Bernstein fall-out benefit information is provided to the
Board. T3009:16-18 (Joenk). It is clear from Joenk's testimony that FMG concedes that the fees
paid Alliance Bernstein are a fall-out benefit, and Joenk reports this to the Board: "The affiliated
commissions, the sub-advisory fees to Alliance Bernstein, we explicitly disclosed that, that is a
fallout benefit." T3033: 11-13 (Joenk).
Schpero testified that "the fees that Alliance Bernstein receives under the sub-advisory
contract" are considered fall-out benefits. T4580: 10-20 (Schpero). Therefore, the credible
testimony demonstrates that the Board was apprised that the fees paid to Alliance Bernstein
constitute fall-out benefits. Plaintiffs failed to demonstrate that the Board breached its fiduciary
duty on the issue of fall-out benefits because the evidence shows that the Board considered these
fees in approving the investment management and administrative contracts.
129

4.

Conclusion on Fall-Out Benefits

For the reasons stated, Plaintiffs have failed to show that wrapper fees, general account
spread, or Alliance Bernstein fees constitute fall-out

benefits~

or that the Board failed to consider

these fees in the 15( c) process.

F.

Comparative Fees
Another Gartenberg factor focuses on the comparative foes charged to others in the

mutual fund industry. Courts may consider fee comparisons but must give them the weight they
merit in light of the similarities and differences in the services provided. Jones. 559 U.S. at 34950. The Supreme Court has cautioned, however, that "'[i]f the services rendered [by separate
investment advisers] are sufficiently different that a comparison is not probative, then courts
must reject such a comparison." Id. at 350 (citations omitted).
The California District Court noted Hevidence of comparative fee structures, though
certainly relevant, is of limited probative value in a Section 36(b) inquiry "because of the
potentially incestuous relationships between many advisers and their funds."' In re American
Mut. Funds Fee Litig., 2009 WL 5215755 at *52 (C.D. Cal. 2009) (citing Gartenberg, 694 F.2d
at 929-30). Moreover, in that case, Defendants cited Lipper and Morningstar data to conclude
that fees were lower than industry average. Id. at *53.
Plaintiffs do not dispute that the Bo.ard received information on comparative fees, but
instead contend that the information they received was unreliable. Specifically, Plaintiffs assert
that Lipper data utilized by Defendants is not independent, objective, or authoritative. Moreover,
Plaintiffs assert that the Lipper data compared dissimilar funds, such as comparing index and
pactive funds to actively managed funds. ECF No. 247, PFOF, if~ 327-334. Plaintiffs contend
that if Defendants had performed the proper fee con;iparisons, using reliable and sound data, the

130

fees for all of the at-issue Funds would be in excess of the fees reported by the Investment
Company Institute.
The Board received comparative fee data that is developed by Lipper, which compares
FMG's fees to others charged in the mutual fund industry. For example. DX-87.1 is the 2012
Lipper report prepared for the EQAT Board. T.2693: 12-20 (Joenk). Every year. a similar report

is submitted that includes comparisons of the expense ratios and expense components for
Ji fferent classes of funds. T.2693: 12-20 (Joenk). Joenk provides Lipper with the expense ratios
J.nd components of the EQA T Funds and then Lipper selects the funds against which Plaintiff's
Funds will be compared. T2693: 12-2694: 12 (Joenk). Joenk acknowledged that there is '"noise in
the data" but he is not aware of better sources of infonnation. so the EQAT Board uses multiple
sources including Lipper and Strategic Insight. T2759: 12-21 (Joenk). Schpero stated that, with
the exception of the S&P 500, Lipper compared index or hybrid funds to active funds.
T3793:10-13 {Schpero). However, Schpero explained that, in response. the Board asks for a
break out of index funds alone for its comparison. T3 793: l 9-3794:12 (Schpero ).
At trial, Plaintiffs presented Pomerantz and Kopcke on the issue of comparative fees.
Pomerantz used the Investment Company Institute fact book, which is widely used in the
industry, to conclude that the industry average for index fund management fees is I 1-13 basis
points. Tl 863:6-24 (Pomerantz). However, Pomerantz explained that FMG's comparative fees
are far greater in basis points for index funds than the industry average. Specifically, the
management fees in basis points for the index funds at issue in this case are as follows: 4 7 basis
points for the Common Stock; 46.5 basis points for the Core Bond Index; 37.4 basis points for
the Equity 500; and 46. 7 basis points for the Intennediate Government Bond. T 1864: 11-15
(Pomerantz).

131

Pomerantz and Kopcke both offered testimony that attempted to undem1ine the Lipper
data that the Board relied upon when assessing comparative fees. Kopckc criticized Lipper data.
stating that it was opaque, not replicable. and subjective. T2364: 15-2366:2. (Kopcke). He stated
that Lipper ignores market demand for funds. T2366:3- l 7 (Kopckc). However. Kopckc said
that he uses Lipper data \Vhen creating his own comparison and admitted that it is almost always
quite difficult to find a comparison group. T2364: 15-2365: 12 (Kopcke). Furthermore,
Pomerantz stated that Lipper was widely used by mutual fund boards. and considered to be an
independent and authoritative source for data. T2026: 13-15; 2026:22-2027:4 (Pomerantz).
Defendants presented James on the issue of comparative fees. James analyzed the
expense ratios of the Funds at issue, excluding l 2b-1 fees (distribution), and compared them to
the Lipper group. T4139:8-l 1 (James). James found that the fees are at about the median. or
midpoint. in the industry. T4 l 39:22-23 (James). James also compared at-issue Funds with the
comparable Lipper Group using asset weighted averages and found that most are at the midpoint
in the distribution or the middle of the industry. T4139:22-4 l 40:3 (James).
James also testified that Lipper is the leading source of fee infom1ation in the industry and
considered credible and independent. T4141 :9-16 (James). James stated that Lipper is used by
academics, practitioners and regulatory agencies. T4141 :9-16 (James).
In their post-trial findings of fact Plaintiffs set forth a number of tables that were not
admitted into evidence or testified to at trial. For example, Tables 21, 22, 23, 24, 25, and 26,
among others, were never admitted into evidence. There is no testimony supporting these Fund
comparisons that Plaintiffs compiled, and as such, the Court did not utilize those tables in
assessing the facts.

132

The Court finds, in light of the inconsistent testimony of Pomerantz and Kopcke.

~md

the

credible testimony ofJames, the Board compared the fees on each Fund against reliable sources,
and determined they were reasonable in the industry. Moreover. even if the Court were to accept
Plaintiffs' position that Lipper data is unreliable. Schpero stated that the EQAT Board was aware
that Lipper compared index funds to active funds, and in response, asked t<.)r a break out of index
funds alone for their comparison. T3793:10-3 794: l 2 (Schpero). The Board conscientiously
recognized that the Lipper Index was not an exact comparison, but in light of same, there is little
proof that the Board did not act conscientiously. Therefore. Plaintiffs have failed to meet their
burden to demonstrate that the fees for the at-issue Funds were excessive when compared to
similar funds in the industry.

Fund Performance
Although not a Gartenberg factor, Plaintiffs contend that the Funds at issue performed
poorly, demonstrating that the nature and quality of services provided by FMG were inadequate.
Plaintiffs offered the testimony of Pomerantz and Goldstein in support of their claim that the atissue Funds performed poorly.
Pomerantz testified that he "made observations regarding the investment performance of
the subject funds as compared to ... peer groups, which are other mutual funds that have the
same investment objective, or objective benchmarks that are defined for each of the funds."
T 1878: 11-15 (Pomerantz). Pomerantz created P-151-i, which contains ''the results of a
calculation that [he] performed that tried to identify the difference in wealth that is achieved by
investors in the subject funds ... as opposed to the investment return of either the benchmark or
peer group that has been identified for those funds." Tl 878:23-1879:3. Pomerantz indicated that
the Funds performed poorly. Tl883:2-12 (Pomerantz).

133

Goldstein also testified on this issue. Goldstein was asked what information led him to
conclude that, in general, the Funds' performance relative to peers was poor. T2l67:19-21
(Goldstein). Goldstein stated, "I don't recall what actual documents, I think there were ...
reports provided to the Board that I looked at." T2167:22-24 (Goldstein). Goldstein was then
asked by the Court, ""[ s]o when you indicate that the general performance of the funds was poor,
what funds are you talking about?" T2l67:25-2168:1 (Goldstein). Goldstein replied, "[ w ]ell, I
didn't - that's why I said generally ... some of them were ... okay. I'd have to look at them on
a one-by-one basis, but generally they were subpar compared to the peers." T2 l 68:3-6
(Goldstein). However, Goldstein acknowledged he ""didn't go into fund by fund comparison"
(T2168:20 (Goldstein)) and could not recall the specific data on any fund. T2168:21-22
(Goldstein). On cross, Goldstein was questioned about any analysis he did on the twelve Funds
at issue, and Goldstein responded, ""I didn't do anything to assess the performance.'' T2l98:1-2
(Goldstein).
To counter Plaintiffs' claims, Wermers evaluated the performance of the Funds at issue in
this case. Relying upon DX-2030A, Wermers illustrated "the difference in monthly returns
between each of the at-issue funds, and their benchmarks for two periods of time." T4336:21-24
(Wermers). Wermers developed DX 2030-A with source data from the prospectus of the Funds
and Lipper Data. T4337:7-9 (Wermers).
l.

Active Fund Performance
GA.MCO

Wermers found that GAMCO achieved its investment goal. Wermers noted that "[a]n
actively managed fund's goal is to beat its benchmark of net fees, and this fund did do so and by

134

quite a margin actually." T4345: 17-19 (Wermers). Wermers supported his testimony and
findings with statistical analysis and P-value significance findings. T4346-4347 (Wermers).
Plflr!CO

Wermers said that the PIMCO fund had"' ... outperformed its benchmark by 5 basis
points." T4348:3-24 (Wermers). As a result, Wermers stated that it "certainly" achieved its goal
T4349:1 (Wermers). Again, Wermers supported his testimony and findings with P-value
confidence levels and statistics. Wermers opined that the GAMCO and PIMCO funds are "'good
or very good funds,'' and that '"FMG was successfol [in choosing sub-advisers]" for the funds.
T4349:6-13 (Wenners).
T.Rowe
Wermers said that T. Rowe had Houtperformed its benchmark by 3 basis points per
month," and that it achieved its goal because "'an active managed fund tries to outperform its
benchmark net of fees and it did so." T4349: 19, 22-23 (Wermers).
To conclude his testimony on active funds, Wermers noted that the returns on those funds
were impressive. Wermers opined that he is very familiar with the numbers of actiye funds that
exceed benchmark because he reads materials on the subject, and that ""roughly 5 to 10 percent of
funds over the last l 0 ·or 20 years have been able to outperform their benchmark net of fees."
T4350:2-7 (Wermers).

2.

Index Fund Performance

With regard to index or passive funds, Wermers explained that the index funds "'slightly
underperformed their benchmarks on a of net fee basis, between 4 and 6 basis points per month.''
T4350: 17-19 (Wermers). He further stated that on a gross fee basis, the index funds "essentially
matched, vety very closely, their benchmarks gross of fees." T4350:22-23 (Wermers).

135

Wermers developed the charts DX-2022A and B to demonstrate his findings. T435 l :2-5
(W errners ). The charts show that the two measures, gross of fees and net of fees, ""actually
overlay themselves so clearly and closely that you can see the blue line.'' T4353 :21-25
(Wermers). Wermers described the quality of the Equity 500 Fund as "'good or very good," and
stated that FMG "succeeded" in its selection of the particular sub-advisers for that Fund.
T4354:2-9 (Wermers).
Wermers then reviewed the other passive or index funds using the same analysis as
Equity 500 (Common Stock Index Portfolio, the Core Bond Index Portfolio, and the Intermediate
Government Bond Index Portfolio), finding that that "'the returns gross of fees of all three of
these index portfolios match their hypothetical benchmark very[,] very closely, so the answer is
yes they succeeded." T4355: 19-23 (Wermers). He also added that "'FMG succeeded in choosing
good sub-advisors." T4355:22-23 (Wermers); Exhibits 2024A-B, 2026A-B, and 2028A-B.
Wermers concluded that the goal of index funds

is to meet the benchmark.

T4355:19-23

(Wermers). Because the index closely matched its respective benchmark, Wermers concluded
that these Funds performed well.
3.

Pactive Fund Performance

Wermers explained that "'[a]ll five of [the pactive funds] made money over this time
period, net of fees ... " T4357: 17-18 (Wermers). When asked whether the pactive funds
achieved their goal of a long-term capital growth or appreciation, Wermers stated that '"[t]hey
did, and some of them produced a lot of capital appreciation." T4358:2-3 (Wermers). Wermers
noted that the best method to evaluate pactive funds is to compare them "'to their benchmarks
gross of fees." T435815-16 (Wermers).

136

Wermers noted that the Global Bond Plus Portfolio outperformed its benchmark gross of
fees and net of fees. T4358: 17-24 (Wermers). He explained that the other four pactive funds,
the Equity funds, are evaluated using the ATM overlay strategy, and that the best way to evaluate
a fund with an A TM overlay is to use the "VMI adjusted benchmark to separate out the influence
of the volatility overlay.'' T4359:7-12 (Wermers). Using that strategy, Wermers explained on a
gross of fee basis, relative to their VMI indices during the period June 2009 to September 2015,
the funds "slightly underperformed their benchmark," and on a net of fee basis, ""three out of four
[trailed the VMI benchmark]." T4359: 13-17 (Wermers); T4359: 16-17 (Wermers); T4360:6
(Wermers).
On direct, Wermers was asked if he had examined the reason why three of the four funds
had trailed on a net of fee basis, and Wermers explained that ••the passive portion of these
portfolios were ... almost the entire reason that these portfolios underperformed significantly ...
on a net of fee basis." T4360:17-21 (Wermers). He further noted that this result did not surprise
him ""because that's exactly what the passive sleeves were supposed to do ... [O]nce I explained
that these were due to the passive sleeves, I was reassured that these were just fine funds, they
had met expectations." T4360:24-4361 :2 (Wermers).

4.

Wermer's Analysis of Pomerantz's Fund Performance

Reviewing Pomerantz's testimony, Wermers found his methodologies in evaluation Fund
performance to be flawed. Wermers noted that Pomerantz's analysis '•annualized average fiveyear returns over the period ending May 31st, 2012, for each at-issue fund[,]" which does not
comport with the industry standard. T4362:25-4363: 1 (Wermers). Wermers testified that
Pomerantz's chart allegedly ended on October 31, 2012 (T4364:23-25 (Wermers)); yet Wermers
pulled the data and found that it ended May 31, 2012, and therefore concluded that this mistake

137

renders the chart inaccurate. T4365:2-5 (Wermers). Wermers stated that it was not accurate to
use Pomerantz's chart to show actual gains or losses expressed in dollars. T4366:3-4 (Wermers).
Wermers explained that adopting Pomerantz's chart would be inaccurate because Pomerantz: (l)
used hypothetical numbers, both for the fund and for the benchmark; and (2) does not take into
the account the time of flows, and the exact time of returns, and how much money existed in the
fund at each particular point in time, versus what the rate ofretum was for that year. T4366:3-16
(Wermers). Therefore, ""for both reasons and other reasons ... it just doesn't make sense, it
doesn't measure losses." T4366:15-16 (Wermers). Wermers further added that he "wouldn't rely
on these charts at all because of this timing problem alone." T4367:20-21 (Wermers).
Wermers explained that there are additional errors in Pomerantz calculations in the
report, and, in his opinion, Pomerantz did not follow best practices for performance analysis.
T4373:8-12 (Wermers). First, Wermers noted that Pomerantz measured '"assets under
management of the Funds over four different years 2008, 2009, 2010 and 2011, rather than the
actual five years that he's presenting the table for." T4370: 18-21 (Wermers). He added that
because some of the funds were growing rapidly during that time period, "if you don't get the
period of time right, you're not going to get this calculation right." T4371 :3-9 (Wermers).
Wermers stated that using the wrong dates caused Pomerantz to "'overstate" his figures in a
number of the Funds. T4372:23-24 (Wermers).
Wermers testified about his exhibits and contrasted them against the figures that
Pomerantz calculated. Using Exhibits DX-2037 and DX-2036, which displayed the Core Bond
Index Fund and the Common Stock Index Fund, respectively, over three and five-year periods,
Wermers stated that the Core Bond Index Fund "performed in the bottom quartile consistently,"
but that does not mean that it was a poor quality index fund. T4377: 2-13 (Wermers). Wermers

138

noted that the Common Stock Index Fund Hended up in either the top ... or the second from the
top quartile ... of the Lipper." T4378:18-20 (Wermers). He said that because ""the benchmark
for the Common Stock Portfolio ends up in a close or exactly equal quartile ranking, it says the
fund and the index were both sort of ranked the same among peers, which means the fund was
doing the job, it [matched] its index." T4379:2-6 (Wermers).
Finally, Wermers addressed one more flaw in Pomerantz's approach, stating that
Pomerantz '"used the benchmark that existed at the end of each of [the] periods, rather than going
back in time and choosing the benchmark that actually existed or that was actually in the
prospectus for each of those funds." T4380:5-15 (Wermers). He notes that these errors caused
changes and miscalculations in the PIMCO and Global Bond PLUS Funds. T4380:20-438 l :5
(Wermers).
Plaintiffs attempted to impeach Wermers and undermine his testimony through crossexamination in a number of areas, but the impeachment did little to undermine Wermers'
credibility. Wermers' testimony was supported by strong facts, evidence, and methods of best
practice. The Court finds Wermers' testimony to be reliable, and his analyses are accurate and
thorough. The Court gave little weight to Pomerantz and Goldstein's opinions. Their work was
less credible and inferior to that of Wermers.

5.

Conclusion on Fund Performance

While underperformance of the mutual fund may be considered, it is not a Gartenberg
factor, and courts have been '"wary about attaching too much significance to a fund's financial
performance." Franklin, 478 F. Supp. 2d at 687. Moreover, ""allegations of underperformance
alone are insufficient to prove that an investment adviser's fees are excessive." Amron v.
Morgan Stanley Advisors, Inc., 464 F.3d 338, 344 (2d Cir. 2006) (quotation omitted). '"While

139

performance may be marginally helpful in evaluating the services which a fund offers ... [e]ven
the most knowledgeable advisers do not always perform up to

expectations~

and investments

themselves involve quite different magnitudes of risk." Migdal v. Rowe Price-Fleming Intern.,
Inc., 248 F.3d 321, 327-28 (4th Cir. 2001).

Plaintiffs have failed to meet their burden to demonstrate that the Funds performed
poorly. Instead, the credible testimony of Wermers indicated that the vast majority of the Funds
performed at or above expectations. As such, Plaintiffs did not demonstrate that FMG's services
were in any way inadequate based on Fund performance.
Benefits of the Lawsuit
Although Plaintiffs failed to meet their burden in demonstrating a breach of fiduciary
duty, Jones requires that courts look beyond the Gartenberg factors and '"all pertinent facts must
be weighed." Jones, 559 U.S. 335 at 345 (citing Gartenberg, 694 F.2d at 929). Of particular
relevance in Plaintiffs' case is that the filing of the initial Complaint in 2011 engendered positive
change to the EQAT Board's process. Many of the Board improvements, including changes to
the Board composition and Board presentations, did not occur until after suit was filed. These
improvements are discussed below.
In October 2011, after the Complaint was filed, Schpero became the lead trustee.
T287: 19 (Joenk). Edwards, an independent trustee, testified at her deposition regarding
Schpero's new focus and leadership. T4483:13-15 (Edwards Dep. Read-In). Edwards stated
that eliminating prior expenses of the Board, such as lavish Board dinners, are now a focus of
Schpero. T4507:9-l 9 (Edwards Dep. Read-In). This aligns with Plaintiffs' theory at trial that
the lawsuit brought about changes to the Board. Specifically, Plaintiffs pointed to bills from
Board dinners in July 2011 and December 2011, with the latter costing $25,000 and billed

140

directly to the EQAT. 37 T824:4-826:24 (Joenk). Although Joenk indicated that the EQAT had
been reimbursed for this cost (T826:23-827:5 (Joenk)}, EQA Twas only reimbursed two and a
half years after the meals occurred. T827:6-12 (Joenk). Joenk stated that the EQAT was
refunded because "the Board raised [this] issue to me." T827: 15 (Joenk). Plaintiffs questioned
Joenk as to whether he knew '"if the Board raised that issue because the Plaintiffs raised that
issue[.]'' T827:16-17 (Joenk). Joenk responded, '"I don't know what their motivation was, but I
can speculate." T827: 18-19 (Joenk).
In reviewing this testimony, it is clear to the Court that Plaintiffs' lawsuit resulted in a
more scrupulous and rigorous examination of Board expenses. Moreover, based on Edwards'
testimony, Schpero seems to have led this effort to ensure that EQAT investors are not footing
the bill for extravagant dinners of the Board. This is a significant benefit to investors that only
occurred because of this lawsuit.
Furthermore, Schpero is credited for the development of charts (the '~Gary Charts") that
analyze the spread- the '"portion of the fee that FMG retains after payment ... to the subadvisor." T3528:3-4 (Schpero). Schpero testified to the importance of approving FMG's fee and
ensuring" ... that the fee is ... reflective of services [FMG] provides separate and apart from the
services that the sub-advisor provides." T3528: 18-20 (Schpero ). The Gary Charts gather
information "very specific to the amount of fee" that FMG retains. T3528: 1-3529: 1 (Schpero);
DX-144.18, Tab 13. However, this seemingly indispensable breakdown of fees was not
provided to the Board until 2013, two years after the suit was filed.
In a similar vein, the organization of the Board materials, specifically the binders,
drastically improved in the years following the lawsuit. For example, in 2010, the "Section l 5(c)

17
·

The Fund paying for dinners is a transparency issue. The Board should remediate the issue through adoption of a
policy regarding those types of expenses.

141

Written Response of FMG" (DX-0007, the HAgenda Book") mentioned the importance of the

Jones v. Harris decision and "the factors the Board ... should consider.'' DX-0007 at Bates 3015.
The 2010 Agenda Book also provided an ""Advisory Contract Renewal" guide, which outlined
the requirements under the ICA. Id. at Bates 3516-17. However, the Board materials from 2013
(DX-144) contained a full PowerPoint presentation on the Gartenberg factors. DX-144 at Bates
0630-3 7. Moreover, the 2013 Board Book contained an index of materials and related each to
the relevant Gartenberg factors. Id. at Bates 0648. Therefore, even at the most superficial level,
it is irrefutable that the Board received more comprehensive information after the lawsuit was
filed.
Schpero testified that many of the changes that occurred after the suit was instituted were
adopted due to the Board's long-term improvement plan. Schpero stated:
Certainly the basics [of the Board process] have not changed, but I
will also tell you that I think we would be a bad board if every year
we didn't change some things ... [F]or example, I became the lead
trustee in September/October of201 l; I had not been the lead trustee
for 10 years. l 've spent a lot of time in the industry, I had my own
views and thoughts on things. If I thought they were really
important, I got them in place. So there were certain things over the
years, like the Gary chart ... [W]hen I became the lead trustee I
certainly did things differently ... [But] I don't think there's been
any arbitrary cutoff where suddenly the Board at some point became
more activist or things changed. I do think every year we try to do
more and we try to get better, and lawsuit or no lawsuit that's what
a good board does.
T3668: 1-3669:2. The Court finds this portion of Schpero' s testimony hard to believe. It seems
that the improvements were made immediately after the lawsuit was filed. This shake-up in
management has led to better decision-making for the Board. Although the substance of this
lawsuit showed little proot: the filing of the suit brought about positive changes to the Board's
composition and process.

142

Damages

Plaintiffs have failed to meet their burden in proving breach of fiduciary duty, and the
Court need not reach damages; however, the requirement to show '"actual damages" is an
element Plaintiffs have not proven, and by itself, this prevents any recovery by Plaintiffs. As
previously stated (see ''Damages Period", supra at p. 14), the damages period for Plaintiffs'
excessive fee claim is limited to the one-year limitation in Section 26(b), 15 U.S.C. 35(b)(3).
There are two damage claims, one for administrative fees (ECF No. 285-2 DCRPFOP if 830) and
one for management fees (ECF No. 285-2 DCRPFOP if 828). The damage period for Plaintiffs'
management fees damages claim for the original eight funds starts on July 21, 2010 (the Sivolella
Complaint), while the period for the other four funds begins on January 15, 2012 (the San.ford
Complaint). ECF No. 285-2 DCRPFOP if 827. The damage period for administrative fee (the

Amended Complaint) damages begins on April 15, 2012. ECF No. 285-2 DCRPFOP if 827.
Sivolella 's claim is limited to the management fees charged to the eight original funds
after June 20, 2010 (i.e. one year prior to the Sivolella Complaint). T29 l 0:24-2911 :6 (Joenk). In
the post-trial submissions, Plaintiffs submitted charts to depict damages. These charts were
never disclosed at trial or prior to trial in the parties' pre-trial order.
The Court finds that Plaintiffs' post-trial charts submitted in their proposed findings of
fact should not be considered because they were not admitted during trial. Moreover, even if the
Court were to accept them at this stage in the litigation, the Court would give them little weight
because there is little or no proof to link the charts to the testimony.
A party cannot cure flaws or inaccuracies in its trial presentation through post-trial
submissions by simply submitting new charts and updated calculations. If the Court were to
allow this, Defendants would be deprived of their right to cross-examine Plaintiffs' witnesses, or
offer their own testimony or evidence in rebuttal. The right to cross-examine and test the
143

soundness of the calculations is particularly important here in light of the large number of errors,
methodological shortcomings, and basic mistakes demonstrated by Plaintiffs' experts at trial.
Many of the new, post-trial charts attempt to cure defects in Plaintiffs' presentation of
their case. Initially, Damage Model I calls for complete disgorgement of FMG' s entire fee.
However, there is nothing in the record to demonstrate that FMG performed no duties, and
therefore would not be entitled to any fee. Looking to the language of the statute itself, the Court
in Kasilag determined the proper measure of damages should be limited to the actual damages
resulting from the breach of fiduciary duty. 15 U.S.C. § 80a-35(b )(3 ). Kasilag, 2016 WL
1394347, at *3. Actual damages would be the difference between the fee paid and a fee that
would have been '''fair"-i.e., a fee that could have been negotiated at arm's length. Krasner v.

Dreyfus Corp., 500 F. Supp. 36, 42 (S.D.N.Y. 1980) ("actual damages" means the '"amount by
which the ... fee [level] exceeded a fair fee.''); accord In re Evangelist, 760 F.2d 27, 29 (1st Cir.
1985) ("the remedy Congress created" under Section 36(b) was the "payment of any excess fee
to the company"). The Plaintiffs presented no evidence to suggest that it would be '"fair" for
FMG to be paid nothing for its services to the funds.
Damage Model 4 similarly fails because, as the Court understands it, it compares FMG's
fees to those of low-cost funds, like Vanguard. Although Vanguard is known in the industry as a
mutual fund with low fees, the Plaintiffs presented no credible evidence demonstrating that
FMG's services are appropriately comparable to those performed by Vanguard. 38 Moreover,

38

Courts have acknowledged that Vanguard is a low-cost option and give limited weight to fee comparisons
between traditional managers and Vanguard. See Amron v. Morgan Stanley Inv. Advisors, Inc., 464 F.3d 338, 345
(2d Cir. 2006) ("That a mutual fund has an expense ratio higher than Vanguard, a firm known for its emphasis on
keeping costs low, raises little suspicion under this [Gartenberg ] factor."); Reso v. Artison Partners, Civ. No. 11873, 2011WL5826034, *8 (E.D. Wis. Nov. 18, 2011) (noting that ''extremely limited comparisons" such as
plaintiffs comparison to the Vanguard funds are of "little value"); Kalish v. Franklin Advisers, Inc., 742 F.Supp.
1222, 1231(S.D.N.Y.1990), affd, 928 F.2d 590 (2d Cir. 1991), cert. den'd, 502 U.S. 818 (1991) (finding ''some

144

Plaintiffs assert that this model is based on the fees paid to managers of index funds only. Here,
however, it is undisputed that FMG served as investment manager for active, pactive, and index
funds. As such, this model also fails.
Damage Models 2 and 3 are potentially viable models in this action. However: ( 1) they
were not disclosed or admitted into evidence; (2) Pomerantz was Plaintiffs' only expert witness
who testified regarding damages at trial, and his testimony was not credible because his reports
contained arithmetic errors (ECF No. l 78, Joint Final Proposed Order, pp. 55-56; Tl 968:20-25;
Tl 969: 1-2 (Pomerantz)); and (3) Pomerantz's findings were incomplete because he failed to
calculate damages for the whole damages period. That is, the Sivolella Complaint was filed on
July 21, 2011 with eight original funds, but Pomerantz's damage calculations included all twelve
at-issue Funds in his 2010 damage calculations. However, Plaintiffs did not add the four
additional Funds until 2012. Therefore, Pomerantz should have limited his 2010 damage
calculations to the original eight Funds, rather than including all twelve. Moreover, Pomerantz
did not testify to damages for 2013 and 2014, and no damages were specified for those years
until post-trial findings of fact. ECF No. 247, PFOF ~~ 814-864.
At trial, Pomerantz calculated Plaintiffs' damages for three years, from the beginning of
2010 to the end of2012 in an exhibit (P-151-j) based on a 39 percent profit margin for FMG in
his calculations. T 1968:24-1969:5 (Pomerantz). Profit margins, or profitability ratios, is the
'"ratio of dollar of profit divided by the dollars of revenue." Tl356:12-13 (Barrett). Pomerantz
explained that he used a 39 percent profit margin because both Lipper and Strategic Insights
conducted surveys that aggregate the information available from public mutual fund companies,

basis" for comparison of defendant's fund with Vanguard, but noting "significant differences in structure, peculiar to
the Vanguard family of funds, which lessen the value of the comparison").

145

which found that 39 percent was the average profit margin for the group of mutual funds as a
whole. Tl 969:6-12 (Pomerantz). The 39 percent represents the alleged profit FMG should be
making for its investment management and administrative services. The difference between
what FMG actually makes and the 39 percent figure, less any sub-advisory expense (T 1975: 1719 (Pomerantz)), is Plaintiffs' proposed damages. However, there is no evidence that FMG's
profit should have been 39 percent. Instead, the credible evidence demonstrated that subadvisory and sub-administration fees are properly treated as expenses. The same is true of the
549 million in allocated costs. Plaintiffs failed to meet their burden in demonstrating that it was
inappropriate to treat these costs as expenses. Therefore, Plaintiffs failed show that the 39
percent profit margin used by Pomerantz is appropriate in calculating damages.

Conclusion
For all of the foregoing reasons, Plaintiffs have failed to meet their burden in
demonstrating a breach of fiduciary duty in violation of§ 36(b) of the Investment Company Act.
An appropriate Order shall follow.

PETER G. SHERIDAN, U.S.D.J.

Dated: August 25, 2016

146

Appendix
Investment 11-lanagement Fee Schedules (JSOF'fi 20):

1. EQ/Common Stock Index Portfolio

EQ/Common Stock Index Portfolio

I

Fee Schedule Under Investment Management
Agreements
2010- 8/31/2011
0.350% (fee on all assets)

9/1/2011- 8/31/2012
0.350% on first $4 billion of assets
0.340% thereafter

9/1/2012 - 8/31/2013
0.350% on first $4 billion of assets
0.340% on next $4 billion of assets
0.330% thereafter

9/1/2013 - 8/3112015
0.350% on first $4 billion of assets
0.340% on next $4 billion of assets
0.330% on next $2 billion of assets ·
0.320% thereafter

9/1/2015
0.350% on first $2 billion of assets
0.340% on next

$4 billion of assets

0.320% on next $3 billion of assets
0.310% on next $2 billion of assets
0.300% thereafter

147

2. EQ/Core Bond Index Portfolio
EQ/Core Bond Index Portfolio

Fee Schedule.Under Investment Management
Agreements
2010- 8/31/2011

0.350% (fee on all assets)
I

l 9/1/2011 I

8/3112012

I

I

0.350% on first $4 billion of assets
0.340% thereafter
9/l/2012 - 8/3112013

0.350% on first $4 billion of assets
0.340% on next $4 billion of assets
0.330% thereafter
9/1/2013 - 8/31/2015

0.350% on first $4 billion of assets
0.340% on next $4 billion of assets
0.330% on next $2 billion of assets
0.320% thereafter
9/1/2015

0.350% on first $2 billion of assets
0.340% on next $4 billion of assets
0.320% on next $3 billion of assets
0.310% on next $2 billion of assets
0.300% thereafter

3. EQ/Equity 500 Index Portfolio

EQ/Equify 500 fndeX Portfolio.

148

I

Fee Schedule Under lijvestrne)lt Management
Agreements,
2010 - 8/31/2011

0.250% (fee on all assets)
9/1/2011 - 8/31/2012

0.250% on first $4 billion of assets
I
I

0.240% thereafter
9/1/2012 - 8/31/2013

0.250% on. first $4 billion of assets
0.240% on next $4 billion of assets
0.230% thereafter
9/1/2013 - 8/31/2015

0.250% on first $4 billion of assets
0.240% on next $4 billion of assets
0.230% on next $2 billion of assets
0.220% thereafter
9/1/2015

0.250% on first $2 billion of assets
0.240% on next $4 billion of assets
0.220% on next $3 billion of assets
0.210% on next $2 billion of assets
0.200% thereafter

4. EQ/Equity Growth PLUS Portfolio

EQ/Equity Growth. PLUS Portf()lfo
..

'

.

.

..

.

.

Fee Sch~duleUnderl~vestment Ma11agement
. Agreements
2010- 2014

149

1

0.500% on first $2 billion of assets
0.450% on next $1 billion of assets
0.425% on next $3 billion of assets
0.400% on next $5 billion of assets
0.375% thereafter

5. EQ/GAMCO Small Company Value Portfolio
EQ/GAMCO Small Company Value Portfolio

Fee Schedule, Under Investment Management
Agreements
·.

2010 - 8/31/2012

0.800% on first $400 million of assets
0. 750% on next $400 million of assets
0. 700% thereafter
9/1/2012 - 2015

0. 750% on first $1 billion of assets
0. 700% on next $1 billion of assets
0.675% on next $3 billion of assets
0.650% on next $5 billion of assets
0.625% thereafter
6. EQ/Global Bond PLUS Portfolio
EQ/Gfobal. Bond PLUS Portfolio

Fee Schedwe Under lllvestment Management
Agreements
2010 - 8/31/2015

0.550% on first $4 billion of assets
0.530% on next $4 billion of assets

150

I 0.510% thereafter

19/1/2015
I 0.550% on first $2 billion of assets

0.530% on next $4 billion of assets
' 0.5 l 0% on next $3 billion of assets
0.490% on next $2 billion of assets
I 0.480% thereafter

7. EQ/Global Multi-Sector Equity Portfolio

EQ/Global Multi-Sector Equity Portfolio
Fee Schedule Under Investme~t Management
Agreements
2010- 2015
0.750% on first $1 billion of assets
0. 700% on next $1 billion of assets
0.675% on next $3 billion of assets
0.650% on next $5 billion of assets
0.625% thereafter
8. EQ/Intermediate Government Bond Index Portfolio
I

EQ/Intermediate Government B()n<flndexPortfolio ..

I

Fee Schedule Under Investment Management Agreements ·
··-·

.:

..

2010 - 8/31/2011
0.350% (fee on all assets)
9/1/2011 - 8/31/2012
0.350% on first $4 billion of assets
0.340% thereafter
9/1/2012 - 8/31/2013

151

·-

:

0.350% on first $4 billion of assets
0.340% on next $4 billion of assets
0.330% thereafter
9/112013 - 8/31/2015

0.350% on first $4 billion of assets
0.340% on next $4 billion of assets
0.330% on next $2 billion of assets
0.320% thereafter
9/112015

0.350% on first $2 billion of assets
0.340% on next $4 billion of assets
0.320% on next $3 billion of assets
0.310% on next $2 billion of assets
0.300% thereafter

9. EQ/Large Cap Value PLUS Portfolio
EQ/Large ·Cap Value PLUS. Portfolio

Fee Schedute·Under lnvestmentManagement
Agreements
2010- 2015

0.500% on first $2 billion of assets
0.450% on next $1 billion of assets
0.425% on next $3 billion of assets
0.400% on next $5 billion of assets
0.375% thereafter

152

l 0. EQ/Mid Cap Value PLUS Portfolio

EQ/Mid,CapValue PL(JSPortfolio
Fee Schedule Under Investment Management
Agreements
2010- 2015
0.550% on first $2 billion of assets
0.500% on next $1 billion of assets
0.475% on next $3 billion of assets
0.450% on next $5 billion of assets
0.425% thereafter
11. EQ/PIMCO Ultra Short Bond Portfolio

EQ/PIMCO Ultra Short Bond Portfolio
Fee Schedule Under Investment Management
Agreements
2010- 2015
0.500% on first $750 million of assets
0.475% on next $750 million of assets
0.450% on next $1 billion of assets
0.430% on next $2.5 billion of assets
0.420% thereafter

12. EQ/T. Rowe Price Growth Stock Portfolio

EQ/T. Rowe PriceGrowthStoc:k Portfolio
Fee . Schedule Under,{nvesttne~tl\1anage1Dent
Agreeme11ts
2010- 8/31/2012
153

\ 0.800% on first $400 million of assets
0.750% on next $400 million of assets
0.700% thereafter
9/1/2012 - 2015

0.750% on first $1 billion of assets
0. 700% on next $1 billion of assets
0.675% on next $3 billion of assets
I

0.650% on next $5 billion of assets

I 0.625% thereafter

Administrative Fee Schedule (JSOF'J, 37):

1. For the Single-Advised Portfolios (EQ/Common Stock Index Portfolio,
EQ/Core Bond Index Portfolio, EQ/Equity 500 Index Portfolio, EQ/GAMCO
Small Company Value Portfolio, EQ/Intermediate Government Bond Index
Portfolio, EQ/PIMCO Ultra Short Bond Portfolio, EQ/T. Rowe Price Growth
Stock Portfolio)
·
Single-Advised Portfolios·
Fee Schedule Under Administrative Agreement

2010- 8/31/2013
0.120% on first $3 billion of assets
0.110% on next $3 billion of assets
0.105% on next $4 billion of assets
0.100% on the next $20 billion of assets
0.0975% thereafter based on aggregate average daily net assets of the Portfolios
Plus $30,000 per Portfolio

154

9/1/2013 - 8/3112014

0.120% on first $3 billion of assets
0.110% on next $3 billion of assets
0.105% on next $4 billion of assets
0.100% on the next $20 billion of assets
0.0975% thereafter based on aggregate average daily net assets of the Single-Advised
Portfolios
Plus $30,000 for each Portfolio with average net assets of less than $5 billion.
9/112014 - 2015

Greater of $30,000 per Portfolio or,
0.120% of first $3 billion of assets
0.110% of next $3 billion of assets
0.105% of next $4 billion of assets
0.100% of next $20 billion of assets
0.0975% of next $10 billion of assets
0.0950% thereafter based on aggregate average daily net assets of the Single-Advised
Portfolios

2. For the Multi-Subadvised/Hybrid Portfolios (EQ/Equity Growth PLUS
Portfolio, EQ/Global Bond PLUS Portfolio, EQ/Global Multi-Sector Equity
Portfolio, EQ/Large Cap Value PLUS Portfolio, EQ/Mid Cap Value PLUS
Portfolio)
Multi~Su badvised/"Hybrid~' ·Portfolios.

Fee· Schedul~ Under Adiniliistrative Agreement
5/l/2009 - 7/31/2010

0.150% of each Portfolio's average daily net assets
Plus $35,000 per Portfolio
Plus $35,000 for each allocated portion of the Portfolio
8/1/2010 - 8/31/2013

155

0.150% on first $20 billion of assets
0.125% on next $5 billion of assets
0.100% thereafter based on aggregate average daily net assets of the Hybrid Portfolios
Plus $32,500 per Portfolio
Plus $32,500 for each allocated portion of the Portfolio 39
9/112013 - 8/31/2014

0. 150% on first $20 billion of assets
0.110% on next $5 billion of assets
0.100% thereafter based on aggregate average daily net assets of the Hybrid Portfolios
Plus $32,500 for each Portfolio with average net assets of less than $5 billion
9/1/2014 - 8/31/2015

Greater of $32,500 per Portfolio or,
0.150% on first $15 billion of assets
0.110% of next $5 billion of assets
0.100% thereafter based on aggregate average daily net assets of the Hybrid Portfolios
9/112015

Greater of $32,500 per Portfolio or,
0.150% on first $14 billion of assets
0.110% on next $6 billion of assets
0.100% on next $5 billion of assets
0.0975% thereafter based on aggregate average daily net assets of the Hybrid Portfolios

39

From September 1, 2012 to August 31, 2013, the $32,500 fee for each allocated portion of the Portfolios only
applied to Portfolios for which separate custodial services were provided.

156

Cost Allocation 1l1/etlwd

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P-210 at Bates 6745.
Each step is explained below:
•

Step A: This first step is known as AXA CAM, and is depicted as letter ~~A'' above.
Everything to the left of~ is within this step. This is AXA's parent-level cost
allocation method. Plaintiffs do not dispute Step A of the process. As the Court
understands it, AXA Equitable's Allocated Expenses are $2,275. 7 million. AXA
allocated those expenses to "different AXA Equitable Product Codes or expenses
buckets." P-210 at Bates 6749. There are 204 different expense buckets used. Id. at
Bates 6750. Of the 204 expense buckets, 83 of them were associated with EQAT, the

157

one subject to this lawsuit. and VIP,~ 0 and the expenses related thereto were$ L3 l 9.7
million. P-210 at Bates 6731-6750. Barrett thought this process was satisfactory.
Barrett testified that ·-AXA CAM is actually quite a robust, relatively sophisticated
methodology as I understand it. I believe they have costs broken down into about
1,500 cost centers, and within each cost center they have identified cost drivers that
allow them to allocate each cost center's cost to various cost objects, products, or
departments or something like that." Tl440:7-13 (Barrett). To Barrett, when
allocation is based on sensible cost drivers, it is an appropriate allocation. For
example, if rent for office space is being allocated on cost per square foot basis, it is a
reasonable methodology. Although Barrett did not know the precise cost-drivers used
within the AXA CAM, he was satisfied that the large number of them ( 1,500) had
appropriate precision. Hence, Step A is not in issue.
•

Step B: FMG allocates those expenses associated with AXA's variable insurance
products (Equivest Column). The six products listed in the Equivest Column account
for 97 percent of all revenue. P-210 at Bates 6756. The allocation is based on
revenue contribution between the three revenue-generating components of those
products: (1) the product wrapper; (2) general account; and (3) investment portfolios.
T2795:24-2798:8 (Joenk); P-210 at Bates 6756-64. Based on the said revenue
percentages, the expenses allocated to each of the revenue producing categories are:
•
•
•

Wrapper: $735.9 million
General Account: $174.9 million
Investment Portfolios: $408. 9 million

~ 0 The VIP is another mutual fund complex, but is not subject to this litigation.

158

Barrett opined that the allocation based on revenue is contrary to accounting
principles. Barrett testified that FMG' s allocation of its expenses based on revenue is
unreasonable because revenue is not an appropriate cost driver, as it does not relate to
the behavior of the expenses. Tl465:1 l-24 (Barrett). He described using revenue as
a cost driver as a ''self-fulfilling prophesy [sic]" because "''the more revenue - the
higher rate they charge[,] the more revenue they take in, the more expenses they
allocate." Tl466:15-18 (Barrett).
•

Step C: FMG then allocates the expenses associated with the Funds to the functions
of managing and distributing the individual portfolios within EQAT, resulting in
''Allocated Expenses" to EQAT underlying portfolios of $309.2 million. P-210 at
Bates 6765~ ECF No. 276, PRDFOF, if 430. FMG allocates expenses associated with
the management of the EQA T funds on the basis of assets under management in each
Fund. Id. In this case, distribution costs were not at issue. Plaintiffs complain about
the allocated cost of $49,454,000 in 2012. That cost is within the $309.2 million as
set forth in Step C. Joenk indicated that, "[i]t's not actually on this page [P-21 O] ...
but embedded in that [$]309 [million] are two numbers, one is the distribution
number, and then the 49 million that would be ascribed as management." T2794:2 l25. Therefore, "out of the $2.275 billion [from Step A], [the] [$]49 [million that]
comes out is [sic] allocated to the EQA T portfolios." T2794:25-2795: 1.

159