Chill et al v. Calamos Advisors LLC et al

Filing 169

OPINION AND ORDER: In sum, the Court concludes that genuine disputes of material fact exist regarding the Gartenberg factors related to comparative fee structures, profitability, the nature and quality of services provided to the Fund, and the conscientiousness and care of the Trustees' evaluation of the Advisory Fees. Consequently, the Court cannot say as a matter of law that Plaintiffs have failed to raise a genuine dispute as to whether Calamos "charge[d] a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining." Jones, 559 U.S. at 346. For the foregoing reasons, Calamos' moti on for summary judgment is GRANTED insofar as Calamos seeks to establish that Plaintiffs have failed to raise triable issues of fact related to economies of scale and fall-out benefits, and DENIED insofar as Calamos seeks judgment as a matter of law on the other Gartenberg factors and Section 36(b) liability generally. Moreover, the parties' Daubert motions are DENIED, as set forth above. The Clerk of the Court is respectfully directed to terminate the summary judgment motion, Doc. 65, and the Daubert motions, Docs. 88, 106, 109, 112, 115, 118. (Signed by Judge Edgardo Ramos on 9/30/2018) (mro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SAUL CHILL and SYLVIA CHILL, for the use and
benefit of the CALAMOS GROWTH FUND,
OPINION AND ORDER
Plaintiffs,
15 Civ. 1014 (ER)
- against CALAMOS ADVISORS LLC,
Defendant.

Ramos, D.J.:
Saul Chill and Sylvia Chill (“Plaintiffs”) are shareholders in the Calamos Growth Fund
(the “Fund”), a mutual fund advised and managed by Defendant Calamos Advisors LLC
(“Calamos”). Plaintiffs bring this action on behalf of and for the benefit of the Fund, pursuant to
the Investment Company Act of 1940, 15 U.S.C. § 80a–1 et seq. (the “ICA”). Plaintiffs allege
Calamos breached its fiduciary duty with respect to Calamos’ receipt of compensation for
investment-adviser services provided to the Fund. Calamos now moves for summary judgment
pursuant to Rule 56 of the Federal Rules of Civil Procedure. Doc. 65. In connection with the
motion, both parties have moved, pursuant to Daubert v. Merrell Dow Pharm., Inc., 509 U.S.
579 (1993), to exclude certain expert testimony. In particular, Calamos seeks to exclude
partially the testimony of two of Plaintiffs’ expert witnesses, see Doc. 88, and Plaintiffs seek to
exclude the testimony of five of Calamos’ expert witnesses, see Docs. 106, 109, 112, 115, 118.
For the reasons set forth below, Calamos’ summary judgment motion is DENIED in part and
GRANTED in part, and the parties’ Daubert motions are DENIED.

I. BACKGROUND
A. The Investment Company Act of 1940
The ICA regulates investment companies, including mutual funds. “A mutual fund is a
pool of assets, consisting primarily of portfolio securities, and belonging to the individual
investors holding shares in the fund.” Burks v. Lasker, 441 U.S. 471, 480 (1979). Typically, a
mutual fund is created by a separate entity called an investment adviser, which also selects the
fund’s board of trustees, manages the fund’s investments, provides the fund administrative
services, and markets the fund to shareholders, all in exchange for various fees paid out from the
fund’s assets. Jones v. Harris Assocs. L.P., 559 U.S. 335, 338 (2010); see also Daily Income
Fund, Inc. v. Fox, 464 U.S. 523, 536 (1984). Because the investment adviser is integral to the
fund’s existence and selects the fund’s board, often the fund “cannot, as a practical matter[,]
sever its relationship with the adviser. Therefore, 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.” Burks, 441 U.S. at 481 (quoting S. Rep. No. 91–184, at 5 (1969)). Consequently, a
report commissioned by the U.S. Securities and Exchange Commission (“SEC”) found that
“investment advisers often charged mutual funds higher fees than those charged [to] the
advisers’ other clients and further determined that the structure of the industry, even as regulated
by the [1940 version of the ICA], had proven resistant to efforts to moderate adviser
compensation.” Daily Income Fund, 464 U.S. at 537 (citing Wharton School Study of Mutual
Funds, H.R. Rep. No. 87-2274, at 28–30, 34, 66–67 (1962)).
Thus, in 1970 Congress added Section 36(b) to the ICA to check this structural conflict of
interest. Id. at 537–39. Of note, Section 36(b) adds two requirements to the ICA. First, the
statute requires that mutual funds be governed by a board of trustees, at least 40 percent of whom

2

must be independent and disinterested. See Burks, 441 U.S. at 482–83; 15 U.S.C. §§ 80a–
2(a)(19), 80a–10. The board of trustees, acting on behalf of the fund, is responsible for
negotiating, approving, and periodically evaluating the terms of any investment-management
agreements between the fund and its investment adviser(s). These responsibilities include
evaluating and approving any service fees charged to the fund by its investment adviser. See §§
80a–15(c), 80a–35(a)–(b).
Second, and most pertinent to this case, Section 36(b) “impose[s] upon investment
advisers a ‘fiduciary duty’ with respect to compensation received from a mutual fund, and
grant[s] individual investors a private right of action for breach of that duty.” Jones, 559 U.S. at
340 (citing § 80a–35(b)).
B. The Fund
Calamos is an investment adviser registered under the Investment Advisers Act of 1940,
15 U.S.C. § 80b-1 et seq., and has served as the investment adviser to a variety of clients,
including Calamos-sponsored “open-end” mutual funds (like the Fund); Calamos-sponsored
“closed-end” funds; private accounts held by institutions and individuals (“institutional” clients);
and mutual funds sponsored by other investment advisers, for which Calamos performs subadvisory services only (“sub-advisory” clients). Pls.’ Counter 56.1, Doc. 148, ¶ 1. 1 Calamos
serves as the investment adviser to sixteen open-end mutual funds, including the Fund, known
collectively as the Calamos Investment Trust (“CIT”). Id. ¶ 3. Each fund within the CIT has a
different investment objective and strategy. Id. The Fund has been in operation since 1990, and
its investment strategy focuses on equity securities issued by U.S.-based companies that possess
large and mid-sized market capitalization (over $1 billion) and that Calamos has identified as

1

Hereinafter, citations to the parties’ Rule 56.1 statements in this Opinion incorporate the evidentiary citations
contained therein.

3

offering “the best opportunities for growth.” Id. ¶ 4; see also Compl., Doc. 1, ¶ 37. Plaintiffs
have been shareholders in the Fund since July 2005. Pls.’ Counter 56.1 ¶ 5.
C. The Investment Management Agreement
Pursuant to an Investment Management Agreement (the “IMA”) entered into on
December 13, 2004, Calamos provides investment advisory services to each Fund within the CIT
in exchange for an agreed-upon annual fee (the “Advisory Fee”). See IMA, Decl. of David A.
Kotler in Supp. of Def.’s Mot. for Summ. J. (“Kotler Decl.”), Doc. 67, Ex. 40 at 00146341–50.
Specifically, the IMA requires Calamos to: “(i) furnish continuously an investment program of
each [f]und, (ii) determine . . . what investments shall be purchased, held, sold or exchanged by
each [f]und and what portion, if any, of the assets of each [f]und shall be held uninvested, and
(iii) make changes on behalf of the [CIT] in the investments of each [f]und,” and “also manage,
supervise and conduct the other affairs and business of the [CIT] and each [f]und thereof and
matters incidental thereto, subject always to the control of the [CIT Board of] Trustees and to the
provisions of . . . the [ICA].” Id. at 00146341–42. In practice, Calamos either provides those
services directly or monitors the provision of those services by contracted third parties.
However, in all cases, Calamos ultimately remains responsible for the provision of those
services. Pls.’ Counter 56.1 ¶¶ 18–21.
Calamos has also entered into another agreement with the CIT funds, namely, the
“Financial Accounting Services Agreement” (the “FASA”). See generally FASA, Kotler Decl.,
Ex. 41. Pursuant to the FASA, Calamos performs certain services for the CIT funds, including
the Fund, for an additional fee—in this case, approximately one basis point. 2 Id.

2

During oral argument regarding Calamos’ motion for summary judgment, counsel for Calamos represented that the
annual fee paid under the FASA was one basis point. See Summ. J. Oral Arg. Tr. at 28:18–29:7, 31:4–9. Counsel
for Plaintiffs did not object to this representation.

4

Notably, during the relevant period, 3 “in evaluating the nature, quality and extent of
[Calamos’] services to the Fund (and the other Calamos-sponsored mutual funds),” the CIT
Board of Trustees “did not seek to separate out the services [Calamos] provide[d] under the IMA
as opposed to the FASA or distinguish whether a particular service [wa]s provided pursuant to
one agreement or the other.” Pls.’ Counter 56.1 ¶ 81.
D. The Board of Trustees and the Annual 15(c) Process
In accordance with the ICA, the Fund is overseen by the CIT Board of Trustees
(hereinafter the “Board”). Id. ¶ 22. During all times relevant, the Board has been comprised of a
super-majority of “Independent Trustees”—i.e., either five or six trustees that are not
“interested,” as that term is defined under the ICA, see 15 U.S.C. § 80a-2(a)(19)—and one
interested trustee, Calamos’ Founder, Chairman, and Global Chief Investment Officer, John P.
Calamos, Sr. See Pls.’ Counter 56.1 ¶¶ 23–24. Although the parties dispute the length of their
experience in the financial services industry, there is no dispute that the Independent Trustees
are, in fact, independent and qualified. Id. ¶ 24. Stephen Timbers has been appointed the “Lead
Independent Trustee” each year since 2004. Id. And at all times relevant, the Independent
Trustees were represented and advised by an independent and experienced mutual fund counsel
team, headed by Paulita M. Pike, a lawyer currently in the Investment Management practice of
the law firm Ropes & Gray LLP. Id. ¶¶ 37–39.
Pursuant to the ICA, the Independent Trustees annually engaged in the so-called “15(c)
Process,” whereby they reviewed and voted to approve the IMA, and thus the Advisory Fees at

3

Under Section 36(b), plaintiffs cannot recover from an investment adviser damages “for any period prior to one
year before the action was instituted.” See 15 U.S.C. § 80a-35(b)(3). Here, in accordance with Section 36(b),
Plaintiffs challenge only the Advisory Fees paid by the Fund to Calamos as far back as February 11, 2014—one year
prior to the filing of their Complaint. See Pls.’ Counter 56.1 ¶ 22. The Board, however, approved the Advisory Fee
then in effect during the June 2013 Board meeting. See June 2013 Board Minutes, Kotler Decl., Ex. 27 at
00503423–27. Thus, unless otherwise stated, the Court considers relevant the period as far back as the June 2013
Board meeting through the present.

5

issue in this case, during the June Board meetings. In preparation for the 15(c) Process, the
Board met in person at least quarterly. Id. ¶¶ 29, 37; see 15 U.S.C. § 80a-15(c). In advance of
each meeting, the Board received from Calamos and various third parties a compendium of
written materials. Pls.’ Counter 56.1 ¶ 30. Those written materials included a

Id. The
Board then discussed several topics at the meetings; Calamos and third parties presented data to
the Board; and, while the parties dispute the extent of this, it is undisputed that the Board
engaged Calamos in some degree of questioning regarding the Fund’s performance, Calamos’
investment philosophy, and the structure of Calamos’ investment team. Id. ¶¶ 44–45.
The 15(c) Process formally begins when the Independent Trustees, through their counsel,
submit a “detailed set of written information requests to [Calamos] on topics pertinent to the
Independent Trustees’ annual review and consideration of the IMA.” Id. ¶ 49. This submission
is commonly referred to as the “15(c) Request.” Id. Among the information sought through the
15(c) Request is information relating to the so-called Gartenberg factors, which courts and the
SEC have deemed relevant to the 15(c) Process. Id. ¶ 50; see also Gartenberg v. Merrill Lynch
Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982). 4 Such information included: (a) “[t]he nature,
quality, and extent of the services provided” by Calamos to the Fund; (b) “the profitability to
[Calamos] and its affiliates from their relationship with the Fund”; (c) whether and, if so, to what
extent Calamos was “realizing and/or sharing economies of scale with Fund shareholders”; (d)

4

The Gartenberg factors are discussed more fully infra.

6

“[h]ow the Fund’s management fee structure compares with those of other similar funds”; (e) an
analysis of any “fall-out” benefits to Calamos (i.e., the collateral benefits that accrued to
Calamos “as a result of its relationship with the Fund”); (f) “the investment performance of the
Fund, as well as performance information for comparable funds and other clients of [Calamos]
following comparable strategies”; and (g) “the fees and other expenses paid by the Fund, as well
as fee information for other clients of [Calamos], (i.e., for sub-advisory and institutional clients)
who follow a strategy similar to the Fund.” Pls.’ Counter 56.1 ¶¶ 50–51.
Calamos typically takes

to respond to the 15(c) Request, although the

parties dispute how much of that time is spent actively preparing responses. Id. ¶ 53.
Ultimately, Calamos’ response—commonly referred to as the “15(c) Response”—consists of
hundreds of pages of information provided to the Independent Trustees approximately

-

prior to the June Board meeting. Id. Following a review of the information, the Independent
Trustees, through their counsel, periodically request supplemental information, which Calamos
must then provide. Id. ¶ 54. The Independent Trustees also receive detailed information from
independent third-party service providers regarding the performance of and fees charged to the
Fund, and the performance of and fees charged to numerous comparable mutual funds. Id. ¶ 55.
E. The Specific Information Provided to the Independent Trustees
Based on the considerations set forth below, each year the Independent Trustees
approved the IMA and the Advisory Fee the Fund paid to Calamos.

7

1. Comparative Fee Structures

The table below reflects the breakpoint-based, 5 marginal Advisory-Fee schedule charged
to the Fund throughout the relevant period. The Advisory Fee is set "as a percentage of the
Fund's total assets under man agement ("AUM"), and decreases as the total AUM increases." Id.

,I 103.

Average Net Assets
in Fund

Annual Fee

$0 - $500 million
$500 million - $1 billion
$1 billion - $6 billion
$6 billion - $ 11 billion
$ 11 billion - $ 16 billion
$16 billion - $21 billion
$21 billion - $26 billion
Over $26 billion

1.00%
.90%
.80%
.78%
.76%
.74%
.72%
.70%

Although the Advisory Fee has remained unchanged during the relevant p eriod, the Fee as a
percentage of the Fund's total AUM has increased because the Fund' s total AUM have decreased
each year since 2013 . Id. ,i 104.
The annual effective Adviso1 Fee paid by the Fund to Calamos during the relevant
y
period ranged from 80 to 86.9 basis points, generally fluctuating because of changes to the
Fund's AUM. Id. ,i 107. The lone exception came in 201 4, when the Independent Trnstees
approved a five-basis-point waiver to that year 's Advisory Fee, reducing the Fee to 78 basis
points from 83. Id. ,i 107 n. 158. The Fund's Advis01y Fee annually was

5

''Breakpoints" are staggered reductions in marginal fee rates that accompany marginal increases in assets under
management. Breakpoints are used to reflect the reduced marginal cost of providing investment advisory services to
a growing pool of assets, allowing shareholders to reap some economy-of-scale benefits via reduced fees.

8

6

Id. Indeed, dmi.ng the relevant period, the Fund 's Adviso1 Fee
y
Id.

Each year, Calamos also presented to the Independent Tm stees a documen t Id.

,r 110.

This presentation included,

among other things, a comparison of the Fund 's Advisory Fee to the standard range of fees
Calamos charged its institutional and sub-advis01y clients following the same broad investment
strategy. Id. Although Calamos provided the institutional and sub-advisory clients with the
same investment strategy as the Fund, Calamos charged them fees that were
Id.

,r 111 .

Calamos also provided the Independent Tm stees

info1
mation concerning the differences in services, costs, an d risks entailed in advising the Fund
as compared to advising Calamos ' institutional and sub-adviso1 clients. Id.
y

,r 109.

2. Nature and Quality of Services, i. e., Performance of the Fund

The Independent Tmstees also received info1
mation from Calamos revealing that the
Fund's perfo1man ce was poor, in both relative and absolute te1
ms, as compared to its own
benchmark and as compared to its peer funds. Id.

,r 87.

For example, at least from 2014 to 2016,

the Fund placed overwhelmingly in
Def. 's Resp. to Pis.' Statement of
Additional Material Facts ,r 385; id. App. D. Dming only one sh01t pe1
i.od did the Fund perfo1m
better than

Id.

9

Id. ¶¶ 184, 412; id. Appx. A.
During the relevant period, Calamos informed the Trustees of certain investments it was
making to improve the Fund’s performance. For example, purportedly in an effort to place
increased focus and resources to its management of the Fund, Calamos closed or reorganized
certain other Calamos-sponsored funds. Pls.’ Counter 56.1 ¶ 47(c). Calamos also informed the
Board of its efforts to improve the quality of the portfolio research and investment team and to
restructure its investment approach. Id. ¶ 90. As part of its effort to strengthen performance, in
February 2017 Calamos terminated and replaced the Fund’s lead portfolio manager. Id. ¶ 47(d).
3. Profitability and Economies of Scale

During the relevant period, the Trustees were well aware of Calamos’ pre- and postdistribution profit margin for both the Fund and the other Calamos-sponsored funds. Id. ¶ 131.

Each year, the Independent Trustees also asked Calamos for information concerning
whether it believed it had experienced, or in the future is likely to experience, economies of

10

scale; 7 whether it has shared any economies of scale with the Fund; and whether (and, if so, to
what extent) more breakpoints should be added to the IMA to account for any realized
economies of scale. Pls.’ Counter 56.1 ¶ 141; see also, e.g., Calamos’ 2014 15(c) Response,
Kotler Decl., Ex. 3 at 00519137–38. In response to these requests, Calamos consistently
informed the Trustees that it

Id.
What’s more, Calamos consistently maintained that it is
Calamos’ 2014 15(c) Response at 00519138; see
also Pls.’ Counter 56.1 ¶ 144.
For each of the years during the relevant period, the Independent Trustees’ board minutes
reflect that the Trustees considered whether the Fund’s Advisory-Fee schedule, including the
breakpoints contained therein, was appropriate in light of the potential economies of scale
realized by Calamos. Pls.’ Counter 56.1 ¶¶ 145, 147. And in at least some of the years, the
board minutes reflect that the Trustees considered the benefits accruing to shareholders from
Calamos’ investments into the Fund’s infrastructure and investment processes.
See, e.g., id. at ¶ 148.

7

“Section 36(b) was enacted in large part because Congress recognized that as mutual funds grew larger, it became
less expensive for investment advisers to provide the additional services. Congress wanted to ensure that investment
advisers passed on to fund investors the savings that they realized from these economies of scale.” Migdal v. Rowe
Price–Fleming Int’l, Inc., 248 F.3d 321, 326–27 (4th Cir. 2001) (citing Fogel v. Chestnutt, 668 F.2d 100, 111 (2d
Cir. 1981)).

11

4. Fall-Out Benefits

Each year, Calamos informed the Independent Trustees of the potential “fall-out benefits”
it enjoyed—i.e., the additional, non-fund sources of revenue accruing to Calamos as a result of
its relationship with the Fund. Id. ¶¶ 150–154.
II. PROCEDURAL BACKGROUND
Plaintiffs filed this action on February 11, 2015, pursuant to Section 36(b) of the ICA, 15
U.S.C. § 80a-35(b). Compl., Doc. 1, ¶ 2. In their Complaint, Plaintiffs challenged both the
Advisory Fees paid to Calamos and the distribution fees paid to the Fund’s distributor, Calamos
Financial Services LLC (“CFS”). 8 Id. On June 12, 2015, Calamos moved to dismiss both
claims. Doc. 14. On March 28, 2016, the Court denied that motion. Doc. 26. The parties
conducted discovery over the next 18 months.
On April 10, 2017, Plaintiffs voluntarily dismissed CFS with prejudice (and,
consequently, any challenge to distribution fees), pursuant to Rule 41(a)(1)(A)(ii) of the Federal
Rules of Civil Procedure. See Stipulation of Voluntary Dismissal with Prejudice, Doc. No. 53.
On October 13, 2017, Calamos filed the instant motion for summary judgment. Doc. 65. On
December 15, 2017, Calamos moved to exclude the opinions and testimony of Plaintiffs’ two
expert witnesses. Doc. 88. On February 9, 2018, Plaintiffs moved to exclude the opinions and
testimony of Calamos’ five experts. See Docs. 106, 109, 112, 115, 118. This Court held oral
argument on August 17, 2018.

8

CFS is an affiliate of Calamos and serves as the Fund’s distributor—that is, “the exclusive agent to sell and
distribute shares of the [Fund].” Pls.’ Counter 56.1 ¶ 2. Whereas the Fund paid Advisory Fees to Calamos pursuant
to the IMA, the Fund paid CFS “distribution fees” pursuant to a separate agreement.

12

III. DAUBERT MOTIONS
Rule 702 of the Federal Rules of Evidence governs the admissibility of expert testimony:
A witness who is qualified as an expert by knowledge, skill, experience, training,
or education may testify in the form of an opinion or otherwise if: (a) the expert’s
scientific, technical, or other specialized knowledge will help the trier of fact to
understand the evidence or to determine a fact in issue; (b) the testimony is based
on sufficient facts or data; (c) the testimony is the product of reliable principles and
methods; and (d) the expert has reliably applied the principles and methods to the
facts of the case.
Fed. R. Evid. 702. The party offering the testimony has the burden of establishing its
admissibility by a preponderance of the evidence. Bourjaily v. United States, 483 U.S. 171, 175–
76 (1987).
“As the Supreme Court explained in Daubert, Rule 702 requires the district court to
ensure that ‘any and all scientific testimony or evidence admitted is not only relevant, but
reliable.’” Ruggiero v. Warner-Lambert Co., 424 F.3d 249, 253 (2d Cir. 2005) (citing Daubert,
509 U.S. at 589). In interpreting Rule 702, district courts, under Daubert, may consider,
depending on the case, the following non-exhaustive list of factors to determine whether
evidence is sufficiently reliable: “[1] whether a theory or technique had been and could be tested,
[2] whether it had been subjected to peer review, [3] what its error rate was, and [4] whether
scientific standards existed to govern the theory or technique’s application or operation.” Nimely
v. City of New York, 414 F.3d 381, 396 (2d Cir. 2005). In Kumho Tire Co. v. Carmichael, 526
U.S. 137 (1999), “the Supreme Court held that the trial judge’s gatekeeping obligation applies
not only to testimony based on ‘scientific’ knowledge, as in Daubert, but also to testimony based
on ‘technical’ or ‘other specialized’ knowledge.” Zaremba v. Gen. Motors Corp., 360 F.3d 355,
358 (2d Cir. 2004).

13

“Daubert and its progeny,” however, “do not apply straightforwardly in the context of
bench trials.” 720 Lex Acquisition LLC v. Guess? Retail, Inc., No. 09 Civ. 7199 (AJN), 2014
WL 4184691, at *10 (S.D.N.Y. Aug. 22, 2014). In jury trials, Daubert requires trial judges to
serve in a “gatekeeping” role by “assur[ing] that the specialized testimony is reliable and
relevant” to “help the jury evaluate that foreign experience.” Kumho Tire Co., 526 U.S. at 141,
149 (emphasis added). In bench trials, however, “there is no possibility of prejudice, and no
need to protect the factfinder from being overawed by ‘expert’ analysis.” Victoria’s Secret
Stores Brand Mgmt., Inc. v. Sexy Hair Concepts, LLC, No. 07 Civ. 5804 (GEL), 2009 WL
959775, at *8 n.4 (S.D.N.Y. Apr. 8, 2009). Because of this distinction, “[w]hen the fact-finder is
the court, expert evidence should be quite freely admitted so that the judge may have the benefit
of live testimony and cross-examination to determine how much weight, if any, to give to the
expert’s conclusions.” Royal & Sun All. Ins. PLC v. UPS Supply Chain Sols., Inc., No. 09 Civ
5935, 2011 WL 3874878, at *2 (S.D.N.Y. Aug. 31, 2011) (internal quotation marks and citation
omitted); see also Van Alen v. Dominick & Dominick, Inc., 560 F.2d 547, 552 (2d Cir. 1977)
(“[O]rdinarily it may be the more prudent course in a bench trial to admit into evidence
doubtfully admissible records, and testimony based on them . . . .”).
Calamos seeks to exclude the opinions and testimony of two of Plaintiffs’ experts, and
Plaintiffs seek to exclude the opinions and testimony of five of Calamos’ experts. The Court will
deny, at this point, all of these challenges. “When the fact-finder is the court,” as is the case
here, “expert evidence should be quite freely admitted so that the judge may have the benefit of
live testimony and cross-examination to determine how much weight, if any, to give to the
expert’s conclusions.” Royal & Sun All. Ins. PLC, No. 09 C 5935, 2011 WL 3874878, at *2. If,
after live testimony, the Court concludes that any of the experts lack the proper qualifications or

14

offer unreliable opinions, the Court will give those opinions little or no weight in its decision.
Cf. In re Salem, 465 F.3d 767, 777 (7th Cir. 2006) (“Thus, where the factfinder and the
gatekeeper are the same, the court does not err in admitting the evidence subject to the ability
later to exclude it or disregard it if it turns out not to meet the standard of reliability established
by Rule 702.”); United States v. Flores, 901 F.3d 1150, 1165 (9th Cir. 2018) (same); United
States v. Wood, 741 F.3d 417, 425 (4th Cir. 2013) (same).
For the reasons set forth above, Plaintiffs’ and Calamos’ motions to exclude the
testimony and expert opinions are DENIED.
IV. MOTION FOR SUMMARY JUDGMENT
A. Standard of Review
Summary judgment is appropriate when “the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to summary judgment as a matter of
law.” Fed. R. Civ. P. 56(a). “An issue of fact is ‘genuine’ if the evidence is such that a
reasonable jury could return a verdict for the non-moving party.” Senno v. Elmsford Union Free
Sch. Dist., 812 F. Supp. 2d 454, 467 (S.D.N.Y. 2011) (citing SCR Joint Venture L.P. v.
Warshawsky, 559 F.3d 133, 137 (2d Cir. 2009)). A fact is “material” if it might affect the
outcome of the litigation under the governing law. Id. The party moving for summary judgment
is initially responsible for demonstrating the absence of any genuine issue of material fact.
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party meets its burden, “the
nonmoving party must come forward with admissible evidence sufficient to raise a genuine issue
of fact for trial in order to avoid summary judgment.” Saenger v. Montefiore Med. Ctr., 706 F.
Supp. 2d 494, 504 (S.D.N.Y. 2010) (internal quotation marks omitted) (citing Jaramillo v.
Weyerhaeuser Co., 536 F.3d 140, 145 (2d Cir. 2008)).

15

In deciding a motion for summary judgment, the Court must “construe the facts in the
light most favorable to the non-moving party and must resolve all ambiguities and draw all
reasonable inferences against the movant.” Brod v. Omya, Inc., 653 F.3d 156, 164 (2d Cir. 2011)
(citation omitted). However, in opposing a motion for summary judgment, the non-moving party
may not rely on unsupported assertions, conjecture or surmise. Goenaga v. March of Dimes
Birth Defects Found., 51 F.3d 14, 18 (2d Cir. 1995). Rather, “the non-moving party must set
forth significant, probative evidence on which a reasonable fact-finder could decide in its favor.”
Senno, 812 F. Supp. 2d at 467–68 (citing Anderson v. Liberty Lobby, 477 U.S. 242, 256–57
(1986)).
B. Governing Law for Section 36(b) Excessive Fee Claims
As noted above, Congress added Section 36(b) to the ICA “because it concluded
that . . . shareholders should not have to ‘rely solely on the fund’s directors to assure reasonable
adviser fees, notwithstanding the increased disinterestedness of the board.’” Kamen v. Kemper
Fin. Servs., Inc., 500 U.S. 90, 108 (1991) (quoting Daily Income Fund, 464 U.S. at 540).
Consequently, Section 36(b) provides in relevant part that “the investment adviser of a registered
investment company shall be deemed to have a fiduciary duty with respect to the receipt of
compensation for services, or of payments of a material nature, paid by such registered
investment company or by the security holders thereof, to such investment adviser or any
affiliated person of such investment adviser.” 15 U.S.C. § 80a-35(b).
“[T]o face liability under [Section] 36(b), an investment adviser must 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 arm’s length bargaining.” Jones v. Harris Associates L.P.,
559 U.S. 335, 346 (2010) (citing Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923,

16

928 (2d Cir. 1982)). Courts must look to all pertinent facts to determine whether fees are
excessive, including the factors set forth by the Second Circuit in Gartenberg:
The Gartenberg Court specifically identified several factors for consideration in
weighing “all pertinent” facts: (1) the nature and quality of services provided to the
fund shareholders; (2) the profitability of the fund to the advisor-manager; (3) fallout benefits; (4) economies of scale; (5) comparative fee structures; and (6) the
independence and conscientiousness of the trustees.
In re Davis N.Y. Venture Fund Fee Litig., No. 14 Civ. 4318 (LTS), 2015 WL 7301077, at *4 n.3
(S.D.N.Y. Nov. 18, 2015) (citing Gartenberg, 694 F.2d at 929–32); see also Amron v. Morgan
Stanley Inv. Advisors Inc., 464 F.3d 338, 340–41 (2d Cir. 2006).
Recognizing the important role disinterested trustees serve as “independent watchdogs”
of the mutual funds they oversee, Congress through the ICA “instructs courts to give board
approval of an adviser’s compensation ‘such consideration . . . as is deemed appropriate under all
the circumstances.’” Jones, 559 U.S. at 348 (quoting 15 U.S.C. § 80a-35(b)(2)). To that end,
Jones makes clear that “the standard for fiduciary breach under [Section] 36(b) does not call for
judicial second-guessing of informed board decisions.” Id. at 352. Indeed, Jones instructs courts
to refrain from “supplant[ing] the judgment of disinterested directors apprised of all relevant
information, without additional evidence that the fee exceeds the arm’s-length range.” Id. Put
differently:
[I]f 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. This is not to deny that a fee may be excessive
even if it was negotiated by a board in possession of all relevant information, but
such a determination must be based on evidence that the fee is so disproportionately
large that it bears no reasonable relationship to the services rendered and could not
have been the product of arm’s-length bargaining.
Jones, 559 U.S. at 351 (emphasis added) (internal quotation marks and citations omitted).
Ultimately, “[w]here a board’s process for negotiating and reviewing investment-adviser
17

compensation is robust, a reviewing court should afford commensurate deference to the outcome
of the bargaining process.” Id. at 351 (citation omitted). Likewise, “where the board’s process
was deficient or the adviser withheld important information, the court must take a more rigorous
look at the outcome.” Id. In the end, a court must focus on both procedure and substance. Id.
Here, Calamos contends that summary judgment is warranted because the undisputed
evidence shows that: (1) the Independent Trustees engaged annually in a robust 15(c) Process
and reached an informed and conscientious decision in approving Calamos’ Advisory Fee,
entitling the Trustees’ judgment to substantial deference; and (2) there are no genuine disputes of
fact with respect to the remaining Gartenberg factors. Def.’s Mem. of Law in Supp. of Mot. for
Summ. J. (“Def.’s S.J. Mot.”), Doc. 66, at 18.
Plaintiffs, for their part, maintain that triable issues of fact exist with respect to each
Gartenberg factor and with respect to the extent of deference owed, if any, to the Independent
Trustees’ approval of the Advisory Fees. See generally Pls.’ Mem. of Law in Opp. to Def.’s
Mot. For Summ. J. (Pls.’ S.J. Opp.), Doc. 76.
Below, the Court addresses the parties’ arguments in turn.
V. DEFERENCE TO BOARD APPROVAL
The Court begins by “calibrating the degree of deference” owed to the Independent
Trustees’ approval of the Advisory Fees. Jones, 559 U.S. at 352; accord Zehrer v. Harbor Cap.
Advisors, Inc., No. 14 C 00789, 2018 WL 1293230 (N.D. Ill. Mar. 13, 2018) (“The first phase of
review is to calibrate the degree of deference that should be given to the Board’s decision to
approve the fees.” (internal quotation marks and alterations omitted)).
Calamos argues that the “the indisputable evidence in this case shows that the business
judgment to annually approve the IMA was reached following a robust process by the Fund’s

18

independent and qualified trustees, and it is thus entitled to ‘considerable weight’ and
‘commensurate deference’ under Jones.” Def’s S.J. Mot. at 17 (quoting Jones, 559 U.S. at
351). 9 Plaintiffs, on the other hand, while not challenging the independence or qualifications of
the Independent Trustees, contend that the Trustees’ approval of the Advisory Fees is entitled to
minimal deference because they were not “fully informed about all the facts” and “did not
exercise care and conscientiousness” with respect to any of the Gartenberg factors. Pls.’ S.J.
Opp. at 27.
After reviewing the procedure and substance of the Independent Trustees’ 15(c) Process,
and in light of the Gartenberg factors, the Court concludes that deficiencies surrounding the
Trustees’ evaluation of the Advisory Fees preclude the Court from affording the Trustees’
judgment substantial deference as a matter of law—at least at this stage of the litigation.
Accordingly, the Court DENIES Calamos’ motion for summary judgment insofar as it urges the
Court to afford substantial deference as a matter of law to the Trustees’ judgment.
A. Alleged Deficiencies Involving the Trustees’ Evaluation of Comparative Fee
Structures
According to Plaintiffs, the Trustees’ process for evaluating comparative fee structures
was deficient in several respects.
1. Fees Paid by Comparable Clients

First, Plaintiffs contend that the Trustees received deficient information from Calamos
regarding the fees paid by Calamos’ comparable institutional and sub-advisory clients. As the
basis for their argument, Plaintiffs point out that the Independent Trustees specifically requested

9

Calamos acknowledges that the Court’s determination of deference owed to the Independent Trustees is not
dispositive in this case, given the sliding-scale nature of the inquiry. See Def.’s S.J. Mot. at 5 (“[Calamos] is not
arguing that the Independent Trustees’ evaluation of the Fund’s management fee[s] in and of itself, immunizes the
fees from any scrutiny.”).

19

from Calamos a

Pls.’ Counter 56.1 ¶ 108. Plaintiffs contend that Calamos
responded to this request by furnishing “misleading” information, given that:

-

Pls.’ S.J. Opp. at 28. Plaintiffs argue that
Calamos’ presentation rendered impossible a true comparison of the fees paid by Calamos’
comparable institutional and sub-advisory clients, and obscured the fact that

According to Plaintiffs,

Id. at 28–29.
Plaintiffs’ objection to Calamos’ response on this ground is unfounded. It is true that
Calamos did not provide the Trustees a

However, contrary to Plaintiffs’ protestations, Calamos
provided much more than the fee ranges of comparable clients. Indeed, Calamos provided the
Independent Trustees with the effective fee rate for the Fund, as well as an aggregate effective
fee rate for all of Calamos’ institutional and sub-advisory clients with AUMs over $25 million.

20

See Pls. ' Counter 56.1 ,i l l0(d)-(e). Moreover, this info1mation reveals that in 2015 , for
example, the Fund paid an effective fee rate
average effective fee rate
fee rate

ofl

ofl

ofl

basis points; institutional clients paid an

basis points; and sub-adviso1y accounts paid an average effective

basis points. See Calamos' 2016 15(c) Response, Deel. of Mark A. Strauss in Opp.

to Def's Mot. for Summ. J. ("Strauss Deel."), Doc. 77, Ex. 14 at 00535107-09. Thus, the
Tmstees were well aware that Calamos ' comparable institutional and sub-adviso1y clients were
paying fees

Pls.' S.J. Opp. at 28. That the infonnation was

displayed in a different fo1mat does not amount to a "deficien[cy]" or "with[o ]ld[ing]" of
"impo1tant infonnation" that would require the Comt to "take a more rigorous look at" the
Tmstees' dete1mination. Jones, 559 U.S. at 35 1. Consequently, Plaintiffs' contention that the
Independent Tmstees were misled with respect to whether Calamos adequately compared the
Fund's Adviso1y Fee to the fees paid by institutional and sub-adviso1 clients is unavailing.
y
Moreover, deposition testimony relied upon by Plaintiffs make clear that the Independent
Tmstees placed little stock in the comparative fee data they received because they believed that
an analysis of the fee disparities did not account for the differences in services Calamos provided
to the Fund vis-a-vis Calamos ' institutional and sub-advisory clients. For example, dming his
deposition, Independent Tmstee John Neal testified that comparative data on the fees charged to
the Fund and Calamos' institutional clients mattered very little to him:

- •-

21

-

***

-

Dep. of Independent Tmstee John Neal (''Neal Dep."), Strauss Deel., Ex. 47 at 114: 10-21,
115:3- 8. Independent Trnstee Stephen B. Timbers testified in a similar fashion:

-

Dep. of Independent Tmstee Stephen B. Timbers ("Timbers Dep."), Strauss Deel., Ex. 49 at
120:25- 121 :8.
In sum, Calamos presented the Independent Trnstees with sufficient info1
mation to
evaluate the disparity in fees between the Fund and Calamos ' institutional and sub-adviso1y
clients. Indeed, Plaintiffs conceded as much dm ing oral argument:
THE COURT:

Well, again, I'm just trying to understand all of this, but as I
understand it, the effective rate for the Fund was 85 [basis
points], con ect?

PLAINTIFFS:

C01Tect.

22

I ,according

THE COURT:

And the effective rate for institutional clients was
to [Calamos'] cha1t?

PLAINTIFFS:

The effective rate for all of the institutional clients, it's not clear
whether that's an average, whether that's a weighted average,
and that pe1tains to all the institutional clients that they had
across all strategies. It's not broken out for the [Fund] and it is
not clear what the total AUM that was on.

THE COURT:

PLAINTIFFS:

-

But even taking all of that, I mean,

CoITect.

THE COURT:

And the effective rate for the sub-advised funds was
then, even given all of your caveats,

PLAINTIFFS:

Conect.

THE COURT:

So, if nothing else, the Independent Trustees knew, even with
the incomplete info1mation, that the Fund was paying
substantially more than the other clients.

PLAINTIFFS:

That is conect.

Summ. J . Oral Arg. Tr. at 59:7- 60:4.
2. Service and Risk Differences Between Clients

Second, Plaintiffs contend that the Tmstees were given misleading and incomplete
info1mation with respect to alleged service and risk differences that justified the fee disparity.
As Plaintiffs tell it, the disparity in fees Calamos charges to the Fund vis-a-vis fees charged to
comparable institutional and sub-advis01y clients is unjustified because the portfolio
management services provided to the Fund, institutional clients, and sub-adviso1 clients alike
y
are vi1tually identical and constitute the "single most impo1tant se1
vice perfo1med for actively
managed mutual funds." Pis. ' S.J. Opp. at 7 (quoting John P. Freeman et al., Mutual Fund

Adviso1y Fees: New Evidence and a Fair Fiduciary Duty Test, 61 OKLA. L. REV. 83, 84
(2008)); id. at 30. Because Calamos did not provide the Tmstees with any quantitative or
23

qualitative information (other than its say-so) justifying its receipt of higher fees from the Fund
vis-à-vis Calamos’ institutional and sub-advisory clients, Plaintiffs argue that the Trustees had no
basis to conclude the Advisory Fees were warranted. Id. at 30. Put differently, Plaintiffs assert
that the Trustees displayed a lack of conscientiousness during their evaluation given that they
failed to inquire into why the Fund pays

of Calamos’ other clients for

what Plaintiffs assert are de minimis additional services.
In response, Calamos notes that Plaintiffs’ own experts concede that the services and
risks that Calamos undertakes for the Fund do differ, at least to some extent, from those Calamos
undertakes with respect to its other clients; and the same experts further concede that Jones does
not require fee parity between funds. See Def.’s S.J. Mot. at 27 n.122 (citing Dep. of Mercer E.
Bullard (“Bullard Dep.”) 74:5–12, 423:24–424:21, 433:19–434:24; Dep. of Steve Pomerantz
(“Pomerantz Dep.”) 279:16–24, 280:21–281:8, 312:10–313:5); see also Def.’s Reply, Doc. 91, at
11 n.49 (same). However, those admissions, standing alone, do not end the Court’s inquiry.
Tellingly, Calamos does not point the Court to record evidence indicating the
Independent Trustees engaged in a robust review of the differences in services rendered to the
Fund vis-à-vis Calamos’ non-Fund clients; nor does Calamos point to evidence demonstrating
that the Trustees were conscientious in their review of the little information they received.
Rather, Calamos relies almost exclusively on the same three slides from the
presentation it provided to the Trustees, which contains a
and appears virtually
verbatim in every annual 15(c) Response. See Pls.’ Counter 56.1 ¶ 112 n.178, 182, 184–185,

24

187–188; id. ¶ 189. Such information hardly establishes that the Trustees’ consideration of the
differences in services and risk was robust. 10
By contrast, and just by way of example, in In re BlackRock Mutual Funds Advisory Fee
Litigation, the district court there concluded that a board’s comparative analysis of services
provided to a fund and sub-advisory funds was entitled to substantial deference. --- F.3d ---, No.
14-1165 (FTW) (TJB), 2018 WL 3075916, at *17–20 (D.N.J. June 21, 2018). In reaching that
conclusion, the district court noted that the board considered “[f]ee [c]omparison [m]emoranda”
that included a comprehensive checklist of the various services provided to the fund, detailed
qualitative analysis of how the services provided to the fund differed from those provided to
Blackrock’s sub-advisory funds, and “provided the estimated costs of providing the listed
services in separate presentations to the Board.” Id. at *19.
Here, while the ICA “does not necessarily ensure fee parity between mutual funds and
institutional clients,” Jones, 559 U.S. at 350, the lack of evidence indicating that the Independent
Trustees conscientiously considered the differences in services and risk between the Fund and
Calamos’ other clients suggests that the Trustees’ 15(c) Process was deficient in its evaluation of
the Advisory Fees. In pushing for summary judgment, Calamos cannot persuasively maintain

10

Calamos also correctly notes that Plaintiffs’ expert, Mercer Bullard, approvingly cites a 2006 publication of the
Investment Company Institute, which explains that “[m]utual funds and institutional accounts are very different
investment products” because they “operate under different legal and regulatory structures, and have different
business risks.” Def.’s Reply at 12 n.50 (quoting Investment Company Institute, “Mutual Funds and Institutional
Accounts: A Comparison,” (2006), at 1 (available at https://www.ici.org/pdf/ppr_06_mf_inst_comparison.pdf)). Of
course, the aforementioned statement is neither novel nor controversial. See Jones, 559 at 350 n.8 (“[A] showing of
relevance requires courts to assess any disparity in fees in light of the different markets for advisory services.”).
What is novel and controversial, however, is the notion seemingly advanced by Calamos—that Section 36(b) allows
for Independent Trustees to rely solely on their business judgment and intuition in approving the Fund’s Advisory
Fees, without regard to any sort of comparative data between the Fund’s fees and non-Fund fees in light of the
actual differences in risks incurred and services rendered by Calamos. Accepting such a view would render Section
36(b) purposeless, given that Congress could have simply prescribed dispositive deference to board approval of
advisory fees. Moreover, this view runs counter to the accepted fact that “scrutiny of investment adviser
compensation by a fully informed mutual fund board is the cornerstone of the [ICA’s] effort to control conflicts of
interest within mutual funds.” Jones, 559 U.S. at 348 (emphasis added) (internal quotation marks and alteration
omitted).

25

that the Trustees found irrelevant the disparity in fee rates charged to the Fund vis-à-vis
Calamos’ institutional and sub-advisory clients due to differences in services and risks, yet at the
same time maintain that the Trustees need not have received actual evidence detailing the
differences in services and risks. Cf. Gallus v. Ameriprise Fin., Inc., 675 F.3d 1173, 1180 (8th
Cir. 2012) (affording “less deference” to board’s approval of advisory fee when board of
directors “was not apprised of all relevant information regarding the fee discrepancy between
Ameriprise’s mutual fund and institutional clients” (emphasis added)).
3. Insufficient Consideration of Data

Third, and finally, Plaintiffs contend that the Independent Trustees did not
conscientiously consider the peer fund information proffered by Calamos. Specifically,
Plaintiffs take issue with the Trustees’ observation that the Advisory Fees were

-

-

relative to its peers. Pls.’ S.J. Opp. at 31 (citation omitted). It appears that Plaintiffs

would have preferred the Trustees to recognize that “the Fund’s fees stand out at the highest end
of the range relative to its peer,” and not simply

Id. The Court finds

Plaintiffs’ argument on this point unavailing. It is undisputed that the Trustees were provided
detailed fee comparison data from industry-recognized, third-party sources; and it is undisputed
that the data indicated the Fund’s fee placement relative to its peers. See Pls.’ Counter 56.1 ¶¶
87, 94–100, 105–107, 114–25.
***
In sum, the Court concludes that Plaintiffs have produced evidence to raise a genuine
dispute of material fact with respect to the care and conscientiousness of the Independent
Trustees’ evaluation process. In particular, the Trustees’ process in evaluating comparative fee
structures, while thorough in several respects, exhibited material deficiencies in other respects.

26

Accordingly, at this stage in the litigation the Court is unable to afford, as a matter of law,
substantial deference to the Trustees’ approval of the Fund’s Advisory Fees.
B. Alleged Deficiencies Involving the Trustees’ Evaluation of Profitability
Plaintiffs contend that the Independent Trustees’ review of the Fund’s profitability was
deficient because Calamos’ presentations on this point materially understated the Fund’s
profitability. Pls.’ S.J. Opp. at 30–31. The Court finds this contention wholly lacking in merit,
as it rests almost entirely on Plaintiffs’ disapproval of Calamos’ use of an

cost-

allocation method to analyze profitability—a method Plaintiffs recognize is commonly accepted
within the industry. See Pomerantz Dep. 208:21–209:19 (recognizing

for

cost allocation). Moreover, as discussed above, see supra Part I.E.3, the Independent Trustees
were fully informed about Calamos’ profitability methodology, thoroughly discussed the impact
that methodology would have on the profitability figures Calamos reported vis-à-vis alternative
methodologies, and formally approved of Calamos’ use of that methodology, see Pls.’ Counter
56.1 ¶¶ 131–36. As another court aptly stated, “Plaintiffs may disagree with the [Trustees’]
evaluation of the information, but that disagreement does not raise a triable issue of fact
regarding the [Trustees’] diligence where it is undisputed that plaintiffs’ preferred method was
considered and rejected.” Zehrer, 2018 WL 1293230, at *9.
C. Alleged Deficiencies Involving the Trustees’ Evaluation of Economies of Scale
Plaintiffs next allege that the Trustees’ evaluation of economies of scale was deficient. In
particular, Plaintiffs contend that Calamos’ presentations to the Trustees, in which it maintained
that any economies of scale realized were shared adequately with the Fund’s shareholders
(through breakpoints, for example) lacked any quantitative basis. Pls.’ S.J. Opp. at 32. The
Court disagrees.

27

While Plaintiffs take issue with the Trustees accepting Calamos’ economies-of-scale
representations, Plaintiffs cannot seriously contend that the Trustees failed to engage in a robust
review of the myriad data they received from Calamos. Nor can Plaintiffs seriously contend that
Calamos withheld important information from the Trustees. Moreover, while Plaintiffs make
much of the fact that

-

computations quantifying economies of scales potentially realized by Calamos, id. at

33, the Court finds the Trustees’ actions (or lack thereof) unremarkable, given the Trustees’
knowledge that the Fund’s AUM had been declining steadily, year after year.
Plaintiffs further contend that Calamos misled the Independent Trustees when it told
them that, to the extent it realized economies of scale, such economies were shared adequately
with the Fund’s shareholders through “significant investments” to the Fund’s portfolio
management and research teams. Specifically, Plaintiffs suggest that Calamos’ representations
were lies per se because

-

Id. at 33. The Court disagrees. For one thing, the addition of personnel is one of many

types of “significant investments” that can be made by an investment adviser to its research and
management teams, not the only type. Moreover, even assuming Plaintiffs’ claim of downsizing
to be true, the Trustees could very well have concluded that Calamos “added by subtracting”
with respect to personnel and reorganization, so to speak. Therefore, on this point, Plaintiffs fail
to show either a deficiency in the Trustees’ evaluation of economies of scale or a withholding of
material information by Calamos.

28

D. Alleged Deficiencies Involving the Trustees’ Evaluation of the Nature and
Quality of Calamos’ Services
Plaintiffs challenge the Independent Trustees’ evaluation of the nature and quality of
services provided to the Fund. Specifically, Plaintiffs contend that the Trustees’ evaluation
failed to distinguish the services Calamos furnished pursuant to the IMA from the services it
furnished pursuant to the FASA. Id. at 33–34. As one Independent Trustee acknowledged, the
Trustees

Decl.
of John Neal, Kotler Decl., Ex. 71 at ¶ 17. Plaintiffs note that the Advisory Fee is provided in
exchange for work done pursuant to the IMA, and Calamos receives an additional fee for
services provided pursuant to the FASA. Consequently, Plaintiffs contend the Trustees should
have analyzed the nature of services provided in support of the IMA only, and should not have
“bundled” those services with services funded through the FASA.
In response, Calamos contends that “the IMA itself obligates [Calamos] to provide all of
the services required by the Fund, regardless of their classification by Plaintiffs.” 11 Def.’s S.J.
Mot. at 33. Calamos notes further that the Advisory Fee for services pursuant to the IMA is 80
times greater than the FASA fee. Id. In Calamos’ view, given the small size of the FASA fee
relative to the Advisory Fee, as well as Calamos’ obligation to provide all services required by
the Fund even absent FASA, the Trustees acted appropriately in failing to distinguish the
services rendered pursuant to each contract. Id. at 33–34.
The Court agrees with Plaintiffs that “[Section] 36(b) requires that transactions be
considered separately and not aggregated.” Pls.’ S.J. Opp. at 34; accord Zehrer, 2018 WL
11

Plaintiffs dispute this assertion.

29

1293230, at *10 (“[T]he legislative history of § 36(b) suggests that the key consideration [in
evaluating the nature and quality of the services provided to a fund] is what services were
secured by the fee paid.” (emphasis added)); In re Blackrock, 2018 WL 3075916, at *25
(denying summary judgment to defendants when parties presented conflicting evidence
concerning whether investment adviser provides certain services under the IMA in exchange for
the advisory fee at issue, “as opposed to under separate agreements in exchange for separate
fees”); Kasilag v. Hartford Inv. Fin. Servs., LLC, No. 11-1083 (RMB/KMW), 2017 WL 773880,
at *19 (D.N.J. Feb. 28, 2017) (“This is a challenge of the investment management fee that
Defendants collected; that fee was paid pursuant to the IMAs. As such, the Court will consider
all services provided under the IMAs for that fee, whether Defendants performed them or hired
others to fulfill their obligations.” (emphasis added)), aff’d, No. 17-1653, 2018 WL 3913102 (3d
Cir. Aug. 15, 2018). Moreover, Plaintiffs have proffered evidence suggesting the Trustees failed
to consider the excessiveness vel non of the Advisory Fees in light of the services provided
pursuant to those fees. See supra Part V.A. Consequently, the Court concludes that Plaintiffs, at
the very least, have raised genuine questions of material fact with respect to whether the
Independent Trustees exhibited a lack of conscientiousness when it evaluated Calamos’ services
in a “bundled” fashion.
Plaintiffs also challenge the Trustees’ evaluation of the quality of services Calamos
provided to the Fund, but do not allege either that Calamos withheld pertinent information on
this point from the Trustees or that the Trustees failed to consider Calamos’ performance data.
Accordingly, the Court deems proper the Trustees’ process as to this factor.

30

E. Alleged Deficiencies Involving the Trustees’ Evaluation of Fall-Out Benefits
Plaintiffs contend that the Independent Trustees’ evaluation of fall-out benefits “suffered
from nondisclosure.” Pls.’ S.J. Opp. at 34. In particular, Plaintiffs contend that Calamos failed
to disclose “any information about the main fall-out benefit received—the millions of dollars in
fees generated by cloning the Fund’s portfolio for the [institutional and sub-advisory accounts
that were invested in the same investment strategy].” Id. Plaintiffs further contend that the
Trustees displayed a lack of conscientiousness when it did not inquire about this potential fallout benefit.
The Court disagrees. As Calamos points out, revenues from advising institutional and
sub-advisory clients do not constitute a fall-out benefit “under any definition utilized in a Section
36(b) case, as confirmed by the rejection of precisely this same argument in Gallus.” Def.’s
Reply at 15; see also Gallus v. Ameriprise Fin., Inc., 497 F. Supp. 2d 974, 981 (D. Minn. 2007),
rev’d and remanded on other grounds, 561 F.3d 816 (8th Cir. 2009), cert. granted, judgment
vacated, 559 U.S. 1046 (2010), and order reinstated sub nom. Gallus v. Am. Exp. Fin. Corp.,
2010 WL 5137419 (D. Minn. Dec. 10, 2010), aff’d, 675 F.3d 1173 (8th Cir. 2012). Moreover,
Plaintiffs do not dispute that Calamos proffered, and the Trustees considered, several other fallout benefits Calamos may have accrued by virtue of its relationship to the Fund. See Pls.’
Counter 56.1 ¶¶ 150–54. With these facts in mind, the Court cannot find error in the
Independent Trustees’ evaluation of this Gartenberg factor.
F. Other Alleged Deficiencies in the Rule 15(c) Process
In addition to purported deficiencies in the Trustees’ evaluation of the Gartenberg
factors, Plaintiffs contend that the Trustees also failed to negotiate with Calamos. This argument
can be easily dismissed. It is well settled that Section 36(b) does not require negotiation between

31

a board of trustees and fund investment adviser. See, e.g., Zehrer, 2018 WL 1293230 at *7
(“Even if the Board might have driven a harder bargain, the legal standard does not require
that.”); In re BlackRock, 2018 WL 3075916, at *16 (“Plaintiffs’ arguments regarding the Board’s
process for negotiating fees are unavailing, because the ICA does not impose a duty on the board
of directors of a mutual fund to negotiate the lowest possible advisory fee as compensation for an
investment adviser’s services, and thus, the Board’s purported failure to secure the lowest fees
for the Funds’ shareholders provides no basis for undermining the Board’s decision to approve
BRA’s Advisory’s Fee.”)
***
For the reasons aforementioned, the Court concludes that the Trustees’ evaluation of the
Advisory Fees, while robust and informed in many respects, suffered from material deficiencies
in process and substance. Consequently, while the Court will afford appreciable weight to the
Trustees’ consideration and subsequent approval of the Advisory Fees, the Court nonetheless
“must take a more rigorous look at the outcome.” Jones, 559 U.S. at 351.
VI. THE GARTENBERG FACTORS
As mentioned above, the touchstone of Section 36(b) liability is whether Calamos’
Advisory Fee is so disproportionately large that it bears no reasonable relationship to the services
rendered and could not have been the product of arm’s length bargaining. See Jones, 559 U.S. at
346. In making this assessment, courts are to take into consideration “all pertinent facts,”
including facts relevant to the Gartenberg factors. Id. at 344–45. “Given the inherently factsensitive nature of the Gartenberg analysis, of those few cases that have reached the summary
judgment stage with regard to § 36(b) claims, even fewer courts have granted summary
judgment.” In re Blackrock, 2018 WL 3075916, at *21. Ultimately, because the Court finds

32

triable issues of material fact with respect to comparative fee structures, the nature and quality of
services provided to the Fund, and the Fund’s profitability, Calamos’ summary judgment motion
will be denied.
A. Comparative Fee Structures
The first Gartenberg factor that Calamos addresses is comparative fee structures. On this
factor, Calamos offers three reasons why Plaintiffs have failed to produce a genuine issue of
material fact tending to show that the Fund’s Advisory Fee is excessive. Def.’s S.J. Mot. at 23,
28–29. None is persuasive.
First, Calamos contends that there is no triable issue of material fact relating to
comparative fee structures because Plaintiffs have “refused” to define the arm’s-length
bargaining range for the Fund’s Advisory Fee. In response, Plaintiffs argue that Jones and
Gartenberg make clear that plaintiffs challenging excessive fees under Section 36(b) do not need
to point to a numerical range of fees per se to establish whether the challenged fee is so
disproportionately large that it could not have been the product of arm’s length bargaining. The
Court agrees. See Jones, 559 U.S. at 352 (“In reviewing compensation under § 36(b), the Act
does not require courts to engage in a precise calculation of fees representative of arm’s-length
bargaining.”). Therefore, to the extent Calamos contends that Plaintiffs must proffer a number
(or a range of numbers) above which the Advisory Fee is excessive per se, the Court expressly
rejects such contention. And, in any event, Plaintiffs do posit a range of fees to compare with the
Fund’s Advisory Fee. Specifically, Plaintiffs cite the fees charged to Calamos’ institutional and
sub-advisory clients—or, as described by Plaintiffs, Calamos’ “non-captive, arm’s length
clients”—as the “benchmark for reviewing challenged fees.” See Pls.’ S.J. Opp. at 11 (citing
Jones, 559 U.S. at 347); Resps. & Objs. to Pls.’ Interrogs., Doc. 77, Ex. 59 at 4. For example,

33

Plaintiffs point to discovery produced by Calamos indicating that Calamos charged those clients

See Summ. J. Oral Arg. Tr. at 45:10–46:3; see also Pls.’ Statement of Additional Material Facts,
Doc. 77, ¶¶ 217–20. From the outset of the lawsuit, Plaintiffs have maintained that the gross
disparities in fees charged to Calamos’ “captive” funds vis-à-vis its “non-captive” clients
utilizing comparable investment strategies and services reflect a lack of arm’s-length bargaining
with the former. Plaintiffs’ reliance on fees charged to Calamos’ other clients to establish a
benchmark for reviewing the Advisory Fee is thus proper at this stage in the litigation. Of
course, at trial Plaintiffs will still bear the burden of proving that their benchmark is probative to
the question whether Fund’s Advisory Fee is excessive.
Second, while Calamos concedes that the Fund’s Advisory Fee is higher than the fee it
typically charges its institutional and sub-advisory clients, Calamos argues that it provides a
greater level of services and undertakes a greater set of risks with respect to the Fund, making a
fee comparison between the Fund and Calamos’ non-Fund clients “inapt” in this case. Def.’s
S.J. Mot. at 29. What is more, Calamos point to a bevy of case law rejecting comparisons
between mutual funds and non-mutual fund clients. Id. at 30 (citing Kalish v. Franklin Advisers,
Inc., 742 F. Supp. 1222, 1237 (S.D.N.Y. 1990), aff’d, 928 F.2d 590 (2d Cir. 1991); Krinsk v.
Fund Asset Mgmt., Inc., 715 F. Supp. 472, 486 (S.D.N.Y. 1988), aff’d, 875 F.2d 404 (2d Cir.
1989); Schuyt v. Rowe Price Prime Reserve Fund, Inc., 663 F. Supp. 962, 974 n.38 (S.D.N.Y.
1987, aff’d, 835 F.2d 45 (2d Cir. 1987); Gallus, 497 F. Supp. 2d at 982); see also Goodman v.
J.P. Morgan Inv. Mgmt., Inc., 301 F. Supp. 3d 759, 770–74 (S.D. Ohio 2018).
Calamos’ argument has some merit. In Gartenberg, for example, the Second Circuit
rejected comparisons between fees charged by an adviser to a money market fund versus fees it

34

charged to a pension fund, noting that “[t]he nature and extent of the services required by each
type of fund differ sharply,” and crediting the district court’s conclusion that the pension fund in
question “d[id] not face the myriad of daily purchases and redemptions throughout the nation
which must be handled by the [money market fund].” 694 F.2d at 930 n.3. Similarly, the
Supreme Court in Jones noted that “[c]omparisons with fees charged to institutional
clients . . . will not doom any fund to trial” absent evidence by plaintiffs showing “a large
disparity in fees that cannot be explained by the different services in addition to other evidence
that the fee is outside the arm’s length range.” 559 U.S. at 350 n.8 (emphasis added) (internal
quotation marks and citation omitted). Thus, Calamos is correct insofar as it asks this Court to
reject fee comparisons between the Fund and non-Fund clients given the differences in services
provided and risks undertaken by Calamos.
The flaw in Calamos’ argument, however, is that the difference in services and risks are
disputed, and Plaintiffs have produced sufficient evidence raising a triable fact as to whether
such differences in services exist and are material, as opposed to de minimis. Naturally,
Plaintiffs maintain that there are triable issues of fact related to whether Calamos’ claimed
service and risks differences are “illusory.” Pls.’ S.J. Opp. at 7. And Plaintiffs have produced
voluminous evidence in support. For example, Plaintiffs produced evidence suggesting the
administrative and legal services provided to the Fund by Calamos are furnished pursuant to
FASA, not the IMA; the non-Fund clients actually received more “shareholder services” from
Calamos than the Fund received; and the “entrepreneurial risks” undertaken by Calamos in
managing the Fund are negligible. See Pls.’ S.J. Opp. at 10, 13–14.
Moreover, as noted in this Court’s previous opinion on Calamos’ motion to dismiss, the
Supreme Court in Jones explicitly rejected a categorical rule prohibiting comparisons to

35

institutional-client fees and instead instructed courts to give those comparisons “the weight that
they merit in light of the similarities and differences between the services that the clients in
question require.” Jones, 559 U.S. at 349–50. And, unlike the instant dispute, the myriad cases
cited by Calamos in which courts rejected comparisons between mutual funds and non-funds
involve findings made either following a bench trial, see, e.g., Kalish, 742 F. Supp. at 1249, or
where differences in services and risks were uncontroverted, see, e.g., Goodman, 301 F. Supp. 3d
at 770–72.
Of course, if at trial the Court determines that “the services rendered are sufficiently
different that a comparison is not probative” then the Court “must reject such a comparison.”
Jones, 559 U.S. at 350. However, this fact-intensive inquiry concerning disputed facts is best
reserved for trial. See In re Blackrock, 2018 WL 3075916, at *26 (“Finally, Defendants’ argument
that BRA’s and BRIM’s subadvisory services are not comparable, because of the different
entrepreneurial, reputational, legal, and regulatory risks assumed by BRA, is too fact intensive to
be decided on summary judgment.”); Kasilag v. Hartford Inv. Fin. Servs., LLC, No. 11-1083
(RMB/KMW), 2016 WL 1394347, at *18 (D.N.J. Apr. 7, 2016) (declining to award summary
judgment to defendant investment adviser on comparative fees factor because “[i]f a jury were to
find that th[e challenged] fee exceeded an arm’s length fee . . . in combination with resolving other
factual disputes in Plaintiffs’ favor, such findings could override the substantial deference given
to the Board’s result”).
Third, and finally, Calamos argues that the Fund’s Advisory Fees cannot be deemed
excessive under any set of circumstances because they fall within the range of fees assessed by
funds in their peer group. Def.’s S.J. Mot. at 28. In response, Plaintiffs concede that the Fund’s
Advisory Fee is within the range of fees charged to peer mutual funds by other investment

36

advisors but nevertheless argue that “the Fund’s fees stand out at the highest end of the range”
and therefore urge the Court not to place much stock in this comparison. Pls.’ S.J. Opp. at 14.
The Court agrees with Plaintiffs insofar as they argue that fee placement among peers is not
dispositive.
Nowhere in Jones does the Supreme Court state that an investment adviser’s fees are
insulated from review if the fees fall within the range charged by third-party investment advisers
to comparable third-party funds. To the contrary, both Jones and Gartenberg make clear that
“the test is essentially whether the fee schedule represents a charge within the range of what
would have been negotiated at arm’s-length in the light of all of the surrounding circumstances.”
Jones, 559 U.S. at 344 (emphasis added) (quoting Gartenberg, 694 F.2d at 928). Indeed, the
Supreme Court in Jones explained that “courts should not rely too heavily on comparisons with
fees charged to mutual funds by other advisers. These comparisons are problematic because
these fees, like those challenged, may not be the product of negotiations conducted at arm’s
length.” Jones, 559 U.S. at 350–51. The Second Circuit in Gartenberg similarly expressed
skepticism at such comparisons, noting that “if rates charged by the many other advisers were an
affirmative competitive criterion, there would be little purpose in § 36(b).” Gartenberg, 694
F.2d at 929; see also id.at 929–30 (expressly rejecting the district court’s conclusions that “[t]he
market price . . . serves as a standard to test the fairness of the investment advisory fee” in part
because “the existence in most cases of an unseverable relationship between the adviser-manager
and the fund it services tends to weaken the weight to be given to rates charged by advisers of
other similar funds”). Here, the placement of the Fund’s Advisory Fee vis-à-vis the Fund’s peer
group hardly comprises all the surrounding circumstances relevant. Consequently, while the
Court “do[es] not suggest that rates charged by other adviser-managers to other similar funds are

37

not a factor to be taken into account,” id. (emphasis added), the Court rejects Calamos’ argument
insofar as it asks this Court to afford dispositive weight to the placement of the Advisory Fee
among the range of fees charged by other advisers to other funds.
Nonetheless, the problematic nature of comparative fee data strikes both ways. Hence,
Plaintiffs will be hard-pressed to prevail at trial merely by demonstrating solely that the
challenged Advisory Fees are higher, even much higher, than those charged to Calamos’
comparable institutional and sub-advisory clients; nor can Plaintiffs prevail by demonstrating
solely that the Fees are higher, even much higher, than those charged by third parties to peer
funds. It is neither the province nor the duty of federal courts to “assess the fairness or
reasonableness of advisers’ fees; the goal is to identify the outer bounds of arm’s length
bargaining and not engage in rate regulation.” Paskowitz v. Prospect Cap. Mgmt. L.P., 232 F.
Supp. 3d 498, 501 (S.D.N.Y. 2017) (quoting Jones v. Harris. Assocs. L.P. (Jones II), 611 F.
App’x 359, 360 (7th Cir. 2015)). Consequently, as mentioned above, at trial Plaintiffs must do
more than simply establish a disparity in fees assessed to peer funds to prove a Section 36(b)
violation.
B. Economies of Scale
“[T]o show economies of scale, [P]laintiff[s] [bear] the burden of proving that the per
unit cost of performing Fund transactions decreased as the number of transactions increased.”
Krinsk v. Fund Asset Mgmt., Inc., 875 F.2d 404, 411 (2d Cir. 1989). Here, Plaintiffs contend that
triable issues of fact exist with respect to economies of scale realized by Calamos. Specifically,
Plaintiffs contend that Calamos’ conclusion that it did not realize economies of scale rests on a
flawed assumption—namely,
Pls.’ S.J. Opp. at 18. To support their view, Plaintiffs

38

rely on a logarithmic model tendered by their expert Steve Pomerantz, which purports to show
that “over the entire Damages Period, Calamos passed on cost savings to Fund investors of
nearly

-

, but retained nearly

-

in cost savings for itself.” Pomerantz Report

at 225. Pomerantz also opines that “[e]ven though the Fund has decreased in size, it still enjoys
enormous economies of scale” resulting from its historic growth. Pomerantz ultimately
concludes, “As a result, the benefits of economies of scale in Calamos’ costs accrue to Calamos
at extremely high profits, with net margins far exceeding those identified in the 15c Profitability
Presentations.” Id. at 227.
Calamos asserts that Pomerantz’s model is insufficient alone to create a triable issue of
fact because: (1) the Fund decreased in size each year within the relevant period, and therefore
economies of scale could not exist; (2) Plaintiffs fail to produce evidence tending to prove that
the per unit cost of performing Fund transactions decreased as the number of transactions
increased; and (3) even assuming economies of scale were realized, Plaintiffs fail to establish
why the existing breakpoints contained within the Fund’s fee schedules inadequately shared the
cost savings. After considering both sides, the Court agrees with Calamos that Plaintiffs have
produced deficient proof as to economies of scale.
At the outset, the Court notes that although the Fund shrank in size throughout the
relevant damages period here, this fact alone does not foreclose Plaintiffs’ argument that

Pls.’ S.J. Opp. at 19. While Section 36(b) provides that “[n]o award
of damages shall be recoverable for any period prior to one year before the action was
instituted,” 15 U.S.C. § 80a-35(b), “recognizing that statistical trends outside the one-year period
may, in some instances, demonstrate excessive fees within the relevant time period, various

39

courts have permitted plaintiffs to present evidence of economies of scale beyond the one-year
period preceding the commencement of a § 36(b) action,” In re Blackrock, 2018 WL 3075916, at
*30 (citation omitted) (collecting cases). The Court agrees with the logic of this approach. In
this case, Plaintiffs’ expert Steve Pomerantz points to the historic growth of the Fund and
contends that Calamos has shared only

-

of the approximately

-

of savings

resulting from economies of scale with the Fund’s shareholders. See Pls.’ S.J. Opp. at 18–20.
Such a fact, if proven, would be material to the question whether Calamos’ Advisory Fees are
excessive given the economies of scales realized. For that reason, whereas the Court agrees with
Calamos’ statement that “it belies common sense to conclude that a fund with a rapidly declining
AUM during the Relevant Period actually realized any meaningful new economies of scale
during that period,” Def.’s S.J. Mot. at 25 n.117 (emphasis added), this statement is a red
herring—totally irrelevant to Plaintiffs allegation that Calamos continues to benefit from old
economies of scale unshared with the Fund, see Pls.’ S.J. Opp. at 19. 12
That being said, the Court concludes that Plaintiffs have failed to produce admissible
evidence showing that the per-unit cost of performing Fund transactions decreased as the number
of transactions increased. It is well settled that “economies of scale cannot be inferred solely
from the fact that operating expenses declined at a time when the at-issue fund’s assets grew.” In
re Blackrock, 2018 WL 3075916, at *30 (citing Kalish, 742 F. Supp. at 1238). “Such an
inference . . . would disregard th[e] fact that ‘costs can change for many reasons other than
economies of scale,’ such as technological changes, falling input prices, or a change in the level
of service provided by an adviser.” Id. (quoting In re Am. Mut. Funds Fee Litig., No. CV 04-

12

However, the Court notes, “Though it may be possible in certain circumstances to demonstrate the existence of
excessive fees by using statistical trends that do not fall squarely within the applicable one-year time period, . . . this
approach weakens Plaintiffs’ economies of scale argument considerably.” In re AllianceBernstein Mut. Fund
Excessive Fee Litig., No. 04 Civ. 4885 (SWK), 2006 WL 74439, at *2 (S.D.N.Y. Jan. 11, 2006).

40

5593 GAF (RNBx), 2009 WL 5215755, at *28 (C.D. Cal. Dec. 28, 2009)). Rather, “to meet
their burden, Plaintiffs must make a substantive allegation regarding the actual transaction costs
at issue and whether the costs per investor increased or decreased as the assets under
management grew.” Hoffman v. UBS-AG, 591 F. Supp. 522, 540 (S.D.N.Y. 2008).
In In re American Mutual Funds Fee Litigation, for example, the district court there
found an expert’s economies of scale analyses “inadequate” and his conclusions “materially
flawed” in part because the expert “did not undertake any analyses to determine whether any
other factors may have caused or contributed to the decrease in [the investment adviser]’s costs.”
2009 WL 5215755, at *28–29. Similarly, in Krinsk, the Second Circuit approved of the district
court’s finding that a Section 36(b) plaintiff “failed to sustain his burden of proof” with respect
to showing unshared economies of scale because “the fact that expenses . . . declined at a time
when the Fund size grew . . . . does not establish that such decline was necessarily due to
economies of scale.” 875 F.2d at 411 (internal quotation marks and citation omitted). Finally, in
In re Blackrock, while the district court there found that plaintiffs had sustained their burden of
raising a triable issue of fact on the economies of scale factor, the court nonetheless reminded
plaintiffs that “it will be Plaintiffs’ burden at trial to show that any disproportionality between
the Funds’ asset growth and operating expenses is attributable to economies of scale, rather than
other cost savings unrelated to scale economies.” 2018 WL 3075916, at *34.
In the instant matter, Plaintiffs’ own expert concedes that he did not undertake any of the
necessary analyses required to demonstrate that Calamos achieved quantifiable economies of
scale in advising the Fund. Specifically, Pomerantz concedes that he did not conduct the
requisite per-unit analysis to demonstrate economies of scale, and he concedes that he did not

41

“exclude external factors that could have resulted in the disproportionate growth rates between”
the Fund’s operating expenses and the Fund’s AUM, In re Blackrock, 2018 WL 3075916, at *33:
CALAMOS:

Okay. Are you aware of any proof that the plaintiffs have put
together to identify or quantify economies of scale in the
Calamos growth fund other than the contents of your reports?

POMERANTZ:

I—I don’t know what else exists.
***

CALAMOS:

In any event, I think you’ve been clear on this, you did not do
any analysis of economies of scale using other measures of costs
such as total long run average cost, correct?

POMERANTZ:

That’s – that’s – I’d say that’s correct.
***

CALAMOS:

The point of your analysis was to prove how these advisory
costs, the ones we just covered, varied with fund assets or fund
size?

POMERANTZ:

No. . . . My intention was to take the data that exists in the report
and say assuming that this data is—is accurate, what the total
costs were, what the total assets were, what that was—what
would happen if I tried to allocate assets using standard metrics,
. . . . I’m not testing anything. . . . I’m taking the data that’s in
the profitability report and I am calibrating the standard cost to
asset relationship model to it to calculate how it would allocate
costs.

CALAMOS:

Based on assets?

POMERANTZ:

If you just used assets as the driver.

CALAMOS:

Right. . . . So did you investigate whether any factors other than
changes in assets caused changes in Calamos advisory costs
from 2014 to 2015?

POMERANTZ:

No. I’m basically looking at what is it that assets would explain.

CALAMOS:

Did you investigate how, for example, the organization of
Calamos’s investment team differed between those two years?

42

POMERANTZ:

I mean I’m vaguely familiar with lots of organizational changes.
In fact, the data seems to suggest that costs for the professionals
involved in the process went up but that—that’s obviously not a
complete picture because we do see total costs going down.

CALAMOS:

But any changes in the investment team didn’t have an impact
on your analysis of the relationship between assets and costs,
right?

POMERANTZ:

Well, I’m looking—I’m looking at the assets and I’m looking at
the total costs. Numbers that I—I think are accurate and I
believe. And I’m—and I’m asking the question how—how can
these varying assets levels explain the cost data that’s being
provided.

CALAMOS:

I—I appreciate that. I accept that. I’m not arguing with that.
What I’m driving at is there are other factors that could have
impacted costs at Calamos in 2014 and 2015. I’m trying to get
at did you investigate the possible impact of these other factors.
That’s the thrust of these questions.

POMERANTZ:

I’d say the answer is no.

Pomerantz Dep. 329:2–9, 333:13–20, 334:9–337:23 (emphasis added).
To prove economies of scale, Plaintiffs must show that the costs per investor decreased as
the assets under management grew, and such a showing cannot be predicated solely from the fact
that expenses increased at a slower rate than the Fund’s assets. As stated aptly in In re
Blackrock, “[a]bsent such information . . . ‘there is no way to determine whether any economy of
scale even existed that could have been passed on to investors or whether there is another
explanation for the statistics’ identified by the plaintiff.” In re Blackrock, 2018 WL 3075916, at
*30 (quoting Hoffman, 591 F. Supp. at 540). Pomerantz’s expert report and corresponding
deposition testimony suggest that he did not consider such information. Moreover, aside from
Pomerantz’s opinions, Plaintiffs proffer no additional evidence demonstrating economies of

43

scales realized by Calamos. Accordingly, summary judgment will be granted to Calamos on this
factor. 13
C. Nature and Quality of Services
The Court turns next to the nature and quality of services offered by Calamos to the
Fund. The Court concludes that there are triable issues of fact related to this Gartenberg factor
for two reasons. First, at the outset, “[t]his inquiry necessarily involves a determination of what
services may be permissibly considered.” Kasilag, 2016 WL 1394347, at *15. And as
mentioned above, see supra Part V.D, Plaintiffs contend that the proper services to be considered
are only those furnished to the Fund pursuant to the IMA, for which Calamos receives the
Advisory Fee, and not those furnished pursuant to the FASA, for which Calamos is paid pursuant
to a separate fee schedule. Calamos disagrees. Because the true nature of the services performed
pursuant to the IMA—that is, the contract giving rise to the Advisory Fees challenged in this
case—“remains relatively nebulous and wrangled-over, viewing the facts in the light most
favorable to Plaintiffs suggests that summary judgment on this factor is inappropriate.” Kasilag,
2016 WL 1394347, at *16.
In addition, Plaintiffs have marshalled sufficient evidence to raise a triable issue of
material fact about whether the quality of services provided to the Fund was poor to such an
extent that the Fund’s Advisory Fees were excessive. “In evaluating the quality of the services
provided to funds, other courts have compared the performance of challenged funds against peer
funds.” Zehrer, 2018 WL 1293230, at *11 (collecting cases). In so doing here, the Court finds
that uncontroverted evidence reveals three facts that readily distinguish this case from others

13

Because of Plaintiffs’ failure of proof as to Calamos’ realization of economies of scale, the Court need not
consider whether there is a triable issue of fact concerning whether Calamos adequately shared any economies of
scales it realized.

44

applying Section 36(b): Calamos charged more than most other investment advisers; the Fund
performed worse than most comparable mutual funds; and
See supra Part I.E.2. These facts separate the
instant case from cases in which plaintiffs either could not seriously challenge a fund’s fee
placement relative to its peer group or could not seriously challenge the fund’s performance. See
Goodman, 301 F. Supp. 3d at 781; Zehrer, 2018 WL 1293230, at *11; In re Blackrock, 2018 WL
3075916, at *21 n.37; Kasilag, 2016 WL 1394347, at *16. Such a unique ensemble of facts, if
proven at trial, could lead a rational factor to conclude that the challenged Advisory Fee “is so
disproportionately large that it bears no reasonable relationship to the services rendered and
could not have been the product of arm’s length bargaining.” Jones, 559 U.S. at 346.
D. Profitability
Plaintiffs contend that there are triable issues of facts regarding the Fund’s profitability.
Specifically, Plaintiffs take issue with Calamos’ method of calculating profitability—a so-called
“indirect cost allocation methodology” in which Calamos analyzes its profitability using an
approach that allocates indirect expenses to each fund in the CIT based on

-

See, e.g., Strauss Decl., Ex. 14, at 00535117–18. According to Plaintiffs,

Pls.’ S.J. Opp. at 15. As an example of

produced by Calamos’ methodology, Plaintiffs point
out that

Id.; see also Calamos’ 2016 15(c) Response, Strauss Decl., Ex.

45

14 at 00535128. 14 Plaintiffs argue that there are alternative cost allocation methods available
that demonstrate that Calamos receives materially higher profitability rates than those reported to
the Independent Trustees. Pls.’ S.J. Opp. at 16. Plaintiffs rely on a model created by their expert
Steve Pomerantz that reflects that the Fund had profitability rates of 71%, and not the
reflected by previous reports submitted to the Independent Trustees by Calamos. Id.

-

In addition, Plaintiffs contend that Calamos’ methodology

All told, Plaintiffs cite
these arguments, and several others, to support its assertion that the Fund’s true profitability to
Calamos tends to reveal the excessiveness of the Advisory Fees.
Calamos disagrees. But aside from arguing that this Court simply defer to the
Independent Trustees’ approval of this allocation method, Calamos provides little in the form of
argument as to why Plaintiffs’ alternative profitability figures and evidence of reporting flaws do
not raise a triable dispute of material fact as to profitability. 15 See Def.’s S.J. Mot. at 30–31;
Def.’s Reply at 13–14. This is not enough to dispel the issues of material fact with respect to
profitability.
That being said, the Court notes that it agrees with Plaintiffs expert Mercer Bullard, who
concedes that “an advisor’s profitability is a poor measure of the excessiveness of its fees

14

Plaintiffs seem to refer to Calamos’ “Focus Growth ETF” relative to the Fund, as opposed to Calamos’ “Focus
Growth Fund.” See Strauss Decl., Ex. 14, at 00535128 (showing Fund expenses for employee compensation and
benefits as $9,407,000 versus $89,000 for the “Focus Growth ETF” and $195,000 for “Focus Growth”).
15
Calamos also notes that “there is simply no per se rule as to how [it] must allocate indirect costs,” Def.’s Reply at
13, but this argument does not bear on the questions whether (1) Calamos’ cost allocation method best reflects the
Fund’s true profitability to Calamos and (2) whether the profits realized by Calamos weigh in favor of a conclusion
that Calamos’ Advisory Fees are excessive.

46

because there is no necessary correlation between the two.” See Bullard Dep. 302:2–7.
Moreover, it is well settled that arguing Calamos “just plain made too much money . . . is not an
acceptable approach” to proving breach of fiduciary duty under Section 36(b). Kalish, 742 F.
Supp. at 1237. Indeed, “Section 36(b) does not prohibit an investment adviser from making a
profit, nor does it regulate the level of profit.” In re Am. Mut. Funds Fee Litig., 2009 WL
5215755, at *50. Nevertheless, a fund’s profitability to its adviser is at least one measure to take
into account when evaluating the excessiveness of the Fund’s Advisory Fee. See Jones, U.S. 559
at 344 n.5. Accordingly, Plaintiffs will have their day in court to submit evidence on the “factintensive nature of the profitability inquiry.” In re Blackrock, 2018 WL 3075916, at *37.
However, given this Court’s conclusion regarding economies of scale, see supra Part VI.B, at
trial Plaintiffs will be unable to rely solely on the argument that the Fund was realizing
economies of scale unaccounted for.
E. Fall-Out Benefits
Plaintiffs contend that there are triable issues of facts regarding Calamos’ receipt of fallout benefits because the reports Calamos furnished

Pls.’ S.J. Opp. at 23. However, as
mentioned above, Plaintiffs have pointed to no authorities that consider such fees as fall-out
benefits. Nor is it plain to the Court that such fees constitute fall-out benefits. Accordingly, no
triable issues of material facts have been raised on this point.
F. Trustees’ Independence and Conscientiousness
For the reasons stated above, see supra Part V, the Court concludes that there are triable
issues of fact related to the deference owed to the Trustees’ judgment.

47

VII.

CONCLUSION

In sum, the Court concludes that genuine disputes of material fact exist regarding the
Gartenberg factors related to comparative fee structures, profitability, the nature and quality of
services provided to the Fund, and the conscientiousness and care of the Trustees' evaluatjon of
the Advisory Fees. Consequently, the Court cannot say as a matter oflaw that Plaintiffs have
failed to raise a genuine dispute as to whether Calamos "charge[ d] a fee that is so
disproportionately large that it bears no reasonable relationship to the services rendered and
could not have been the product of arm's length bargaining." Jones, 559 U.S. at 346.
For the foregoing reasons, Calamos' motion for summary judgment is GRANTED
insofar as Calamos seeks to establish that Plaintiffs have failed to raise triable issues of fact
related to economies of scale and fall-out benefits, and DENIED insofar as Calamos seeks
judgment as a matter oflaw on the other Gartenberg factors and Section 36(b) liability generally.
Moreover, the parties' Daubert motions are DE IED, as set forth above. The Clerk of the Court
is respectfully directed to terminate the summary judgment motion, Doc. 65, and the Daubert
motions, Docs. 88, 106, 109, 112, 115, 118.
It is SO ORDERED.
Dated:

September 30, 2018
New Yark, ew York
Edgardo Ramos, U.S.D.J.

48