Reso v. Artisan Partners Limited Partnership

Filing 78

ORDER signed by Judge J P Stadtmueller on 11/18/11 denying 61 defendant's Renewed Motion to Dismiss. See Order. (cc: all counsel) (nm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
EDWIN L. RESO, for the use and
benefit of The Artisan International
Fund, The Artisan International
Value Fund, and The Artisan Mid
Cap Value Fund,

Case No. 11-CV-873-JPS

Plaintiff,
v.
ARTISAN PARTNERS LIMITED
PARTNERSHIP

ORDER

Defendant.

On September 16, 2011, the Court received this case on transfer from
the Northern District of California. (Docket #43, 44). The plaintiff, Edwin
Reso (“Reso”), invests in several mutual funds that receive investment
advising services from the defendant, Artisan Partners Limited Partnership
(“Artisan”). (Compl. ¶ 5–6). Reso has brought this action on behalf of himself
and the mutual funds in which he invests, arguing that Artisan has breached
its fiduciary duty to the funds in violation of Section 36(b) of the Investment
Company Act of 1940 (ICA). (Compl. ¶¶ 7–9 (citing 15 U.S.C. § 80a-1, et seq.)).
Essentially, Reso alleges that Artisan charges excessive fees to the Mutual
Funds, thus breaching the 36(b)-imposed fiduciary duty that Congress
created to regulate the fees charged to mutual funds by investment advisors.
(Compl. ¶¶ 9, 11).
While this case was pending in the Northern District of California,
Artisan filed a motion to dismiss, which Artisan has now renewed in this
Court. (Docket #34, 61). After Artisan filed its brief in support of its renewed

motion to dismiss, Reso filed a response brief. (Docket #62, 66). And, now
that Artisan has filed its reply brief, the Court rules on Artisan’s renewed
motion. (Docket #74).
For the reasons below, the Court will deny Artisan’s renewed motion
to dismiss the case.
1.

FACTUAL BACKGROUND
Artisan advises each of the funds in which Reso invests and on behalf

of which he has brought this action. (Compl. ¶¶ 6, 8). For its advising
services, Artisan receives a fee based on a percentage of each fund’s assets.
(Compl. ¶¶ 31–32). This fee is not based on Artisan’s actual costs, which Reso
alleges consist mainly of “de minimis” costs for office rental, equipment and
personnel. (Compl. ¶¶ 32, 34–35). Artisan points out that it provides a
number of services to Reso and the funds, including making investment
decisions, negotiating and choosing transaction services, preparing
regulatory filings, managing legal matters, setting up board meetings,
providing shareholder services, dealing with tax-related matters, and a
number of other tasks associated with the advisement of a mutual fund.
(Def.’s Mot. Dism. 2 (citing Compl. ¶¶ 8, 34; Investment Advisory Agreement
for Artisan International Fund, Def.’s App. Ex. A, at 1; Amended S-1 (cited
in Compl. ¶ 82); Statement of Additional Information, Def.’s App. Ex. E, at
45–46, 54 (cited in Compl. ¶ 57))). Reso alleges that the funds themselves pay
for many of those services, as opposed to those costs being covered by the fee
paid to Artisan. (Compl. ¶ 34).
Artisan’s fee and the services it provides are governed by Investment
Advisory Agreements between it and each of the funds. (Compl. ¶ 8).
Pursuant to the Advisory Agreements, each fund pays Artisan a monthly fee,
which is computed as a percentage of the fund’s average daily assets.
Page 2 of 17

(Compl. ¶ 32). The Advisory Agreements also set forth “breakpoints.”
(Compl. ¶ 33). When the funds’ assets reach those breakpoints, the
percentage used to compute Artisan’s fee is reduced. (Compl. ¶ 33). The
terms of these Advisory Agreements are predominantly the same as between
each fund, though the International Fund’s agreement contains an additional
breakpoint. (Def.’s App., Ex. A; Def.’s App., Ex. B; Def.’s App., Ex. C).
Under Section 15(a) of the ICA, Artisan’s Advisory Agreements must
be approved every year to remain effective. The Advisory Agreements must
receive the approval of: (1) a majority of uninterested board members; and
(2) either: (a) the board as a whole; or (b) a majority of each fund’s
shareholders. 15 U.S.C. §§ 80a-15(a), (c).
The Advisory Agreements that apply to the funds in this case have
received the required approval every year, but Reso takes issue with the fact
that their terms are not as favorable as those that apply to other funds—some
managed by Artisan and some with no relation to Artisan. (Pl.’s Resp. 3–4
(citing Compl. ¶¶ 53, 55–58, 61, 64, 66–67)). Reso points out that Artisan
manages a number of other funds, which share the same managers and
holdings but pay lower fees than the funds in this case. (Compl. ¶¶ 55, 57, 58,
61). Specifically, Reso identifies the California Public Employees’ Retirement
System, the Clearwater International Fund, and the Wells Fargo Advantage
Diversified International Fund, as receiving services from Artisan at a lower
rate than the funds in this case. (Compl. ¶¶ 61–62). Reso argues that the
lower-rate funds received those lower rates as a result of their arm’s-length
bargaining position. (Compl. ¶ 58). And, to be sure, if the funds in this case
received the benefit of those lower rates—which range from 10% to 50%
less—they would pay substantially less in fees to Artisan. (Compl. ¶¶ 61–62).

Page 3 of 17

In fact, Reso alleges that the funds would save between $32 million and $63
million annually. (Compl. ¶ 62).
Reso also states that the Artisan-managed funds in this case have
higher fees than similarly-sized, similarly-managed Vanguard funds that
receive comparable services. (Compl. ¶¶ 66–67). Again, Reso argues that the
lower fees charged to the Vanguard funds is a result of those funds’ ability
to negotiate their fees at arm’s length. (Pl.’s Resp. 3–4 (citing Compl. ¶ 66)).
The Artisan funds pay rates that are four times those paid by the Vanguard
funds, and could save $30 million to $54 million annually in fees, if it were
entitled to similar rates. (Compl. ¶¶ 67–68).
Reso also alleges that Artisan’s fees are high by industry standards.
(Compl. ¶ 64). Because its fees rank in the highest 40% of those charged by
similar mutual funds, Artisan received a grade of “F” for its fees from
Morningstar. (Compl. ¶ 36, 65).
Finally, Reso turns to the Advisory Agreements, and points out that
Artisan has received significant economies of scale from its management of
the funds in this case, but has not passed along savings to its customers or
significantly altered its Advisory Agreements to reflect those economies.
(Pl.’s Resp. 4–7 (citing Compl. ¶¶ 33, 45–48, 61.b, 62 75–77, 82)). Reso alleges
that the funds in this case have grown over time, allowing Artisan to take the
same percentage from a higher pool of funds with little additional work.
(Compl. ¶ 48, 55–61). Significant breakpoints would help to alleviate this
problem by reducing the percentage to which Artisan is entitled as the assets
grow larger. (See Compl ¶¶ 55–61).
Reso brings to light a number of interesting comparisons between the
breakpoints of the funds in this case and the other Artisan-managed funds.
The funds in this case are entitled to several breakpoints. (Compl. ¶ 33). The
Page 4 of 17

first occurs when the fund reaches $500 million, and is a drop of 2.5 basis
points, from 1.000% to 0.975%; similar 2.5 basis point drops also occur at $750
million, $1 billion, and $12 billion. (Compl. ¶ 33). On the other hand, the
Clearwater

International Fund—which

has

lower

fees to

begin

with—receives a 20 basis point drop from 0.800% to 0.600% at $50 million,
and another 10 basis point drop at $100 million. (Compl. ¶ 61.b). Thus, the
Clearwater International Fund’s fee rate drops 30 basis points, or nearly 40%
from its original rate, over the course of reaching $100 million in assets.
Meanwhile, over the course of reaching $12 billion in assets, the funds in this
case receive a reduction of only 10 basis points, or 10% from the original
rates. (Pl.’s Resp. 5). Reso alleges that this type of disparity has resulted in the
funds in this case contributing an excessively large amount to Artisan’s
profits. (Compl. ¶¶ 75, 82). Even though the funds in this case account for
only one-half of Artisan’s total managed assets, the funds provide more than
two-thirds of Artisan’s profits. (Compl. ¶ 82).
Seeking redress, Reso has sued Artisan for breach of fiduciary duty
under the ICA. (Docket #1). Artisan moved to dismiss Reso’s suit for failure
to state a claim (Docket #61), and this Court now decides that motion.
2.

STANDARD OF REVIEW ON MOTION TO DISMISS
To survive a motion to dismiss, “a complaint must contain sufficient

factual matter, accepted as true, to ‘state a claim to relief that is plausible on
its face.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 570 (2007)). A claim is plausible when the plaintiff
has alleged in his complaint “factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.”
White v. Marshall & Ilsey Corp., No. 10-CV-311, 2011 WL 2471736 at *2 (E.D.
Wis. June 21, 2011).
Page 5 of 17

Of course, in making a decision, the court must accept all well-pleaded
allegations as true. Twombly, 550 U.S. at 570. Also, as Reso correctly points
out, the Court must draw all reasonable inferences in favor of the plaintiff.
AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011) (stating that courts
must make “all possible inferences from the allegations in favor of the
plaintiff”).
3.

DISCUSSION
There are two issues that the Court must address in reaching a

decision on whether to grant the Artisan’s motion to dismiss. First, the Court
must determine whether it can consider certain facts alleged by Reso, which
Artisan asserts are insufficiently specific. (See Def.’ Br. in Supp. 8–9; Def.’s
Reply 1–4). Second, the Court must decide whether Reso alleged specific facts
in his complaint to state a plausible claim for relief under Section 36(b) of the
ICA, which requires satisfaction of the Gartenberg standard. (See Pl.’s Resp.
12–30 (discussing Jones v. Harris Associates, L.P., 130 S. Ct. 1418, 1425 (citing
Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923, 928 (2d Cir.
1982), as setting forth a number of factors that provide “all the pertinent
facts” that a court should look to in deciding whether a fee violates section
36(b)))).
3.1

Factual Issues

Artisan first argues that many of Reso’s factual allegations are mere
conclusions, not entitled to be taken as true by the Court and also not specific
enough to state a claim for relief that is plausible, as required under Iqbal.
(Def.’s Reply 1 (citing Iqbal, 129 S. Ct. at 1949)). Artisan points out that Reso
made many of his factual allegations “solely ‘on information and belief.’”
(Def.’s Reply 1). Specifically, Artisan indicates that Reso has made several
allegations based on “information and belief” that relate to the Gartenberg
Page 6 of 17

factors. (Def.’s Reply 2 (citing Pl.’s Resp. 17, 22, 24, 26)). Artisan states that
such “information and belief” allegations are “pure speculation,” and that
Reso did not make a reasonable inquiry into verifying them. (Def.’s Reply
2–3). Artisan also notes that many of the factual allegations in Reso’s
complaint have been copied—sometimes verbatim—from briefs filed by
Reso’s attorneys in similar cases against other mutual funds. (Def.’s Reply
2–3).
As unsatisfied as Artisan may be with Reso’s factual allegations, the
Court cannot disregard those allegations. In all of Artisan’s discussion of the
allegations, Artisan fails to cite any case that stands for the proposition that
allegations made on “information and belief” can be disregarded if the Court
finds that the alleging party has not made a reasonable inquiry into them.
Artisan does cite Sins v. Janus Capital Mgmt. LLC, a case in which the deciding
court spoke poorly of—but, nonetheless, did not dismiss—one of Reso’s
lawyers’ verbatim complaints. (Def.’s Reply 4 (citing Sins v. Janus Capital
Mgmt. LLC, 2006 WL 3746130 at *2, *4 (D. Colo. Dec. 15, 2006) (in which the
court stated that “[t]he number of apparently generic, boiler plate allegations
in the Amended Complaint cause me to question whether reasonable inquiry
underlies the allegations made ‘on information and belief.’ I nonetheless find
that Plaintiffs have alleged facts sufficient to state a claim upon which relief
may be granted.”))). Artisan also implies that, because Sins was decided prior
to Twombly and Iqbal, the Sins court may have decided the motion differently
and dismissed the case if it had been decided today. (Def.’s Reply 4). Sins was
certainly decided after both Twombly and Iqbal, but the Court will not
speculated as to whether the Sins court would have reached any different
result. Further, neither Twombly nor Iqbal deal with issues related to pleading
facts “on information and belief,” and therefore the Court is not convinced
Page 7 of 17

that those cases should have any impact on the issue at hand. See, e.g., Iqbal,
129 S. Ct. 1937, Twombly, 550 U.S. 544.
In fact, even if a case did allow the Court to disregard such allegations,
the Court would not do so here. The mere fact that allegations are somewhat
generic and have been pled elsewhere does not give the Court sufficient
indicia that Reso’s lawyers failed to reasonably inquire into the circumstances
in this case. Reso’s lawyers could very well have performed some inquiry,
but simply resorted to using a standard pleading when filing this case. Such
“cookie-cutter”

tactics

may

be

unfavorable

and

even

quite

dangerous—Reso’s lawyers run the risk of over- or under-inclusion—but
they do not require this Court to conclude that Reso’s lawyers have failed to
do their jobs.
Thus, even though some of Reso’s allegations are generic, the Court
will not disregard any of them.
3.2

Evaluation of Reso’s Claims Under the Gartenberg Standard

Having decided that it will look to all of Reso’s alleged facts in
deciding Artisan’s motion to dismiss, the Court now turns to the substantive
issue of whether Reso’s factual allegations state a plausible claim for relief.
In Jones, the Supreme Court stated that, “to face liability under § 36(b),
an investment adviser must charge a fee that is so disproportionately large
that it bears no reasonable relationship to the service rendered and could not
have been the product of arm’s length bargaining.” Jones, 130 S. Ct. at 1426
(adopting the standard set forth in Gartenberg, 694 F.2d at 929–30). The Jones
court also expressed its approval of the multi-factor Gartenberg test as taking
into account all of the circumstances relevant in deciding a Section 36(b)
claim. Jones, 130 S. Ct. at 1427 (citing Gartenberg, 694 F.2d 929 (2d Cir. 1982)).

Page 8 of 17

As such, this Court will look to the Gartenberg factors to determine
whether Reso has alleged facts sufficient demonstrate a plausible claim for
relief. The Gartenberg factors include: (1) the independence, care, and
conscientiousness of a fund’s directors in approving advisory agreements; (2)
the nature and quality of services provided by the advisor; (3) comparative
fee structures; (4) economies of scale reaped by the advisor; and (5)
profitability of the fund to the advisor. Jones, 130 S. Ct. at 1425–26 & n. 5
(citing Gartenberg, 694 F. 2d at 929–32) (this Court has changed the sequence
of the Gartenberg factors from the listing in the Jones decision).
As Reso points out, several other district courts have allowed
complaints to survive dismissal when the alleged facts did not show each of
the six Gartenberg factors. (Pl.’s Resp. 14 (citing Curran v. Principal
Management Corporation, LLC, 2010 WL 2889752, at *9 (S.D.Iowa June 8, 2010)
(stating that “Plaintiffs need not make a conclusive showing of each of the
Gartenberg factors but, instead, may state a § 36(b) claim by alleging any
combination of facts that plausibly support an inference that a particular fee,
given all of the surrounding facts and circumstances, is disproportionately
large to the services rendered in exchange for that fee”), In re Goldman Sachs
Mut. Funds Fee Litig., 2006 WL 126772, at *9 (S.D.N.Y. Jan. 17, 2006), Wicks v.
Putnam Inv. Mgmt., LLC, 2005 WL 705360, at *4 (D. Mass. Mar. 28, 2005))).
Those cases allowed complaints to survive motions to dismiss, so long as the
totality of the alleged facts gave rise to an inference that a particular fee was
disproportionately large. See, e.g., Curran, 2010 WL 2889752, at *9. This is
consistent with the Seventh Circuit’s pleading standard that requires district
courts to make “all possible inferences from the allegations in favor of the
plaintiff.” AnchorBank, 649 F.3d at 614 (citing Wilson v. Price, 624 F.3d 389, 391
(7th Cir. 2010)).
Page 9 of 17

Given such consistency and the fact that all three cases specifically
construe the Gartenberg factors, the Court is justified in adopting those cases’
approach in deciding this motion to dismiss Reso’s Section 36(b) claim. See
Curran v. Principal Management Corporation, LLC, 2010 WL 2889752, at *9
(decided after the Supreme Court’s decision in Jones), In re Goldman Sachs
Mut. Funds Fee Litig., 2006 WL 126772, at *9 (decided prior to the Jones
decision, but in a Second Circuit district court, which applied the Second
Circuit’s Gartenberg decision, which the Supreme Court later adopted in
Jones), Wicks v. Putnam Inv. Mgmt., LLC, 2005 WL 705360, at *4 (same).
Thus, the Court will deny Artisan’s motion to dismiss even if Reso has
failed to allege certain of the Gartenberg factors, so long as Reso’s complaint,
taken as a whole, alleges facts that demonstrate a plausible claim for relief
under Section 36(b). In its analysis, the Court will look to each of the
Gartenberg factors, but will not dismiss the case for failure to allege facts that
would satisfy certain of the factors. Rather, as mentioned, the Court will look
to the totality of the facts alleged in Reso’s complaint, viewed through the
lens of Gartenberg, to determine whether he has stated a plausible claim for
relief under Section 36(b).
3.2.1

Independence, Care and Conscientiousness of the
Funds’ Directors in Approving Advisory Agreements

This factor of the Gartenberg test may be difficult to satisfy without
discovery into the directors’ process of approving advisory agreements.
Additionally, proving the care and conscientiousness of the directors may
require

somewhat

circular

logic:

establishing

lack

of

care

and

conscientiousness through proving the negative effects of agreements
entered by the directors.

Page 10 of 17

3.2.1.1 Independence
Given such evidentiary difficulties, the Court finds that Reso has
alleged facts that sufficiently establish a lack of independence. Artisan argues
that Reso lacks information about the board’s fee-setting process, and then
goes further to list the qualifications of the board members. (Def.’s Reply 5,
Def.’s Br. in Supp. 24–25). Despite any lack of information, Reso has offered
several specific actions, which he alleges as demonstrations of the lack of
independence of the directors. (Compl. ¶¶ 45–47, 49 (including Artisan’s
failure to provide the directors with “sufficient, complete, and/or accurate
information” or meaningful information about economies of scale, while also
providing “misleading information to the directors)).
The Court finds those allegations to be specific enough to raise an
inference of lack of independence. Even though Artisan has released
information publicly relating to that decisionmaking process (see Ex. A, att.
to Def.’ Reply), the Court cannot expect Reso to know or outline the exact
contours of the directors’ decisionmaking processes. Like many of Reso’s
allegations, this one slips in by the skin of its teeth: the allegations are
threadbare and not well-researched, but are sufficient to satisfy the Court at
this stage of the case.
Therefore, the Court finds that Reso has alleged facts that raise an
inference that Artisan’s directors have not acted independently.
3.2.1.2 Care and Conscientiousness
Reso has also alleged facts that raise an inference that Artisan’s
directors failed to act with care and conscientiousness. As discussed above,
Reso has alleged a number of facts that demonstrate that the funds in this
case pay a much higher rate than other funds managed by Artisan, and also
account for a disproportionately large amount of Artisan’s profits, despite
Page 11 of 17

the similar nature of services provided to each by Artisan. (Compl. ¶¶ 33, 75,
82). Taking those facts as true, the Court can infer that the directors did not
adequately take into account important facts relating to better rates offered
to other Artisan-managed funds.
That inference, which the Court is obliged to make at this stage of the
case, AnchorBank, 649 F.3d at 614, is appropriate to establish a lack of care and
conscientiousness on behalf of Artisan’s directors.
3.2.2

Nature and Quality of Services

Reso argues that, other than standard investment advising services,
Artisan provides only de minimis services to the funds at issue in this case.
(Pl.’s Resp. 14–15; Compl. ¶¶ 31, 34, 35). In his complaint, Reso sets forth a
number of items for which the funds are responsible for paying: custodial
transfer agency, legal and accounting services. (Compl. ¶ 34). On the other
hand, Artisan is responsible for covering the costs of office space, equipment
and management personnel. (Compl. ¶ 34).
Reso also argues that the quality of services provided by Artisan is
below par, relying on a Morningstar evaluation of Artisan. (Compl. ¶ 36).
Morningstar awarded Artisan an “F” grade for its fees, due to the fact that
Artisan’s fees rank in the highest 40% of mutual fund fees. (Compl. ¶ 36, Pl.
Resp. 15, Def.’s Br. in Supp. 16). While that is true, Morningstar also gave
Artisan higher grades in the categories of regulatory issues, board quality,
manager incentives, and corporate culture. (Def.’s Br. in Supp. 15).
On this factor, Reso’s allegations are somewhat threadbare, but the
Court must draw an inference in Reso’s favor. AnchorBank, 649 F.3d at 614.
Reso has alleged that Artisan covers only a small amount of the costs
associated with running the mutual fund, and that the mutual fund covers
other expenses (Compl. ¶ 34). This allegation has included somewhat specific
Page 12 of 17

information, detailing the relatively high-cost items for which the mutual
fund is responsible, including legal and accounting fees. (Compl. ¶ 34).
Additionally, while Reso may have only alleged one area—and a rather
insignificant area, at that1—in which Morningstar determined that Artisan is
deficient, Reso’s allegations nonetheless raise an inference that the nature and
quality of Artisan’s services may be viewed as deficient by outside analysts
of mutual funds.
For these reasons, the Court finds that Reso’s complaint alleges facts
that at least raise the inference of deficiency in the nature and quality of
services provided by Artisan when compared to the services provided.
Therefore, the Court will treat this factor as present for purposes of deciding
Artisan’s motion to dismiss.
3.2.3

Comparative Fee Structures

Reso has alleged facts that demonstrate substantial differences
between the fees Artisan charges to the funds in this case and: (1) the fees
charged by Artisan to other funds Artisan manages; and (2) the fees charged
by other advisers to other fund similar to those in this case. (Compl. ¶¶ 36,
53–63, 66–68). Artisan argues that Reso has “not pleaded facts to make either
comparison meaningful.” (Def.’s Br. in Supp. 17). The Court disagrees. Reso

1

On this fact, the Court agrees with Artisan that fee comparisons are of little
value when discussing the nature and quality of services provided. (See Def.’s Br.
in Supp. 16 (citing Amron v. Morgan Stanley Inv. Advisors, Inc., 464 F.3d 338, 345 (2d
Cir. 2006), In re Franklin Mut. Funds Fee Litig., 478 F. Supp. 2d 677, 686–87 (D. N.J.
2007))). The fees charged by one mutual fund may differ due simply to the nature
of services provided, and it is thus not necessarily a meaningful metric by which
to measure the nature and value of services offered by an adviser. However, at this
motion to dismiss phase, given the relatively low standard of plausibility, such
information is sufficient to raise an inference that Artisan’s services are viewed as
deficient by outside analysts.

Page 13 of 17

has alleged facts that clearly give rise to the inference that Artisan has
comparatively over-charged the funds in this case.
3.2.3.1 Fees Charged to Other Artisan Clients
Reso has alleged that Artisan charges vastly different amounts to
other funds to which it offers management services. (Compl. ¶¶ 53–63). As
discussed above, Artisan charges the funds in this case a higher fee rate, with
less significant breakpoints, than it charges several other funds it manages.
(Compl. ¶¶ 58, 61–62). Additionally, Reso alleges that Artisan receives a
vastly disproportionate amount of its income from the funds at issue in this
case, in comparison to those funds’ respective shares of Reso’s total portfolio.
(Compl. ¶ 82).
Artisan argues that these differences are of no consequence, because
Reso has failed to allege any differences in services between the funds in this
case and the funds receiving better rates. (Def.’s Br. in Supp. 19). Reso has
alleged that Artisan provides similar services to all the funds it manages
(Compl. ¶¶ 35, 55, 57, 58); but, Artisan counters that Reso’s allegations are
purely speculative, because they were based on “information and belief.”
(Def.’s Reply 10–11). As discussed above, the Court will not disregard Reso’s
allegations that were based upon”information and belief.”
Accordingly, Reso has alleged substantial differences in fees that are
not supported by differences in services provided by Artisan.
3.2.3.2 Fees Charged by Other Advisers to Other Funds
Artisan is correct that Gartenberg stressed that fee comparisons should
be given limited weight by courts considering Section 36(b) claims. (Def.’s Br.
in Supp. 16 (citing Gartenberg, 694 F.2d at 929)). However, Reso is correct in
pointing out that such comparisons should still be considered by Courts.
(Pl.’s Resp. 17 (quoting Gartenberg, 694 F.2d at 929 (“We do not suggest that
Page 14 of 17

rates charged by other adviser-managers to other similar funds are not to be
taken into account.”))).
Reso’s comparisons to the Vanguard funds are of little value. In his
complaint, Reso identified several funds operated by Vanguard, all of which
have lower expense ratios than the funds in this case. (Compl. ¶¶ 66–68).
While the Court can certainly look to comparative differences between funds
operated by different managers, the Court agrees with Artisan that extremely
limited comparisons—such as the ones offered by Reso—are of little value.
(Def.’s Br. in Supp. 20 (citing In re Scudder Mut. Funds Fee Litig., 2007 WL
2325862, at *17 (S.D.N.Y. Aug. 14, 2007)), Def.’s Reply 12 (citing Kalish v.
Franklin Advisers, Inc., 742 F. Supp. 1222, 1230–31 (S.D.N.Y. 1990))). Therefore,
the Court places little weight on the comparative fee differences alleged by
Reso.
Despite that limited weight, though, the Court finds that Reso’s
allegations have satisfied the comparative fee structure factor of Gartenberg.
However weak Reso’s comparisons to non-Artisan funds may be, his makes
strong comparisons between the funds in this case and other Artisanoperated funds.
Additionally, the Court acknowledges that Reso has alleged facts
related to Morningstar’s “F” grade for Artisan’s fees. The Court realizes that,
during discovery, information may become available that would bolster
Reso’s argument that Artisan’s fees are comparatively inappropriate.
3.2.4

Economies of Scale

Reso’s strongest allegations relate to the economies of scale factor of
Gartenberg. Based solely on the breakpoints offered to the mutual funds in
this case, Reso establishes that Artisan receives economies of scale that it does
not pass on to the mutual funds in substantial ways. (Compl. ¶¶ 69–75). In
Page 15 of 17

fact, as discussed above, the mutual funds in this case receive a drop of only
ten basis points over the course of reaching nearly $12 billion in assets.
(Compl. ¶ 33). At this stage, the Court is also satisfied with Reso’s allegations
that Artisan provides only de minimis non-advisory services.
As such, the Court finds that Reso has alleged facts that establish the
economies of scale factor of Gartenberg. Reso has alleged facts that sufficiently
establish that Artisan’s fee is reduced only slightly over the course of
amassing a large amount of assets, but that Artisan does not suffer significant
additional expenditures over the course of that expansion. Therefore, the
Court finds that Artisan is not appropriately passing on those economies of
scale to the mutual funds.
3.2.5

Profitability of the Fund to the Adviser

Relatedly, as discussed above, the funds in this case account for a
larger portion of Artisan’s profits than the respective share they account for
of Artisan’s total managed assets. (Compl. ¶ 82 (alleging that Artisan receives
two-thirds of its profits from the funds in this case, while the funds account
for only one-half of Artisan’s total managed assets)). Again, though, Artisan
argues that Reso has failed to adequately allege that such a comparison is
valid. (Def.’s Br. in Supp. 23–24, Def.’s Reply 13).
As discussed above, the Court has determined that Reso’s allegations
are adequate, at this stage of the case, to establish similarity between the
ways Artisan operates the funds in this case and other funds.
Therefore, the Court finds that Reso has alleged facts sufficient to
show that Artisan reaps too great a benefit from the funds in this case. Thus,
the Court finds that the profitability factor of Gartenberg is satisfied.

Page 16 of 17

4.

CONCLUSION
In sum, the Court has found that Reso has alleged minimal facts that

sufficiently establish each of the Gartenberg factors. Accordingly, the Court
must deny the Artisan’s motion to dismiss because Reso has stated a
plausible claim for relief under Section 36(b).
Accordingly,
IT IS ORDERED that defendant’s Renewed Motion to Dismiss
(Docket #61) be and the same is hereby DENIED.
Dated at Milwaukee, Wisconsin, this 18th day of November, 2011.
BY THE COURT:

J.P. Stadtmueller
U.S. District Judge

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