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The legal theory that mutual fund companies gouged regular investors by charging them higher fees than institutional investors is losing ground following recent summary judgments for the mutual fund company defendants. A summary judgment in a case against Minneapolis-based Ameriprise Financial Inc., which owns the American Express Funds, follows a similar ruling in an Illinois federal court in February involving Harris Associates’ fund family, the Oakmark Funds. The Oakmark case is now on appeal in the 7th U.S. Circuit Court of Appeals. John E. Gallus v. Ameriprise Financial Inc., No. 04-4498 (D. Minn); Jerry N. Jones v. Harris Associates, No. 07-1624 (7th Cir.). Turning the tide The Ameriprise and Oakmark suits are part of an “industrywide assault” launched by the plaintiffs’ bar in 2001, claimed Rob Skinner, a defense lawyer on the Ameriprise and Oakmark cases and a litigation partner at Boston’s Ropes & Gray. Courts dismissed early batches of cases because the complaints were inadequate, but many newer cases filed a few years later have settled on confidential terms, Skinner said. “This is the first time that judges have concluded that plaintiffs could not make their case [after discovery],” Skinner said. “We’re hopeful this means the tide is turning on these cases.” In the Ameriprise case, the shareholder plaintiffs sued underwriters, distributors and advisers of the American Express funds owned by Ameriprise. The breach-of-fiduciary-duty claims are based on excessive investment advisory fees; keeping excessive profits by not incorporating economies-of-scale savings into the fee schedule; and excessive distribution fees, which are used for marketing and selling to new shareholders. The plaintiffs sought an order enjoining the defendants from further violations of the Investment Company Act of 1940 and the return of all fees not covered by the statue of limitations, with interest and attorney fees added. In his July 6 opinion, Judge Donovan Frank said the plaintiffs failed to show that a so-called arm’s-length bargaining process � which involves disinterested parties acting in good faith � would not have produced the same fees. Frank also noted that the board set fees at the median rate charged to comparable funds in the industry, shared economies of scale as the funds grew and used performance-incentive adjustments to cut the fees. “Plaintiffs have failed to establish a genuine issue of material fact regarding whether the fees charged were so disproportionately large that they bear no reasonable relationship to the service rendered,” Frank wrote. The Oakmark judge, Charles P. Kocoras, said that “at most” the plaintiffs established that others paid different amounts for similar services. Kocoras also said it’s irrelevant whether plaintiffs could have gotten more for their money from the funds’ investment adviser. “What matters is whether there is a fundamental disconnect between what the funds paid and what the services were worth; on this score Plaintiffs have not set forth an issue of fact that, if resolved in their favor, could lead to a finding that [the investment adviser] breached its duty,” Kocoras wrote. The Oakmark plaintiffs alleged that Chicago-based Harris Associates breached fiduciary duties by charging excessive investment advisory services fees to individual shareholders compared with institutional investors and kept excess profits gained through economies of scale. The ‘Gartenberg’ test Both summary judgments rely on a test outlined in a seminal case to determine whether a fee was so large that it isn’t related to the services provided and it could not have resulted from arm’s-length bargaining. Gartenberg v. Merrill Lynch Asset Mgmt. Inc., 649 F.2d 923 (2d Cir. 1982). The law firms Johnson Pope Bokor Ruppel & Burns of Clearwater, Fla., and Richardson, Patrick, Westbrook & Brickman of Charleston, S.C., filed many of the suits, Skinner said. Lawyers at Johnson Pope and Richardson Patrick involved in the Ameriprise and Oakmark cases did not return calls for comment. Other plaintiffs’ lawyers involved in the two cases also did not return calls or declined to comment, including Keller Rohrback of Seattle and Karl L. Cambronne of Chestnut & Cambronne in Minneapolis, on the Gallus case, and Chicago lawyers Kevin Flynn of Kevin M. Flynn & Associates and Michael Coffield of Michael W. Coffield & Associates on the Jones case involving the Oakmark funds. The recent summary judgment decisions are heartening, said Jeffrey Maletta, a Washington partner at Kirkpatrick & Lockhart Preston Gates Ellis. Maletta has defended mutual fund companies in cases with excessive-fee allegations along with other claims. “Even if you can show that other investment-management clients were charged less, that’s not going to be persuasive to courts where the other evidence indicates that the board acted in good faith and came up with a fee in the range of reasonableness under long-established standards in Gartenberg,” Maletta said. Several cases against major mutual fund players are still pending, including against three Boston mutual fund companies: Putnam, Fidelity Investments and Massachusetts Financial Services Co. John J. Vaughn v. Putnam Investment Management, No. 04-10988; Cynthia Bennett v. Fidelity Management & Research Co., No. 04-11651; Marcus Dumond v. Massachusetts Financial Services Co., No. 04-11458 (D. Mass.). A case against San Mateo, Calif.-based mutual fund company Franklin Resources Inc. is slated for a September trial in a California federal court. Susan Strigliabotti v. Franklin Resources Inc., No. 04-883 (N.D. Calif.). Bob Friedman, a litigation partner at Boston’s Burns & Levinson on the plaintiffs’ side of the Fidelity case, challenged the notion that the summary judgments are part of a trend. Each case is fact-specific and depends on how economies of scale are passed onto the fund holders, Friedman said. “Fidelity is organized differently than other mutual funds and in some ways uniquely,” Friedman said. “I think those distinctions are going to matter.” Fidelity defense lawyers from Goodwin Procter of Boston, and New York-based Debevoise & Plimpton and Milbank, Tweed, Hadley & McCloy declined to comment or could not be reached for comment.

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