UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
_______________________________________________
JAMES GILLIAM, Individually And On Behalf Of )
All Others Similarly Situated, )
)
Plaintiff, )
) Civil Action No. 04cv11600 (RGS)
vs. )
)
FIDELITY MANAGEMENT AND RESEARCH )
COMPANY, et al., )
)
Defendants. )
_______________________________________________ )
BOGATIN FAMILY TRUST, Individually And On )
Behalf Of All Others Similarly Situated, )
)
Plaintiff, )
) Civil Action No. 04cv11642 (RGS)
vs. )
)
FIDELITY MANAGEMENT AND RESEARCH )
COMPANY, et al., )
)
Defendants. )
_______________________________________________ )
CYNTHIA A. BENNETT and GUY E. MILLER, )
)
Plaintiffs, )
) Civil Action No. 04cv11651 (RGS)
vs. )
)
FIDELITY MANAGEMENT AND RESEARCH )
COMPANY, et al., )
)
Defendants. )
_______________________________________________ )
[Caption continues on next page]
FIDELITY DEFENDANTS’ MEMORANDUM IN OPPOSITION TO THE GILLIAM
PLAINTIFFS’ MOTION FOR CONSOLIDATION OF RELATED CASES
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 1 of 13
_______________________________________________
GHASSAN J. AWALI et al., Individually And On )
Behalf Of All Others Similarly Situated, )
)
Plaintiff, ) Civil Action No. 04cv11709 (RGS)
)
vs. )
)
FIDELITY MANAGEMENT AND RESEARCH )
COMPANY, et al., )
)
Defendants. )
_______________________________________________ )
WILLIAM S. GROESCHEL, Individually And On )
Behalf Of All Others Similarly Situated, )
)
Plaintiff, ) Civil Action No. 04cv11735 (RGS)
)
vs. )
)
FIDELITY MANAGEMENT AND RESEARCH )
COMPANY, et al., )
)
Defendants. )
_______________________________________________ )
NANCY HAUGEN, MICHAEL F. MAGNAN, )
KAREN L. MAGNAN, ROSE M. IANNACCONE, )
PRESLEY C. PHILLIPS, ANDREA M. PHILLIPS, )
and CINDY SCHURGIN, for the use and benefit of )
FIDELITY MAGELLAN AND FIDELITY ) Civil Action No. 04cv11756 (MLW)
CONTRAFUND, )
)
Plaintiffs, )
)
vs. )
)
FIDELITY MANAGEMENT AND RESEARCH )
COMPANY, et al., )
)
Defendants. )
_______________________________________________ )
[Caption continues on next page]
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 2 of 13
_______________________________________________
DAVID O. FALLERT, Individually And On Behalf )
Of All Others Similarly Situated, )
)
Plaintiff, ) Civil Action No. 04cv11812 (RGS)
)
vs. )
)
FIDELITY MANAGEMENT AND RESEARCH )
COMPANY, et al., )
)
Defendants. )
_______________________________________________ )
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 3 of 13
Defendants Fidelity Management & Research Company (“FMRCo”), FMR Co., Inc.
(“FMRC”), FMR Corp., Fidelity Distributors Corporation, Edward C. Johnson 3d, Abigail P.
Johnson, Edward C. Johnson IV, Elizabeth L. Johnson, Peter S. Lynch, Laura B. Cronin, Robert
L. Reynolds, Robert C. Pozen, and J. Gary Burkhead (collectively the “Fidelity Defendants”) 1
respectfully submit this memorandum in opposition to the Motion for Consolidation of Related
Cases.
INTRODUCTION AND DESCRIPTION OF THE AFFECTED CASES
The instant motion seeks the consolidation of two separate groups of cases that have been
brought by shareholders in various Fidelity mutual funds and are now pending in the district.
The Fidelity Defendants oppose the motion because of the fundamental differences between
these two groups of cases with respect to the claims alleged, the parties against whom the claims
are made, the law governing the claims, the operative facts to which that law will be applied, and
the procedural requirements applicable to the claims.
The first group of cases consists of two “Excessive Management Fee” cases. These are
cases in which the plaintiffs make virtually identical claims against two defendants, FMRCo and
FMRC on behalf of five Fidelity mutual funds in which they are shareholders. See Bennett, et al.
v. Fidelity Mgmt. & Research Co., et al., No. 04-11651-MLW (D. Mass. filed July 23, 2004) and
Haugen, et al. v. Fidelity Mgmt. & Research Co., et al., No. 04-11756-MLW (D. Mass. filed
August 10, 2004). These two cases assert claims under a single section of the Investment
Company Act of 1940 (“1940 Act”)—Section 36(b). The first case, Bennett, was originally filed
in December 2003 in the United States District Court for the Southern District of Illinois. After
1 The Fidelity Defendants consist of the parent company of Fidelity Investments (FMR Corp.), the investment
adviser to all the named Fidelity mutual funds (FMRCo), the funds’ sub-adviser (FMRC), the affiliated
distributor of fund shares (Fidelity Distributors Corporation), and certain individuals affiliated with the
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 4 of 13
2
the parties submitted papers regarding a transer of venue to this Court, Plaintiffs withdrew that
action and re-filed it in this Court. The second case, Haugen, was filed in the United States
District Court for the District of Arizona in May 2004, and the plaintiffs thereafter agreed to
transfer it to this Court.
In both of these cases, plaintiffs allege that investment management fees charged to one
or more of five specific Fidelity mutual funds are excessive and that the receipt of these fees
constitutes a breach of fiduciary duty by FMRCo and FMRC in violation of Section 36(b).
Plaintiffs focus their claim on the allegation that the fees do not reflect economies of scale
experienced by the five funds as they grew larger, and on the allegation that the fees are higher
than those charged by FMRCo and FMRC to their non-mutual fund or “institutional” clients.
These claims under Section 36(b) are subject to the statute’s one-year limitation period. Thus,
these claims are defined and circumscribed by plaintiffs’ theories as to why the fees are
excessive, by a one-year time frame, and by the fact that they are asserted against only two
defendants and involve only five of Fidelity’s more than 200 funds. These cases are to be tried
by the Court, not a jury. The Excessive Management Fee cases are assigned to Judge Wolf.
The second group of cases consists of five “Revenue Sharing” cases. These cases were
all commenced in this Court between July 19 and August 19, 2004, after commencement of the
Excessive Management Fee cases. The Revenue Sharing cases are virtually identical to one
another; indeed, the complaints largely track each other verbatim. These five cases consist of a
wide variety of class-action claims and derivative claims purportedly brought on behalf of all of
Fidelity’s more than 200 retail mutual funds against twenty-five named defendants (including the
investment adviser, including certain present or former interested fund trustees and certain members of the
Johnson family (the individual defendants identified by this brief).
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 5 of 13
3
Fidelity Defendants) and “John Does 1-100.”2 The charges asserted in these five complaints are
that the Fidelity Defendants made undisclosed, improper and excessive payments to
broker-dealers to promote the sale of Fidelity funds over other mutual funds. Plaintiffs in these
cases challenge a number of sales and marketing practices that have been commonplace in the
mutual fund industry—including so-called “revenue sharing,” expenditures for distribution of
fund shares under 1940 Act Rule 12b-1 plans, and directed portfolio brokerage. The complaints
assert a plethora of claims under three sections of the 1940 Act, two sections of the Investment
Advisors Act of 1940, and common law. The alleged class period is 4½ years. Unlike the
Excessive Management Fee cases brought solely under Section 36(b), there is no single, settled
legal framework for resolving the variety of different statutory and common law claims made in
the Revenue Sharing cases. At least one of the claims asserted may be subject to trial by jury.
The Revenue Sharing cases are assigned to Judge Stearns.
Plaintiffs in the Revenue Sharing cases have moved for consolidation of all seven cases,
arguing that the cases present substantially the same claims. Revenue Sharing plaintiffs’
Memorandum (“Mem.”) at 3-4. They are wrong. Even a cursory comparison of the two
categories of complaints reveals the paucity of factual or legal issues common to both categories.
Accordingly, consolidation would produce no measurable gain in convenience or efficiency.
Indeed, it would cause unnecessary confusion, delay, and prejudice, owing to the marked
differences between these two categories of cases. It is for these reasons that the Fidelity
Defendants – along with all parties to these cases other than the Revenue Sharing case
plaintiffs – oppose the amalgamated consolidation sought here.
2 Gilliam v. Fidelity Mgmt. & Research Co., et al., No. 04-11600-RGS (D. Mass. filed July 19, 2004); Bogatin
Family Trust v. Fidelity Mgmt. & Research Co., et al., No. 04-11642-RGS (D. Mass. filed July 23, 2004);
Awali, et al. v. Fidelity Mgmt. & Research Co., et al., No. 04-11709-RGS (D. Mass. filed Aug. 3, 2004);
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 6 of 13
4
At the same time, the Fidelity Defendants are not opposed to the separate consolidation
of the five Revenue Sharing cases pending before Judge Stearns. Nor do they oppose a separate
consolidation of the two Excessive Management Fee cases pending before Judge Wolf, and they
expect to file a motion with Judge Wolf to accomplish that more limited consolidation in short
order. Such separate consolidations would not only track the lines drawn by the legal and factual
issues common to each group of cases separately, but would also produce substantial gains in
convenience and efficiency with no corresponding burden for any party.
ARGUMENT
Under Rule 42(a), this Court “has broad discretion in weighing the costs and benefits of
consolidation to decide whether that procedure is appropriate.” Seguro de Servicio v. McAuto
Sys. Grp., Inc., 878 F.2d 5, 8 (1st Cir. 1989) (citations omitted); see also Data General Corp. v.
Grumman Sys. Support Corp., 834 F. Supp. 477, 487 (D. Mass. 1992) (in exercising this
discretion, the Court should “weigh the prospective benefits of consolidation, in terms of
convenience to the parties and judicial economy against the extent of any confusion, delay or
prejudice that might result from consolidation”) (quotation marks and citation omitted).
Consolidation of all seven cases would result in confusion, delay, and prejudice for the parties in
both categories of cases.
I. CONSOLIDATION WILL NOT LEAD TO ANY GAIN IN CONVENIENCE OR
ECONOMIES IN THE USE OF JUDICIAL RESOURCES.
In support of their motion, the Revenue Sharing plaintiffs recite a litany of allegations
they claim are common to all seven of the “Complaints.” These include: (i) the payment of
excessive commissions to broker-dealers in exchange for “some form of rebate or kickback” (Pl.
Groeschel v. Fidelity Mgmt. & Research Co., et al., No. 04-11735-RGS (D. Mass. filed Aug. 6, 2004); and
Fallert v. Fidelity Mgmt. & Research Co., et al., No. 04-11812-RGS (D. Mass. filed Aug. 19, 2004).
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 7 of 13
5
Mem. at 3); (ii) the defendants’ direction of brokerage payments to broker-dealers that “favored
Fidelity funds, which was a form of marketing that was not disclosed” and which was not
properly evaluated by the mutual fund trustees (id.); (iii) the use of “Soft Dollars and/or
excessive commissions … to pay for overhead expenses” (id. at 4); and (iv) the payment of
excessive management fees to the investment adviser (id. at 3). Yet a review of the
“Complaints” reveals that most of these claims are common only to the Revenue Sharing cases.
Indeed, only one of these claims – under Section 36(b) for the payment of excessive management
fees to the investment adviser – is common to all seven complaints. Compare, e.g., Bennett
Compl. ¶¶ 118-119 with Gilliam Compl. ¶¶ 104-110.
Yet even the Section 36(b) claims are only superficially common, as the factual bases
allegedly underlying those claims are in fact quite different. Plaintiffs in the two Excessive
Management Fee cases allege that the management fees are excessive because defendants have
failed to share “the extraordinary economies of scale created by the Plaintiffs and the Funds” as
the Funds have grown larger, and because the fees paid by FMRCo’s non-mutual fund clients are
lower. Bennett Compl. ¶ 119; Haugen Compl. ¶ 117. The Revenue Sharing plaintiffs assert an
entirely different theory. They simply re-hash their Rule 12b-1, soft dollar and brokerage
commission allegations, tacking on the assertion that such conduct also resulted in excessive
management fees — i.e., that certain defendants “violated Section 36(b) by improperly charging
investors in the Fidelity Funds purported Rule 12b-1 marketing fees, and by drawing on Fidelity
Funds assets to make undisclosed payments of Soft Dollars and excessive commissions” to
brokers. E.g., Gilliam Compl. ¶ 107.3 In short, the theory of the Excessive Management Fee
3 Other paragraphs in the Revenue Sharing complaints confirm that the sole premise of the excessive
management fee claim in that category of cases is the alleged charging of improper distribution fees under Rule
12b-1. See, e.g., Gilliam Compl. ¶¶ 66-75, 88, 96(e).
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 8 of 13
6
cases is that the advisory fees paid by five funds are excessive, while the theory of the Revenue
Sharing cases is that certain distribution charges applicable to all Fidelity funds are improper.
Thus, even though both categories of cases charge that the investment adviser violated its
“fiduciary duty with respect to the receipt of compensation [or other] payments” under Section
36(b), the underlying facts to which that fiduciary obligation will be applied are different.
Furthermore, the mere presence of a Section 36(b) claim in the Revenue Sharing cases
does not support consolidation because that claim neither is “central” to nor “predominates” in
those cases. See, e.g., Wright & Miller, Federal Practice & Procedure: Civil 2d § 2383 at 440-42
(Denial of consolidation appropriate where “the common issue is not a central one”); Scardino v.
Amalgamated Bank of New York, No. CIV. A. 93-6740, 1994 WL 408180, (E.D. Pa. Aug. 2,
1994), at *2 (denying motion where the “common questions of law or fact … are not sufficiently
predominant”).
II. THE DIFFERENCES BETWEEN THE TWO CATEGORIES OF CASES WILL
LEAD TO CONFUSION, PREJUDICE, AND DELAY IF ALL SEVEN CASES
ARE CONSOLIDATED.
Besides failing to achieve any economies, consolidation of the two group of cases will
lead to unnecessary delay and case management burdens. Accordingly, the motion should be
denied. See Wright & Miller § 2383 (consolidation may be denied if it “will cause delay in the
processing of one or more of the individual cases”); Manual for Complex Litigation § 20.11
(“Cases should not be consolidated if it would result in increased delay and other unnecessary
burdens on parties, such as having to participate in discovery irrelevant to their cases.”); id.
§ 11.631 (consolidation “is also inappropriate where its principal effect will be to magnify
unnecessarily the dimensions of the litigation”).
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 9 of 13
7
A. The Scope And Content Of Discovery In The Two Categories Of Cases Will
Be Materially Different.
The operative facts in the two categories of cases are entirely different. The Excessive
Management Fee cases focus on the size of the management fees in light of the services rendered
to the five mutual funds, the profitability of providing these services, the alleged economies of
scale in the provision of these services, any separate ancillary benefits received by defendants as
a result of the adviser’s investment management activities, the fees charged by other advisers and
by FMRCo to non-mutual fund clients, and the process by which the funds’ board of trustees
approved the investment management contracts. See, e.g., Haugen Compl. ¶¶ 57-115.
The Revenue Sharing plaintiffs have a very different focus – namely, the investment
adviser’s and distributor’s practices in marketing and distributing shares in the Fidelity mutual
funds and the disclosure of that process. As a result, the claims in the Revenue Sharing cases
revolve around the relationships between certain of the defendants and broker-dealers who sell
shares in over 200 Fidelity mutual funds and execute the funds’ securities trades. For example,
the Revenue Sharing complaints allege payment of excessive brokerage commissions, use of
directed brokerage as a form of undisclosed marketing, payments of distribution expenses in
violation of Rule 12b-1, and the improper use of “soft dollars” and brokerage commissions to
pay broker-dealers for the adviser’s overhead expenses. See, e.g., Gilliam Compl. ¶¶ 49-96.
None of these allegations is made in the Excessive Management Fee cases.
These marked differences in the fact issues raised by the two categories of cases will
create profound differences in the scope, scale, and substance of discovery. This, too, counsels
against consolidation. See Manual for Complex Litigation § 11.631 (4th ed. 2004) (“Whether
consolidation is permissible or desirable depends largely on the amount of common evidence in
the cases.”); see also Liberty Lincoln Mercury, Inc. v. Ford Mktg. Corp., 149 F.R.D. 65, 81
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 10 of 13
8
(D.N.J. 1993) (“[W]here the evidence in one case is not relevant to the issues in the other,
consolidation would create a likelihood of prejudice by confusing the issues”).
The same is true for the periods of time relevant to the two categories of cases. In the
Excessive Management Fee cases, the 1940 Act limits any recovery to the period of time
beginning one year prior to the filing of the complaints in mid-2004. By contrast, the alleged
class period in the Revenue Sharing cases covers 4½ years from July 1999 to November 2003.
Thus, there is at most only a six-month overlap between the periods of time most relevant to the
claims in these two categories of cases.
B. The Revenue Sharing Cases Present A Host of Procedural Issues And Requirements
Not Present In The Excessive Management Fee Cases.
Important procedural distinctions also exist between the two categories of cases. The
Excessive Management Fee cases are straightforward. Although any damages recovered would
be for the benefit of the five mutual funds, these cases are not subject to the demand
requirements of Rule 23.1. See Daily Income Fund v. Fox, 464 U.S. 523, 535 n.11 (1984). The
Excessive Management Fee cases are also to be tried to the Court, not to a jury. FMRCo and
FMRC are answering the Excessive Management Fee complaints simultaneous with this
opposition, and are prepared to proceed with discovery.
By contrast, the Revenue Sharing cases consist of both class action and derivative claims
that erect a number of procedural hurdles not present in the Excessive Management Fee cases.
The class action claims are subject to Rule 23, necessitating substantial motion practice. The
derivative claims are subject to the requirements of Rule 23.1, and the applicable law of
shareholder demand. For those claims sounding in fraud, the stringent pleading requirements of
Rule 9(b) apply. See, e.g., Gilliam Compl. ¶ 121. The Revenue Sharing plaintiffs are attempting
to proceed on behalf of a number of Fidelity funds in which they do not own shares, raising
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 11 of 13
9
standing issues. The Fidelity Defendants intend to move to dismiss some or all of the claims
made in the Revenue Sharing complaints, pursuant to Rules 9(b), 12(b)(6) and 23.1.
The Revenue Sharing cases, moreover, assert a variety of claims against a variety of
different classes of defendants, many of which do not appear in the Excessive Management Fee
cases. Protection of the Excessive Management Fee defendants from the prejudice of excessive
and irrelevant discovery and the prejudice of admission of confusing evidence at trial warrants
against consolidation with the Revenue Sharing cases.
* * *
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 12 of 13
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CONCLUSION
For the foregoing reasons, the motion of plaintiffs in the Revenue Sharing cases—which
is opposed by plaintiffs in the Excessive Management Fee cases and by all defendants in all
cases—should be denied.
Of Counsel:
James N. Benedict
Mark Holland
Mary K. Dulka
C. Neil Gray
CLIFFORD CHANCE US LLP
31 West 52nd Street
New York, New York 10019
Tel: 212.878.8000
Respectfully submitted,
/s/ James S. Dittmar, P.C.
James S. Dittmar, P.C. (BBO# 126320)
Christopher D. Moore (BBO# 630651)
GOODWIN PROCTER LLP
Exchange Place
53 State Street
Boston, Massachusetts 02109
Tel: 617.570.1000
Attorneys for Defendants Fidelity Management &
Research Co., FMR Co., Inc., FMR Corp., Fidelity
Distributors Corporation, Edward C. Johnson 3d,
Abigail P. Johnson, Edward C. Johnson IV,
Elizabeth L. Johnson, Peter S. Lynch, Laura B.
Cronin, Robert L. Reynolds, Robert C. Pozen, and J.
Gary Burkhead.
Dated: October 7, 2004
LIBA/1417524.5
Case 1:04-cv-11600-NG Document 13 Filed 10/07/2004 Page 13 of 13
