Obeslo et al v. Great-West Capital Management, LLC

MOTION to Dismiss for Failure to State a Claim

D. Colo.May 2, 2016

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No.: 1:16-cv-00230-CMA-MJW JOAN OBESLO, ROYCE HORTON, DANIEL FISHER, NATHAN COMER, STEVE MIGOTTI, VALERIE MIGOTTI, JAMES DIMAGGIO, ANNE HALL, CAROL A. REYNON-LONGORIA, on behalf of GREAT-WEST FUNDS, INC., Plaintiffs, v. GREAT-WEST CAPITAL MANAGEMENT, LLC, Defendant. DEFENDANT’S MOTION TO DISMISS THE FIRST AMENDED COMPLAINT PURSUANT TO FED. R. CIV. P. 12(B)(6) Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 1 of 33 i TABLE OF CONTENTS Page(s) TABLE OF AUTHORITIES ...............................................................................................ii CERTIFICATION OF CONFERRAL PURSUANT TO LOCAL RULE 7.1 ........................ 1 INTRODUCTION ............................................................................................................. 1 FACTUAL BACKGROUND ............................................................................................. 3 A. The Parties and The Funds ....................................................................... 3 B. Mutual Funds and the Investment Company Act of 1940 .......................... 3 C. GWCM’s Advisory Services ....................................................................... 5 D. The Manager-of-Managers Structure ......................................................... 7 ARGUMENT .................................................................................................................... 8 I. PLAINTIFFS LACK STANDING TO PURSUE CLAIMS ON BEHALF OF FUNDS IN WHICH THEY DO NOT OWN SHARES ............................................. 8 II. THE COMPLAINT DOES NOT ADEQUATELY ALLEGE THAT EACH OF THE FUNDS PAID EXCESSIVE FEES .............................................................. 13 A. Plaintiffs Make No Allegations Relating to Some Great-West Funds ....... 15 B. The Complaint Does Not State a Claim with Respect to Any Specific Fund ........................................................................................... 16 1. Nature and Quality of Services...................................................... 16 2. Comparative Fees ......................................................................... 18 3. Profitability .................................................................................... 19 4. Fall-Out Benefits ........................................................................... 19 5. Economies of Scale ...................................................................... 20 6. Independence and Conscientiousness of the Board ..................... 22 III. DISMISSAL WITH PREJUDICE IS APPROPRIATE .......................................... 24 CONCLUSION .............................................................................................................. 25 Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 2 of 33 ii TABLE OF AUTHORITIES Page(s) Cases Allen Oil & Gas, LLC v. Klish, 113 F. App’x 869 (10th Cir. 2004) ............................................................................ 25 Allen v. Wright, 468 U.S. 737 (1984) ................................................................................................... 9 In re AllianceBernstein Excessive Fee Litig., No. 04-4885, 2005 WL 2677753 (S.D.N.Y. Oct. 19, 2005) ................................ 10, 12 In re AllianceBernstein Mut. Fund Excessive Fee Litig., No. 04-4885, 2006 WL 74439 (S.D.N.Y. Jan. 11, 2006) .......................................... 14 In re Am. Mut. Funds Fee Litig., No. CV 04-5593 GAF, 2009 WL 5215755 (C.D. Cal. Dec. 28, 2009), aff’d sub nom. Jelinek v. Cap. Res. & Mgmt. Co., 448 F. App’x 716 (9th Cir. 2011) ..................................................................................................... 18, 19, 22 Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338 (2d. Cir. 2006) ........................................................................ 19, 21, 22 In re Bank of Bos. Corp. Sec. Litig., 762 F. Supp. 1525 (D. Mass. 1991)………………………………………………………9 Batra v. Inv'rs Research Corp., No. 89-0528-CV-W-6, 1992 WL 278688 (W.D. Mo. Oct. 4, 1991) ........................... 12 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ................................................................................................. 13 In re BlackRock Mut. Funds Advisory Fee Litig., No. 14-1165 (FLW) (DEA), 2015 WL 1418848 (D.N.J. Mar. 27, 2015) .................... 16 Burks v. Lasker, 441 U.S. 471 (1979) ................................................................................................... 4 Carrillo v. Suthers, No. 12-cv-02034, 2014 WL 11297187 (D. Colo. Dec. 29, 2014) .............................. 25 Curran v. Principal Mgmt. Corp., No. 4:09-cv-00433, 2011 WL 223872 (S.D. Iowa Jan. 24, 2011) ................. 12, 13, 20 Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 3 of 33 iii In re Eaton Vance Corp. Sec. Litig., 219 F.R.D. 38 (D. Mass. 2003) ................................................................................ 10 Forsythe v. Sun Life Financial, Inc., 417 F. Supp. 2d 100 (D. Mass. 2006) ............................................................ 9, 10, 12 In re Franklin Mut. Funds Fee Litig., 478 F. Supp. 2d 677 (D.N.J. 2007) .............................................................. 14, 17, 23 FW/PBS, Inc. v. City of Dallas, 493 U.S. 215 (1990) ................................................................................................... 9 Gartenberg v. Merrill Lynch Asset Mgmt., 694 F.2d 923 (2d Cir.1982) ................................................................................ 2,5,14 Genesis Bio-Pharm., Inc. v. Chiron Corp., 27 F. App’x 94 (3d Cir. 2002) ................................................................................... 13 In re Goldman Sachs Mut. Funds Fee Litig., No. 04-2567 (NRB), 2006 WL 126772 (S.D.N.Y. Jan. 17, 2006) ............................. 21 Griggs v. Jornayvaz, No. 09-cv-00629-PAB-KMT, 2010 WL 4932674 (D. Colo. Nov. 29, 2010) ........................................................................................................................ 13 Hoffman v. UBS-AG, 591 F. Supp. 2d 522 (S.D.N.Y. 2008) ................................................................ 21, 23 ING Principal Prot. Funds Derivative Litig., 369 F. Supp. 2d 163 (D. Mass. 2005) ...................................................................... 23 Jones v. Harris Assoc. L.P., 559 U.S. 335 (2010) .......................................................................................... passim Kalish v. Franklin Advisors, Inc., 742 F. Supp. 1222 (S.D.N.Y. 1990) ......................................................................... 19 Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210 (10th Cir. 2011) ................................................................................ 13 Kasilag v. Hartford Inv. Fin. Servs., No. 11-083, 2016 WL 1394347 (D.N.J. April 7, 2016) .............................................. 10 Krantz v. Prudential Invs. Fund Mgmt. LLC, 77 F. Supp. 2d 559 (D.N.J. 1999), aff’d, 305 F.3d 140 (3d Cir. 2002)...................... 14 Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 4 of 33 iv Krinsk v. Fund Asset Mgmt., 715 F. Supp. 472 (S.D.N.Y. 1988), aff’d, 875 F.2d 404 (2d Cir. 1989)........... 5, 15, 20 Meyer v. Oppenheimer Mgmt. Corp., 895 F.2d 861 (2d Cir. 1990) ..................................................................................... 20 Migdal v. Rowe Price-Fleming Int’l., Inc., 248 F.3d 321 (4th Cir. 2001) ........................................................................ 17, 18, 19 In re Mut. Funds Inv. Litig., 519 F. Supp. 2d 580 (D. Md. 2007) .......................................................................... 11 Nobel Asset Mgmt. v. Allos Therapeutics, Inc., No. 04-cv-1030-RPM, 2005 WL 4161977 (D. Colo. Oct. 20, 2005) ......................... 13 Olesh v. Dreyfus Corp., No. 94-1664 (CPS), 1995 WL 500491 (E.D.N.Y. Aug. 8, 1995) ............................... 14 People to End Homelessness, Inc. v. Develco Singles Apartments Assocs., 339 F.3d 1 (1st Cir. 2003)............................................................................ 9 Raines v. Byrd, 521 U.S. 811 (1997) ................................................................................................... 9 Redus-Tarchis v. N.Y. Life Inv. Mgmt., LLC, No. 14-7991, 2015 WL 6525894 (D.N.J. Oct. 28, 2015) .................................... 16, 24 Robbins v. Oklahoma, 519 F.3d 1242 (10th Cir. 2008) ................................................................................ 16 Santomenno v. John Hancock Life Ins. Co., 677 F.3d 178 (3d Cir. 2012) ..................................................................................... 10 In re Scudder Mutual Funds Fee Litig., No. 04 Civ. 1921 (DAB), 2007 WL 2325862 (S.D.N.Y. Aug. 14, 2007) .............. 12, 17 Seni v. Peterschmidt, No. 12-cv-00320, 2013 WL 1191265 (D. Colo. Mar. 22, 2013) ................................ 16 Siemers v. Wells Fargo & Co., No. 05-cv-04518, 2006 WL 2355411 (N.D. Cal. Aug. 14, 2006) .............................. 10 Siemers v. Wells Fargo & Co., No. C 05-04518 WHA, 2006 WL 3041090 (N.D. Cal. Oct. 24, 2016) ................. 12, 13 Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 5 of 33 v Sins v. Janus Capital Mgmt., LLC, Nos. 04-CV 01647-WDM, 04-cv-02395-MSK-C, 2006 WL 3746130 (D. Colo. Dec. 15, 2006) ................................................................................................ 14 Stegall v. Ladner, 394 F. Supp. 2d 358 (D. Mass. 2005) ...................................................................... 12 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)……………………………………………………………….……….6 Toone v. Wells Fargo Bank, N.A., 716 F.3d 516 (10th Cir. 2013) .................................................................................. 13 Turner v. Davis Selected Advisers, LP, 626 F. App’x 713 (9th Cir. 2015) .............................................................................. 20 Williams v. Bank One Corp., No. 03 C 8561, 2003 WL 22964376 (N.D. Ill. Dec. 15, 2003) .................................. 12 Statutes 15 U.S.C. § 80a-6(c) ....................................................................................................... 7 15 U.S.C. § 80a-10(a)-(b) ................................................................................................ 4 15 U.S.C. § 80a-15(a)-(e) ................................................................................................ 4 15 U.S.C. § 80a-35(b) ................................................................................................. 4, 9 15 U.S.C. § 80a-35(b)(1)-(3) ..................................................................................... 5, 15 Other Authorities Exemption from Shareholder Approval for Certain Subadvisory Contracts, 81 SEC Docket 939, 2003 WL 22423216 (Oct. 23, 2003) ......................................... 8 Mut. Series Fund, Inc., SEC No-Action Letter, 1995 WL 693304 (Nov. 7, 1995) ........................................................................................................................ 11 Principal Inv'rs Fund Inc., SEC No-Action Letter, 2005 WL 1160193 (May 13, 2005) .................................................................................................................. 11 Robert Pozen & Theresa Hamacher, The Fund Industry: How Your Money Is Managed (2012) ..................................................................................................... 7 Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 6 of 33 vi Salomon Bros. Inc., SEC No-Action Letter, 1995 WL 329631 (May 26, 1995) ........................................................................................................................ 11 SEC, IM Guidance Update No. 2014-03 (Feb. 2014), http://www.sec.gov/divisions/investment/guidance/im-guidance-2014- 03.pdf ......................................................................................................................... 7 USAllianz Variable Insurance Products Trust & USAllianz Advisers, LLC, 67 Fed. Reg. 55286-01, 2002 WL 1970906 (Aug. 28, 2002) ..................................... 8 USAllianz Variable Insurance Products Trust, Supplement (Form 497) (Sept. 23, 2002) ......................................................................................................... 8 Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 7 of 33 Pursuant to Federal Rule of Civil Procedure 12(b)(6), Defendant Great-West Capital Management, LLC (“GWCM”) moves to dismiss Plaintiffs’ First Amended Complaint in its entirety. In support of its motion, Defendant states as follows: CERTIFICATION OF CONFERRAL PURSUANT TO LOCAL RULE 7.1 Pursuant to Local Rule 7.1, the undersigned certifies that they have conferred with opposing counsel in a good faith effort to resolve the issues raised herein. Specifically, counsel had a meet-and-confer on April 25, 2016. Prior to the meet-and- confer, Defendant provided Plaintiffs with detailed notice of the deficiencies in the Original Complaint. See Exh. A, Letter to Michael Wolff from Sean Murphy, dated March 16, 2016. Plaintiffs chose to amend the Complaint but did not correct for these deficiencies. After the meet-and-confer, Defendant sent a letter to opposing counsel regarding the grounds for the current Motion to Dismiss on April 28, 2016. See id.; Exh. B, Letter to Michael Wolff from Sean Murphy, dated April 28, 2016. The issues could not be resolved despite good faith efforts, as Plaintiffs have chosen to stand on the First Amended Complaint. INTRODUCTION This is an action for allegedly “excessive” mutual fund fees in violation of Section 36(b) of the Investment Company Act of 1940 (“ICA”). That statute provides a limited remedy for a plaintiff who can meet the difficult burden of showing that the fund’s adviser charged 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 Assoc. L.P., 559 U.S. 335, 351 (2010) (adopting Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 8 of 33 2 standard in Gartenberg v. Merrill Lynch Asset Mgmt., 694 F.2d 923, 928-29 (2d Cir.1982)). Plaintiffs bring this action against Defendant GWCM to recoup allegedly excessive fees paid by 63 different Great-West mutual funds for which GWCM serves as investment adviser. The Complaint should be dismissed for two reasons. First, despite the fact that Plaintiffs currently own shares in only 17 Great-West mutual funds, they purport to bring this action derivatively on behalf of 63 different Great-West funds. Section 36(b)’s express terms require Plaintiffs to be “security holders” of each fund on whose behalf they bring a claim, and the “case and controversy” requirement of Article III of the U.S. Constitution requires Plaintiffs to have a personal stake in the litigation. Here, Plaintiffs are not security holders in Great-West mutual funds they do not own, they do not pay any fees in connection with those non- owned funds and they would not benefit from any recovery by those funds in this action. Courts have routinely dismissed Section 36(b) claims under Rule 12(b)(6) for lack of statutory and constitutional standing in these exact circumstances. Second, Plaintiffs have not pled sufficient facts to state a claim under Section 36(b). Because the Complaint purports to allege a claim against 63 different funds, Plaintiffs do not allege the elements of a claim against any one fund. Instead, Plaintiffs resort to “group pleading” tactics, making sweeping allegations that apply to “most funds,” “nearly all” or “half” the funds. Such blunderbuss allegations are insufficient to survive dismissal, as Plaintiffs must make at least some showing that each fund’s fees are excessive. Highlighting the deficiency of the Complaint, Plaintiffs make absolutely no mention of many of the 63 funds at issue. This is fatal to their claim. Even in those Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 9 of 33 3 instances where allegations are made about specific funds, the allegations are of the same type rejected by previous courts as insufficient. FACTUAL BACKGROUND A. The Parties and The Funds The Plaintiffs are currently shareholders in 17 different Great-West funds, but purport to bring this action on behalf of 63 different Great-West funds (collectively, “Great-West Funds”). (Compl. ¶¶ 1-2, 10-18.) Each of the 63 funds is a “series” within a broader investment company known as Great-West Funds, Inc., a registered investment company under the ICA. (Compl. ¶ 5; Original Compl. ¶ 28.) Each of the Great-West Funds is overseen by a four-person board of directors, three of whom are independent of GWCM (the “Board”). (Compl. ¶ 8.) GWCM, a registered investment adviser under the ICA, acts as investment adviser to the Great-West Funds pursuant to an Investment Management Agreement dated May 1, 2015. (Compl. ¶ 22.) For its services, GWCM is paid according to a separate fee schedule for each fund, which currently varies from .10% to 1.05% of each fund’s assets under management. (Compl. ¶ 28.) B. Mutual Funds and the Investment Company Act of 1940 “A mutual fund is a pool of assets, consisting primarily of [a] portfolio [of] securities, and belonging to the individual investors holding shares in the fund.” Jones, 559 U.S. at 338. The management and operations of a mutual fund are typically externalized and contractually delegated to its investment adviser. Since the enactment of the ICA, courts have recognized the legal separation of a mutual fund and its adviser Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 10 of 33 4 and have acknowledged this distinction as a principal purpose of the ICA, which protects fund investors by maintaining a fund’s independence from its adviser. See 15 U.S.C. §§ 80a-10(a)-(b), 80a-15(a)-(e); Burks v. Lasker, 441 U.S. 471, 480-85 (1979). The ICA creates a regulatory structure designed to safeguard the interests of fund shareholders. The statute entrusts “noninterested” directors or trustees sitting on a mutual fund’s board (the “independent trustees”) with the primary responsibility of protecting fund shareholders from any conflicts of interest with the fund’s adviser. A majority of independent trustees, who represent the “cornerstone” of the ICA’s efforts to check conflicts of interest, Jones, 559 U.S. at 339, must approve annually the compensation paid to the adviser. 15 U.S.C. § 80a-15(c); accord Jones, 559 U.S. at 340. To fulfill that obligation, the trustees must “request and evaluate” all information from the adviser reasonably necessary to evaluate the terms of the advisory contract with the funds. See 15 U.S.C. § 80a-15(c). The ICA’s reliance on independent trustees to manage potential conflicts of interest between a fund and its adviser is a central tenet of Section 36(b), which provides that an adviser owes a “fiduciary duty with respect to the receipt of compensation” from a mutual fund. 15 U.S.C. § 80a-35(b). The Supreme Court has made clear that to prove a breach of this duty, the plaintiff must meet the high burden of showing that the fee charged 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 345-46. In making that inquiry, a court must consider—and give appropriate deference to—the role of the independent trustees in Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 11 of 33 5 approving that fee: “[A]pproval by the board of directors of such investment company of such compensation or payments . . . shall be given such consideration by the court as is deemed appropriate under all the circumstances.” 15 U.S.C. 80a-35(b)(2). The statute does not oblige the directors to negotiate the ‘“best deal’ possible.” Krinsk v. Fund Asset Mgmt., Inc., 875 F.2d 404, 409 (2d Cir. 1989). Nor does it authorize the court to sit as a “super-trustee” or to second-guess informed board decisions. See Jones, 559 U.S. at 352. “[T]he court is not authorized ‘to substitute its business judgment for that of a mutual fund’s board of directors in the area of management fees.’” Gartenberg, 694 F.2d at 928 (quoting S. Rep. No. 91-184 (1970); H.R. Rep. No. 91-1382 (1970)). C. GWCM’s Advisory Services Under the terms of the Investment Advisory Agreement, GWCM is obligated to provide the following services to the Great-West Funds: (a) perform research and obtain and evaluate pertinent economic, statistical, and financial data relevant to the investment policies of the funds; (b) consult with the Board and furnish to the Board recommendations with respect to an overall investment plan for approval, modification, or rejection by the Board; (c) seek out, present, and recommend specific investment opportunities, consistent with any overall investment plan approval by the Board; (d) take such steps as are necessary to implement any overall investment plan approved by the Board, including making and carrying out decisions to acquire or dispose of permissible investments, management of investments and any other property of the funds, and providing or obtaining such services as may be necessary in managing, acquiring, or disposing of investments; (e) regularly report to the Board with respect to the implementation of any approved overall investment plan and any other activities in connection with management of the assets of the funds; Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 12 of 33 6 (f) maintain all required accounts, records, memoranda, instructions, or authorization relating to the acquisition or disposition of investments for the funds; (g) determine the net asset value of the funds as required by applicable law; (h) assist in supervising all aspects of the funds’ operations, including the coordination of all matters relating to the functions of the custodian, transfer agent, other shareholder service agents, if any, accountants, attorneys, and other parties performing services or operational functions for the funds; (i) provide the funds, at GWCM’s expense, with services of persons who may be GWCM’s officers, competent to perform such administrative and clerical functions as are necessary in order to provide effective administration of the funds, including duties in connection with certain reports and the maintenance of certain books and records of the funds; and (j) provide the funds, at GWMC’s expense, with adequate office space and related services necessary for its operations. Exh. C, Investment Advisory Agreement, May 1, 2015 at 1-3.1 Among the 63 mutual funds managed by GWCM are a number of “funds-of- funds” known as Asset Allocation Funds, each of which is a mutual fund that invests in a number of other underlying mutual funds. (Compl. ¶¶ 34, 43.) For these “funds-of- funds,” GWCM is responsible for selecting the underlying investment options from a range of proprietary mutual funds, non-proprietary mutual funds or a fixed interest contract guaranteed by GWCM’s affiliate, Great-West Life & Annuity Insurance Company. (Compl. ¶¶ 34, 39, 43.) GWCM selects an allocation in order to meet the specified objective of each Asset Allocation Fund that may change over time. For 1 Plaintiffs ignore certain services under the Investment Advisory Agreement in their Complaint, a copy of which is attached as Exhibit C. See Exh. C, Investment Advisory Agreement, May 1, 2015 at 2-3; see also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323 (2007) (on Rule 12(b)(6) motions, courts may consider “documents incorporated into the complaint by reference”). Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 13 of 33 7 example, GWCM has developed a “glide path” for certain funds that changes each fund’s asset allocation over time to meet changing investor needs, for example, by reducing exposure to equities to make the fund more conservative as the investor gets closer to retirement. (Compl. ¶¶ 37-38.) The Asset Allocation Funds do not use sub- advisers (discussed below); rather, GWCM is responsible for selecting the underlying mutual funds. (Compl. ¶ 54.) D. The Manager-of-Managers Structure The Investment Management Agreement permits GWCM to hire sub-advisers, allowing GWCM to find and engage experts in specific investment disciplines to manage assets in the funds. This arrangement allows a fund complex “to add new fund types to their product lineup, even when they don’t have the investment expertise in-house.”2 This structure, “first introduced in the early 1990s,” has “grown in popularity” to the point where “[m]any mutual funds today use a so-called ‘multi-manager structure . . . .’”3 Plaintiffs attempt to portray the adviser-subadviser structure as a conduit for excessive fees. But over nearly two decades, the SEC has approved as “necessary or appropriate in the public interest and consistent with the protection of investors,” 15 U.S.C. § 80a-6(c), more than two hundred exemptive applications authorizing “manager-of-manager” arrangements without the usual requirement that shareholders 2 Robert Pozen & Theresa Hamacher, The Fund Industry: How Your Money Is Managed 455 (2012). 3 SEC, IM Guidance Update No. 2014-03, at 1 (Feb. 2014), http://www.sec.gov/divisions/investment/guidance/im-guidance-2014-03.pdf. Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 14 of 33 8 vote on a change in sub-adviser.4 A central rationale for these exemptive orders is that a sub-adviser in “manager-of-manager” funds is analogous to an individual portfolio manager who may be terminated at the discretion of the adviser, while the investment adviser is the investment company’s principal service provider.5 For certain Great-West Funds, GWCM has hired sub-advisers to assist it in managing the assets of those funds pursuant to one of these SEC orders. (Compl. ¶¶ 30-31.) While these sub-advisers select the underlying investments within the investment guidelines developed by GWCM, GWCM maintains overall responsibility for the management and operation of the funds. Among other tasks, GWCM is also responsible for designing the funds; researching, selecting, monitoring and replacing sub-advisers; making asset allocation decisions across funds that use multiple sub- advisers; and providing a host of regulatory, record keeping and administrative tasks necessary to operate a mutual fund. Exh. C, Investment Advisory Agreement, May 1, 2015 at 1-3. ARGUMENT I. PLAINTIFFS LACK STANDING TO PURSUE CLAIMS ON BEHALF OF FUNDS IN WHICH THEY DO NOT OWN SHARES “Standing is a threshold inquiry and is particularly important in securities litigation, where strict application of standing principles is needed to avoid vexatious 4 See id.; see also USAllianz Variable Insurance Products Trust & USAllianz Advisers, LLC, 67 Fed. Reg. 55286-01, 2002 WL 1970906 (Aug. 28, 2002); USAllianz Variable Insurance Products Trust, Supplement (Form 497) (Sept. 23, 2002). 5 See Exemption from Shareholder Approval for Certain Subadvisory Contracts, 81 SEC Docket 939, 2003 WL 22423216, at *6 (Oct. 23, 2003). Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 15 of 33 9 litigation and abusive discovery.” Forsythe v. Sun Life Fin., Inc., 417 F. Supp. 2d 100, 117-18 (D. Mass. 2006) (citing Warth v. Seldin, 422 U.S. 490, 498 (1975); In re Bank of Bos. Corp. Sec. Litig., 762 F. Supp. 1525, 1531 (D. Mass. 1991)). In their Complaint, Plaintiffs allege they own shares in only 17 Great-West mutual funds. See Appendix I. Yet this lawsuit is brought on behalf of 63 different Great-West Funds, 46 of which are not owned by any Plaintiff. The law is clear that Plaintiffs do not have standing to pursue claims on behalf of these non-owned funds. Under Section 36(b), private plaintiffs may sue only on behalf of the funds whose shares they own: “[a]n action may be brought under this subsection by the Commission, or by a security holder of such registered investment company [(i.e., mutual fund)] on behalf of such company.” 15 U.S.C. § 80a-35(b) (emphasis added). Aside from this statutory standing requirement, Article III, Section 2 of the U.S. Constitution requires a party to have standing. Raines v. Byrd, 521 U.S. 811, 818 (1997). “Article III standing imposes three fairly strict requirements.” People to End Homelessness, Inc. v. Develco Singles Apartments Assocs., 339 F.3d 1, 8 (1st Cir. 2003) (citation omitted). These requirements include (1) a personal injury suffered by the plaintiff that is (2) fairly traceable to the defendant’s allegedly unlawful conduct and (3) likely to be redressed by the requested relief. Allen v. Wright, 468 U.S. 737, 751 (1984). The burden is on Plaintiffs to meet these requirements. FW/PBS, Inc. v. City of Dallas, 493 U.S. 215 (1990). Courts have consistently held that both the “security holder” language in Section 36(b) and Article III require that a plaintiff currently own shares in those funds on whose Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 16 of 33 10 behalf the claim is brought. Santomenno v. John Hancock Life Ins. Co., 677 F.3d 178, 185 (3d Cir. 2012) (affirming dismissal of Section 36(b) claim where plaintiff sold shares in the fund); Kasilag v. Hartford Inv. Fin. Servs., LLC, No. 11-1083 (RMB/KMW), 2016 WL 1394347, at *9 (D.N.J. Apr. 7, 2016) (“Ownership is a requirement for Section 36(b) actions.”); Siemers v. Wells Fargo & Co., No. 05-cv-04518 WHA, 2006 WL 2355411, at *20-21 (N.D. Cal. Aug. 14, 2006) (plaintiff lacked standing under Section 36(b) because he failed to allege that he owned fund shares); Forsythe, 417 F. Supp. 2d at 119-20 (dismissing Section 36(b) claims on behalf of funds in which the plaintiffs did not hold shares); In re AllianceBernstein Mut. Fund Excessive Fee Litig., No. 04 Civ. 4885, 2005 WL 2677753, at *9 (S.D.N.Y. Oct. 19, 2005) (same); In re Eaton Vance Corp. Sec. Litig., 219 F.R.D. 38, 41 (D. Mass. 2003) (same). Here, Plaintiffs have no financial stake in litigation concerning advisory fees charged to the majority of Great-West Funds they do not own. Plaintiffs are not “security holders” in those funds, they do not pay fees associated with those funds, and they would not benefit from any recovery with respect to those funds. Thus, Plaintiffs lack standing to pursue claims on behalf of those non-owned funds.6 That each Great-West mutual fund is a “series” in Great-West Funds, Inc., which itself is an investment company registered under the ICA, (Original Compl. ¶ 28), does 6 The Complaint alleges that Plaintiffs formerly owned shares in other Great-West Funds. (Compl. ¶¶ 10-18.) However, having sold their shares, Plaintiffs lack standing to pursue Section 36(b) claims related to those funds. Santomenno, 677 F.3d at 185 (affirming dismissal of Section 36(b) action where plaintiffs sold shares); Forsythe, 417 F. Supp. 2d at 117 (“Former security holders may not bring a claim on behalf of an investment company that they formerly held shares in but no longer do.”). Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 17 of 33 11 not alter the standing analysis. For example, in In re Mutual Funds Investment Litigation, 519 F. Supp. 2d 580 (D. Md. 2007), the plaintiff brought Section 36(b) claims on behalf of a group of mutual funds, each of which was a “series” within a single broader investment company. Id. at 588. The court noted the SEC’s position that “each series is to be treated as a separate investment company”7 and cited cases holding that the broader corporate structure of a series trust does not confer standing on plaintiffs to pursue claims on behalf of non-owned funds. Id. at 588-89. The court held: Plaintiffs cannot overcome the fact that the text of Section 36(b) (expressly requiring that a plaintiff be a “security holder of” the entity on whose behalf he seeks to bring suit), SEC pronouncements, and well-reasoned case law provide overwhelming support for treating an individual mutual fund as a “registered investment company.” Accordingly, derivative plaintiffs may not assert claims under Section 36(b) on behalf of mutual funds in which they never held shares. Id. at 590. Numerous courts have similarly held that a plaintiff lacks standing to sue on behalf of “series” funds within a broader single investment company unless they own 7 In re Mut. Funds Inv. Litig., 519 F. Supp. 2d at 588 n.11 (citing Adoption of Rule 18f-2, 1972 SEC LEXIS 1497, 1972 WL 125428, at *1 (Aug. 8, 1972) (“[T]he individual series of [a registered investment company] are, for all practical purposes, separate investment companies. Each series of stock represents a different group of stockholders with an interest in a segregated portfolio of securities.”); Salomon Bros. Inc., SEC No-Action Letter, 1995 WL 329631, at *2 (May 26, 1995) (“[O]n a number of occasions, [SEC staff] has treated individual portfolios of a single registered investment company as separate investment companies under other provisions of the 1940 Act that expressly apply to a ‘registered investment company.’”); Mut. Series Fund, Inc., SEC No-Action Letter, 1995 WL 693304, at *2 (Nov. 7, 1995) (the SEC has “recognized that a series is the functional equivalent of a separate investment company and have concluded that an individual series should be deemed a separate investment company in applying the various limitations and restrictions imposed by the 1940 Act and the rules under the 1940 Act.”); Principal Investors Fund Inc., SEC No-Action Letter, 2005 WL 1160193, at *3 (May 13, 2005) (“[E]ach series of a series investment company is a separate investment company for the purposes” of Section 12 of the ICA)). Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 18 of 33 12 shares in each of the specific funds. Curran v. Principal Mgmt. Corp., No. 4:09-cv- 00433, 2011 WL 223872, at *2 n.3 (S.D. Iowa Jan. 24, 2011) (each “series” fund treated as a registered investment company, even though one trust was registered with the SEC); Siemers v. Wells Fargo & Co., No. C 05-04518 WHA, 2006 WL 3041090, at *7 (N.D. Cal. Oct. 24, 2006) (citation omitted) (“Plaintiff cannot sue on behalf of funds he does not own.”); Forsythe, 417 F. Supp. 2d at 118 (citation omitted) (each fund should be treated as a “separate and distinct entity” under Section 36(b); “a plaintiff may not use the corporate structure of the broader investment company to confer standing”); Stegall v. Ladner, 394 F. Supp. 2d 358, 362 (D. Mass. 2005) (no standing under Section 36(b) to sue on behalf of non-owned funds); Williams v. Bank One Corp., No. 03 C 8561, 2003 WL 22964376, at *1 (N.D. Ill. Dec. 15, 2003) (no standing to bring a derivative claim on behalf of unincorporated funds within incorporated business trust).8 8 In Batra v. Investors Research Corp., No. 89-0528-CV-W-6, 1992 WL 278688 (W.D. Mo. Oct. 4, 1991), plaintiffs were permitted to pursue claims on behalf of “series” funds in which they did not own shares. Id. at *1. There, however, the broader investment company charged a single one-percent fee for all assets that applied equally to every series within the trust. Id. at *3 n.6. Here, as alleged in the Complaint, each fund pays different fees. (See Compl. ¶ 28.) Numerous courts have distinguished Batra on this ground. In re Scudder Mut. Funds Fee Litig., No. 04 Civ.1921(DAB), 2007 WL 2325862, at *10 (S.D.N.Y. Aug. 14, 2007); Siemers v. Wells Fargo & Co., No. C 05- 04518 WHA, 2006 WL 3041090, at *7 n.2 (N.D. Cal. Oct. 24, 2006); In re AllianceBernstein, 2005 WL 2677753, at *10. In any event, Batra was wrongly decided in light of more recent decisions relying on subsequent SEC guidance. Siemers, 2006 WL 3041090, at *7 n.2 (“After considering the weight of recent authority and relevant SEC rulings, this [court] respectfully disagrees with the Batra decision.”). Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 19 of 33 13 Accordingly, if this action proceeds at all—which it should not—Plaintiffs should only be entitled to challenge fees paid by the 17 Great-West mutual funds they own.9 II. THE COMPLAINT DOES NOT ADEQUATELY ALLEGE THAT EACH OF THE FUNDS PAID EXCESSIVE FEES To avoid dismissal under Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face.” Toone v. Wells Fargo Bank, N.A., 716 F.3d 516, 520-21 (10th Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)); Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1212-13 (10th Cir. 2011) (dismissing lawsuit for failure to state a claim for relief under the standard in Twombly and Iqbal). A complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “[C]onclusory statements” are “not entitled to the assumption of truth.” Iqbal, 556 U.S. at 678. Allegations also need not be credited if they are contradicted by the public record or by documents upon which the complaint relies.10 See Genesis Bio-Pharm., Inc. v. Chiron Corp., 27 F. App’x 94, 99-100 (3d Cir. 2002). Courts grant motions to dismiss Section 36(b) claims where the plaintiff’s allegations are contradicted by public records 9 Plaintiffs cannot use their ownership of the Asset Allocation Funds to challenge the fees paid by the underlying funds within those funds. See Curran, 2011 WL 223872, at *4 (plaintiffs lack standing to pursue Section 36(b) claims challenging fees charged to underlying funds within a fund-of-funds). 10 Griggs v. Jornayvaz, No. 09-cv-00629-PAB-KMT, 2010 WL 4932674, at *3 (D. Colo. Nov. 29, 2010) (courts can consider on a motion to dismiss public disclosure documents required by law to be, and that have been, filed with the SEC); Nobel Asset Mgmt. v. Allos Therapeutics, Inc., No. 04-cv-1030-RPM, 2005 WL 4161977, at *2 (D. Colo. Oct. 20, 2005) (taking judicial notice of the defendant company’s Form 10-K Annual Report that was filed with the SEC while considering defendant’s motion to dismiss). Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 20 of 33 14 that “paint a more complete picture . . . of the Fund in question.” See, e.g., In re AllianceBernstein, 2006 WL 74439, at *2 (S.D.N.Y. Jan. 11, 2006). Claims under Section 36(b) “are particularly appropriate for dismissal for failure to state a claim under [FED. R. CIV. P.] 12(b)(6).” Krantz v. Prudential Invs. Fund Mgmt. LLC, 77 F. Supp. 2d 559, 562 (D.N.J. 1999), aff’d, 305 F.3d 140 (3d Cir. 2002); see also Olesh v. Dreyfus Corp., No. 94-1664 (CPS), 1995 WL 500491, at *21 (E.D.N.Y. Aug. 8, 1995) (dismissing complaint). Rule 12(b)(6) motions further the congressional intent to “prevent the harassment of investment [managers] by ill-founded or nuisance law suits, the so-called strike suit.” In re Franklin Mut. Funds Fee Litig., 478 F. Supp. 2d 677, 687 (D.N.J. 2007) (citing H.R. Rep. No. 91-1382, at 8 (1970)). In Section 36(b) cases, courts typically consider the six “Gartenberg factors” in assessing the sufficiency of the Complaint: (1) the nature and quality of services provided to the funds; (2) the independence and conscientiousness of the funds’ board of trustees; (3) whether the adviser realized and shared economies of scale; (4) the fees charged to comparable mutual funds; (5) the adviser’s profitability; and (6) fall-out benefits to the adviser. Jones, 559 U.S. at 344 & n.5; see Gartenberg, 694 F.2d at 928- 29; Sins v. Janus Capital Mgmt., LLC, No. 04-CV 01647-WDM-MEH, 2006 WL 3746130, at *3 (D. Colo. Dec. 15, 2006). The most important Gartenberg factor is the independence and conscientiousness of the funds’ trustees. See Krinsk, 875 F.2d at 412 (citation omitted) (“The expertise of the [independent trustees], whether they are fully informed, and the extent of care and conscientiousness with which they perform their duties are among Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 21 of 33 15 the most important factors to be examined.”); Krinsk v. Fund Asset Mgmt., 715 F. Supp. 472, 501 (S.D.N.Y. 1988) (“The Court will not ignore a responsible decision by the [trustees], including a majority of the [independent trustees], to continue the fee structure as it stands.”), aff’d, 875 F.2d 404 (2d Cir. 1989). Under the ICA, the independent trustees are the first line of defense in protecting fund shareholders, and courts must give appropriate consideration to the board’s approval of the challenged fees. 15 U.S.C. § 80a-35(b)(1)-(3); see also Jones, 559 U.S. at 351-53. A. Plaintiffs Make No Allegations Relating to Some Great-West Funds Plaintiffs have taken a “group pleading” approach in their Complaint. That is, rather than address each fund individually, they make allegations such as: (1) the challenged fees vary by fund, with some funds paying one tenth what other funds pay, (Compl. ¶ 28); (2) “[f]ully half of the funds have failed to match their stated benchmarks in 2015”, (Compl. ¶ 102) (emphasis added); (3) “most” sub-advisers have declining fee schedules, (Compl. ¶ 31) (emphasis added); (4) sub-advisers manage “nearly all” the funds, (Compl. ¶ 30) (emphasis added); (5) the structure of the funds differ (e.g., only some are fund-of-funds), (Compl. ¶ 34); (6) there are different assets under management, (Compl. ¶ 28); and (7) the advisory services vary across funds (e.g., some are index funds and some are actively managed). (Compl. ¶¶ 63, 82.) The failure to make specific and individualized allegations is fatal to the claim. Robbins v. Oklahoma, 519 F.3d 1242, 1249-50 (10th Cir. 2008) (citation omitted) (“[T]he complaint must meet the minimal standard of notice pleading as articulated by the Court in Twombly. . . . Without allegations sufficient to make clear the ‘grounds’ on which the Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 22 of 33 16 plaintiff is entitled to relief, it would be impossible for the court to perform its function of determining, at an early stage in the litigation, whether the asserted claim is clearly established.”); Seni v. Peterschmidt, No. 12-cv-00320-REB-CBS, 2013 WL 1191265, at *3 (D. Colo. Mar. 22, 2013) (dismissing derivative action due to plaintiffs’ reliance on group pleading). Each Great-West fund has its own fee schedule, performance history (e.g., some funds outperformed their benchmark and others did not), and unique structure. The Gartenberg factors that courts use to assess the allegations in the Complaint apply very differently across such a large number of diverse mutual funds. Plaintiffs do not attempt to address each fund separately, hoping to avoid the inconvenience when those factors do not support their theories. The Complaint does not even mention or identify all of the 63 funds on whose behalf Plaintiffs purport to sue, much less provide any facts that would support a finding of excessive fees under the Gartenberg factors. Dismissal is therefore appropriate.11 B. The Complaint Does Not State a Claim with Respect to Any Specific Fund Turning to the allegations of any specific fund, it is clear that Plaintiffs have not made out a claim with respect to even a single one of the 63 at-issue funds. 1. Nature and Quality of Services 11 Plaintiffs’ attempt to bring a claim on behalf of an entire complex of funds, with very few allegations specific to any one fund, distinguishes this case from other recent Section 36(b) claims that have survived a motion to dismiss. See, e.g., Redus-Tarchis v. N.Y. Life Inv. Mgmt., LLC, Cv. No. 14-7991, 2015 WL 6525894, at *36 (D.N.J. Oct. 28, 2015); In re BlackRock Mut. Funds Advisory Fee Litig., No. 14-1165 (FLW) (DEA), 2015 WL 1418848, at *8-9 (D.N.J. Mar. 27, 2015). Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 23 of 33 17 Plaintiffs’ allegations about the nature and quality of services provided to the Great-West Funds are insufficient. While they focus almost exclusively on some funds’ performance, they provide almost no specifics. For example, the Complaint alleges that “[f]ully half the [active] funds have failed to match their stated benchmarks in 2015.” (Compl. ¶ 102.) But this does not identify which funds underperformed and concedes that many other of the funds did beat their benchmark. Without identifying any specific funds, Plaintiffs also generically assert that “the [Asset Allocation Funds] have underperformed their stated benchmarks, including the Morningstar universe of their peers.” (Compl. ¶ 55.) However, absent allegations about which funds underperformed, over what time period, or the amount of the underperformance, these allegations are insufficient. Migdal v. Rowe Price-Fleming Int’l, Inc., 248 F.3d 321, 327 (4th Cir. 2001) (dismissing Section 36(b) claim where funds allegedly “did not meet their preselected benchmark performance standards”); In re Franklin, 478 F. Supp. 2d at 687 (dismissing Section 36(b) claim and holding that alleged poor performance for an undated period is “unavailing”); In re Scudder Mut. Funds Fee Litig., No. 04 Civ.1921(DAB), 2007 WL 2325862, at *16-17 (S.D.N.Y. Aug. 14, 2007) (“Plaintiffs’ argument that statistics from other years provide a necessary context to the relevant fee allegations is without merit.”). Indeed, even if these details were provided, the allegations would be insufficient. Migdal, 248 F.3d at 327 (allegations that funds underperformed benchmarks or peers are, standing alone, insufficient under Section 36(b) and are at best “marginally helpful”). Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 24 of 33 18 Moreover, Plaintiffs’ generic allegations of underperformance are particularly lacking in light of the fact that the Great-West Funds’ public filings with the SEC indicate that some of these funds have had excellent long term performance. See, Exh. D, Great-West Funds, Inc. Semi-Annual Report, Great-West Profile II Funds, June 30, 2015 at 39 (stating that the Great-West Aggressive Profile II Fund, the Great-West Moderately Aggressive Profile II Fund and the Great-West Moderate Profile II Fund beat the majority of their peer funds over a one, three, five and ten year period, and two out of three of these funds outperformed their benchmark over a ten year period); In re Am. Mut. Funds Fee Litig., No. CV 04-5593 GAF (RNBx), 2009 WL 5215755, at *48 (C.D. Cal. Dec. 28, 2009) (long-term performance is more relevant than short term when assessing performance under Section 36(b)), aff’d sub nom. Jelinek v. Cap. Res. & Mgmt. Co., 448 F. App’x 716 (9th Cir. 2011). 2. Comparative Fees Plaintiffs’ allegations with respect to the comparative fees are similarly deficient. The Complaint provides comparative fee data for only a handful of the funds. (Compl. ¶¶ 77-79.) Even for the few funds that the Complaint does address, the allegations are scant at best. For example, Plaintiffs compare some funds to a single Vanguard fund, (Compl. ¶¶ 68, 78-79), or assert in conclusory fashion that a fund’s fee is “significantly more” than other unspecified funds. (Compl. ¶ 79.) These allegations are insufficient to survive dismissal. For example, in Migdal v. Rowe Price-Fleming International, Inc., plaintiffs alleged that “two or three similar funds offered lower fee rates than the funds in this case, while simultaneously outperforming Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 25 of 33 19 them.” Migdal, 248 F.3d at 327. In affirming dismissal of the complaint for failure to state a claim, the Fourth Circuit found these allegations “not particularly meaningful” because they did not address the particular services offered by the funds’ adviser. Id. The allegations here against the Great-West Funds are even less probative because the few comparative funds cited in the Complaint most often are Vanguard funds. (Compl. ¶¶ 59, 67-69.); Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338, 345 (2d. Cir. 2006) (fee comparisons to “Vanguard, a firm known for its emphasis on keeping costs low, raises little suspicion”); Kalish v. Franklin Advisers, Inc., 742 F. Supp. 1222, 1250 (S.D.N.Y. 1990) (“[t]he Vanguard comparison is seriously flawed”). 3. Profitability The Complaint contains no factual allegations about the profitability of any Great- West Fund or GWCM’s overall profitability. See Amron, 464 F.3d at 344-45 (dismissing Section 36(b) claim based on a failure to adequately allege profitability; assertions regarding the size of the fees “are irrelevant to a showing of profitability without some allegation of the corresponding costs incurred in operating the funds”). Plaintiffs allege only in conclusory fashion that GWCM earned “extreme and excessive profits.” (Compl. ¶ 72.) Without supporting facts, this allegation standing alone is insufficient under Iqbal/Twombly. 4. Fall-Out Benefits Plaintiffs have not adequately alleged any fall-out benefits. “Fall-out benefits” are profits to the adviser or its affiliates that “would not have occurred but for the existence of the Fund.” Krinsk, 715 F. Supp. at 495; see also In re Am. Mut. Funds Fee Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 26 of 33 20 Litig., 2009 WL 5215755, at *53. Here, the Complaint alleges a single fall-out benefit: advisory fees on other Great-West Funds used within the Asset Allocation Funds. (Compl. ¶ 110.) These allegations fail to withstand scrutiny. First, courts have rejected attempts by plaintiffs to allege that other fees charged to the mutual funds are fall-out benefits absent a showing that those other fees are themselves excessive. For example, the Ninth Circuit recently affirmed the dismissal of a complaint based on similar allegations of fall-out benefits in Turner v. Davis Selected Advisers, LP, 626 F. App’x 713, 715 (9th Cir. 2015) (mem.). There, the plaintiff alleged that service fees collected on the funds were a fall-out benefit. Id. at 717. The court held that “[t]he mere labeling of such fees as ‘fall out benefits’ . . . says nothing about whether the service fee here fails to resemble what would be the product of arm’s- length bargaining.” Id.; see also Meyer v. Oppenheimer Mgmt. Corp., 895 F.2d 861, 866 (2d Cir. 1990) (“If the fee for each service viewed separately is not excessive in relation to the service rendered, then the sum of the two is also permissible.”). Second, Plaintiffs’ labeling of the advisory fees paid by the underlying funds used in the Asset Allocation Funds as fall-out benefits is simply an end-run around their lack of standing to challenge those fees. Curran, 2011 WL 223872, at *4 (plaintiffs cannot challenge fees in the funds held within their fund-of-funds). 5. Economies of Scale Plaintiffs allege that GWCM realized economies of scale because “most” sub- advisers have breakpoints12 in their fee schedules, (Compl. ¶ 103), and the total fees of 12 “Breakpoints” reduce the fees paid at certain specified levels of assets. Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 27 of 33 21 the Great-West Funds in the aggregate increased from 2012 to 2014. (Compl. ¶¶ 105, 107.) These allegations are insufficient to plead economies of scale. First, these allegations say nothing about whether GWCM realized economies of scale with respect to any individual funds, which is exactly why Plaintiffs’ group pleading approach is inadequate. For most of the 63 funds at issue, Plaintiffs have no economies of scale allegations. Grouping funds together masks that some funds decreased in assets during the relevant period. Second, even for those few funds the Complaint does address, the economies of scale allegations rest exclusively on the existence of subadvisory fee breakpoints in a minority of funds.13 (Compl. ¶¶ 64, 83-98.) A “differential in breakpoints between sub- advisors and investment advisors is irrelevant to the issue of economies of scale” because GWCM and the sub-advisers perform different services. Hoffman v. UBS-AG, 591 F. Supp. 2d 522, 540 (S.D.N.Y. 2008). Rather, in order to survive dismissal, a plaintiff “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, 591 F. Supp. 2d at 540; see also Amron, 464 F.3d at 345 (economies of scale requires “allegations regarding the costs of performing fund 13 The Complaint alleges that GWCM’s fees have increased over time, but this does not speak to economies of scale. (Compl. ¶¶ 107-08.) “Mere assertions that fees increased with the size of the Funds are not enough to establish that the benefits from economies of scale were not passed on to investors.” In re Goldman Sachs Mut. Funds Fee Litig., No. 04 Civ. 2567(NRB), 2006 WL 126772, at *9 (S.D.N.Y. Jan. 17, 2006). Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 28 of 33 22 transactions or the relationship between such costs and the number of transactions performed”). Plaintiffs have failed to do so. Even if subadvisory breakpoints were relevant, these allegations do not apply to the majority of the funds. For example, of the 17 funds owned by Plaintiffs, 3 are alleged to use sub-advisers that employ breakpoints, (Compl. ¶¶ 84, 86-87), 6 funds are alleged to use sub-advisers that have flat fee schedules, (Compl. ¶¶ 64, 92-93, 98), and the other funds either do not use sub-advisers or are not mentioned. Finally, Plaintiffs point to the lack of breakpoints in the fee schedules used to compensate GWCM as evidence that scale economies were not shared. However, the level of sharing is only relevant if Plaintiffs adequately allege that economies of scale were realized, which they have not done. In any event, breakpoints are only one form of sharing. The Complaint fails to address other forms of sharing, such as waivers and pricing to scale from inception. See In re Am. Mut. Funds Fee Litig., 2009 WL 5215755, at *52 (“Economies of scale can be shared with fund shareholders in a number of ways, including breakpoints, fee reductions and waivers, offering low fees from inception, or making additional investments to enhance shareholder services.”). 6. Independence and Conscientiousness of the Board Plaintiffs fail to allege any facts about the Great-West Funds’ trustees that would demonstrate that they failed to act independently and conscientiously. With respect to independence, there is an express presumption under the ICA that mutual fund trustees are disinterested, 15 U.S.C. § 80a-2(a)(9), and “a plaintiff’s burden to overcome this presumption is a heavy one.” Amron, 464 F.3d at 344. Here, none of the three Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 29 of 33 23 independent trustees on the Great-West Funds’ Board is alleged to have any affiliation with GWCM. (Compl. ¶ 8.) Other than a conclusory allegation that the Board was “not disinterested in setting adviser compensation,” (Compl. ¶ 113), there is not a single alleged fact that identifies how the independent trustees benefited from the advisory contract. These allegations are insufficient to rebut the presumption of independence. Hoffman, 591 F. Supp. 2d at 540 (general allegations insufficient to survive dismissal because of express presumption of trustee independence); ING Principal Prot. Funds Derivative Litig., 369 F. Supp. 2d 163, 172 (D. Mass. 2005). The Complaint is essentially silent on the conscientiousness of the trustees. Instead, Plaintiffs claim only that the Board “rubber-stamped” and “consistently approved” the Investment Advisory Agreement. (Compl. ¶ 111.) But these allegations simply assume the fees were excessive and conclude from that false premise that the Board process must have been flawed. This conclusory and circular reasoning fails to meet the Iqbal/Twombly standard. See ING Principal Prot. Funds, 369 F. Supp. 2d at 172 (“Simply because the Board of Trustees approved the fee contracts at issue does not render the independent trustees ‘interested’.”). Indeed, if these allegations were sufficient, it would be at odds with the statutory scheme, which gives significant deference to the Board and is designed to protect advisers from ill-founded suits. See In re Franklin, 478 F. Supp. 2d at 687 (allowing plaintiffs to state a Section 36(b) claim based on allegations that could apply to a significant portion of fund complexes would violate Congressional intent). Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 30 of 33 24 Finally, Plaintiffs allege that the Board is given “hundreds of thousands of pages of information,” but they did not get information about profitability, comparative fees or the nature of GWCM’s services. (Compl. ¶ 114.) This allegation directly contradicts the funds’ public filings that lay out the information considered by the Board in approving the advisory fees. These SEC filings make clear that the trustees: (1) had “regular Board meetings held throughout the year;” (2) met and consulted with “independent legal counsel” and “with representatives of Lipper, Inc. (‘Lipper’), an independent provider of investment company data;” (3) requested and considered follow-up information following the March meeting; and (4) considered information about the nature and quality of services provided by GWCM, comparative fee and performance data, profitability, economies of scale, and other factors. See Exh. D, Great-West Funds, Inc. Semi-Annual Report, Great-West Profile II Funds, Jun. 30, 2015 at 38-40. Because these public filings contradict Plaintiffs’ conclusory allegations, the Court should not credit the Complaint’s allegation that the Board “rubber-stamped” the agreement. See Redus-Tarchis v. N.Y. Life Inv. Mgmt., LLC, Cv. No. 14-7991, 2015 WL 6525894, at *11 (D.N.J. Oct. 28, 2015) (finding that the independence and conscientiousness factor weighed in defendant’s favor on a motion to dismiss where SEC filings showed that the Board received fee and performance information from third party consulting firms). III. DISMISSAL WITH PREJUDICE IS APPROPRIATE As noted above, Defendant provided Plaintiffs with detailed notice of the deficiencies in the Original and First Amended Complaints. Having had multiple opportunities to cure the deficiencies herein, dismissal should be with prejudice. Carrillo Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 31 of 33 25 v. Suthers, No. 12-cv-02034, 2014 WL 11297187, at *18 (D. Colo. Dec. 29, 2014); Allen Oil & Gas, LLC v. Klish, 113 F. App’x 869, 871 (10th Cir. 2004). CONCLUSION For the reasons stated above, the Moving Defendant respectfully requests that the Court dismiss the Complaint in its entirety. Dated: May 2, 2016 Respectfully submitted, /s/ Edward C. Stewart Edward C. Stewart (#23834) Wheeler Trigg O’Donnell LLP 370 Seventeenth Street, Suite 4500 Denver, CO 80202-5647 Telephone 303.244.1800 Facsimile 303.244.1879 stewart@wtotrial.com Sean M. Murphy Milbank, Tweed, Hadley & McCloy LLP One Chase Manhattan Plaza New York, NY 10005 Telephone 212.530.5688 Facsimile 212.822.5688 smurphy@milbank.com Robert M. Little Great-West Life & Annuity Insurance Company 8525 East Orchard Road, 2T3 Greenwood Village, CO 80111 Telephone: 303.737.5089 Facsimile: 303.737.1699 bob.little@gwl.com Attorneys for Defendant, Great-West Capital Management, LLC Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 32 of 33 26 CERTIFICATE OF SERVICE (CM/ECF) I hereby certify that on May 2, 2016, I caused the foregoing to be electronically filed with the Clerk of Court using the CM/ECF system, which will send notification to all counsel of record. • Mark G. Boyko mboyko@uselaws.com • Robert Michael Little bob.little@greatwest.com • Sean Miles Murphy smurphy@milbank.com, cfrye@milbank.com • Jerome Joseph Schlichter jschlichter@uselaws.com, wballard@uselaws.com, rfreisinger@uselaws.com, hlea@uselaws.com, jredd@uselaws.com • Sean E. Soyars ssoyars@uselaws.com • Edward Craig Stewart stewart@wtotrial.com, powell@wtotrial.com, papsdorf@wtotrial.com • Michael Armin Wolff mwolff@uselaws.com, rfreisinger@uselaws.com /s/ Edward C. Stewart Edward C. Stewart (#23834) Wheeler Trigg O’Donnell LLP 370 Seventeenth Street, Suite 4500 Denver, CO 80202-5647 stewart@wtotrial.com Attorneys for Defendant, Great-West Capital Management, LLC Case 1:16-cv-00230-CMA-MJW Document 35 Filed 05/02/16 USDC Colorado Page 33 of 33