Obeslo et al v. Great-West Life And Annuity Insurance Company et al

BRIEF in Opposition to 21 MOTION to Dismiss

D. Colo.April 19, 2017

1 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 16-cv-03162-RM-STV JOAN OBESLO et al., on behalf of GREAT-WEST FUNDS, INC., Plaintiffs, v. GREAT-WEST LIFE & ANNUITY INSURANCE CO. and GREAT-WEST CAPITAL MANAGEMENT, LLC, Defendants. PLAINTIFFS’ OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS [DOC. 21] The Investment Company Act authorizes any security holder of a registered investment company to bring an action on behalf of her company to recover the company’s damages from an adviser’s breach of fiduciary duties. 15 U.S.C. §80a-35(b). Plaintiffs are security holders of Great-West Funds Inc., a registered investment company. They seek to recover the damages their company suffered from Defendants’ breach of their fiduciary duties. In such derivative actions, it is the redressable injury to the company, not the plaintiff, that establishes Article III standing. Plaintiffs have standing to pursue this action on behalf of their company to recover all of their company’s damages. The Investment Company Act does not limit the scope of recoverable damages to the plaintiffs’ specific investments. Defendant cites no precedential or persuasive authority to the contrary. Defendant’s motion to dismiss should be denied. Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 1 of 16 2 I. Background. A. The Investment Company Act. An investment company, commonly known as a mutual fund, 1 “is a pool of assets, consisting primarily of a portfolio of securities, and belonging to the individual investors holding shares in the fund.” Jones v. Harris Assocs. L.P., 559 U.S. 335, 338 (2010)(quoting Burks v. Lasker, 441 U.S. 471, 480 (1979)); see also 15 U.S.C. §80a-3(a). An investment adviser creates the mutual fund by incorporating the investment company, choosing the directors, managing the investments, and taking fees from the money invested in the company. Jones, 559 U.S. at 338. The investment company practically is controlled by the adviser; thus, “the forces of arm’s- length bargaining do not work in the mutual fund industry in the same manner as they do in other sectors of the American economy.” Id. (quotation marks and citation omitted); see also Gartenberg v. Merrill Lynch Asset Mgmt. Inc., 694 F.2d 923, 929 (2d Cir. 1982)(describing relationship as “potentially incestuous”). Congress enacted the Investment Company Act of 1940 (“ICA”) to address “the potential for abuse inherent in the structure of investment companies” (Daily Income Fund v. Fox, 464 U.S. 523, 536 (1984)) and to protect shareholders (Jones, 559 U.S. at 339). In 1970 Congress “bolstered shareholder protection” in the ICA by adding §36(b), which “imposed upon investment advisers a fiduciary duty with respect to compensation received from a mutual fund and granted individual investors a private right of action for breach of that duty.” Jones, 559 U.S. at 339-40. As to the private right of action, §36(b) provides, in pertinent part: An action may be brought under this subsection by the Commission, or by a 1 United States v. Cartwright, 411 U.S. 546, 549 n.5 (1973). The Investment Company Act does not refer to “mutual funds.” Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 2 of 16 3 security holder of such registered investment company on behalf of such company, against such investment adviser, or any affiliated person of such investment adviser, or any other person enumerated in subsection (a) of this section who has a fiduciary duty concerning such compensation or payments, for breach of fiduciary duty in respect of such compensation or payments paid by such registered investment company or by the security holders thereof to such investment adviser or person. 15 U.S.C. §80a-35(b) (emphasis added). An adviser is liable to the investment company under §36(b) if it charges a fee “that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” Jones, 559 U.S. at 346. Any “security holder” of the “registered investment company” may bring an action under §36(b) against the adviser. 15 U.S.C. §80a-35(b). 2 The ICA does not define “security holder,” although it does define “security” to mean “any ... stock” as well as “note, ... bond, ... [or] evidence of indebtedness” of the investment company. 15 U.S.C. §80a-2(36). 3 Thus, any shareholder or other debt-holder of the investment company may bring action under §36(b) on behalf of the investment company. Section 36(b) grants a similar right to the SEC, but the SEC rarely does so. 4 Defendants attempt to conceal §36(b)’s clear reference to “registered investment company” by claiming that §36(b)’s “express terms require Plaintiffs to be ‘security holders’ of each Fund on whose behalf they bring a claim[.]” Doc. 21 at 7 (Mem. 2)(emphasis added). The express terms of the statute say no such thing. As noted above, the ICA does not even refer to “mutual 2 An investment company registers with the SEC by filing a registration statement. 15 U.S.C. §80a-8; 17 CFR §§270.8b-1 - 270.8b-32. 3 In securities law, “security” must be construed broadly to effect the law’s purpose of protecting investors. Reves v. Ernst & Young, 494 U.S. 56, 60 (1990). 4 The SEC was not the plaintiff in any §36(b) case cited by either party in this action. Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 3 of 16 4 funds.” Investment pools can be registered as separate investment companies or a single investment company can be registered with multiple investment pools as series of shares of the same company. 17 C.F.R. §§270.18f-2 - 270.18f-3. Section 36(b), however, refers only to the “registered investment company” as the entity on whose behalf any security holder of that company can bring an action for breach of fiduciary duty, not the separate series or classes of the shares of that investment company. A shareholder (or other plaintiff) cannot sue for her own personal damages under §36(b). Instead, she can recover only her company’s damages. A §36(b) action is a derivative action on behalf of the investment company because the recovery “will go to the company rather than the plaintiff[.]” Daily Income, 464 U.S. at 535 n.11. “[T]he right asserted by a shareholder suing under the statute is a ‘right of the corporation[.]’” Id. (emphasis added). Given that the action is the company’s action, there is no reason to limit the company’s recoverable damages to the individual losses of the plaintiff who brings that action, whether that plaintiff be a shareholder, a debt holder, or the SEC. And §36(b) provides no such limitation. B. Great-West Funds Inc. Great-West Funds Inc. is a registered investment company incorporated in Maryland and located in Denver, Colorado. Doc. 1 ¶2. It has issued over 63 series of shares of its stock, each of which it describes as a “Fund.” Id. ¶3. It is nominally governed by a board of directors, which is supposed to oversee all Funds. Id. ¶5. Plaintiffs are shareholders of Great-West Funds Inc. through their investment in various Funds. Id. ¶12-19. They purchased their shares through workplace retirement programs or IRAs administered by Empower Retirement, a wholly-owned subsidiary of Defendant Great-West Life and Annuity Insurance Company. Id. The Funds are not Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 4 of 16 5 publicly available. Id. ¶4. Defendant Great-West Capital Management LLC (GWCM) is the investment adviser of all Funds under a single Investment Advisory Agreement with Great-West Funds Inc. Id. ¶11; 15 U.S.C. §80a-2(a)(20); Doc. 21 at 8 5 (Mem. 3). Defendant Great-West Life and Annuity Insurance Company (GWLA) is GWCM’s corporate parent, and provides all of GWCM’s employees, officers, and facilities. Doc. 1 ¶¶9-10. GWLA has provided putative administrative and recordkeeping services for the Funds since at least 2006. Id. ¶23. Until mid-2015, GWLA provided these services through an Administrative Services Agreement (“ASA”) with GWCM by which GWCM agreed to pay GWLA an amount equal to 35 basis points (bps, 0.35%) of the average daily net assets of the Funds, which was a share of the fees GWCM took from those Funds. Id. As of May 1, 2015, GWCM caused Great-West Funds Inc. to take over the ASA and contract with GWLA directly, causing the company to pay the 35 bps fee directly to GWLA. Id. ¶26; Doc. 21 at 3, 8, 10 (Mem. 3). 6 The terms of the 2015 ASA are materially identical to the terms of GWLA’s prior ASAs with GWCM. Doc. 1 ¶26. GWLA putatively provides administrative and recordkeeping services to all Funds through this same ASA. Id. ¶¶23, 26; Doc. 21 at 9 (Mem. 4); Doc. 21-2 at 2-3. The ASA was approved by the Great-West Funds Inc. board of directors for all 63 Funds in a single agreement. Doc. 1 ¶¶ 5, 26, 28; Doc. 21-2 at 10. In approving the ASA, the board did not engage in any significant analysis of the profits GWLA had been making from its 35 bps fee 5 “Doc.” page references are to the ECF header page numbers. All “Doc.” references are hyperlinked. 6 See also Doc. 21-2 at 10 (Fee schedule of what Defendant represents to be the Administrative Services Agreement). After Great-West Funds Inc. entered into the ASA with GWLA, GWCM reduced its investment advisory fees on the Funds by the same 35 bps it formerly passed through to GWLA. Doc. 1 ¶27. Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 5 of 16 6 despite the fact that this was an asset-based fee and the Funds’ assets had more than doubled in the time GWLA had been taking its fee. Id. ¶28. Nor did the board engage in any significant analysis of the services GWLA provided or the cost of those services, or even attempt to negotiate a lower fee on behalf of the Funds’ shareholders. Id. It did not put the administrative and recordkeeping services out for competitive bidding, or question why GWLA was charging an asset-based fee rather than a fixed fee or a fee based on the number of shareholders. Id. Instead, the board uncritically accepted the same contract terms GWCM had agreed to. Id. The board approved renewing the ASA in 2016 and, again, performed no critical analysis necessary to protect the company or shareholders’ interests. Id. ¶31. Such deficient oversight by an investment company’s directors, who are supposed to be “independent watchdogs,” requires “greater scrutiny” of the Defendants’ compensation and “a more rigorous look at the outcome[.]” Jones, 559 U.S. at 351-52 (citations omitted). GWLA’s purported services include performing sub-accounting to record retirement plan participants’ interests in Funds, investigating inquiries from retirement plan representatives or Fund shareholders, recording the ownership interest of Fund shareholders, and maintaining a record of the total number of shares issued to shareholders. Id. ¶23. The bulk of this work is recordkeeping, which includes the keeping of individual shareholder accounts and handling investments and distributions from and to shareholders. Id. ¶33. Recordkeeping is a highly- commoditized industry, and it costs no more to keep the records of a $100,000 account than for a $1,000 account. Id. As such, recordkeepers typically charge on a fixed-price basis (either on a total-dollar annual fee or a fixed-dollar per investment account basis), not based on total assets under management. Id. An outside company, DST Systems Inc., provides this recordkeeping Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 6 of 16 7 service for Great-West Funds Inc. for a fixed fee that is much lower than GWLA’s and does not increase as Fund assets increase. Id. ¶¶34-37. Given the recordkeeping services DST provides, it is not clear what services GWLA provides, much less why GWLA should receive so much more compensation than DST for similar services. Id. ¶46. The ASA has been immensely profitable for GWLA. In 2014 and 2015 alone it generated $300 million in profits. Id. ¶47. Because recordkeeping largely involves fixed costs, GWLA’s costs do not increase at the same rate as the Funds’ assets under management have increased (they have doubled over the past 5 years). Id. ¶54. Because GWLA receives an asset-based fee, its profit margins have increased along with its overall dollar profits. Id. Defendants do not challenge the sufficiency of the allegations of the Complaint to state a claim upon which relief can be granted under ICA §36(b). Instead, they contend only that §36(b) damages must be limited to the damages the Plaintiffs suffered and that Plaintiffs must identify the specific Funds in which they invest in order to state a claim. Doc. 21 at 11-12 (Mem. 6-7). Defendants are wrong on both counts. II. Plaintiffs have standing to sue on behalf of their investment company. As shareholders of Great-West Funds Inc., Plaintiffs unquestionably have statutory standing to bring this action to recover for their company all of the damages their company suffered from Defendants’ breach of their fiduciary duties. 15 U.S.C. §80-35(b). Since the plaintiff in a §36(b) action cannot sue for her own personal damages, only the company’s damages (Daily Income, 464 U.S. at 535 n.11), it make no sense to limit the damages recoverable in a §36(b) action to only those damages the plaintiff herself suffered in the specific fund in which she invested. The ICA nowhere contains such a limitation. Instead, it refers only to the damages that the investment Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 7 of 16 8 company suffered and the right of any shareholder (as well as debt holder or the SEC) to pursue that remedy for the company. “‘[W]hen the statute’s language is plain, the sole function of the courts-at least where the disposition required by the text is not absurd-is to enforce it according to its terms.’” In re Woods, 743 F.3d 689, 694 (10th Cir. 2014)(citation omitted). “[W]hether a party ‘falls within the class of plaintiffs whom Congress has authorized to sue’ under a particular statute … is a question of statutory interpretation.” Niemi v. Lasshofer, 770 F.3d 1331, 1344 (10th Cir. 2014)(quoting Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S.Ct. 1377, 1387-88 (2014)). While this broad interpretation of §36(b) is within the plain meaning of the statutory text, it also comports with “the premise that securities legislation must be broadly construed in order to insure the investing public a full measure of protection.” Prudential Ins. Co. v. SEC, 326 F.2d 383, 386 (3d Cir. 1964)(citations omitted). For these reasons, courts have recognized that when mutual fund “series” are issued by a single investment company, as Great-West Funds Inc. does, a shareholder in one series can sue on behalf of the company to recover the excessive fees in all of the series. Batra v. Investors Research Corp., No. 89-0528, 1992 WL 278688, *1-3 (W.D.Mo. Oct. 4, 1991); see also Barrett v. Van Kampen Merritt, Inc., No. 93-366, 1993 WL 95382, *2-3 (N.D.Ill. Mar. 26, 1993). That conclusion is bolstered by the structure of the ICA generally. For single investment companies that issue series of shares representing different investment funds, the ICA expressly states when those series should be treated as separate entities. 15 U.S.C. §§80a-11, 80a- 12(d)(1)(E)(ii), 80a-17(f)(2), 80a-18, 80a-22(d). The ICA does not treat each series as a separate entity or “registered investment company” for purposes of a §36(b) action. That shows Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 8 of 16 9 Congress’s intent that separate series are not separate “investment companies” for purposes of a §36(b) action. See Russello v. United States, 464 U.S. 16, 23 (1983)(where “Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion”). 7 For Article III standing, a plaintiff “must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 1547 (2016). A §36(b) action is derivative because it is brought for the benefit of the investment company that cannot sue on its own. Daily Income, 464 U.S. at 535 n.11. Whether the action is brought by the SEC, a debt holder, or a shareholder, the action is for the recovery of the company’s damages, not the plaintiff’s damages. Thus, the relevant “injury in fact” for Article III purposes is injury to the investment company. See Donoghue v. Bulldog Investors G.P., 696 F.3d 170, 175-76 (2d Cir. 2012)(addressing 15 U.S.C. §78p(b)); see also Vt. Agency of Nat. Res. v. United States ex rel. Stevens, 529 U.S. 765, 773-74 (2000)(“assignee of a claim has standing to assert the injury in fact suffered by the assignor”). The shareholder-plaintiff in a derivative action need only have 7 Courts recognize that investors in only certain classes of mutual fund shares can recover even fees charged to classes in which they did not invest. Turner v. Davis Select Advisers LP, No. 08-421, 2011 U.S.Dist.LEXIS 159021, *12-13 (D.Ariz. June 1, 2011)(quoting In re Am. Mut. Funds Fee Litig., No. 04- 5593, 2009 U.S.Dist.LEXIS 120597, 2009 WL 5215755, *42 (C.D.Cal. Dec. 28, 2009)). Since the fee challenged by the plaintiff on behalf of the company is at issue in funds other than those in which the plaintiff invests and it is the company’s right to recover all of its damages, it makes no sense to limit the company’s §36(b) action to only the plaintiff’s specific losses. Even Defendant’s citation recognizes that a plaintiff can sue for all funds where the “defendant’s allegedly illegal conduct caused the same type of harm to the plaintiff and all the others on whose behalf he is asserting claims.” In re Mut. Funds Inv. Litig., 519 F.Supp.2d 580, 587 (D.Md. 2007). Of course, the “other” on whose behalf the plaintiff is asserting his claim is the investment company, not other investors. Mutual Fund erroneously holds otherwise. See infra at 11-12. Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 9 of 16 10 some “personal financial interest” in the litigation to satisfy Article III. See Donoghue, 696 F.3d at 176. The principle that it is the company-or the entity on whose behalf the action is brought by the plaintiff-that must suffer the redressable injury in fact for Article III standing is recognized in other contexts. Under the Employee Retirement Income Security Act (ERISA), where a retirement plan participant is authorized to sue to recover her plan’s losses from a breach of fiduciary duty (29 U.S.C. §1132(a)(2), §1109(a)), courts recognize that injury to the plan on whose behalf the participant brings the action is all that is required for Article III standing. L.I. Head Start Child Dev. Servs., Inc. v. Econ. Opportunity Comm'n of Nassau County, Inc., 710 F.3d 57, at 67 n.5 (2d Cir. 2013); Fletcher v. Convergex Group L.L.C., No. 16-734, 2017 U.S.App.LEXIS 2459, 2017 WL 549025, *1 (2d Cir. Feb. 10, 2017)(summary order). Here, Plaintiffs indisputably allege an injury in fact to their investment company (Great-West Funds Inc.) on whose behalf they bring this action-the total excessive administrative services fees GWLA took from the company. That injury is directly traceable to Defendants’ breach of fiduciary duty under §36(b), and will be redressed by recovery of those excessive fees for Great- West Funds Inc., as provided for by the ICA. Plaintiffs each have an individual financial stake in the litigation because recovery of the excessive fees will increase the value of their investments in Great-West Funds Inc. Thus, Plaintiffs have Article III standing to recover all of their company’s damages from Defendant’s breach. There is nothing improper under Article III in Congress granting plaintiffs authority to recover damages on behalf of an entity such as a retirement plan or investment company that are greater than the plaintiff’s personal damages. “[P]ersons to whom Congress has granted a right Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 10 of 16 11 of action, either expressly or by clear implication, may have standing to seek relief on the basis of the legal rights and interests of others[.]” Warth v. Seldin, 422 U.S. 490, 501 (1975); see also Donoghue, 696 F.3d at 175 (citing cases). “In such a case, a plaintiff may be able to assert causes of action which are based on conduct that harmed him, but which sweep more broadly than the injury he personally suffered.” Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 592 (8th Cir. 2009)(citing Sprint Communs. Co. v. APCC Servs., Inc., 554 U.S. 269, 287 (2008)(“federal courts routinely entertain suits which will result in relief for parties that are not themselves directly bringing suit”)). A §36(b) action seeks to recover the investment company’s damages, not the individual plaintiff’s damages. Daily Income, 464 U.S. at 535 n.11. Thus, authorizing any shareholder of the company, as well as a debt holder or the SEC, to pursue an action to recover the company’s full damages, not just the specific plaintiff’s damages, is wholly within the scope of Article III. GWLA obtains its excessive fees from all Funds through a single ASA that was approved by the same board of directors for all Funds. GWLA provides the same services and charges the same excessive 35 bps fee for every Fund. See Doc. 21-2 (ASA) at 2, 3, 10. Defendants’ breach of duty to Great-West Funds Inc. therefore is the same as to all Funds, though the specific amount of recovery may vary among Funds. If the Court found GWLA’s fee to be excessive for any Fund, it necessarily will have found the same fee excessive for all the Funds, and Great-West Funds Inc. would be entitled to recover all of those excessive fees regardless of who were the plaintiffs bring the action on its behalf. To argue instead that a §36(b) action is limited to the specific investments of the Plaintiffs, Defendants cite district court decisions that are not precedential and are unpersuasive because Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 11 of 16 12 they ignore the plain text of §36(b) and rely on parts of the ICA and SEC rules and letters that have nothing to do with §36(b). See Doc. 21 at 13-16 (Mem. 8-11). In re Mutual Funds Investment Litigation relies on ICA provisions and SEC letters that indicate when a series is to be treated as a separate entity in other circumstances but ignores the fact that Congress and the SEC expressly do not apply that separate entity status to §36(b) actions. 519 F.Supp.2d at 588-90 & n.11; see also supra at 8. While separate entity status applies to separately registered and incorporated investment companies (id. at 588), there is no basis in the statute or logic to apply that status to a single registered investment company such as Great-West Funds Inc. Curran v. Principal Management Corp., LLC, No. 09-433, 2011 WL 223872, *2 n.3 (S.D. Iowa Jan. 24, 2011), did not analyze whether series of a single registered investment company must be treated as several registered investment companies under §36(b) because the plaintiff there conceded each series should be so treated. In Forsythe the plaintiffs sought to use a class action to encompass all separately registered investment companies created by the ultimate parent Sun Life. Forsythe v. Sun Life Fin., Inc., 417 F.Supp.2d 100, 103-04 (D.Mass. 2006). 8 Forsythe does not hold that series of stock of a single registered investment company are themselves separate registered investment companies under §36(b) and it appears that issue was not argued. Stegall v. Ladner, 394 F. Supp. 2d 358, 362-63 (D.Mass. 2005), relies on Williams v. Bank One Corp., No. 03-8561, 2003 WL 22964376, *1 (N.D.Ill. Dec. 15, 2003), which does not address the text or principles of §36(b) and instead relies on what it viewed as an analogous arrangement “in the corporate world.” Siemers v. Wells Fargo & Co., No. 05-4518, 2006 WL 8 MFS mutual funds such as the Massachusetts Investors Trust are separately registered investment companies. See Registration Statement (Form N-1A), https://www.sec.gov/Archives/edgar/data/63091/000095015606000150/d642041.txt Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 12 of 16 13 3041090, *7-8, *24 (N.D.Cal. Oct. 24, 2006), relies on cases concerning mutual funds that were individually registered investment companies, such as In re AllianceBernstein Mutual Fund Excessive Fee Litigation, No. 04-4885, 2005 WL 2677753 (S.D.N.Y. Oct. 19, 2005), and In re Eaton Vance Corp. Sec. Litig., 219 F.R.D. 38 (D.Mass. 2003). Eaton Vance is not even a §36(b) case. 219 F.R.D. at 40. Three of Defendant’s cases concern the “continuous ownership” requirement that is not at issue here because Plaintiffs presently own shares in Great-West Funds Inc. Santomenno v. John Hancock Life Ins. Co. (U.S.A.), 677 F.3d 178, 183-85 (3d Cir. 2012); Kasilag v. Hartford Inv. Fin. Servs., No. 11-1083, 2016 WL 1394347, *9 (D.N.J. Apr. 7, 2016); Siemers v. Wells Fargo & Co., No. 05-4518, 2006 WL 2355411, *20-21 (N.D.Cal. Aug. 14, 2006). 9 Defendants’ interpretation of §36(b) produces absurd results. GWLA charged each Fund the same 35 bps fee under the same ASA approved by the same board, under circumstances that demonstrate that the fee is excessive for every Fund. Defendants’ interpretation would require joinder of up to 63 different plaintiffs (if no plaintiff invested in more than one Fund), if not exponentially more to account for all share classes, simply to challenge a single agreement and excessive fee arrangement. It is reasonable to conclude that by omitting a “series holder” requirement from §36(b), Congress sought to avoid such unwieldy and inefficient suits. The ICA and the remedial purpose of §36(b) authorize Plaintiffs to bring their action on behalf of Great-West Funds Inc. to recover for that company all of GWLA’s excessive fees. Defendants’ standing argument, designed to hinder that remedy on behalf of Great-West Funds 9 Although it is not presently at issue, Plaintiffs do not concede that there is a “continuous ownership” requirement for a §36(b) action. Such requirement would allow a defendant to escape liability by terminating all shares from which it took unlawful fees and preclude an investment company from recovering its past damages for lack of any current investor. Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 13 of 16 14 Inc., should be rejected. II. Plaintiffs are not required to allege their specific investments in particular Funds and Defendants do not dispute that at least some Plaintiffs are invested in Funds that pay the 35 bps administrative service fee. Citing unauthenticated documents, Defendants contend certain Funds had institutional share classes that paid no administrative services fee and argue that any individual who invested only in such a fund has no standing to pursue this action on behalf of Great-West Funds Inc. That is an irrelevant issue because Defendants do not contend that no Plaintiff is invested in an administrative services fee paying Fund. 10 As noted above, so long as any Plaintiff is invested in such a Fund, she has standing to bring suit on behalf of Great-West Funds Inc. to recover all of the company’s damages from Defendants’ fiduciary breach. There is no requirement under §36(b) to “make specific and individualized allegations regarding the Funds Plaintiffs own[.]” Doc. 21 at 19 (Mem. 14). 11 Not all Funds have institutional share classes. The SecureFoundation Lifetime Funds and Profile I Funds have no institutional share class. 12 Institutional share classes of the other Funds were not issued until May 2015. Since Funds are not publicly available and are sold only through 10 Since GWLA claims to perform recordkeeping services for the Funds, it certainly would know if this were true. 11 The “group pleading” addressed in Seni v. Peterschmidt, No. 12-320-REB-CBS, 2013 WL 1191265 at *3 (D.Colo. Mar. 22, 2013), is the failure “to make sufficiently specific allegations addressing each defendant individually.” Defendants do not contend the complaint fails to sufficiently allege the bases of their respective liabilities. As noted above, their respective liabilities do not depend on the specific Funds in which any Plaintiff invested. Instead, they are liable under §36(b) for all of Great-West Funds Inc.’s damages from their breach of fiduciary duty. In that respect, the complaint provides Defendants “fair notice” of Plaintiffs’ claim and “the ground upon which it rests.” Pueblo of Jemez v. United States, 790 F.3d 1143, 1171-72 (10th Cir. 2015). 12 SecureFoundation Lifetime Funds Certified Shareholder Report (Dec. 31, 2016), Note 2. https://www.sec.gov/Archives/edgar/data/356476/000119312517069512/d333900dncsr.htm. Profile I FundCertified Shareholder Report (Dec. 31, 2016), Note 2. https://www.sec.gov/Archives/edgar/data/356476/000119312517069425/d333900dncsr.htm. Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 14 of 16 15 Defendant-affiliated retirement plans, investors have limited choices as to the share classes in which they are invested and may be moved into different share classes as their plan moves. Defendants’ motion does not identify any Plaintiff that owns only institutional share classes (even though they keep the records of what each shareholder owns). Should the Court find it necessary, Plaintiffs can allege who invests in which particular Funds that pay Defendants administrative services fees with such specificity as the Court requires, and the Court should grant Plaintiffs leave to do so. 13 Sheldon v. Vermonty, 269 F.3d 1202, 1207 n.5 (10th Cir. 2001)(“As a general matter, a party should be granted an opportunity to amend his claims prior to a dismissal with prejudice”). And if, somehow, the Court required a plaintiff who invested in each of the fee-paying share class of every Fund issued by Great-West Funds Inc., the Court should grant Plaintiffs leave to join such plaintiffs as is necessary. (As noted above, §36(b) avoids such a cumbersome process by allowing any shareholder of the registered investment company to bring suit to recover the company’s total damages and does not require joinder of a shareholder in every single series of stock.) Because there is no merit to Defendants’ motion, it should be denied. 13 Defendants did not mention in their letter a claim that any Plaintiff invested only in institutional shares or a contention that the Plaintiffs must allege the specific share class of the Funds in which they are presently invested. Doc. 21-1; cf. D.C.Colo. LCivR 7.1(a). Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 15 of 16 16 April 19, 2017 Respectfully submitted, /s/ Michael A. Wolff Jerome J. Schlichter Michael A. Wolff Stephen M. Hoeplinger Schlichter Bogard and Denton, LLP 100 South 4th Street, Suite 1200 St. Louis, MO 63102 Phone: 314.621.6115 Fax: 314.621.5934 Counsel for Plaintiffs CERTIFICATE OF SERVICE I hereby certify that on April 19, 2017, 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. /s/ Michael A. Wolff Case 1:16-cv-03162-RM-STV Document 28 Filed 04/19/17 USDC Colorado Page 16 of 16 Turner v. Davis Select Advisers LP United States District Court for the District of Arizona May 31, 2011, Decided; June 1, 2011, Filed No. 08-CV-421-TUC-AWT Reporter 2011 U.S. Dist. LEXIS 159021 * DONALD TURNER, Plaintiff, vs. DAVIS SELECT ADVISERS LP; DAVIS DISTRIBUTORS LLC, Defendants. Subsequent History: Modified by, On reconsideration by, Motion granted by, in part, Motion denied by, in part, Motion denied by Turner v. Davis Select Advisers LP, 2013 U.S. Dist. LEXIS 190290 (D. Ariz., Mar. 19, 2013) Affirmed by Turner v. Davis Selected Advisers, LP, 626 Fed. Appx. 713, 2015 U.S. App. LEXIS 17150 (9th Cir. Ariz., 2015) Counsel: [*1] For Donald Turner, on behalf of the David New York Venture Fund, Plaintiff: Daniel W Krasner, Robert B Weintraub, LEAD ATTORNEYS, Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY; Francis Joseph Balint, Jr., Bonnett Fairbourn Friedman & Balint PC - Phoenix, AZ, Phoenix, AZ. For Davis Selected Advisers LP, Davis Distributors LLC, Defendants: Shannon Lori Giles, LEAD ATTORNEY, Awerkamp & Bonilla PLC, Tucson, AZ; Nicholas G Terris, Nicole A Baker, Stephen G Topetzes, K&L Gates LLP, Washington, DC. Judges: A. Wallace Tashima, United States Circuit Judge. Opinion by: A. Wallace Tashima Opinion MEMORANDUM ORDER This action challenges the propriety of fees paid to Defendants Davis Select Advisers LP ("DSA") and Davis Distributors LLC ("DD") under § 36(b) of the Investment Company Act of 1940 ("ICA"), 15 U.S.C. § 80a-35(b). Defendants moved to dismiss Plaintiff's Amended Complaint ("AC") (Doc. 33) on June 23, 2009, under Fed. R. Civ. P. 8 and 12(b)(6) (Doc. 43). On January 28, 2010, the Court sought supplemental briefing addressing whether Plaintiff had standing to bring his claim (see Doc. 62). On March 30, 2010, before the Court was able to rule on the pending motion, the Supreme Court decided Jones v. Harris Assocs., L.P., 559 U.S. 335, 130 S.Ct. 1418, 176 L. Ed. 2d 265 (2010). In light of Jones' discussion of § 36(b)'s fiduciary duty, the Court sought further [*2] supplementary briefing on whether Jones resolved any issues in this case (see Doc. 72). That briefing is now complete and the original motion is ready for decision. For the following reasons, the motion is granted as to all counts. I. BACKGROUND AND PROCEDURAL HISTORY "A mutual fund is a pool of assets, consisting primarily of portfolio securities, and belonging to the individual investors holding shares in the fund." Burks v. Lasker, 441 U.S. 471, 480, 99 S. Ct. 1831, 60 L. Ed. 2d 404 (1979). An entity called an "investment adviser" "selects the fund's directors, manages the fund's investments, and provides other services." Jones, 130 S.Ct. at 1422. This intimate adviser-fund relationship means that "the forces of arm's-length bargaining do not work in the mutual fund industry in the same manner as they do in other sectors of the American economy." Burks, 441 U.S. at 481 (quoting S. Rep. No. 91-184, at 5 (1969)) (internal quotations omitted). The potential conflicts of interest that can arise in such a context are obvious to even the most casual observer. See Galfand v. Chestnutt Corp., 545 F.2d 807, 808 (2d Cir. 1976) ("The relationship between investment advisers and mutual funds is fraught with potential conflicts of interest."). To mitigate the effect of such conflicts of interest, Congress amended the ICA in 1970. The amended language includes § 36(b), which provides [*3] that the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 1 of 11 Page 2 of 11 security holders thereof, to such investment adviser or any affiliated person of such investment adviser. 15 U.S.C. § 80a-35(b). Section 36(b) also grants a private right of action to "a security holder of such registered investment company" for breach of the fiduciary duty. Id. The burden to show there was a breach of fiduciary duty lies squarely with the security- holder plaintiff. Id. Plaintiff owns Class A shares in the Davis New York Venture Fund (the "Fund"). AC ¶¶ 25, 29. The Fund is "an open-end management investment company" that is incorporated under Maryland law and registered under the ICA. AC ¶¶ 26, 30. The Fund contains several classes of shares, AC ¶ 33, but each share class represents an interest in the same underlying portfolio of assets. AC ¶ 34. Plaintiff, under § 36(b) of the ICA, alleges that Defendants breached their fiduciary duty as advisers to the Fund. AC ¶ 1. The Fund's advisers provide it with a number of services, including "accounting and administrative services, [*4] . . . Investor Services . . . , provid[ing] investment advice for the Davis Funds, manag[ing] their business affairs, and provid[ing] day-to- day administrative services." AC ¶ 45. The Fund reimburses its advisers for these services. Id. Plaintiff contends that the fees paid to the advisers were excessive and disproportionate to the services performed and a breach of Defendants' fiduciary duty under § 36(b). AC ¶ 16. This case involves two types of fees.1 Investment Advisory Fees, or "management fees," "are paid to the investment adviser . . . for managing the portfolio of securities and for providing some of the back-office support operations required to support portfolio management." AC ¶ 68. The second type, 12b-1 fees, are marketing or distribution fees assessed on an annual basis. They are operational expenses "calculated as a percentage of assets under management." AC ¶ 70. In light of these fees, Plaintiff raises four claims in his 1 Although Plaintiff mentions Transfer Agency Fees in his complaint, they are not the subject of any of the four counts and will not be considered. Further, Plaintiff admits that the "overwhelming majority of payments for transfer agent services" go to Boston Financial Data Services, Inc. AC ¶ 72. As that is a non-affiliated company, § 36(b)'s fiduciary duty [*5] requirement does not apply. AC: 1. Defendants DSA and DD violated § 36(b) of the ICA by receiving disproportionately large 12b-1 fees in violation of their statutory duty. AC ¶¶ 386-400. 2. Defendant DSA violated its statutory fiduciary duty under § 36(b) and accepted excessively disproportionate advisory fees. Id. ¶¶ 401-09. 3. Defendant DSA violated § 48(a) of the ICA by causing DD to engage in wrongful conduct that violated DD's fiduciary duty under § 36(b). Id. ¶¶ 410-17. 4. Defendants DSA and DD violated § 47 of the ICA in writing their contracts with the Fund. Id. ¶¶ 418- 22. To remedy these alleged violations, Plaintiff seeks reimbursement to the Fund of the excessive fee amounts (more than $200 million), other unspecified damages, and rescission of both (1) the advisory contracts between the Fund and DSA and (2) any Plans of Distribution between the Fund and DD. Id. ¶¶ 400, 409, 417, 422. II. THE LEGAL STANDARD A pleading must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). While Rule 8 does not demand detailed factual allegations, "it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009). "Threadbare recitals of the [*6] elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. Rather, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. "Determining whether a complaint states a plausible claim for relief [is] . . . a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 1950. Thus, although a plaintiff's specific factual allegations may be consistent with a valid claim, a court must assess whether there are other "more likely explanations" for a 2011 U.S. Dist. LEXIS 159021, *3 Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 2 of 11 Page 3 of 11 defendant's conduct. Id. at 1951. A motion to dismiss under Rule 12(b)(6) tests the sufficiency of the complaint. N. Star Int'l v. Ariz. Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). Dismissal of the complaint, or any claim within it, may be based on either a "'lack of a cognizable legal theory' or 'the absence of sufficient facts alleged under a cognizable legal theory.'" Johnson v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1121-22 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990)). In determining whether a complaint states a claim under this standard, the facts and inferences in the complaint [*7] must be construed in the light most favorable to the non-moving party. Loyd v. Paine Webber, Inc., 208 F.3d 755, 759 (9th Cir. 2000). To state a claim under § 36(b), a plaintiff must allege excessive fees, not just fees that are somehow "improper." Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923, 928 (2d Cir. 1982). Specifically, a plaintiff must claim that "the adviser-manager . . . charge[d] a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's- length bargaining." Id. (emphasis added). This standard was confirmed and clarified by the Supreme Court in Jones: [W]e conclude that Gartenberg was correct in its basic formulation of what § 36(b) requires: 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 services rendered and could not have been the product of arm's length bargaining. 130 S.Ct. at 1426. In making its determination, the Jones Court referred to fiduciary duty language from a much earlier case: "The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain. If it does not, equity will set it aside." Id. at 1427 (quoting Pepper v. Litton, 308 U.S. 295, 306-07, 60 S. Ct. 238, 84 L. Ed. 281 (1939)) (emphasis in original). The Court also noted how § 36(b) shifted the burden [*8] of proof to the plaintiff "to show that the fee is outside the range that arm's-length bargaining would produce." Id. Both the fiduciary duty test in Pepper and § 36(b)'s burden- shifting language are "fully incorporate[d]" by the Gartenberg decision. Id. To determine whether a fee is excessive, a court should consider whether the fee is "within the range of what would have been negotiated at arm's-length in the light of all the surrounding circumstances." Gartenberg, 694 F.2d at 928. Gartenberg outlined six specific factors to consider: (1) the nature and quality of the services provided, (2) the adviser's profit from the fund, (3) the extent to which the adviser realizes economies of scale as the fund grows larger, (4) "'fall-out' financial benefits annually in the form of commissions on non-Fund securities business," (5) comparison of fees paid by similar funds, and (6) the board's determination of appropriate levels for adviser compensation. Id. at 929- 32. However, determining whether a fee is "disproportionately large" under § 36(b) "requires consideration of all relevant factors," not just the Gartenberg factors. Jones, 130 S.Ct. at 1428.2 The Jones Court also [*9] specifically discussed two of the Gartenberg factors: (1) the comparison of advisory fees charged to a captive mutual fund with those charged to an independent client, and (2) the board of directors' procedures used to determine adviser fee levels. Regarding the first factor, the Court held that there is no "categorical rule regarding the comparisons of the fees charged different types of clients." Id. Courts should, in evaluating such comparisons, determine how similar the clients are and how appropriate the comparison would be. "If the services rendered are sufficiently different that a comparison is not probative, then courts must reject such a comparison." Id. at 1429. Even when the fees are disproportionate and the adviser services are similar, however, "the [ICA] does not necessarily ensure fee parity between mutual funds and institutional clients." Id. As to the second factor, the Court held that because it was Congress' intent to have mutual fund directors police their own industry, "if the disinterested directors considered the relevant factors, their decision to approve a particular fee agreement is entitled to considerable weight, even if a court might weigh the factors differently." [*10] Id. However, if a court finds that "the board's process was deficient or the adviser withheld important information, the court must take a more rigorous look at the outcome." Id. at 1430. That is to say, a court must look at all relevant factors touching 2 The SEC, for instance, suggested nine other factors that "provide helpful guidance to directors" in its final Rule 12b-1. Bearing of Distribution Expenses by Mutual Funds, Investment Company Act Release No. 11414, 21 SEC Docket 324 (Oct. 28, 1980). 2011 U.S. Dist. LEXIS 159021, *6 Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 3 of 11 Page 4 of 11 on a board's decision and not hold any one particular factor to be dispositive. It also must not engage in "judicial second-guessing of informed board decisions." Id. III. DISCUSSION A. Standing As a threshold matter, Defendants contend that Plaintiff does not have constitutional or statutory standing to bring his § 36(b) claim because he only owns shares in one class of shares within the Fund, whereas his excessive fee claim is made for all share classes. Defendants allege that at most, Plaintiff can only challenge the fees charged against the Class A shares that he owns. To meet Article III's "irreducible constitutional minimum of standing," a plaintiff must have a particularized and actual injury, the injury must be fairly traceable to the wrong alleged, and court action must be able to redress the wrong. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S. Ct. 2130, 119 L. Ed. 2d 351 (1992). These requirements are "an indispensable part of the plaintiff's case," which "must be supported in the same way as any other matter on which the [*11] plaintiff bears the burden of proof." Id. at 561. In the early stages of litigation, however, "general factual allegations of injury resulting from the defendant's conduct may suffice, for on a motion to dismiss we 'presum[e] that general allegations embrace those specific facts that are necessary to support the claim.'" Id. (quoting Lujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 889, 110 S. Ct. 3177, 111 L. Ed. 2d 695 (1990)). Of the three standing requirements - injury, traceability, and redressability - Defendants only challenge the injury prong. To satisfy this prong, "the party seeking review [must] be himself among the injured." Sierra Club v. Morton, 405 U.S. 727, 734-35, 92 S. Ct. 1361, 31 L. Ed. 2d 636 (1972). Here, "Defendants concede that Plaintiff appears to have Article III standing to challenge the advisory fee and the .25% service fee assessed on the Class A shares Plaintiff owns." Defendants dispute Plaintiff's ability to challenge the distribution portion of 12b-1 fees charged against non-Class A shares. To support their position, Defendants cite In re Am. Mut. Funds Fee Litig., No. CV-04-05593 GAF (RNBx), 2009 U.S. Dist. LEXIS 98871, Statement of Intended Decision (C.D. Cal. Sept. 16, 2009). While that "intended decision" may support Defendants' contention, that court's subsequent Findings of Fact and Conclusions of Law do not. See In re Am. Mut. Funds Fee Litig., 2009 U.S. Dist. LEXIS 120597, 2009 WL 5215755 (Dec. 28, 2009). There, the court concluded that "Plaintiffs have standing [*12] to pursue a Section 36(b) claim with respect to Rule 12b-1 and administrative service fees charged to each class of shares for each of the Funds at issue in this litigation." 2009 U.S. Dist. LEXIS 120597, [WL] at *42 (emphasis added). The plain language of § 36(b) "does not distinguish among owners of different classes of shares in a mutual fund, and does not impose any requirement at the share class level." Id. As far as statutory standing under § 36(b) is concerned, "a plaintiff must own shares in the investment company which paid the fees being challenged as excessive." Id. Plaintiff owns Class A shares, which are only subject to the .25% 12b-1 service fees. Throughout the mutual fund industry, 12b-1 fees for shareholder services - the "service fees" - are capped at a .25% annual rate. Other 12b-1 fees, used for marketing or distribution services, are capped at .75% annually. Thus, the total percentage of 12b-1 fees that a particular class could be assessed in one year is 1.0%. See Mutual Fund Fees and Expenses, http://www.sec.gov/answers/mffees.htm (last visited Dec. 17, 2010). In this case, the Fund distributes 12b-1 fees disproportionately among its different share classes: Go to table1 Plaintiff satisfies that statutory requirement because he owns shares within the Fund. Although he owns only Class A shares, all the shares in the Fund participate in the same underlying portfolio of assets. Thus, ownership in any one share class is sufficient to confer statutory standing. Such ownership is also enough to satisfy the injury requirement of Article III. Because each share class participates in the same portfolio of assets, excessive fees charged to one class will detract from the overall pool and affect the value of other share classes. See Mutual Fund Classes, http://www.sec.gov/answers/mfclass.htm (last visited Dec. 16, 2010). "The different share classes in a particular Fund invest in the same portfolio of assets, receive the same types and levels of service, and are managed in the same manner. The fact that different share classes are assessed different fees and/or fee levels is not sufficient to preclude Plaintiffs from proceeding on behalf of all shareholders of the funds at 2011 U.S. Dist. LEXIS 159021, *10 Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 4 of 11 Page 5 of 11 issue." Am. Mut. Funds, 2009 U.S. Dist. LEXIS 120597, 2009 WL 5215755, at *42. As a result, Smith has standing to bring all his claims regarding excessive fees. B. The propriety and relation back of the AC "As a general rule, when a plaintiff files an amended complaint, '[t]he amended complaint [*14] supersedes the original, the latter being treated thereafter as non- existent.'" Rhodes v. Robinson, 621 F.3d 1002, 1005 (9th Cir. 2010) (quoting Loux v. Rhay, 375 F.2d 55, 57 (9th Cir. 1967)). This principle, however, only applies to the content of the pleading and not the date for the commencement of the action. See Fed. R. Civ. P. 3. Smith filed his Complaint on July 28, 2008 (Doc. 1). Since that time, the Federal Rules have been amended.3 Under Rule 15(a)(1)(A), in effect when the complaint was filed, "[a] party may amend its pleading once as a matter of course before being served with a responsive pleading." Defendants answered neither complaint, but have moved to dismiss each complaint (Docs. 17 & 43). Because those motions were not "pleadings" under Fed. R. Civ. P. 7(a), Plaintiff was entitled to amend his complaint without leave of court. Defendants have not pointed to any specific "transactions or occurrences" that took place after the filing of the original complaint that would transform the AC into a "supplemental pleading" - and require leave of Court - under Rule 15(d).4 The AC is valid under the Rules. The question now is whether it relates back to the original complaint and, if so, whether that has any effect on § 36(b)'s damages period. An AC "relates back to the date of the original pleading when . . . the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out - or attempted to be set out - in the original pleading." Fed. R. Civ. P. 15(c)(1)(B). The relation-back 3 The amended rules that took effect on December 1, 2009, may be applied, "insofar as just and practicable, [*15] [to] all proceedings then pending." Order, 2009 U.S. Order 17 (Mar. 26, 2009). Given the significant change in Rule 15, which would render Plaintiff's AC untimely, the Court does not apply the amended rule. 4 Supplemental pleadings - and leave of court - are only required when the amended complaint adds claims based on facts that arose after the original complaint was filed. See U.S. ex rel. Atkins v. Reiten, 313 F.2d 673, 674 (9th Cir. 1963). Contrary to Defendants' position, the amended complaint does not include such new facts. doctrine is to be liberally applied, especially when there is no prejudice to the opposing party. Clipper Exxpress v. Rocky Mountain Motor Tariff Bureau, Inc., 690 F.2d 1240, 1259 n. 29 (9th Cir. 1982); Rural Fire Prot. Co. v. Hepp, 366 F.2d 355, 362 (9th Cir. 1966). In determining whether a complaint relates back, a court looks at "whether the original and amended pleadings share a common core of operative facts so that the adverse party has fair notice of the transaction, occurrence, or conduct called into question." Martell v. Trilogy, Ltd., 872 F.2d 322, 325 (9th Cir. 1989). Defendants cite Brever v. Federated Equity Mgmt. Co. of Pa., 233 F.R.D. 429 (W.D. Pa. 2005), to support their position. In Brever, the original plaintiff forfeited his standing by selling his shares in [*16] the fund. Other plaintiffs then joined the suit and attempted to amend the original plaintiff's complaint. Because the claims brought by the newly added plaintiffs were based on their own individual agreements, and not the original plaintiff's contract, the court concluded that the substitution of plaintiffs was closer to a new lawsuit than an amendment. See id. at 435. The court allowed the substitution of plaintiffs, but not the relation back of the complaint. Id. at 435-36. In this case, the AC includes two claims not present in the original complaint. The new claim for advisory fees certainly relates back to the original complaint because it refers to the facts present at the time of the complaint. Indeed, advisory fees are discussed at various points in the original complaint. See, e.g., Doc. 1 ¶¶ 85 n. 4, 98, 102, 136-150, 166, 173. The claim for a violation of § 47 also relates back to the original complaint because it arises from facts that Smith set out or attempted to set out in his original pleading. The § 47 claim seeks rescission of the very contracts that gave rise to the allegedly excessive fees. That claim, therefore, must involve those facts raised in the original complaint. Because both of the new [*17] claims relate back to the original complaint, the date of the commencement of the action is July 28, 2008. C. Section 36(b)(3)'s damages period Although the AC relates back to the date of filing of the original complaint, that does not affect the statutory damages period of § 36(b)(3).5 When the "plain 5 Under the Rules Enabling Act, procedural rules cannot "abridge, enlarge or modify any substantive right" given by statute. 28 U.S.C. § 2072. Resolving the relation-back doctrine 2011 U.S. Dist. LEXIS 159021, *12 Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 5 of 11 Page 6 of 11 language of the statute unambiguously indicate[s]" a particular result, the court's inquiry ends. Zuni Pub. Sch. Dist. No. 89 v. Dep't of Educ., 550 U.S. 81, 93, 127 S. Ct. 1534, 167 L. Ed. 2d 449 (2007); Cassirer v. Kingdom of Spain, 616 F.3d 1019, 1028 (9th Cir. 2010) (en banc) ("In the normal event our task is over when a statute is clear on its face."). Here, the plain language of the statute refers only to past damages, not prospective damages: "No award of damages shall be recoverable for any period prior to one year before the action was instituted." 15 U.S.C. § 80a-35(b)(3). Both parties agree that there can be no damages from before July 28, 2007. Plaintiff's Response (Doc. 52), at 27; Defendants' Reply (Doc. 56), at 6. Plaintiff argues, however, that the damages period should extend from one year before the original filing date -I. e., July 28, 2007 - to the present, while Defendants, through a tortuous reading of the statutory language, arrive at a three-month damages window. Defendants assert that damages should be available from one year before the filing of the AC to the filing of the original complaint, [*18] or April 23, 2008 to July 28, 2008. Motion to Dismiss (Doc. 43), at 7-9. Defendants attempt to support their position with In re Franklin Mut. Funds Fee Litig., 478 F.Supp.2d 677 (D.N.J. 2007). That case held that the § 36(b)(3) damages period was confined to the year leading up to the commencement of the action. The court reasoned that "the intent and purpose of the statute clearly limits recovery to one year." Id. at 685. Because the ICA allows shareholders to challenge a fund's fee agreements and such fee agreements are generally renewed on an annual basis, the court reasoned that the damages period should apply only to the 12-month period before commencement of a suit. Once a fee agreement is changed, a plaintiff would have to bring a new action. See id. at 685-86. The reasoning of In re Franklin, however, overlooks the unambiguous language of the statute. A court need not search for an intention beyond what Congress has included in the statutory language itself. Saipan Stevedore Co. Inc. v. Dir., OWCP, 133 F.3d 717, 722 (9th Cir. 1998) ("If the intent of Congress is clear from the face of the statutory language, [a [*19] court] must give effect to the unambiguously expressed Congressional intent."). While it is true that "a court must look beyond [a statute's] plain language where a literal interpretation . . . would thwart the purpose of the overall statutory scheme, would lead to an absurd result, or and the statutory damages period involves two separate and distinct inquiries. would otherwise produce a result 'demonstrably at odds with the intentions of the drafters,'" such is not the case here. Royal Foods Co., Inc. v. RJR Holdings, Inc., 252 F.3d 1102, 1108 (9th Cir. 2001) (internal citations omitted). Section 36(b)(3) only limits past damages. It is silent as to future damages. A more compelling analysis of this statute and the damages period is contained in Dumond v. Mass. Fin. Servs. Co., 2007 U.S. Dist. LEXIS 12304, 2007 WL 602589 (D. Mass. 2007). In Dumond, the court presented an extended discussion of § 36(b)(3) and cases confining the damages period to one year. As the court noted, limiting damages to a one-year period requires "some creative rearranging of the words." 2007 U.S. Dist. LEXIS 12304, [WL] at * 1. The court also noted that such a restrictive reading is not required by the language itself or Congress's apparent intention. 2007 U.S. Dist. LEXIS 12304, [WL] at *2. Here, as in Dumond, "there is no reason to stray into speculation about whether that limitation dovetails optimally with other statutory provisions or satisfactorily fulfills a discerned congressional purpose." Id. As a result, the damages period in this case runs from [*20] July 28, 2007, to July 28, 2008. D. 12b-1 and advisory fee claims Defendants' contention that Rule 12b-1 fees cannot be addressed by § 36(b) is without merit. Defendants contend that 12b-1 fees are exempted as "sales loads" under § 36(b)(4). To support that position, Defendants cite Yameen v. Eaton Vance Distribs., 394 F. Supp. 2d 350, 353-55 (D. Mass. 2005). That decision, however, is directly contrary to Defendants' position. Yameen states that "[t]he adoption of a fee plan under Rule 12b-1 gives rise to the fiduciary duties imposed by Section 36(b)." Id. at 354. The opinion then cites a number of cases that look at 12b-1 fees in the context of § 36(b). See id. Contrary to Defendants' position, the court notes that although "[i]t is undisputed that the Fund's distribution and service fees are within the limits set by NASD Rule 2830 . . . this does not necessarily mean that the fees are per se reasonable." Id. at 355. The reasonableness of a fee must be evaluated by all the relevant factors. See id. The 12b-1 fees may be considered as part of Plaintiff's § 36(b) claim, but Plaintiff still has the burden to prove that the 12b-1 and advisory fees were excessive in proportion to the services rendered. See Jones, 130 S.Ct. at 1427. 2011 U.S. Dist. LEXIS 159021, *17 Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 6 of 11 Page 7 of 11 While Plaintiff is correct that "[t]he Amended Complaint Sufficiently Articulates the Gartenberg Factors," Plaintiff's allegations largely consist of general conclusions, [*21] not facts, and Plaintiff does not explain how any of the facts alleged show that a particular fee was "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." Gartenberg, 694 F.2d at 928. 1. Nature and quality of the services In considering the nature and quality of the services provided by the advisers, Plaintiff first makes a general allegation that the Fund charged the maximum amount allowed by law. AC ¶ 106. This fact does not mean the fee is per se excessive and cannot be the basis for a § 36(b) claim. In his specific allegations, Plaintiff attempts to show disproportionality between the fee and the services by alleging that the Fund paid for broker- dealers to maintain a mutual fund "supermarket" on their websites. AC ¶ 108. Plaintiff's argument is that the brokerage firms maintaining these supermarket websites have an independent financial incentive to include large and well-known funds such as the Debt Services Funds on their websites. Thus, receiving money from the Fund does not incentivize the brokerage houses to include the Fund's information on their websites because the brokerage houses would include the [*22] information anyway. Whatever the relative incentives may be, however, Plaintiff challenges the use of the fee - he thinks that the service was unnecessary - and does not allege that the fee level exceeded what was reasonable for the service provided. Plaintiff also states that the 12b-1 fees were nearly as large as the advisory fees charged by Defendants. But the ratio between 12b-1 and advisory fees is irrelevant to a § 36(b) claim and is not, per se, evidence of any disproportionality between the individual fee levels and services provided with those fees. 2. Profitability of the mutual fund to the adviser Another argument Plaintiff raises is that the Fund was "excessively profitable" to the advisers. AC ¶¶ 128 et seq. However, Plaintiff states again how large the fees are in pure dollar amounts, even though large fees do not necessarily equal excessive fees. See AC ¶ 136. The statistics Plaintiff marshals in support of his argument show that the Fund's expenses grew in relation to the Fund's net assets and the ratio between fees and net assets remained constant. If there was any change, the 12b-1 fee-to-net-asset ratio slightly decreased over the past five years. Advisers are entitled to [*23] make a profit and fees are not "excessive" because they do so.6 In making this allegation, Plaintiff refers to "total" 12b-1 and advisory fees. The attempt to aggregate 12b-1 and advisory fees to further a § 36(b) claim has been rejected in the case law and is rejected here. See Meyer v. Oppenheimer Mgmt. Corp., 895 F.2d 861, 866 (2d Cir. 1990). 3. Comparison to other funds Plaintiff argues that the Fund's fees were excessive when compared to other funds, but he refers to other funds that are not comparable to this Fund. Smith states that the Fund underperformed the S & P Index in recent years, acting like an index fund. As a result, Smith cites the fee levels of various index funds, which do not compare to actively managed funds even when managed funds perform poorly or mirror the performance of index funds. Alleging under- performance in a down economy is particularly unavailing. Migdal v. Rowe Price-Fleming Int'l Inc., 248 F.3d 321, 327 (4th Cir. 2001) ("[A]llegations of underperformance alone are insufficient to prove that an investment adviser's fees are excessive."). Of the non- index funds the Plaintiff mentions, two are Vanguard funds, which are known in the industry for having low fees. As explained [*24] in Jones, "[i]f the services rendered [by separate funds] are sufficiently different that a comparison is not probative, then courts must reject such a comparison." 130 S.Ct. at 1429. Plaintiff's comparisons to other funds have little probative value and they cannot be the foundation for a claim under § 36(b). 4. Fall-out benefits In alleging that Defendants received excessive fall-out benefits, Plaintiff argues that "the investment advisory fees and transfer agent fees can constitute fall-out benefits" and that the "yearly increases in advisory fees each is excessive and disproportionate because each is based upon the unlawful use of the excessive 12b-1 fee to increase Fund assets so as to increase the advisory fee." AC ¶¶ 199, 203. Here, Plaintiff attempts to indirectly aggregate the fees in order to state a claim. 6 S. Rep. No. 91-184, at 5 (1970) ("[T]he investment adviser is entitled to make a profit. Nothing in the bill is intended to imply otherwise."). 2011 U.S. Dist. LEXIS 159021, *20 Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 7 of 11 Page 8 of 11 However, because Plaintiff does not adequately allege that either the 12b-1 or the advisory fee was excessive individually, the fall-out benefit argument fails. Plaintiff claims that shareholders are charged twice for services that are provided once, resulting in a fall-out benefit for Debt Services. However, Plaintiff's argument fails because he alleges that when a shareholder owns shares in the Fund [*25] and other mutual funds within the Debt Services Family of Funds, that shareholder is charged twice for research, accounting, advertising, and other services. AC ¶¶ 216-219. Plaintiff is bringing this suit as a security owner of only one Fund. To have standing to bring claims related to other funds in the family, he would have to own shares in those funds.7 Because he does not, this argument is moot. 5. Economies of scale After making general statements about increased efficiency brought about by new technology, Plaintiff alleges that economies of scale were not only realized by Defendants, but that they were not passed down to shareholders. Plaintiff's claim fails for two reasons. First, Plaintiff points to no facts that show a particular fee was excessive. See Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338, 345 (2d Cir. 2006). Plaintiff does not state what services were provided, and does not state the [*26] cost of the services to show that a fee was disproportionate to the service provided. Mere allegations that the fund was "large" and that there were economies of scale to be realized are insufficient. Second, breakpoints in mutual fund structures - by which a fee decreases when net assets increase - are a satisfactory means to give shareholders the benefits of economies of scale. See Kalish v. Franklin Advisers, Inc., 742 F.Supp. 1222, 1239 (S.D.N.Y. 1990). This Fund has breakpoints that are more beneficial to shareholders than other comparable funds. Plaintiff does not provide any facts to show that these breakpoints are inadequate means of giving the shareholders benefits of economies of scale. As a result, Plaintiff's claim fails for this reason as well. 7 Where a shareholder owns one class of shares in a multi- class fund, the shareholder has standing because each class participates in the same underlying portfolio of assets. However, when the question involves separately registered funds with separate assets - although they may be under the umbrella of one company - a different standing analysis applies. 6. Independent decisions of the directors In Jones, the Supreme Court stated that in evaluating a § 36(b) claim, a court must look to the procedures taken by a board of directors as well as the substance of its decision. "[I]f the disinterested directors considered the relevant factors, their decision to approve a particular fee agreement is entitled to considerable weight, even if a court might weigh the factors differently." Jones, 130 S.Ct. at 1429. Here, Plaintiff argues that the directors are "interested" directors based on where and [*27] from whom the directors obtain their information, as well as the frequency with which and amount of time the directors meet throughout the year. These generalities do not satisfy Plaintiff's burden. As the Fourth Circuit has stated, The fact that directors of the funds might be busy does not suggest that they were in any way "interested" as defined by the ICA. See 15 U.S.C. § 80a-2(a)(19). Likewise, plaintiffs' assertions that the directors were dependent on the investment advisers for information sheds no light on the question of whether the directors are disinterested. One would expect any conscientious director to request information from management and staff on the day-to-day operations for which they are responsible. The ICA itself approves this very practice. "It shall be the duty of the directors of a registered investment company to request and evaluate, and the duty of an investment adviser to such company to furnish, such information as may reasonably be necessary to evaluate the terms of any contract whereby a person undertakes regularly to serve or act as investment adviser of such company." 15 U.S.C. § 80a-15(c). There is a presumption under the ICA that natural persons are disinterested, see 15 U.S.C. § 80a- 2(a)(9), which plaintiffs' evidence [*28] simply fails to counteract. Plaintiffs have thus failed to state a claim that the funds' disinterested directors are in fact interested. Migdal, 248 F.3d at 328. The same is true here. As the preceding discussion of the Gartenberg factors reveals, Plaintiff fails to state a claim under § 36(b). Claims I and II, relating to excessive fees, must be dismissed. 2011 U.S. Dist. LEXIS 159021, *24 Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 8 of 11 Page 9 of 11 E. Claims under §§ 47(b) and 48(a) Plaintiff alleges that Defendants violated § 47(b) and § 48(a) of the ICA, which discuss the entering of unlawful contracts and "control person" liability, respectively. Defendants assert that the claims under these sections must be dismissed for various reasons. They allege that § 47 claims must be brought by the Fund itself, not individual investors. They also state that § 48 claims are derivative and require a valid claim under some other section of the ICA to survive. 1. Section 47(b) claim Section 47(b) reads as follows: A contract that is made, or whose performance involves, a violation of this subchapter, or of any rule, regulation, or order thereunder, is unenforceable by either party (or by a nonparty to the contract who acquired a right under the contract with knowledge of the facts by reason of which the making or performance violated or would violate any provision of this subchapter or of [*29] any rule, regulation, or order thereunder) unless a court finds that under the circumstances enforcement would produce a more equitable result than nonenforcement and would not be inconsistent with the purposes of this subchapter. 15 U.S.C. § 80a-46(b)(1). Courts have recognized that § 47(b) is remedial only, and does not contain "a distinct cause of action or basis for liability." Smith v. Franklin/Templeton Distribs., Inc., 2010 U.S. Dist. LEXIS 56516, 2010 WL 2348644, at *7 (N.D. Cal. June 8, 2010). Further, a claim for rescission of a contract must be brought by a party to the contract. 15 U.S.C. § 80a-46(b)(1); see Lessler v. Little, 857 F.2d 866, 874 (1st Cir. 1988). The Lessler court rejected a § 47(b) claim because the plaintiff was "not a party to the Narragansett-Monarch contract, nor [did] his complaint assert a derivative action on behalf of Narragansett, which is a party." Id. Rather, the plaintiff "proceed[ed] solely on his own behalf as a shareholder and on behalf of others similarly situated." Id. Here, although Plaintiff includes much of the information required for a derivative action,8 he expressly states that 8 Rule 23.1(b) requires that "[t]he complaint must be verified." Plaintiff includes information consistent with an attempt to verify his complaint in his introductory comments, AC at 2. The items Plaintiff included have been held to be sufficient to verify this is not a derivative action under Rule 23.1. Plaintiff states in his introductory language that he is bringing the action "on behalf of the Fund," AC at 2, and that "[t]his is an action by a security holder of the Fund." AC ¶ 1. This language is consistent with § 36(b), which allows an action "by a security holder of such registered [*30] investment company on behalf of such company." 15 U.S.C. § 80a-35(b). Moreover, Plaintiff states that because "[t]hese claims are brought exclusively under Section 36(b) . . . plaintiff need not comply with the prerequisites of shareholder litigation set forth in Federal Rules of Civil Procedure 23.1 and 23." AC ¶ 2. "A derivative action is an extraordinary process" that allows a shareholder to stand in the place of a corporation to assert the corporation's rights. Quinn v. Anvil Corp., 620 F.3d 1005, 1012 (9th Cir. 2010). Plaintiff is not standing in the shoes of the Fund. Nor was Plaintiff a party to the original contract. Thus, Plaintiff's § 47(b) claim must be dismissed. 2. Section 48(a) claim Section 48(a) of the ICA contemplates an indirect claim requiring a predicate violation of another ICA section. That section states: [i]t shall be unlawful [*31] for any person, directly or indirectly, to cause to be done any act or thing through or by means of any other person which it would be unlawful for such person to do under the provisions of this subchapter or any rule, regulation, or order thereunder. 15 U.S.C. § 80a-47(a). Courts have also recognized that there is no independent cause of action under § 48(a). See Korland v. Cap. Res. & Mgmt. Co., 2009 U.S. Dist. LEXIS 33937, 2009 WL 936612, at *4 (Feb. 10, 2009) (citing cases). Because Plaintiffs § 36(b) claims are dismissed, his § 48(a) claim must be dismissed as well. Accordingly, IT IS ORDERED: a complaint under Rule 23.1. See, e.g., Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 86 S. Ct. 845, 15 L. Ed. 2d 807 (1966) (shareholder's reliance on comments of an investment adviser sufficient to verify); Lewis v. Curtis, 671 F.2d 779, 788 (3d Cir. 1982) (Wall Street Journal article was sufficient verification). Because Plaintiff expressly alleges that this is only a § 36(b) claim, AC ¶ 2, the verification language appears to be irrelevant. 2011 U.S. Dist. LEXIS 159021, *28 Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 9 of 11 Page 10 of 11 1. Defendants' Motion to Dismiss (Doc. 43) is granted as to all counts. Because Plaintiff has not indicated how he could amend his Amended Complaint to state a claim, leave to further amend is denied, and this dismissal is with prejudice. 2. The Clerk is directed to enter judgment accordingly and to close the case. 3. Defendants shall recover their costs of suit. DATED this 31st day of May, 2011. /s/ A. Wallace Tashima A. Wallace Tashima United States Circuit Judge Sitting by Designation 2011 U.S. Dist. LEXIS 159021, *31 Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 10 of 11 Page 11 of 11 Table1 (Return to related document text) 12b-1 service fees 12b-1 distribution fee Total 12b-1 fees Class A .25% 0% .25% Class B .25% .75% 1.0% Class C .25% .75% 1.0% Class R [*13] .25% .50% .75% Table1 (Return to related document text) End of Document 2011 U.S. Dist. LEXIS 159021, *31 Case 1:16-cv-03162-RM-STV Document 28-1 Filed 04/19/17 USDC Colorado Page 11 of 11