Ronald Siemers v. Wells Fargo & Company et al

MOTION to Dismiss Plaintiff's Consolidated Amended Class Action Complaint

N.D. Cal.May 2, 2006

600143407v1 Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PILLSBURY WINTHROP SHAW PITTMAN LLP BRUCE A. ERICSON #76342 CLIFFORD C. HYATT #196458 DAVID L. STANTON #208079 JACOB R. SORENSEN #209134 KRISTIN M. LEFEVRE #221541 50 Fremont Street Post Office Box 7880 San Francisco, CA 94120-7880 Telephone: (415) 983-1000 Facsimile: (415) 983-1200 bruce.ericson@pillsburylaw.com Attorneys for All Defendants THOMAS O. JACOB #125665 VANESSA M. HOFFMANN #206086 OFFICE OF GENERAL COUNSEL WELLS FARGO & CO. 633 Folsom Street, 7th Floor San Francisco, California 94107 Telephone: (415) 396-4425 Facsimile: (415) 975-7867 tojacob@wellsfargo.com Attorneys for Defendants WELLS FARGO & CO. and affiliates UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION THE McDANIEL FAMILY TRUST, Individually And On Behalf Of ALL OTHERS SIMILARLY SITUATED, Plaintiff, vs. WELLS FARGO & COMPANY, et al., Defendants. No. C-05-04518-WHA CLASS ACTION (PSLRA) MOTION OF DEFENDANTS WELLS FARGO FUNDS MANAGEMENT, LLC, WELLS CAPITAL MANAGEMENT, INC., WELLS FARGO FUNDS DISTRIBUTOR, LLC AND STEPHENS INC. TO DISMISS PLAINTIFF’S CONSOLIDATED AMENDED CLASS ACTION COMPLAINT Date: June 22, 2006 Time: 8:00 a.m. Ctrm: 9, 19th Floor Honorable William H. Alsup Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page1 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - i - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA TABLE OF CONTENTS Page NOTICE OF MOTION AND MOTION TO DISMISS.........................................................1 ISSUES TO BE DECIDED....................................................................................................1 MEMORANDUM OF POINTS AND AUTHORITIES........................................................2 I. INTRODUCTION......................................................................................................2 II. STATEMENT OF THE CASE. .................................................................................2 III. ARGUMENT. ............................................................................................................3 A. Plaintiff Does Not Have Standing to Pursue Count VI. .......................................3 1. Plaintiff lacks standing because he does not allege that he currently holds shares in the funds at issue....................................................................4 2. Plaintiff lacks standing under the Trust Agreement and Delaware law because he does not allege that he holds one-third of the shares of the funds at issue. .................................................................................................5 B. The Complaint Fails to State a Section 36(b) Claim For Revenue Sharing..................................................................................................................6 C. The Complaint Fails to State a Section 36(b) Claim For Excessive Fees. ...........9 1. The first Gartenberg factor: the nature and quality of services. .................12 2. The second and third Gartenberg factors: the profitability of the mutual funds to the Investment Adviser and any “fall-out” benefits that the Investment Adviser received. ..........................................................13 3. The fourth Gartenberg factor: whether economies of scale were passed on to investors. ..................................................................................13 4. The fifth Gartenberg factor: comparative fee structures.............................15 5. The sixth Gartenberg factor: the independence of the funds’ outside trustees. .........................................................................................................16 D. The Section 36(b) Claim is Largely Barred by the Statute of Limitations.........18 IV. CONCLUSION. .......................................................................................................19 Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page2 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - ii - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA TABLE OF AUTHORITIES Page Cases Benzon v. Morgan Stanley Distrib., Inc., 2004 WL 62747 (M.D. Tenn. Jan. 8, 2004) ............................................................... 8 Burks v. Lasker, 441 U.S. 471 (1979) ................................................................................................... 6 Castillo v. Dean Witter Reynolds, Inc., 1998 WL 342050 (S.D.N.Y. June 25, 1998) .............................................................. 8 Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984) ............................................................................................... 5, 6 Dumond v. Massachusetts Financial Services Company, 2006 WL 149038 (D. Mass. Jan. 19, 2006)................................................................ 8 Forsythe v. Sun Life Financial, 417 F. Supp. 2d 100 (D. Mass. 2006)............................................................. 3, 4, 6, 8 Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982) .............................................................................. passim In re AllianceBernstein Mut. Fund Excessive Fee Litig., 2005 WL 2677753 (S.D.N.Y Oct. 19, 2005)........................................................ 7, 14 In re Davis Selected Mut. Funds Litig., 2005 WL 2509732 (S.D.N.Y. Oct. 11, 2005)............................................................. 7 In re Dreyfus Mut. Funds Fee Litig., 2006 WL 909434 (W.D. Pa. April 10, 2006) ............................................................. 7 In re Dreyfus Mut. Funds Fee Litig., 2005 WL 3970836 (W.D. Pa. Sept. 30, 2005) ........................................................... 7 In re Eaton Vance Mut. Funds Fee Litig., 380 F. Supp. 2d 222 (S.D.N.Y. 2005) ............................................................... passim In re Evergreen Mut. Funds Fee Litig., 2006 WL 753000 (S.D.N.Y. Mar. 24, 2006).......................................................... 7, 9 In re Franklin Mutual Funds Fee Litig., 388 F. Supp. 2d 451 (D.N.J. 2005)......................................................................... 3, 7 In re Goldman Sachs Mut. Funds Fee Litig., 2006 WL 126722 (S.D.N.Y. Jan 17, 2006) ....................................................... passim In re Lord Abbett Mutual Funds Fee Litig., 385 F. Supp. 2d 471 (D.N.J. 2005)......................................................................... 3, 7 Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page3 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 600143407v1 - iii - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA In re Morgan Stanley and Van Kampen Mut. Fund Securities Litig, 2006 WL 1008138, (S.D.N.Y. Apr 18, 2006) .................................................. 7, 9, 10 In re Mut. Funds Investment Litig., 2006 WL 827339 (D. Md. Mar. 6, 2006) ................................................................... 8 In re Oppenheimer Funds Fees Litig., 2006 WL 592881 (S.D.N.Y. Mar. 10, 2006).................................................... 8, 9, 11 In the Matter of Morgan Stanley DW, Inc., No. E-2003-31, No. E-2003-53, at 1 (Sec’y Mass. Comm. Sec. Div. May 24, 2004) ............................................................................................................ 8 Jablon v. Dean Witter & Co., 614 F.2d 677 (9th Cir. 1980) .................................................................................... 18 Kalish v. Franklin Advisers, Inc., 742 F. Supp. 1222 (S.D.N.Y. 1990) ......................................................................... 14 Kamen v. Kemper Financial Services, Inc., 500 U.S. 90 (1991) ................................................................................................. 4, 5 Krantz v. Prudential Investments Fund Management LLC, 305 F.3d 140 (3d Cir. 2002) ......................................................................... 10, 11, 17 Meyer v. Oppenheimer Management Corp., 895 F.2d 861 (2d Cir. 1990) ............................................................................... 12, 15 Migdal v. Rowe Price-Fleming Int’l Inc., 248 F.3d 321 (4th Cir. 2001) .................................................................. 10, 11, 13, 17 Mutchka v. Harris, 373 F. Supp. 2d 1021 (C.D. Cal. 2005)...................................................................... 3 Press v. Quick & Reilly, Inc. 218 F.3d 121 (2d Cir. 2000) ....................................................................................... 8 Ritchie v. United States, 210 F. Supp. 2d 1120 (N.D. Cal. 2002).................................................................... 18 Strigliabotti v. Franklin Resources, No. C. 04-00883 SI, 2005 WL 645529 (N.D. Cal. March 7, 2005) ......................... 10 Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004)......................................................................................... 3 U.S. v. Alvarado, 2001 WL 1631396 (S.D.N.Y. Dec. 19, 2001)............................................................ 8 Verkouteren v. Blackrock Financial Management, 37 F. Supp. 2d 256 (S.D.N.Y. 1999) .................................................................. 10, 18 Yampolsky v. Morgan Stanley Investment Advisers, Inc., 2004 WL 1065533 (S.D.N.Y. May 12, 2004) .......................................................... 10 Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page4 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 600143407v1 - iv - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA Statutes And Codes Delaware Code Title 12, Section 3816................................................................................................. 5 Title 12, Section 3816(e) ............................................................................................ 6 Investment Act of 1940 Section 36(b) ..................................................................................................... passim Section 48(a)............................................................................................................... 7 United States Code Title 15, Section 80-2(a)(3) ...................................................................................... 16 Title 15, Section 80a-2(a)(9) .............................................................................. 11, 16 Title 15, Section 80a-2(a)(19) .................................................................................. 16 Title 15, Section 80a-10(a) ....................................................................................... 16 Title 15, Section 80a-15(c) ....................................................................................... 16 Title 15, Section 80a-35(b)......................................................................... 3, 4, 18, 19 Title 15, Section 80a-35(b)(2) .................................................................................. 11 Title 15, Section 80a-35(b)(3) .................................................................................. 19 Rules and Regulations Federal Rules of Civil Procedure Rule 12(b)(6) ........................................................................................................ 1, 18 Rule 23.1..................................................................................................................... 5 Security and Exchange Commission Rules Rule 12b-1 .............................................................................................................. 7, 9 Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page5 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 1 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA NOTICE OF MOTION AND MOTION TO DISMISS TO ALL PARTIES AND THEIR COUNSEL OF RECORD: PLEASE TAKE NOTICE that on Thursday, June 22, 2006, at 8 a.m., before the Honorable William H. Alsup, United States District Judge, in Courtroom 9, 19th Floor, 450 Golden Gate Avenue, San Francisco, California, defendants WELLS FARGO FUNDS MANAGEMENT LLC (“WF Funds Management”), WELLS CAPITAL MANAGEMENT, INC. (“WF Capital Management”), WELLS FARGO FUNDS DISTRIBUTOR, LLC (“WF Funds Distributor”) and STEPHENS INC. (“Stephens”) (collectively, the “Movants”) will move and hereby do move, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss plaintiff’s Consolidated Amended Class Action Complaint (Dkt. 58) (“CAC” or “Complaint”) as to them. This motion is made on the grounds that the CAC’s Count VI fails to plead facts sufficient to state a claim. (The other counts are addressed by the other motions.) This motion is based on this notice of motion and motion, the memorandum that follows, the request for judicial notice filed herewith, the motions to dismiss filed concurrently by the other defendants (which motions the Movants hereby join in and incorporate by reference), all pleadings and records on file in this action, and any other arguments and evidence presented to this Court at or before the hearing on this motion. ISSUES TO BE DECIDED 1. Does plaintiff have standing to pursue a claim under the Investment Company Act of 1940 (“’40 Act”) despite failing to allege that he currently owns most of the funds at issue or has ever owned one-third of the interest in any of the fund? 2. Are plaintiff’s allegations about revenue sharing actionable under section 36(b) of the ’40 Act? 3. Are plaintiff’s allegations about excessive fees actionable under section 36(b) of the ’40 Act? 4. Is plaintiff’s claim under section 36(b) of the ’40 Act limited by the applicable statute of limitations? Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page6 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 2 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION. The CAC is simply the latest mutation of a complaint brought by a class action law firm in a national litigation campaign against various mutual fund companies. Eight federal district judges have ruled on motions to dismiss in similar cases and dismissed the complaints in their entirety. The CAC should meet the same fate. Count VI alleges that Wells Fargo mutual funds paid excessive fees to their advisers and distributors, in violation of section 36(b) of the ’40 Act (“section 36(b)”). Plaintiff apparently wishes to allege that each of the over 90 Wells Fargo mutual funds for which the Movants acted as advisers or distributors charged excessive fees, although plaintiff himself invested in only three of the funds. Count VI should be dismissed for several reasons: First, plaintiff has not alleged facts sufficient to give him standing to bring a section 36(b) claim. Second, the theory that participation in a revenue-sharing program violates section 36(b) is one that courts have consistently rejected. Third, the facts—as opposed to conclusions and theories—alleged in the CAC do not establish that the fees at issue are so disproportionately large that they bear no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining, as is required to state a claim under section 36(b). These fees were fully disclosed to plaintiff before he invested. All that his number-crunching establishes is that funds differ both in their performance and their fees—hardly a revelation. The Court should be reluctant to accept plaintiff’s invitation to establish price controls for the mutual fund industry. That should be addressed by regulatory bodies after proper notice and comment, not through litigation. This case should be dismissed. II. STATEMENT OF THE CASE. This case is described in more detail in the motion to dismiss filed by the broker-dealer and distributor defendants, in which motion Movants join. Here Movants address only Count VI, for violation of section 36(b) of the ’40 Act. Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page7 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 3 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA III. ARGUMENT. A. Plaintiff Does Not Have Standing to Pursue Count VI. Section 36(b) of the ’40 Act creates a claim for breach of fiduciary duties by an investment adviser or “any affiliated person of such investment adviser” relating to “compensation or payments paid by such registered investment company or by the security holders thereof to such investment adviser or person.”1 Section 36(b) places a fiduciary duty on investment advisers to refrain from charging or accepting excessive fees for services provided to funds and paid for by fund assets.2 A section 36(b) claim may only be brought against “the recipient of such compensation or payments, and no damages or other relief shall be granted against any person other than the recipient of such compensation or payments.”3 A section 36(b) claim may only be asserted by the SEC or by “a security holder of such registered investment company on behalf of such company . . . .”4 Section 36(b) creates a derivative action, not a direct action.5 Plaintiff here lacks 1 15 U.S.C. § 80a-35(b). 2 Id. 3 Id. § 80a-35(b)(3); In re Eaton Vance Mut. Funds Fee Litig., 380 F. Supp. 2d 222, 238 (S.D.N.Y. 2005) (holding that section 36(b)(3) claim could not be brought against investment adviser defendants and trustee defendants who were not recipients of allegedly excessive fees). 4 15 U.S.C. § 80a-35(b) 5 Some courts have held that a claim under section 36(b) is derivative based on the plain language the statute, which provides that a claim may be brought by a security holder “on behalf of such company.” See, e.g., Forsythe v. Sun Life Financial, 417 F. Supp. 2d 100, 117-18 (D. Mass. 2006); In re Lord Abbett Mutual Funds Fee Litig., 385 F. Supp. 2d 471, 488-89 (D.N.J. 2005); In re Franklin Mutual Funds Fee Litig., 388 F. Supp. 2d 451, 468 (D.N.J. 2005); Mutchka v. Harris, 373 F. Supp. 2d 1021, 1025 (C.D. Cal. 2005). Other courts have looked to the law of the state in which the investment company is incorporated to answer the question. See, e.g., In re Eaton Vance Mut. Funds Fee Litig., 380 F. Supp. 2d at 234 n.4 (applying Massachusetts law and concluding that the claims were derivative). Applying Delaware law, one would agree a claim under section 36(b) is derivative. Delaware law provides that whether a claim is direct or derivative turns on two questions: (1) who suffered the alleged harm; and (2) who would receive the benefit of any recovery. Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1032, 1035 (Del. 2004). An alleged “direct” injury “must be independent of any alleged injury to the corporation. The stockholder must demonstrate that . . . he or she can prevail without showing an injury to the corporation.” Id. at 1039. In this case, there is no “direct” injury suffered by shareholders independent of the alleged injury to the (continued…) Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page8 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 4 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA standing to assert a section 36(b) claim for two reasons: (1) he has not alleged that he holds shares in the funds at issue, which is a prerequisite to bringing a derivative claim under both federal law and Delaware law; and (2) he does not allege that he holds (or ever held) at least one-third of the shares of any of the funds at issue, which is a prerequisite to asserting a derivative claim under Delaware law and the relevant Trust Agreement. 1. Plaintiff lacks standing because he does not allege that he currently holds shares in the funds at issue. Section 36(b) requires a plaintiff to be a “holder” of the mutual fund at issue at the time that the action is brought.6 This means that a plaintiff must have bought an interest in a fund and continue to hold that interest when he sues.7 “Former security holders may not bring a claim on behalf of an investment company that they formerly held shares in, but no longer do.”8 Plaintiff alleges that he held shares in three of roughly 90 Wells Fargo Funds during the alleged Class Period,9 but he fails to allege that he holds those shares today. He therefore has not established his standing to bring a claim under section 36(b). Section 36(b)’s standing requirement is clear on its face. But if the Court were to perceive an ambiguity, it would look to Delaware law to fill any gaps. Gaps in the ’40 Act bearing on the allocation of governing power within an investment company are filled by state law unless state law permits actions prohibited by the ’40 Act or would undercut the federal policy underlying the claim.10 Indeed, “the presumption that state law should be incorporated into federal common law is particularly strong in areas in which private parties (…continued) investment company (that of paying allegedly excessive fees to its investment advisor and distributor). Section 36(b) explicitly provides that any recovery will flow to the investment company. Consequently, under Delaware law, a claim under section 36(b) is derivative in nature. 6 15 U.S.C. § 80a-35(b). 7 Forsythe, 417 F. Supp. 2d at 117-18. 8 Id. 9 CAC ¶ 15 & Ex. B. 10 Kamen v. Kemper Fin. Serv., Inc., 500 U.S. 90, 98 (1991). Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page9 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 5 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA have entered legal relationships with the expectation that their rights and obligations would be governed by state-law standards. . . . Corporation law is one such area.”11 In this case, the registered investment company is defendant Wells Fargo Funds Trust, a business trust organized under the laws of Delaware.12 Thus, if the Court finds a gap in section 36(b), the Court should apply Delaware’s business trust law to fill that gap in determining whether plaintiff in this case has standing. Delaware law governing derivative actions by beneficial owners of business trusts provides that (1) “the plaintiff must be a beneficial owner at the time of bringing the action”; and (2) the plaintiff must be a beneficial owner at the time of the transaction of which plaintiff complains (or that plaintiff’s status as beneficial owner must have devolved upon plaintiff by operation of law).13 Thus, under either federal case law or Delaware law, plaintiff lacks standing because the CAC does not allege that he continues to hold the funds at issue.14 2. Plaintiff lacks standing under the Trust Agreement and Delaware law because he does not allege that he holds one-third of the shares of the funds at issue. Plaintiff also has not met the requirements under the Trust Agreement governing the Wells Fargo Funds Trust to bring an action under section 36(b). The Trust Agreement provides that to bring a derivative action, “Shareholders owning not less than one third of the Outstanding Shares of all Series of the Trust, or of the affected Series or Classes of the Trust, as the case may be, [must] join in the bringing of the derivative action.”15 Such a 11 Id. (citations omitted). 12 CAC ¶ 28; RFJN Ex. 1 at RFJN 10; Ex. 2 at RFJN 35; Ex. 3 at RFJN 65 (Trust Agreement). 13 12 Del. C. § 3816 (emphasis added). 14 Though the Supreme Court has held that there is no demand requirement for causes of action under section 36(b), it did not hold that other requirements for derivative actions need not be met. Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 535 n.11 (1984) (holding that Federal Rule of Civil Procedure 23.1 (relating to pleading in derivative actions) does not apply to claims under section 36(b)). This issue does not affect the analysis here. 15 RFJN Ex. 1 at RFJN 29; Ex. 2 at RFJN 58-59; Ex. 3 at RFJN 90 (Trust Agreement). Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page10 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 6 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA limitation is expressly permitted by Delaware law: A beneficial owner’s right to bring a derivative action may be subject to such additional standards and restrictions, if any, as are set forth in the governing instrument of the statutory trust, including, without limitation, the requirement that beneficial owners owning a specified beneficial interest in the statutory trust join in the bringing of the derivative action.16 In this case, plaintiff seeks to recover under section 36(b) on behalf of all beneficial owners of all of the Wells Fargo Funds. As a result, he must be “joined” in this action by shareholders “owning not less than one third of the Outstanding Shares of all Series of the Trust.” The fact that plaintiff purports to represent a class does not change the analysis.17 This requirement does not impede or frustrate the purpose of the ’40 Act or section 36(b). As noted by the Supreme Court, Congress adopted the ’40 Act because of concern for “‘the potential for abuse inherent in the structure of investment companies.’”18 Section 36(b) was intended to prevent the payment of excessive fees to investment advisors.19 The requirement imposed by the Wells Fargo Funds Trust agreement does not frustrate this purpose. Shareholders may still challenge the fees charged by investment advisers without being required to make demand on the board of directors (or trustees) to do so. The requirement simply provides some assurance that the suit is not frivolous by requiring that at least one-third of the affected shareholders agree that the suit is worth bringing. Because the CAC does not allege that plaintiff owns at least one-third of the affected shares in any fund, plaintiff lacks standing as to all funds. B. The Complaint Fails to State a Section 36(b) Claim For Revenue Sharing. The Complaint alleges that defendants paid or received revenue sharing monies. Count VI of the Complaint alleges that the Movants caused the Wells Fargo Funds and their investors to “pay inflated commissions” that they recouped through adviser fees and that 16 12 Del. C. § 3816(e). 17 Forsythe, 417 F. Supp. 2d at 119 (“A plaintiff may not avoid the standing inquiry merely by styling his suit as a class action.”). 18 Daily Income Fund, 464 U.S. at 536 (quoting Burks v. Lasker, 441 U.S. 471, 480 (1979)). 19 Id. at 540-41. Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page11 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 7 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA the fees charged by the funds were excessive under section 36(b) because they “improperly inflated management fees and shifted expenses from the Investment Advisers to the Funds and their investors without a corresponding reduction in their management fees to reflect that shift in expense.”20 Plaintiff seems to allege that some of the fund’s 12b-1 fees,21 soft dollar payments, advisory fees and commissions to brokers violated section 36(b) because they were used to finance the revenue-sharing program.22 This is not by any means a case of first impression. Courts have repeatedly looked at this issue and held that revenue-sharing is not actionable under section 36(b). Numerous courts have dismissed complaints based on revenue-sharing claims in their entirety.23 As 20 See CAC ¶ 206. 21 SEC Rule 12b-1 permits funds to establish distribution plans whereby up to 0.75 percent of fund assets can be used for marketing and selling the fund’s shares. These fees are paid to the distributor out of fund assets, and the cost is therefore borne directly by investors. 22 See CAC ¶ 97. 23 See In re Morgan Stanley and Van Kampen Mut. Fund Securities Litig, 2006 WL 1008138 (S.D.N.Y. Apr 18, 2006) (dismissing nondisclosure and excessive fee claims against registered broker-dealer, fund distributors, investment adviser and sub-advisers, and fund company board of trustees); In re Evergreen Mut. Funds Fee Litig., 2006 WL 753000 (S.D.N.Y. Mar. 24, 2006) (dismissing excessive fee claims against funds advisers and distributors); In re Goldman Sachs Mut. Funds Fee Litig., 2006 WL 126722 (S.D.N.Y. Jan 17, 2006) (dismissing claims excessive fee claims against fund complex, but not a broker dealer case); In re Lord Abbett Mut. Funds Fee Litig., 407 F.Supp.2d 616 (D.N.J. Dec. 28, 2005) (dismissing excessive fee claims against advisers and officers); In re Eaton Vance Mut. Funds Fee Litig., 403 F. Supp. 2d 310, Fed. Sec. L. Rep. P 93,620 (S.D.N.Y. Dec. 6, 2005) (affirming dismissal of excessive fee claims against trustees and investment advisers, and denying leave to file third amended complaint); In re AllianceBernstein Mut. Fund Excessive Fee Litig., 2005 WL 2677753 (S.D.N.Y Oct. 19, 2005) (dismissing nine excessive fee claims, but sustaining section 36(b) claim against investment adviser defendants), vacated in part, aff’d in part, In re AllianceBernstein Mut. Fund Excessive Fee Litig., 2006 WL 74439 (S.D.N.Y. Jan. 11, 2006) (vacating Court’s previous ruling upholding section 36(b) claim and dismissing claims against mutual fund advisers); In re Davis Selected Mut. Funds Litig., 2005 WL 2509732 (S.D.N.Y. Oct. 11, 2005) (dismissing excessive fee claims against investment adviser, sub-adviser and distributor); In re Dreyfus Mut. Funds Fee Litig., 2005 WL 3970836 (W.D. Pa. Sept. 30, 2005) (denying motion to dismiss section 36(b) and 48(a) excessive fee claims) but see In re Dreyfus Mut. Funds Fee Litig., 2006 WL 909434 (W.D. Pa. April 10, 2006) (granting motion for judgment on the pleadings as to section 36(b) and 48(a) claims); In re Franklin Mut. Funds Fee Litig., 388 F. Supp. 2d 451 (D.N.J. Sept. 9, 2005) (dismissing excessive fee claims against advisers, distributors and directors). See also In re Oppenheimer Funds Fee Litig., 2006 WL 864574 (S.D.N.Y. 2006) (dismissing section 36(b) claim); Benzon v. Morgan Stanley Distrib., Inc., 2004 WL 62747 (M.D. (continued…) Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page12 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 8 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA one well-reasoned opinion rendered in a revenue sharing case noted, allegations that the defendant authorized improper 12b-1 fees, soft dollar payments and commissions to brokers are insufficient to allege a claim under section 36(b), which address only the negotiations and enforcement of payment arrangements between investment advisors and funds, not whether investment advisers spent their fees improperly or unwisely.24 In re Oppenheimer Funds Fee Litigation is instructive. In that case, plaintiffs alleged that defendants had caused “improper secret payments to be made from the Funds’ assets to various brokerage firms in order to induce those firms to market the Funds more aggressively in a manner benefiting the parent and its affiliates at the expense of the Funds.”25 In a motion for reconsideration, the court held that the plaintiffs’ “failure to make any specific factual allegations as to why the added amounts renders the advisory fees, as an economic matter, disproportionate to the services rendered is fatal to the claim” (…continued) Tenn. Jan. 8, 2004) (dismissing claims regarding differential compensation paid to registered representatives), aff’d., 420 F.3d 598 (6th Cir. Mar. 18, 2005) (affirming dismissal of claims regarding differential compensation paid to registered representatives); Castillo v. Dean Witter Reynolds, Inc., 1998 WL 342050 (S.D.N.Y. June 25, 1998) (dismissing non-disclosure claims based on alleged failure to disclose differential compensation); Press v. Quick & Reilly, Inc., 218 F.3d 121 (2d Cir. 2000) (dismissing non-disclosure claims against broker-dealer alleging failure to disclose revenue-sharing program); U.S. v. Alvarado, 2001 WL 1631396 (S.D.N.Y. Dec. 19, 2001) (limiting use of evidence regarding excessive compensation received by registered representatives under indictment); In the Matter of Morgan Stanley DW, Inc., No. E- 2003-31, No. E-2003-53, at 1 (Sec’y Mass. Comm. Sec. Div. May 24, 2004)), aff’d, In the Matter of Morgan Stanley DW, Inc., No. E-2003-31, No. E-2003-53, at 2 (Sec’y Mass. Comm. Sec. Div. June 22, 2004) (excluding non-disclosure claims from action brought by state securities regulators, and holding that broker-dealer had no duty to disclose compensation incentives and conflicts of interest). But see In re Mut. Funds Investment Litig., 2006 WL 827339 (D. Md. Mar. 6, 2006) (motions to dismiss granted in part and denied in part; nondisclosure and excessive fee claims permitted to proceed against advisers and distributors); Dumond v. Massachusetts Financial Services Company, 2006 WL 149038 (D. Mass. Jan. 19, 2006) (granting in part and denying in part motion to dismiss in revenue sharing case; excessive fee claims permitted to proceed against advisers); Forsythe v. Sun Life Financial, Inc., 417 F. Supp. 2d 100 (D. Mass. Jan. 16, 2006) (same). 24 See Eaton Vance, 380 F. Supp. 2d at 268-38 (dismissing section 36(b) claims relating to advisory fees, 12b-1 fees, soft dollar payments and commissions paid to brokers). 25 In re Oppenheimer Funds Fee Litig., 2006 WL 592881, at *1 (S.D.N.Y. Mar. 10, 2006). Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page13 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 9 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA and dismissed the section 36(b) claim.26 Plaintiff here states that the Movants used investment advisory fees to circumvent Rule 12b-127 and that the advisory fees were therefore excessive. Like the plaintiffs in the other revenue sharing cases already dismissed, plaintiff does not allege any specific facts as to why an added amount of fees derived from revenue sharing would make the aggregate fees so disproportionately large that they could not have resulted from arms’ length bargaining. Accordingly, plaintiff does not state a section 36(b) claim with respect to revenue sharing. C. The Complaint Fails to State a Section 36(b) Claim For Excessive Fees. Plaintiff attempts to avoid the extensive case law dismissing revenue-sharing claims under section 36(b) by adding allegations that the fees were excessive, never mind revenue sharing. Using statistics involving expenses incurred for select share classes of only a handful of the Wells Fargo funds (most of which plaintiff never owned), plaintiff alleges that all of the Wells Fargo Funds charged excessive fees—and, in particular, 12b-1 fees that bear no reasonable relationship to the services rendered. Plaintiff makes only one factual allegation with respect to the 12b-1 fees: they were “higher than those charged to comparable funds.”28 Plaintiff makes no reference to the services performed by the distributors who received them or the relationship of the services to the fees charged. Plaintiff therefore fails to state a claim under section 36(b) relating to the 12b-1 fees.29 26 In re Oppenheimer Funds Fee Litig., 2006 WL 864574, at *1 (S.D.N.Y. Apr. 5, 2006). See also In re Evergreen Mutual Funds Fee Litig., 2006 WL 753000, at *7 (S.D.N.Y. Mar. 24, 2006) (dismissing section 36(b) claim in a revenue sharing cases where plaintiffs “alleged that the fees at issue were used improperly, and not that the fees themselves were excessive.”); Goldman Sachs, 2006 WL 126772, at *10 (“In sum, plaintiffs here at most have alleged that the advisory fees and Rule 12b-1 fees were used for improper purposes. We agree with Judge Koetl and Judge Cedarbaum that such allegations do not suffice to state a claim under section 36(b).”). 27 CAC ¶ 151. 28 CAC ¶ 153. 29 See In re Morgan Stanley, 2006 WL 1008138, at *12-13; Eaton Vance, 380 F. Supp. 2d at 237; In re Goldman Sachs, 2006 WL 12677, at *8-*11. Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page14 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 10 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA To state a section 36(b) claim for excessive fees, a plaintiff must satisfy the stringent standard enunciated by the Second Circuit in Gartenberg, that “the advisor manager 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.”30 “To survive a motion to dismiss [a claim under section 36(b)], a complaint may not simply allege in a conclusory manner that advisory fees are ‘excessive.’ Instead, a plaintiff must allege facts that, if true, would support a claim that the fees at issue are excessive.”31 Many courts have dismissed section 36(b) claims on motions to dismiss.32 Adhering to the stringent standards enunciated in Gartenberg makes good sense. 30 Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923, 928 (2d Cir. 1982) (emphasis added). See also Strigliabotti v. Franklin Resources, Inc., 2005 WL 645529 (N.D. Cal. Mar. 7, 2005) (applying the same standard in denying motion to dismiss section 36(b)). The Strigliabotti court held that allegations that (1) the investment managers charged plaintiffs much higher fees than they charged another client (New York State) for identical services and that the services rendered and fees charged had apparently not changed despite the fact that the size of the funds exploded from $2 billion to $300 billion were sufficient to survive a motion to dismiss. Id at *3-*4. Strigliabotti is distinguishable from this case; the CAC does not allege that defendants provided identical services at lower costs to other individuals or that the funds had not lowered their fees during periods of dramatic growth. 31 Migdal v. Rowe Price-Fleming Int’l Inc., 248 F.3d 321, 327 (4th Cir. 2001); see also Yampolsky v. Morgan Stanley Investment Advisers, Inc., 2004 WL 1065533, at *2 (S.D.N.Y. May 12, 2004). 32 See, e.g., Krantz v. Prudential Investments Fund Management LLC, 305 F.3d 140, 143- 44 (3d Cir. 2002) (dismissing section 36(b) claim for failure to “allege any facts indicating that the fees received were disproportionate to services rendered” or facts that “would support a claim that the ‘independent’ directors of the Fund were actually ‘interested.’); Migdal v. Rowe Price-Fleming Int’l Inc., 248 F.3d 321, 327 (4th Cir. 2001) (upholding dismissal pursuant to Rule 12(b)(6)); In re Morgan Stanley and Van Kampen Mutual Fund Securities Litig., 2006 WL 1008138, at *12-*13 (S.D.N.Y. April 18, 2006) (dismissing section 36(b) claims where, in addition to revenue sharing, plaintiff had alleged that (1) the fund’s directors were controlled by the defendants, (2) the fund used soft dollars to purchase computer hardware and software, (3) the fund did not share economies of scale with shareholders and (4) the average expense ratio of defendant’s funds was 50% higher than the average expense ratio of non-Morgan Stanley funds); Yampolsky v. Morgan Stanley Inv. Advisers, Inc., 2004 WL 1065533, at *2 (S.D.N.Y. May 12, 2004) (dismissing complaint where “conspicuously absent [were] any factual allegations as to the actual fee negotiations or management and distribution services rendered by these defendants. Instead, the complaints rely on speculation, inference and generalized observations about the securities industry from public figures such as Warren Buffett.”); Verkouteren v. Blackrock Fin. Mgmt., 37 F. Supp. 2d 256, 259 (S.D.N.Y. 1999) (dismissing section 36(b) claim for failure to make “allegations . . . that the directors are in fact controlled by defendant.”). Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page15 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 11 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA Courts are understandably reluctant to get into the business of setting professional fees. That is particularly true of setting fees for a business as complex and volatile as the investment business. All investment has risks, the performance of all funds varies, and sometimes a good fund will underperform its peers.33 If all a plaintiff had to do to survive a motion to dismiss was to allege that a fund’s fees were higher than some benchmark, or its performance for some period was below some average, mutual funds and their affiliates could be dragged into court and through the discovery process without having done anything other than make investment decisions that, in hindsight, did not work out well.34 The structure of the ’40 Act requires a stringent analysis of the Gartenberg factors.35 For example, a court must give due consideration to approval of allegedly excessive fees by a board of directors,36 bearing in mind the presumption that those directors are not interested or controlled.37 In these ways, “[t]he Investment Company Act balances the tension between protecting mutual fund investors from overly generous charges by investment advisers, and shielding fund management from an outbreak of harassing lawsuits.”38 “The test is basically an economic one, i.e., that the fees charged must be materially disproportionate to the services rendered.”39 The factors that the Gartenberg court and other courts have considered in analyzing whether the fees were within the range of reasonableness are (1) the nature and quality of the service provided by the advisers to the shareholders, (2) the profitability of the mutual fund to the adviser, (3) the “fall-out” 33 Migdal, 248 F.3d at 327. 34 Id. at 327-28. 35 See, e.g., Krantz, 305 F.3d at 144. 36 15 U.S.C. § 80a-35(b)(2). 37 15 U.S.C. § 80a-2(a)(9). 38 Migdal, 248 F.3d at 331. 39 In re Oppenheimer Funds Fee Litig., 2006 WL 864574, at *1 (S.D.N.Y. April 5, 2006) (granting, on motion for reconsideration, motion dismissing section 36(b) claim in a revenue sharing case where plaintiff had alleged that defendants had used advisory fees to “create a slush fund to bribe brokers for the benefit of the Adviser Defendants”). Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page16 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 12 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA benefits, (4) the economies of scale achieved by the mutual fund and whether such savings were passed on to the shareholders, (5) comparative fee structures with other similar funds, and (6) the independence and conscientiousness of the mutual fund’s outside trustees.40 Where a plaintiff challenges both advisory fees and section 12b-1 fees, each fee must be separately considered under section 36(b).41 This is appropriate because each covers a separate service.42 1. The first Gartenberg factor: the nature and quality of services. Plaintiff makes only one specific allegation about the nature and quality of services provided by the Wells Fargo. Plaintiff makes a conclusory allegation that the services provided by Wells Fargo were not valuable because they were similar to managing an index fund.43 Plaintiff’s purported support is an assertion that “most of the Wells Fargo Funds’ returns were highly correlated with the S&P 500 index, indicating a level of performance that is consistent with the management characteristics of an index fund.”44 But even if it is true that certain funds’ performance matched the S&P 500’s performance, that would not mean that the funds were not actively managed (as most of the Wells Fargo Funds are), much less support a claim that excessive fees were charged. The net of plaintiff’s allegations⎯that some of the approximately 90 Funds in the Wells Fargo complex had below average returns in discrete time periods⎯does not support an allegation that the services provided by the Movants to the Funds were of such a nature as to render the fees charged for them excessive. As the Fourth Circuit explained in affirming the dismissal of a 36(b) suit: 40 In re Goldman Sachs Mut. Funds Fee Litig., 2006 WL 126772, at * 9 (S.D.N.Y. Jan. 17, 2006); Eaton Vance, 380 F. Supp. 2d at 237. 41 Meyer v. Oppenheimer Management Corp., 895 F.2d 861, 866 (2d Cir. 1990); Goldman Sachs, 2006 WL 126772, at * 9. 42 Id. 43 See CAC ¶¶ 134, 206. 44 CAC ¶ 134. Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page17 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 13 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA While performance may be marginally helpful in evaluating the services which a fund offers, allegations of underperformance alone are insufficient to prove that an investment adviser's fees are excessive. Investing is not a risk-free endeavor. Even the most knowledgeable advisers do not always perform up to expectations, and investments themselves involve quite different magnitudes of risk. Furthermore, investment results are themselves cyclical. An under-achieving fund one year may be an overachieving fund the next. Accepting plaintiffs' invitation to permit discovery here because the funds underperformed would make it possible for other plaintiffs to state a claim in limitless actions filed under Section 36(b). The district court provided plaintiffs with three opportunities to allege something about the particular services offered by the funds' investment advisers. Plaintiffs failed to do so, and thus failed to state a claim that the fees charged by defendants were excessive.45 Plaintiff’s alleged statistics about a few funds do not support an allegation that the fees charged were excessive. 2. The second and third Gartenberg factors: the profitability of the mutual funds to the Investment Adviser and any “fall-out” benefits that the Investment Adviser received. Courts sometimes look at the profitability of the mutual funds to the investment adviser and the existence and extent of any “fall-out“ benefits to the investment adviser.46 The Complaint mentions “fall-out” benefits in passing,47 but does not allege any facts about fall-out benefits or the profitability of the funds to the investment adviser. 3. The fourth Gartenberg factor: whether economies of scale were passed on to investors. Plaintiff contends that economies of scale were not passed on to investors in the Wells Fargo Funds.48 But he fails to plead with any particularity that economies of scale were realized at all. Courts reject this kind of speculation. “Plaintiffs in prior cases have argued in substance that since a fund increased dramatically in size, economies of scale 45 Migdal v. Rowe-Price Fleming Int’l, Inc. 248 F.3d 321, 327-28 (4th Cir. 2001). 46 In re Goldman Sachs, 2006 WL 126772, at *8. 47 CAC ¶ 109 (defining fall-out benefits as benefits other than advisory fees that flow to the adviser and its affiliates as a result of the adviser’s relationship with the fund). 48 CAC ¶¶ 111-29. Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page18 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 14 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA must have been realized. The courts reject that argument.”49 “The concept is meaningful only if increased size of a fund (more shareholders, more assets under management) directly reduces the manager’s costs of processing each transaction and servicing each shareholder. A plaintiff must prove that the fund actually realized such economies of scale.”50 Plaintiff alleges generally that economies of scale occur in mutual funds,51 but fails to allege what economies of scale occurred here. Plaintiff alleges nothing about the transaction and servicing costs incurred by the investment adviser, only that “substantial economies of scale” existed which were not passed on to shareholders.52 Indeed, plaintiff admits that, during the relevant time period (after November 4, 2004), advisory fee breakpoints existed in many of the Wells Fargo Funds’ fee structures.53 Instead of alleging facts relating to economies of scale, plaintiff cites statistics relating to expense ratios generally, and references “statistics” in support of his claim that alleged economies of scale were not passed on to investors in Wells Fargo Funds. But most of these “statistics” are irrelevant. As discussed below, the statute of limitations for a cause of action under section 36(b) is one year, and claims from before November 4, 2004 are time-barred. Consequently, allegations of excessive fees charged before November 4, 2004 are irrelevant.54 In particular, this renders the allegations of paragraphs 114 and 116 (both relating to alleged increases in the particular funds’ expense ratios between 2002 and 2005), 119, 120-121 and 123-124 (all relating to alleged lack of breakpoint fee structures prior to August 1, 2004) irrelevant. In addition, plaintiff makes numerous comparisons of fund 49 Kalish v. Franklin Advisers, Inc., 742 F. Supp. 1222, 1238 (S.D.N.Y. 1990). 50 Id. at 1239. 51 CAC ¶¶ 98, 111-112. 52 CAC ¶ 113. 53 See generally CAC ¶¶ 119-29. The Complaint defines a fee breakpoint as a declining rate structure in which the fee as a percentage of total assets decreases in steps or at designated points (“breakpoints”) as total assets increase. CAC ¶ 119. 54 In re AllianceBernstein Mutual Fund Excessive Fee Litigation, 2006 WL 74439 at *2 (S.D.N.Y. Jan. 11, 2006). Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page19 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 15 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA “expense ratios,”55 which include things other than the advisory fees at issue.56 Plaintiff devotes the bulk of his remaining allegations regarding economies of scale to comparisons between the breakpoint fee structures of the advisory agreement and the breakpoint fees structures in the sub-advisory agreement.57 Plaintiff appears to take the position that the advisory fees are excessive because investment advisory fee breakpoints do not coincide with sub-advisory fee breakpoints. But there is no reason to believe they would. Advisers and sub-advisers do not perform identical services (and plaintiff does not allege they do). It proves nothing to say that their breakpoints differ. Besides, sub- advisers’ fees are irrelevant because they are paid by the investment adviser, and do not increase the total fees paid by the fund.58 4. The fifth Gartenberg factor: comparative fee structures. The Complaint states in conclusory terms that the Wells Fargo Funds’ fees are “higher [than those of] other investment advisers who manage the same type of portfolio.”59 But plaintiff does not actually allege any facts to support this comparison. As set forth above, investment advisory fees must be evaluated separately from 12b-1 fees (or any other challenged fees).60 Here, plaintiff makes comparisons using fund expense ratios, which plaintiff alleges contain investment advisory fees, 12b-1 fees, service and administrative 55 CAC ¶¶ 108, 114, 116, 117. Not only is the chart in paragraph 117 irrelevant, it is incomprehensible. It is unclear how plaintiff arrived at this “arithmetic average” or to what funds it purportedly relates. Moreover, as with the rest of plaintiff’s statistics, this comparison to some hypothetical “benchmark” fund which does not exist is evidence of nothing. The nature of an average is just that⎯some funds are more expensive, some are less. 56 Meyer v. Oppenheimer Management Corp., 895 F.2d 861, 866 (2d Cir. 1990) (each type of fees must be separately assessed); Goldman Sachs, 2006 WL 126772, at * 9 (same). 57 CAC ¶¶ 125-129. 58 RFJN Ex. 5 at 115 (Sub-advisory agreement). 59 CAC ¶ 135. 60 Meyer v. Oppenheimer Management Corp., 895 F.2d 861, 866 (2d Cir. 1990); Goldman Sachs, 2006 WL 126772, at * 9. Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page20 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 16 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA fees and transfer agency fees, all sloshed together.61 Plaintiff’s comparisons are nothing more than manufactured statistics designed to create an apparent inequity. Plaintiff uses comparisons not to any actual competing funds offered to investors, but to a hypothetical benchmark fund that does not exist.62 Indeed, plaintiff’s manipulation of the numbers is apparent from the face of the Complaint. In the chart in paragraph 121, for example, plaintiff compares expense ratios (not advisory fees) to the “value-weighted benchmark,” and concludes the expense ratios are, on average, 55 basis points higher (comparing retail share classes only). Or, to pick another example, the chart in paragraph 141 (comparing the same fees of the same funds, plus one more) compares expense ratios (still not advisory fees) to an “equally-weighted” benchmark and concludes the fees are, on average 64 basis points higher (comparing all share classes). These charts do not allege facts showing that Wells Fargo Funds investment advisory fees are higher than those charged to comparable funds. 5. The sixth Gartenberg factor: the independence of the funds’ outside trustees. The ’40 Act requires that at least 40 percent of an investment company’s directors be “disinterested”63 and that every agreement with an investment adviser be approved by a majority of the disinterested directors.64 “Disinterested” directors are those directors who are not “affiliated” with the fund's investment adviser, or “controlled,” by the investment adviser.65 “Control” is “the power to exercise a controlling influence over the management or policies of a [fund], unless such power is solely the result of an official position with such [fund].”66 The’40 Act, however, expressly creates a presumption against control, stating that a “natural person shall be presumed not to be a controlled person within the 61 CAC ¶ 108. 62 CAC at 41 n.10. 63 15 U.S.C. § 80a-10(a). 64 See 15 U.S.C. § 80a-15(c). 65 See 15 U.S.C. §§ 80a-2(a)(19) & 80-2(a)(3). 66 15 U.S.C. § 80a-2(a)(9). Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page21 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 17 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA meaning of this subchapter.”67 This presumption, however, may be rebutted by “evidence.”68 Plaintiff devotes substantial energy to attempting to allege that the directors of the Wells Fargo Funds failed to act independently and fulfill their duties under the ’40 Act, thereby confirming that the fees could not have been the result of arms’ length negotiation. But plaintiff’s allegations amount to circular reasoning: fees were excessive because the directors were not independent; and we know the directors were not independent because they approved excessive fees.69 This is not sufficient to allege a lack of director (or, in this case, Trustee) independence. One of plaintiff’s primary contentions appears to be that there is something wrong with the fact that the Trustees of the Wells Fargo Funds Trust are the trustees for each of the various funds.70 But neither the ’40 Act nor the SEC proscribes the use of multi-board membership within mutual fund complexes.71 Indeed, it is the prevailing practice in the industry.72 “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.”73 Plaintiff does not identify any facts relating to control of the independent trustees that are relevant to the inquiry: (1) selection or nomination of the director by the alleged controlling party; (2) existence of family ties; (3) social relations; (4) former business 67 Id. 68 Id. 69 See, e.g., CAC ¶ 162 (“Directors” failed to consider “that no economies of scale were passed to investors as the Wells Fargo Funds grew; that the fees were significantly more expensive than comparable funds; and that the advisory fees should be reduced to reflect the fall out benefits received by Defendants.”); CAC ¶ 168 (“Additionally, the Directors failed to ensure that the economies of scale were passed to the Wells Fargo Funds and their investors and that the Funds’ expense ratios are reasonable in relation to comparable funds.”). 70 CAC ¶¶ 161, 163. 71 Migdal v. Rowe Price-Fleming International Inc., 248 F.3d 321, 330 (4th Cir. 2001); Krantz v. Prudential Investments Fund Management LLC, 305 F.3d 140, 143-44 (3d Cir. 2002). 72 Migdal, 248 F.3d at 330; Krantz, 305 F.3d at 143-44. 73 Migdal, 248 F.3d at 331. Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page22 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 18 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA associations between the director and the controlling person; (5) the amount of time spent by directors at meetings; (6) respective ages; (7) participation in recommending, evaluating, and terminating policies; (8) independent knowledge of corporate affairs; (9) interlocking directors and officers, together with share ownership; and (10) actual dominion and control.74 In fact, the Gartenberg court considered not only whether trustees were fully informed about all facts bearing on the adviser-manager’s service and fee, and the extent of care and conscientiousness with which they performed their duties, but the expertise of the independent trustees of a fund.75 Plaintiff does not allege that the trustees were not competent professionals, qualified to hold their positions. In considering a claim under section 36(b), a court must “give[] such consideration . . . as is deemed appropriate under all the circumstances” to approval of investment advisory fee contracts by the board of directors.76 Plaintiff has failed to allege any facts to call into question the validity or appropriateness of the approval of the relevant contracts by the board of trustees of the Wells Fargo Funds Trust. Plaintiff’s allegations about independence are particularly misplaced as applied to Stephens, which is not an affiliate of any Wells Fargo entity but an independent broker- dealer. Nothing alleged in the Complaint suggests any reason why the funds’ dealings with Stephens would be anything other than completely arms’ length. D. The Section 36(b) Claim is Largely Barred by the Statute of Limitations. Where the facts and dates alleged in a complaint demonstrate that the complaint is barred by the statute of limitations, a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) should be granted.77 No damages are recoverable in an action under 74 Verkouteren v. Blackrock Financial Management, Inc., 37 F. Supp. 2d 256, 261 (S.D.N.Y. 1999). 75 Gartenberg, 694 F.2d at 930. 76 Section 36(b)(2), 15 U.S.C. § 80a-35(b). 77 Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980); Ritchie v. United States, 210 F. Supp. 2d 1120, 1123 (N.D. Cal. 2002) (citing same). Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page23 of 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 19 - Motion to Dismiss Count VI of Complaint No. C-05-04518-WHA section 36(b) for any period prior to one year before the complaint was filed.78 In this case, the complaint was filed November 4, 2005. As a result, no damages are recoverable for the time before November 4, 2004.79 The alleged Class Period begins on June 30, 2000. But claims relating to the period from June 2000 to November 3, 2004 are barred by the applicable statute of limitations. The Court should therefore, at a minimum, dismiss Count VI with prejudice to the extent it asserts claims relating to the period before November 4, 2004. IV. CONCLUSION. For the foregoing reasons, the Complaint should be dismissed as to the Movants. Dated: May 2, 2006. PILLSBURY WINTHROP SHAW PITTMAN LLP BRUCE A. ERICSON CLIFFORD C. HYATT DAVID L. STANTON JACOB R. SORENSEN KRISTIN M. LEFEVRE 50 Fremont Street Post Office Box 7880 San Francisco, CA 94120-7880 Attorneys for All Defendants THOMAS O. JACOB #125665 VANESSA M. HOFFMANN #206086 OFFICE OF GENERAL COUNSEL WELLS FARGO & CO. 633 Folsom Street, 7th Floor San Francisco, California 94107 Telephone: (415) 396-4425 Facsimile: (415) 975-7867 tojacob@wellsfargo.com Attorneys for Defendants WELLS FARGO & CO. and affiliates By /s/ Bruce A. Ericson Bruce A. Ericson 78 15 U.S.C. § 80a-35(b). 79 15 U.S.C. § 80a-35(b)(3). Case3:05-cv-04518-WHA Document65 Filed05/02/06 Page24 of 24