Bass, Berry & Sims attorney Chris Lazarini analyzed the case of Goodman vs. J.P. Morgan Investment Management, Inc., in which Plaintiffs alleged Defendants, mutual fund administrators, breached their fiduciary duties by overcharging JP Morgan mutual funds in violation of Section 36(b) of the Investment Company Act. The Court holds that under §36(b), breach of fiduciary duty claims can be brought against direct payees, not against those receiving payments indirectly. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Goodman vs. J.P. Morgan Investment Management, Inc., No. 2:14-cv-414 (S.D. Ohio, 2/26/16)
*Plaintiffs suing investment advisers under §36(b) of the Investment Company Act must allege facts supporting the disproportionality of the advisers' fees, rather than general facts about the potential for abusive practices, to survive a motion to dismiss.
**Section 36(b) provides for breach of fiduciary duty claims against the direct payee; not against those receiving fees indirectly.
Plaintiffs in this consolidated action allege that Defendants breached their fiduciary duty by overcharging certain JPMorgan mutual funds in violation of §36(b) of the Investment Company Act of 1940 ("ICA"). Defendants are affiliated entities and include J.P. Morgan Investment Management Inc. ("JPMIM"), the investment adviser to some of the funds; JP Morgan Funds Management, Inc. ("JPMFM"), the funds' administrator; and JP Morgan Chase Bank, NA ("JPMCB"), a sub-administrator engaged by JPMFM. In an earlier opinion (SLA 2015-12), the Court denied JPMIM's Rule 12(b)(6) motion to dismiss, finding the complaint presented a plausible claim that the advisory fees charged the funds were disproportionally large.
In this installment, JPMFM and JPMCB seek dismissal of the claims that the administrative fees were excessive. JPMCB argues that the claims against it should be dismissed because §36(b) liability only attaches to a direct recipient of fees. As sub-administrator, JPMCB was paid indirectly, receiving from JPMFM a portion of the administrative fees charged the funds by JPMFM. Plaintiffs concede that the funds do not pay JPMCB directly, but argue the intent of §36(b) permits claims against entities indirectly receiving excessive fees charged by an affiliate. The Court sides with JPMCB and dismisses the claims against it, finding the plain language of the statute limits claims to direct payees only.
JPMFM asks the Court to review its contracts attached to the complaint and compare the services provided the JPMorgan funds with those provided to unaffiliated funds. It argues the contracts show the services provided to the JPMorgan funds are more extensive and, therefore, justify the higher administrative fees. The Court rejects the notion that a simple comparison of a list of JPMFM's services reveals whether the fees charged are within the range of what would be negotiated in an arm's length transaction. It is the work done and not the label given that ultimately will be dispositive. The Court denies JPMFM's motion, concluding that its arguments are more appropriate for summary judgment or trial.