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From Securities Regulation Daily, March 5, 2015

Claims of excessive advisory fees survive motion to dismiss

By Rodney F. Tonkovic, J.D.

A district court found that investors presented a plausible claim that an investment adviser's fees were disproportionately large. The investor plaintiffs alleged that advisory fees charged by JP Morgan Investment Management Inc. were excessive and caused the funds to sustain millions of dollars in damages. The court concluded that the complaint sufficiently pleaded so that the fees were so disproportionately large as to bear no reasonable relationship to the services rendered (Goodman v. J.P. Morgan Investment Management, Inc., March 4, 2015, Frost, G.).

Allegations. The plaintiffs each invested in one or more mutual funds advised by JP Morgan. Under an Investment Advisory Agreement, JP Morgan was paid an annual fee by each fund for its advisory services. The plaintiffs alleged that the fees charged by JP Morgan were excessive in breach of the fiduciary duty created by Section 36(b) and that this breach caused millions of dollars in damages to the funds.

The complaint contrasted the advisory fees paid by the three funds with other mutual funds subadvised by JP Morgan and involving substantially the same types of securities and investment strategies. According to the plaintiffs, the fee rates for the funds at issue were between 25 and 525 percent higher than the subadvised funds. The complaint also alleged that when the funds grew, JP Morgan realized economies of scale that were not passed along to the plaintiffs. Finally, the plaintiffs asserted that the fees charged by JP Morgan were not negotiated at arm's length.

Excessive fees. The court found that these allegations were sufficient to survive a motion to dismiss. Here, the court cited precedent stating that claims under Section 36(b) need only meet the liberal pleading standards of FRCP Rule 8 and allege facts sufficient to support an inference that the fees are so disproportionately large as to bear no reasonable relationship to the services rendered.

In this case, the court said, the plaintiffs pleaded "a notable disparity" between the fees for the three funds and the subadvised funds while the services provided to and resources involved in all of the funds were substantially the same. The plaintiffs also adequately alleged that there was Plaintiffs allege that there was effectively no negotiation when the advisory agreement was approved: "factual allegations of rubber-stamping for an affiliated fund are there," the court said. Taken as a whole, the court concluded, the complaint pleaded sufficient facts about the fees paid and their relationship to the services rendered to present a plausible claim that the fees were disproportionately large.

The case is No. 2:14-cv-414.

Attorneys: David P. Meyer (Meyer Wilson Co., LPA) for Nancy Goodman. Steven Walter Tigges (Zeiger, Tigges & Little LLP) for J.P. Morgan Investment Management, Inc.

Companies: J.P. Morgan Investment Management, Inc.

MainStory: TopStory InvestmentAdvisers OhioNews

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