An excessive fee suit brought by participants in several plans recordkept by Empower that used Great-West investment options has come to a conclusion.
The suit was actually two suits, brought by participants (Obeslo, Hall and Gorrell-Deyerle) in plans that had chosen Empower as recordkeeper, and investment options from Great-West and other fund complexes from which participants could choose. The funds are overseen by the directors on the Great-West Funds Board of Directors, a majority of whom are independent, and the Board engages in an annual “15(c)” process for reviewing and approving the fees charged to the funds. The funds are administered by GWL&A as part of its recordkeeping services, pursuant to an Administrative Services Agreement approved by the Board.
Plaintiffs claim that the fees charged by Defendants Great-West Capital Management, LLC (GWCM) and Great-West Life & Annuity Insurance Co. (GWL&A) violate § 36(b) of the Investment Company Act of 1940 (ICA), which prohibits fees that 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.”
Case History
The parties here had been busy, following the initiation of the case on Jan. 29, 2016, and then on Aug. 22, 2016, and April 20, 2017, the Court granted Defendants' Motions to Consolidate this case with two related actions, producing a Consolidated Amended Complaint on Sept. 27, 2017. At that point, the Great-West/Empower defendants filed a motion to dismiss and a motion for summary judgment, the former was granted in part—specifically the claims of “various shareholder plaintiffs whom it found to lack standing because they could not demonstrate that they continuously owned shares throughout the pendency of this case.”
However, the court denied the motion for summary judgment after a hearing on Sept. 27, 2018, finding that there was a genuine dispute of material fact as to whether Defendants’ fees were so high that they could not have been the product of arms-length bargaining—in doing so, the court relied on opinions offered by Plaintiffs' expert, J. Chris Meyer—who we’ll hear more about in a bit.
Then on Feb. 11, 2019, the defendants filed a Motion to Strike Meyer as an expert—but the court denied that motion, “concluding that weaknesses in Mr. Meyer’s qualifications and conclusions were proper subjects for cross examination, but they did not preclude him from testifying.”
And then, finally the Court held an 11-day bench trial that included 13 fact witnesses and three expert witnesses, as well as four plaintiffs—each of whom testified that they had invested in Great-West Funds through employer-sponsored retirement plans or individual retirement accounts—and C. Michael Pfister, who is a trustee of the Duplass Plan.
The Issues
The ruling (Obeslo v. Great-West Capital Mgmt. LLC, 2020 BL 297664, D. Colo., No. 16-cv-00230, 8/7/20) by U.S. District Judge Christine M. Arguello in the U.S. District Court for the District of Colorado, notes that the ICA “regulates investment companies, including mutual funds,” and imposes a “fiduciary duty” on investment advisers with respect to the compensation they receive for providing services to mutual funds. That said, she explained that the U.S. Supreme Court has held that, in order for an investment adviser “to face liability under § 36(b) , [the] 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." Moreover, the “essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm’s length bargain,” and that, as a result, “the benchmark for reviewing challenged fees is ‘the range of fees that might result from arm’s-length bargaining.’”
In addition to establishing a breach of fiduciary duty, plaintiffs must prove that “as a result of the breach, there was an injury or damages; and . . . [t]he amount of actual damages related to the breach of fiduciary duty that occurred.”
The Decision
“The Court finds that Plaintiffs failed to meet their burden of proof with respect to all of the Gartenberg factors. Additionally, Plaintiffs’ claims fail for the independent reason that they did not establish that any actual damages resulted from Defendants’ alleged breach of fiduciary duty.”
So, how did Judge Arguello get to that conclusion? Well, she adopted and incorporated the defendants’ “proposed findings of fact and conclusions of law with regard to the Gartenberg factors[i] and surrounding circumstances,” explaining that those findings of fact were “well-supported by the record and their conclusions of law are proper with respect to each factor.”
She cited “persuasive and credible evidence that overwhelmingly proved that their fees were reasonable,” noted that both the advisory and administrative fees were within the range of comparable funds, that their profits were within the range of their competitors, and that they provided “extensive, high-quality services in exchange for their fees.”
She also rejected assertions that the plaintiffs were entitled to recover advisory fees that exceeded the average fees of the top 10 “large market” competitors, while also explaining that charging a fee that is above the industry average doesn’t violate the ICA. Judge Arguello also noted that the legislative history of the ICA makes clear that “lost gains” aren’t “actual damages” recoverable under the statute.
In short, she noted that “the Court finds that Plaintiffs failed to prove by a preponderance of the evidence that Defendants breached their fiduciary duties. Moreover, even though they did not have the burden to do so, Defendants presented persuasive and credible evidence that overwhelmingly proved that their fees were reasonable and that they did not breach their fiduciary duties.”
The Damages
As for damages—the court ruled that the plaintiffs “failed to meet their burden with respect to damages” at trial. And that was through the testimony of J. Chris Meyer (remember him?) who, the court noted “was thoroughly discredited on cross examination.” While the decision listed a number of shortcomings in his background, current knowledge, and conclusions, the decision concluded by explaining that there were “abundant examples of other weaknesses and inconsistencies in Mr. Meyer’s testimony which the Court will not list in detail. Suffice it to say, the Court found Mr. Meyer’s testimony to be non-credible. Moreover, in addition to the general inadequacy of his testimony, his specific theories regarding Plaintiffs’ alleged damages are legally flawed.”
The decision continued, “When those flaws are juxtaposed with the inadequacy of his testimony overall, the Court concludes that his opinions are entitled to no weight. As a consequence, the record is devoid of any evidence that suggests that Plaintiffs sustained actual damages as a result of the fees that Defendants charged.”
Defendants, therefore, are entitled to judgment in their favor on two independent grounds. First, Plaintiffs failed to meet their burden of proof with respect to their claim that Defendants breached their fiduciary duties under § 36(b) of the ICA . Second, Plaintiffs failed to meet their burden to prove that they suffered actual damages due to Defendants’ conduct.
And with that Judge Arguello entered judgment in favor of the defendants, and ruled that they could recover their costs.
In addition to Schlichter Bogard and Denton LLP, Peiffer Rosca Wolf Abdullah Carr & Kane APLC, and Schneider Wallace Cottrell Konecky Wotkyns LLP represented the plaintiffs. Milbank LLP represented the defendants.
[i]In case you were wondering, these factors are: the Board was independent, qualified, and it engaged in a robust process in approving Defendants’ fees, the Advisory Fees and Administrative Fee were within the range of comparable funds, the plaintiffs failed to quantify any alleged economies of scale or show that those economies were not adequately shared with shareholders, defendants’ profits were within the range of their competitors, defendants provided extensive, high-quality services in exchange for their fees, and plaintiffs failed to identify any significant fall-out benefits that Defendants acquired.
