Chill v. Calamos Advisors LLC

• Decision Date: 30 September 2018
• Docket Number: 15 Civ. 1014 (ER)
• Parties: SAUL CHILL and SYLVIA CHILL, for the use and benefit of the CALAMOS GROWTH FUND, Plaintiffs, v. CALAMOS ADVISORS LLC, Defendant.
• Court: U.S. District Court — Southern District of New York

SAUL CHILL and SYLVIA CHILL, for the useand benefit of the CALAMOS GROWTH FUND, Plaintiffs, v. CALAMOS ADVISORS LLC, Defendant.

15 Civ. 1014 (ER)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

September 30, 2018

OPINION AND ORDER

Ramos, D.J.:

Saul Chill and Sylvia Chill ("Plaintiffs") are shareholders in the Calamos Growth Fund (the "Fund"), a mutual fund advised and managed by Defendant Calamos Advisors LLC ("Calamos"). Plaintiffs bring this action on behalf of and for the benefit of the Fund, pursuant to the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. (the "ICA"). Plaintiffs allege Calamos breached its fiduciary duty with respect to Calamos' receipt of compensation for investment-adviser services provided to the Fund. Calamos now moves for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Doc. 65. In connection with the motion, both parties have moved, pursuant to Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993), to exclude certain expert testimony. In particular, Calamos seeks to exclude partially the testimony of two of Plaintiffs' expert witnesses, see Doc. 88, and Plaintiffs seek to exclude the testimony of five of Calamos' expert witnesses, see Docs. 106, 109, 112, 115, 118. For the reasons set forth below, Calamos' summary judgment motion is DENIED in part and GRANTED in part, and the parties' Daubert motions are DENIED.

I. BACKGROUND

A. The Investment Company Act of 1940

The ICA regulates investment companies, including mutual funds. "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 (1979). Typically, a mutual fund is created by a separate entity called an investment adviser, which also selects the fund's board of trustees, manages the fund's investments, provides the fund administrative services, and markets the fund to shareholders, all in exchange for various fees paid out from the fund's assets. Jones v. Harris Assocs. L.P., 559 U.S. 335, 338 (2010); see also Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 536 (1984). Because the investment adviser is integral to the fund's existence and selects the fund's board, often the fund "cannot, as a practical matter[,] sever its relationship with the adviser. Therefore, 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)). Consequently, a report commissioned by the U.S. Securities and Exchange Commission ("SEC") found that "investment advisers often charged mutual funds higher fees than those charged [to] the advisers' other clients and further determined that the structure of the industry, even as regulated by the [1940 version of the ICA], had proven resistant to efforts to moderate adviser compensation." Daily Income Fund, 464 U.S. at 537 (citing Wharton School Study of Mutual Funds, H.R. Rep. No. 87-2274, at 28-30, 34, 66-67 (1962)).

Thus, in 1970 Congress added Section 36(b) to the ICA to check this structural conflict of interest. Id. at 537-39. Of note, Section 36(b) adds two requirements to the ICA. First, the statute requires that mutual funds be governed by a board of trustees, at least 40 percent of whommust be independent and disinterested. See Burks, 441 U.S. at 482-83; 15 U.S.C. §§ 80a-2(a)(19), 80a-10. The board of trustees, acting on behalf of the fund, is responsible for negotiating, approving, and periodically evaluating the terms of any investment-management agreements between the fund and its investment adviser(s). These responsibilities include evaluating and approving any service fees charged to the fund by its investment adviser. See §§ 80a-15(c), 80a-35(a)-(b).

Second, and most pertinent to this case, Section 36(b) "impose[s] upon investment advisers a 'fiduciary duty' with respect to compensation received from a mutual fund, and grant[s] individual investors a private right of action for breach of that duty." Jones, 559 U.S. at 340 (citing § 80a-35(b)).

B. The Fund

Calamos is an investment adviser registered under the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq., and has served as the investment adviser to a variety of clients, including Calamos-sponsored "open-end" mutual funds (like the Fund); Calamos-sponsored "closed-end" funds; private accounts held by institutions and individuals ("institutional" clients); and mutual funds sponsored by other investment advisers, for which Calamos performs sub-advisory services only ("sub-advisory" clients). Pls.' Counter 56.1, Doc. 148, ¶ 1.¹ Calamos serves as the investment adviser to sixteen open-end mutual funds, including the Fund, known collectively as the Calamos Investment Trust ("CIT"). Id. ¶ 3. Each fund within the CIT has a different investment objective and strategy. Id. The Fund has been in operation since 1990, and its investment strategy focuses on equity securities issued by U.S.-based companies that possess large and mid-sized market capitalization (over $1 billion) and that Calamos has identified asoffering "the best opportunities for growth." Id. ¶ 4; see also Compl., Doc. 1, ¶ 37. Plaintiffs have been shareholders in the Fund since July 2005. Pls.' Counter 56.1 ¶ 5.

C. The Investment Management Agreement

Pursuant to an Investment Management Agreement (the "IMA") entered into on December 13, 2004, Calamos provides investment advisory services to each Fund within the CIT in exchange for an agreed-upon annual fee (the "Advisory Fee"). See IMA, Decl. of David A. Kotler in Supp. of Def.'s Mot. for Summ. J. ("Kotler Decl."), Doc. 67, Ex. 40 at 00146341-50. Specifically, the IMA requires Calamos to: "(i) furnish continuously an investment program of each [f]und, (ii) determine . . . what investments shall be purchased, held, sold or exchanged by each [f]und and what portion, if any, of the assets of each [f]und shall be held uninvested, and (iii) make changes on behalf of the [CIT] in the investments of each [f]und," and "also manage, supervise and conduct the other affairs and business of the [CIT] and each [f]und thereof and matters incidental thereto, subject always to the control of the [CIT Board of] Trustees and to the provisions of . . . the [ICA]." Id. at 00146341-42. In practice, Calamos either provides those services directly or monitors the provision of those services by contracted third parties. However, in all cases, Calamos ultimately remains responsible for the provision of those services. Pls.' Counter 56.1 ¶¶ 18-21.

Calamos has also entered into another agreement with the CIT funds, namely, the "Financial Accounting Services Agreement" (the "FASA"). See generally FASA, Kotler Decl., Ex. 41. Pursuant to the FASA, Calamos performs certain services for the CIT funds, including the Fund, for an additional fee—in this case, approximately one basis point.² Id.

Notably, during the relevant period,³ "in evaluating the nature, quality and extent of [Calamos'] services to the Fund (and the other Calamos-sponsored mutual funds)," the CIT Board of Trustees "did not seek to separate out the services [Calamos] provide[d] under the IMA as opposed to the FASA or distinguish whether a particular service [wa]s provided pursuant to one agreement or the other." Pls.' Counter 56.1 ¶ 81.

D. The Board of Trustees and the Annual 15(c) Process

In accordance with the ICA, the Fund is overseen by the CIT Board of Trustees (hereinafter the "Board"). Id. ¶ 22. During all times relevant, the Board has been comprised of a super-majority of "Independent Trustees"—i.e., either five or six trustees that are not "interested," as that term is defined under the ICA, see 15 U.S.C. § 80a-2(a)(19)—and one interested trustee, Calamos' Founder, Chairman, and Global Chief Investment Officer, John P. Calamos, Sr. See Pls.' Counter 56.1 ¶¶ 23-24. Although the parties dispute the length of their experience in the financial services industry, there is no dispute that the Independent Trustees are, in fact, independent and qualified. Id. ¶ 24. Stephen Timbers has been appointed the "Lead Independent Trustee" each year since 2004. Id. And at all times relevant, the Independent Trustees were represented and advised by an independent and experienced mutual fund counsel team, headed by Paulita M. Pike, a lawyer currently in the Investment Management practice of the law firm Ropes & Gray LLP. Id. ¶¶ 37-39.

Pursuant to the ICA, the Independent Trustees annually engaged in the so-called "15(c) Process," whereby they reviewed and voted to approve the IMA, and thus the Advisory Fees atissue in this case, during the June Board meetings. In preparation for the 15(c) Process, the Board met in person at least quarterly. Id. ¶¶ 29, 37; see 15 U.S.C. § 80a-15(c). In advance of each meeting, the Board received from Calamos and various third parties a compendium of written materials. Pls.' Counter 56.1 ¶ 30. Those written materials included a [Redacted] Id. The Board then discussed several topics at the meetings; Calamos and third parties presented data to the Board; and, while the parties dispute the extent of this, it is undisputed that the Board engaged Calamos in some degree of questioning regarding the Fund's performance, Calamos' investment philosophy, and the structure of Calamos' investment team. Id. ¶¶ 44-45.

The 15(c) Process formally begins when the Independent Trustees, through their counsel, submit a "detailed set of written information requests to [Calamos] on topics pertinent to the Independent Trustees' annual review and consideration of the IMA." Id. ¶ 49. This submission is commonly referred to as the "15(c) Request." Id. Among the information sought through the 15(c) Request is information relating to the so-called Gartenberg factors, which courts and the SEC have deemed relevant to the 15(c) Process. Id. ¶ 50; see also Gartenberg v. ...