Chill v. Calamos Advisors LLC

• Decision Date: 27 September 2019
• Docket Number: 15 CIV. 1014 (ER)
• Citation: 417 F.Supp.3d 208
• 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

417 F.Supp.3d 208

Saul CHILL and Sylvia Chill, for the use and benefit of the Calamos Growth Fund, Plaintiffs,

v.CALAMOS ADVISORS LLC, Defendant.

15 CIV. 1014 (ER)

United States District Court, S.D. New York.

Signed September 27, 2019

Filed October 9, 2019

Ira M. Press, Andrew Martin McNeela, I Mark Allen Strauss, Kirby McInerney LLP, New York, NY, for Plaintiffs.

Catherine Vera Wigglesworth, Tiffany Engsell, Dechert LLP, Philadelphia, PA, David Adam Kotler, Dechert, LLP, New York, NY, Matthew L. Larrabee, Dechert LLP, San Francisco, CA, for Defendant.

OPINION AND ORDER

Ramos, D.J.:

This opinion considers whether a mutual fund investment adviser breached the "fiduciary duty with respect to the receipt of compensation for services" that is imposed by § 36(b) of the Investment Company Act of 1940 (the "ICA") (codified at 15 U.S.C. § 80a-35(b) ).

Plaintiffs Saul Chill and Sylvia Chill are shareholders in of the Calamos Growth Fund (the "Fund"), a mutual fund. Statement of Stipulated Facts ("SSF") ¶ 1, Doc. 187-1. Defendant Calamos Advisors LLC ("Calamos") serves as investment advisor to the Fund pursuant to an Investment Management Agreement (the "IMA") between Calamos and the Fund. Id. ¶ 58. The IMA requires Calamos to provide certain investment advisory services to the Fund in exchange for an annual investment advisory fee. Id. ¶ 60.

Plaintiffs filed the present suit in February 2015 on behalf of and for the benefit of the Fund, pursuant to § 36(b) of the ICA. Compl. ¶ 1, Doc. 1. Plaintiffs claim that Calamos received, and continues to receive, "excessive" investment advisory fees from the Fund, in violation of its fiduciary duty under § 36(b). Id. ¶¶ 3–4.

The Court granted partial summary judgment to Calamos in September 2018, concluding that Plaintiffs had failed to raise triable issues of fact related to two of the six so-called " Gartenberg factors" traditionally considered by courts in § 36(b) cases. See Chill v. Calamos Advisors LLC , No. 15 Civ. 1014 (ER), 2018 WL 4778912, at *21 (S.D.N.Y. Oct. 3, 2018) ; see also Gartenberg v. Merrill Lynch Asset Mgmt. , 694 F.2d 923 (2d Cir. 1982). Specifically, the Court concluded that Plaintiffs had failed to raise triable issues of fact regarding the extent to which Calamos realized and shared "fall-out" benefits and economies of scale. Chill , 2018 WL 4778912 at *21.

In that same opinion, the Court declined to rule on the parties' motions to exclude certain expert testimony from the record. Id. The Court explained that if, after hearing live testimony at trial, it concluded that an expert was unqualified to opine on a particular topic or offered unreliable or unhelpful opinions, then the Court would afford those opinions little or no weight in evaluating the merits of Plaintiffs' claim. Id. at *6–7.

The Court commenced a bench trial on November 19, 2018 that lasted two weeks. Because of the Court's pre-trial rulings, the evidence introduced at trial centered on whether the compensation received by Calamos was excessive in light of the four remaining " Gartenberg factors" — namely, (1) the nature and quality of services provided to the Fund and its shareholders; (2) the profitability of the Fund to Calamos; (3) comparative fee structures (in other words, a comparison of the fees paid to Calamos by the Fund with those paid by similar funds); and (4) the care and conscientiousness of the Fund's board of trustees in evaluating adviser compensation. The Court also considered all other pertinent facts.

Shortly after trial, the parties submitted proposed findings of facts and conclusions of law. See Docs. 217–22. Closing arguments were held in February 2019. For the reasons explained below, the Court concludes that Plaintiffs have failed to prove that Calamos breached its duty under § 36(b). Accordingly, Plaintiffs' claim is DISMISSED.

I. THE INVESTMENT COMPANY ACT OF 1940

Congress adopted the ICA to regulate investment companies, including mutual funds. Jones v. Harris Assocs. L.P. , 559 U.S. 335, 338, 130 S.Ct. 1418, 176 L.Ed.2d 265 (2010). "A mutual fund is a pool of assets, consisting primarily of [a] portfolio [of] securities, and belonging to the individual investors holding shares in the fund." Id. (quoting Burks v. Lasker , 441 U.S. 471, 480, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979) ) (alteration in original). Typically, a mutual fund is created by a separate entity called an investment advisor, which also selects the fund's board of trustees, manages the fund's investments, provides the fund with administrative services, and markets the fund to shareholders — all in exchange for various fees paid by the fund to the investment advisor. Jones , 559 U.S. at 338, 130 S.Ct. 1418.

"Because the [investment] generally supervises the daily operation of the fund and often selects affiliated persons to serve on the company's board of directors, the relationship between investment advisers and mutual funds is fraught with potential conflicts of interest." Daily Income Fund, Inc. v. Fox , 464 U.S. 523, 536, 104 S.Ct. 831, 78 L.Ed.2d 645 (1984) (internal quotation marks omitted). "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, 99 S.Ct. 1831 (quoting S. Rep. No. 91-184, at 5 (1969)).

To lessen "the potential for abuse inherent in the structure of investment companies," id. at 480, 99 S.Ct. 1831, Congress, through passage of the ICA, established a regulatory scheme for the industry that limited who may be on a fund's board of directors and required that any contract between advisors and a fund be approved by the board and shareholders. See Fox , 464 U.S. at 536–37, 104 S.Ct. 831.

As the Supreme Court detailed in Jones , the growing popularity of mutual funds as an investment vehicle in the 1950s and 1960s sparked studies and reports centered on the ICA's effectiveness (or lack thereof) in protecting shareholders. 559 U.S. at 339, 130 S.Ct. 1418. One Securities and Exchange Commission ("SEC") report found that mutual fund advisors often charged higher fees to captive funds than to their other clients, despite the best efforts of the then-current version of the ICA. See Fox , 464 U.S. at 537, 104 S.Ct. 831.

Congress thereafter set out to remedy the perceived inadequacies in the ICA and bolster shareholder protection. To that end, Congress amended the ICA in two primary ways with the Investment Company Amendments Act of 1970 ("ICAA"), Pub. L. No. 91-547, 84 Stat. 1413 (1970).

First , in an effort to control conflicts of interest within mutual funds, Congress amended the ICA to require that at least 40% of an investment company's board be composed of members who are not "interested persons" in the company, as defined by the ICA. ICAA § 5 (codified at 15 U.S.C. § 80a–10(a) ); see also Burks , 441 U.S. at 482, 99 S.Ct. 1831. This "stricter" requirement strengthened the prior version of the ICA, which required that only 40% of the board not be officers or employees of the company or "affiliated persons" of the company's advisor. See id. (citing the Investment Company Act of 1940, ch. 686, 54 Stat. 789, 806 (1940)). Congress also added a requirement that the outside members of the board not be "interested persons" — a much "broader category than the previously identified group of persons ‘affiliated’ with the advisor," Fox , 464 U.S. at 538, 104 S.Ct. 831 (citing 15 U.S.C. §§ 80a-2(a) ; 80a-15(c)). The ICA assigns "a host of special responsibilities" to the disinterested board members. Jones , 559 U.S. at 340, 130 S.Ct. 1418 (citation omitted). Of note, the disinterested board members "review and approve the contracts of the investment annually, and a majority of these [members] must approve an adviser's compensation." Id. (internal quotation marks and citation omitted).

Second , Congress added § 36(b) to the ICA. Section 36(b) "imposed upon investment advisers a ‘fiduciary duty’ with respect to compensation received from a mutual fund and granted individual investors a private right of action for breach of that duty." Jones , 559 U.S. at 340, 130 S.Ct. 1418 (citing 84 Stat. 1429, codified at § 80a-35(b) (internal citations removed)). Notably, "[i]n contrast to its approach in other aspects of the 1970 amendments, ... Congress decided not to rely solely on the fund's directors to assure reasonable adviser fees, notwithstanding the increased disinterestedness of the board." Fox , 464 U.S. at 540, 104 S.Ct. 831 (emphasis added).

"The ‘fiduciary duty’ standard contained in § 36(b) represent[s] a delicate compromise." Jones , 559 U.S. at 340, 130 S.Ct. 1418. Specifically, § 36(b) reflects Congress desire to adopt "a different method of testing management compensation that [is] more favorable to shareholders than the previously available remedies," yet stringent enough to "not permit a compensation agreement to be reviewed in court for ‘reasonableness.’ " Id. (citation and some internal quotation marks omitted).

"Congress added § 36(b) to the ICA in 1970 because it concluded that ... shareholders should not have to ‘rely solely on the fund's directors to assure reasonable adviser fees, notwithstanding the increased disinterestedness of the board.’ " Kamen v. Kemper Fin. Servs., Inc. , 500 U.S. 90, 108, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991) (quoting Fox , 464 U.S. at 540, 104 S.Ct. 831 ). Thus, the ICA allows shareholders, like Plaintiffs, to file suit on behalf of the company for breach of the investment adviser's fiduciary duty with respect to compensation received from the company. Id.

II. LEGAL STANDARD

To succeed on their § 36(b) claim, Plaintiffs must demonstrate by a preponderance of the evidence that the advisory fee charged to the Fund by Calamos during the relevant period¹ was "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." Jones , 559 U.S. at 346, 130...