Gartenberg v. Merrill Lynch Asset Management, Inc.
| Decision Date | 28 December 1981 |
| Docket Number | 79 Civ. 5726(MP).,No. 79 Civ. 3123(MP),79 Civ. 3123(MP) |
| Citation | 528 F. Supp. 1038 |
| Parties | Irving L. GARTENBERG, Plaintiff, v. MERRILL LYNCH ASSET MANAGEMENT, INC., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Merrill Lynch Ready Assets Trust, Defendants. Simone C. ANDRE, Plaintiff, v. MERRILL LYNCH READY ASSETS TRUST and Merrill Lynch Asset Management, Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Pomerantz, Levy, Haudek & Block, by Stanley M. Grossman, Stephen P. Hoffman, Bruce G. Stumpf, New York City, for plaintiff Irving L. Gartenberg.
Silverman & Harnes, by Sidney B. Silverman, Joan T. Harnes, Martin H. Olesh, New York City, for plaintiff Simone C. Andre.
Brown, Wood, Ivey, Mitchell & Petty, by James B. May, James K. Manning, A. Robert Pietrzak, New York City, for defendant Merrill Lynch Ready Assets Trust.
Rogers & Wells by William P. Rogers, Stanley Godofsky, James N. Benedict, Anne D. Neal, New York City, for defendants Merrill Lynch Asset Management, Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc.
FINDINGS AND OPINION
Over 1,100,000 persons and institutions were at the time of trial herein shareholders in a money market fund whose net assets at that time exceeded $19 billion, known as the "Merrill Lynch Ready Assets Trust" (the "Fund" hereafter). Two individual shareholders, Irving Gartenberg and Simone Andre, have brought this suit under Section 36(b) of the Investment Act of 1940, 15 U.S.C. Section 80a-35(b) (the "Act") complaining of the size of the annual compensation paid to the Fund's Investment Adviser in 1980-81 under its percentage contract with the Fund. The fee paid to the Adviser, "Merrill Lynch Asset Management, Inc." ("MLAM" hereafter) is contingent on the average daily value of the net assets of the Fund during the period; the annual compensation amounted to 0.288% or slightly above ¼ of one percent of those net assets.
The Gartenberg complaint names as defendants, i) the Fund, ii) MLAM, a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), which supplies the Fund with investment management, administration and required services, and iii) "Merrill Lynch, Pierce, Fenner & Smith Incorporated" (MLPF&S) another wholly-owned subsidiary of Merrill Lynch, which processes the vast bulk of the daily orders of the Fund's shareholders. The Andre complaint names only the Fund and MLAM as defendants.
There is no claim by the plaintiffs that the shareholders individually did not receive their money's worth from MLAM, i.e., that the services supplied were not worth the fractional percentage attributable to the net assets they had in the Fund. Rather, the plaintiffs claim that because of the size of the Fund, MLAM made too much money from the application of the agreed percentage.1
As of December 31, 1980, plaintiff Gartenberg held 986 shares (valued at $1 per share) of the Fund and plaintiff Andre held 2,850 shares and they have continued to hold those shares together with additional shares received daily as dividends.2
The Fund and the Merrill Lynch organization
The Fund was organized in 1975 as an unincorporated business trust under the laws of Massachusetts and registered with the Securities and Exchange Commission ("SEC") as a diversified, open-end investment company. It is a no-load money market mutual fund (meaning that there is no cost to purchase its shares) and invests primarily in short-term money market securities.3
The Fund's Board of Trustees is comprised of eight Trustees, two of whom are "interested persons" as defined in the Act. The six "non-interested" or "unaffiliated" Trustees make up the Audit Committee of the Fund. The Fund has no employees of its own. Its business is conducted from the offices of MLAM as is the business of other Merrill Lynch investment companies.
MLAM, a Delaware corporation, has served as the Investment Advisor of the Fund since June 1976. MLAM also acts as the investment adviser for four other mutual funds sponsored by Merrill Lynch. MLAM selects the Fund's investments and trades in money market securities for the Fund's account. MLAM performs or provides the administrative and management services for the Fund and provides the Fund with office space and facilities, equipment and personnel. It imports the services of its affiliate, defendant MLPF&S, the brokerage subsidiary of Merrill Lynch, to process the principal volume of the huge number of daily orders of the Fund shareholders for the deposit and withdrawal of money to and from the Fund. MLAM also provides investment management services to individuals and institutions. The services performed for the Fund by MLAM and its affiliates can be divided into three categories: portfolio management; general administrative services; and money market fund shareholder services.
The Merrill Lynch brokerage branch office system consists of 408 domestic offices in which its more than 7,000 account executives are located, all of whom are available to process shareholder orders and administer shareholder accounts for the Fund without any commission. An average of more than 30,000 shareholder orders per day are processed in that way by MLPF&S involving the purchase and redemption of shares of the Fund and other services. Much of the success of the Fund in terms of its acceptance by shareholders can be attributed to the fulsome shareholder service provided by that system.
In making its investment decisions, MLAM has access to the advice and expertise of all Merrill Lynch affiliates, and particularly Merrill Lynch Economics, Inc., Merrill Lynch Government Securities, Inc. and MLPF&S. The first of these affiliates provides basic economic research and forecasting; the second is one of the largest dealers in United States Government securities and Government Agency securities; and MLPF&S is the largest registered broker-dealer in the United States and provides fundamental research on bank and other corporate issuers.
The compensation attributable to the individual shareholder for the services provided by MLAM and its affiliates was far below the cost of any available alternative for similar service. The administrative services provided for the Fund by MLAM amply serve the Fund's requirements and go well beyond mere office matters. Substantial efforts are necessary to maintain compliance with SEC and state regulatory requirements, including recordkeeping and reporting requirements. MLAM renders these services to the Fund. Additionally Merrill Lynch Funds Distributor, Inc. (MLFD), which is a 100% owned subsidiary of MLAM, acts as distributor of Fund shares and maintains a staffed answer-telephone for inquiries from shareholders. MLFD has waived its right to commissions on the sale of Fund shares.4
Money market funds make available to small investors and short term cash depositors substantially higher interest rates than are obtainable through bank deposits. They offer redeemable participations in terms of shares in a portfolio of securities. The first such fund was started in 1972.
The money market fund industry has experienced extraordinary growth in the last few years. New money market funds have been sprouting up regularly — there is no difficulty in entering the field. In 1975, there were 32 money market funds. By 1978 there were 54 and today there are 1394a such funds. The assets under management in all the money market funds have likewise grown enormously and dramatically. In June 1978 there was a total of about $6.8 billion of assets in money market funds; today their assets total more than $185 billion — a 25-fold growth. The Fund involved herein is by far the largest money market fund in existence.
The principal reason for the prodigious growth of the Fund under MLAM's supervision, from $100 million to over $19 billion in just a few years, has been the spectacular surge in interest rates and the availability of the Merrill Lynch system to cope with the processing services required — to administer the dramatic growth of the Fund and to satisfy the daily orders and other demands of its shareholders. It was conceded by plaintiffs' expert that there is no adequate substitute readily available for the Merrill Lynch system to handle the Fund. The enormous gap between interest rates paid by banks and money funds renders the Fund an attractive short-term investment for high daily income returns, in a medium available without any cost to the customer to buy or sell the investment, by easy means of deposits and withdrawals in every geographical area of the United States (and beyond), subject to simple check withdrawals, as frequently as desired by the shareholder, with relative security of the principal meanwhile.
The net asset value of shares of the Fund remains constant at $1 per share and net income (including realized and unrealized gains and losses of the Fund's portfolio) is credited daily to shareholder accounts in the form of dividend shares declared daily. Thus, the fluctuations in the value of a shareholder's investment in the Fund are reflected in the number of shares held in the shareholder's account.
The deposits and withdrawals by participants in the Fund are somewhat euphemistically styled as purchases and sales of shares of the value of those deposits and withdrawals. In a very real sense, an account in a money market fund is more like a bank account than a traditional investment in securities; and unlike an equity stock investment or other types of securities. The funds in a money market fund are not tied up for a fixed or long time.
The Fund commenced operations on February 18, 1975 as the "Lionel D. Edie Ready Assets Trust". The initial investment advisory agreement provided for an advisory fee of 0.50% of the net average daily assets.5
MLAM was formed in 1976 as the investment management subsidiary of Merrill...
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