Migdal v. Rowe Price-Fleming International, PRICE-FLEMING

Citation248 F.3d 321
Decision Date24 January 2001
Docket NumberNo. 00-1420,PRICE-FLEMING,00-1420
Parties(4th Cir. 2001) DAVID MIGDAL; LINDA ROHRBAUGH, Plaintiffs-Appellants, v. ROWEINTERNATIONAL, INCORPORATED; T. ROWE PRICE INTERNATIONAL STOCK FUND; T. ROWE PRICE GROWTH STOCK FUND; T. ROWE PRICE ASSOCIATES, INCORPORATED; T. ROWE PRICE RETIREMENT PLAN SERVICES, INCORPORATED; T. ROWE PRICE INVESTMENT SERVICES, INCORPORATED, Defendants-Appellees, and M. DAVID TESTA; MARTIN G. WADE; DONALD W. DICK, JR.; ANTHONY W. DEERING; PAUL M. WYTHES; JAMES A.C. KENNEDY, III; HANNE M. MERRIMAN; JAMES S. RIEPE; HUBERT D. VOS; DAVID FAGIN; T. ROWE PRICE SERVICES, INCORPORATED, Defendants. Argued:
CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)

Appeal from the United States District Court for the District of Maryland, at Baltimore. Andre M. Davis, District Judge.

(CA-98-2162-AMD)

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] COUNSEL ARGUED: Ronald Barry Rubin, RUBIN & MONAHAN, CHARTERED, Rockville, Maryland, for Appellants. Daniel A. Pollack, POLLACK & KAMINSKY, New York, New York, for Appellees. ON BRIEF: Joel C. Feffer, Wechsler Harwood, HALEBIAN & FEFFER, L.L.P., New York, New York, for Appellants. Anthony Zaccaria, POLLACK & KAMINSKY, New York, New York; David Clarke, Jr., PIPER MARBURY, L.L.P., Washington, D.C., for Appellees.

Before WILKINSON, Chief Judge, and WIDENER and WILLIAMS, Circuit Judges.

Affirmed by published opinion. Chief Judge Wilkinson wrote the opinion, in which Judge Widener and Judge Williams joined.

OPINION

WILKINSON, Chief Judge:

Plaintiffs, shareholders of two mutual funds, sued the investment advisers of their funds for breach of fiduciary duty under S 36(b) of the Investment Company Act of 1940, ("ICA"), 15 U.S.C. S 80a35(b). After twice permitting plaintiffs to amend their complaint, the district court dismissed the action with prejudice. Because plaintiffs have failed to state a claim that the fees charged by the funds' investment advisers were excessive in relation to the services they provided, we affirm the judgment of the district court.

I.
A.

This appeal concerns the organization and governance of mutual funds. A fund, or "investment company," is typically organized by a sponsor, such as an investment management company or a financial institution. Most funds are externally managed -each fund contracts with an investment adviser to recommend and supervise the fund's investments. The investment adviser also provides varying levels of service to the fund, for instance, by providing the fund with office space and staff. A fund's investment adviser is typically affiliated with the entity which originally organized the fund.

The fund's board of directors is responsible for approving the advisory agreement setting the investment adviser's fee. See 15 U.S.C. S 80a-15(a), (c). Under the ICA, at least forty percent of a fund's directors must be "disinterested" -i.e., independent of the investment adviser. See 15 U.S.C. SS 80a-10(a) & 80a-2(a)(19)(A). Furthermore, the advisory agreement between a fund and its investment adviser must be approved by a majority of the fund's disinterested directors. See 15 U.S.C. S 80a-15(c).

B.

Plaintiffs David Migdal and Linda Rohrbaugh are shareholders in the International Stock Fund and the Growth Stock Fund respectively. Both of these funds are part of the T. Rowe Price Fund Complex, and both are registered "investment companies" under the ICA. See 15 U.S.C. S 80a. Two T. Rowe Price affiliates serve as the investment advisers of plaintiffs' respective funds. Rowe Price-Fleming International, Inc., is the International Stock Fund's investment adviser. T. Rowe Price Associates, Inc., is the Growth Stock Fund's investment adviser.

Plaintiffs filed an initial, and later an amended, complaint against these two investment advisers and various subsidiaries for breach of fiduciary duty under S 36(b) of the ICA, 15 U.S.C. S 80a-35(b). The district court dismissed the amended complaint for failure to state a claim upon which relief could be granted. The court, however, granted plaintiffs leave to re-amend their complaint.

On February 16, 1999, plaintiffs filed a second amended complaint, which again alleged violations of Section 36(b) of the ICA, 15 U.S.C. S 80a-35(b). The amended complaint asserted two related claims. First, plaintiffs alleged that the investment advisers breached their fiduciary duty under Section 36(b) because the fees they received were excessive. Second, plaintiffs contended that the "independent" directors of each of the mutual funds were not actually disinterested parties as required by the ICA. See 15 U.S.C. SS 80a-10(a) & 80a15(c). Specifically, several of the funds' disinterested directors served on the boards of between twenty-two and thirty-eight other funds within the T. Rowe Price Fund Complex. For their services, these directors received aggregate compensation of either $65,000 or $81,000. Plaintiffs alleged that since forty percent of the boards were not disinterested, the advisory agreements could not have been properly approved as required by Section 15(c). Therefore, the defendant investment advisers breached their fiduciary duty under Section 36(b) by failing to negotiate their advisory agreements at arm's-length.

On March 20, 2000, the district court granted defendants' Rule 12(b)(6) motion with prejudice. The court held that plaintiffs had failed to plead sufficient facts to show that the compensation the investment advisers received was excessive. The court stated that the complaint's "level of generality remains too high," because the plaintiffs' allegations "do not remotely touch on the issue of what, if any, relation exists between the disputed fees on the one hand, and the services provided in consideration for their payment, on the other hand." The court also held that plaintiffs had failed to allege sufficient facts to show that the funds' directors were not "disinterested," and hence in violation of the ICA. Plaintiffs now appeal.

II.
A.

A Rule 12(b)(6) motion should only be granted if, after accepting all well-pleaded allegations in the plaintiff's complaint as true, it appears certain that the plaintiff cannot prove any set of facts in support of his claim entitling him to relief. See Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999). Furthermore, the "Federal Rules of Civil Procedure do not require a claimant to set out in detail the facts upon which he bases his claim." Conley v. Gibson, 355 U.S. 41, 47 (1957). Rather Rule 8(a)(2) requires only a"short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2).

Rule 12(b)(6), however, is not without meaning."The presence [ ] of a few conclusory legal terms does not insulate a complaint from dismissal under Rule 12(b)(6) when the facts alleged in the complaint" cannot support the legal conclusion. Young v. City of Mount Ranier, 238 F.3d 567, 577 (4th Cir. 2001). And"[a]lthough the pleading requirements of Rule 8(a) are very liberal, more detail often is required than the bald statement by plaintiff that he has a valid claim of some type against defendant." 5A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure S 1357 at 318 (2d ed. 1990). This requirement serves to prevent costly discovery on claims with no underlying factual or legal basis. "Conclusory allegations in a complaint, if they stand alone, are a danger sign that the plaintiff is engaged in a fishing expedition." DM Research v. College of Am. Pathologists, 170 F.3d 53, 55 (1st Cir. 1999).

B.

Section 36(b) of the ICA creates a fiduciary duty in a mutual fund's investment adviser "with respect to the receipt of compensation for services." 15 U.S.C. S 80a-35(b). Section 36(b) also provides a private cause of action to a mutual fund investor, against the fund's investment adviser, "for breach of fiduciary duty in respect of such compensation" paid to the investment adviser by a fund.1 Id. The plaintiff bears the "burden of proving a breach of fiduciary duty." 15 U.S.C. S 80a-35(b)(1).

Plaintiffs' first claim is that defendants violated Section 36(b) because the fees the investment advisers received from the fund were so disproportionately large that they bore no reasonable relationship to the services rendered. In Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982), the court exhaustively analyzed Section 36(b). Gartenberg concluded that the standard for determining whether compensation for managing a fund constitutes a breach of fiduciary duty is "whether the fee schedule represents a charge within the range of what would have been negotiated at arm's-length in the light of all of the surrounding circumstances." Id. at 928. The court reasoned that the typical arm's-length bargaining does not occur between an investment adviser and a mutual fund because the operations of the fund are conducted by the adviser. Gartenberg concluded, therefore, that to violate Section 36(b), "the adviser-manager 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." Id.

Section 36(b) was enacted in large part because Congress recognized that as mutual funds grew larger, it became less expensive for investment advisers to provide the additional services. Congress wanted to ensure that investment advisers passed on to fund investors the savings that they realized from these economies of scale. See Fogel v. Chestnutt, 668 F.2d 100, 111 (2d Cir. 1981). Plaintiffs, however, do not make any allegations about excess profits from economies of scale here. Rather, they offer the following as evidence of "excessive fees." First, the amount of fees charged by the two funds. Second, the fact that two or three similar funds offered lower fee rates than the funds in this case, while...

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