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Jones v. Harris Associates L.P.

February 27, 2007

JERRY N. JONES, MARY FRANCES JONES, AND ARLINE WINERMAN, PLAINTIFFS,
v.
HARRIS ASSOCIATES L.P., DEFENDANT.



The opinion of the court was delivered by: Charles P. Kocoras, District Judge

MEMORANDUM OPINION

This matter comes before the court on cross motions for summary judgment. For the reasons set forth below, Plaintiffs' motion for summary judgment is denied and Harris's motion for summary judgment is granted.

BACKGROUND

During the time relevant to Plaintiffs' complaint, Defendant Harris Associates LP ("Harris") served as an investment adviser to three mutual funds (collectively referred to as "the Funds"): the Oakmark Fund ("Oakmark"), the Oakmark Equity and Income Fund ("Equity"), and the Oakmark Global Fund ("Global").*fn1 Plaintiffs Jerry and Mary Jones have been shareholders in Equity since December 2003 and in Global since March 2004. Plaintiff Arline Winerman has held shares in Oakmark since December 2003. The services Harris rendered to the Funds included research and stock selection.

For its services as investment advisor, Harris received a fee that was calculated according to a contractual schedule. The contracts containing the fee schedules were approved on a yearly basis by the Funds' board of trustees. Before approval, a committee of board members met several times to review information from Harris regarding the funds' performance, the services Harris provided to the Funds, comparisons with fees charged to Harris's other clients, and comparisons with fees charged by other companies managing similar funds. The committee attended presentations from the Funds' managers and made recommendations to the full board on whether to approve the contracts. For the period at issue, the applicable contracts went through this approval process and were approved by the board. The resulting fees were calculated as a percentage of a Fund's assets at the end of the preceding month.

In addition to managing the Funds, Harris also provided services to sub-advised funds (other mutual funds for which Harris was not the primary investment adviser), "separate account" clients, and limited partnerships (collectively referred to herein as "institutional clients"). The services Harris provided to institutional clients varied, but in all events were more limited than those they provided to the Funds. The fee schedules applied to different types of clients also varied. For the applicable damages period for Oakmark of August 2003 to August 2004,*fn2 the fee was 1% of the first $2 billion of the Fund's assets, 0.9% for the next $1 billion, 0.8% for the next $2 billion, and then 0.75% for assets in excess of $5 billion. These reductions as the Fund's assets grew are referred to as "breakpoints." For institutional clients with investment strategies similar to Oakmark's, the percentages ranged from 0.75% to 0.35%, with breakpoints ranging from $15 million to $500 million. For the fiscal year ending in September 2004, Oakmark paid $50,652,178 in advisory fees for Harris's services-$13,577,704 more than the previous year. According to the Funds' expert, during the applicable damages period Oakmark paid Harris $46,698,385 in fees.

For Equity, as of November 2003, the fee schedule was 0.75% for the first $5 billion of assets, 0.7% on the next $2.5 billion, 0.675% on the next $2.5 billion, and then 0.65% for assets above the $10 billion mark. For institutional clients with similar investment strategies, the fee percentages began at 1% and went as low as 0.25%. Breakpoints varied from $10 million to $400 million. For the fiscal year ending in September 2004, Equity paid Harris $46,997,810- $23,529,291 more than the year before. According to the Funds' expert, during the applicable damages period, Equity paid $39,622,122.

For Global, again as of November 2003, the fee schedule began as for Oakmark, at 1% of the first $2 billion. It then decreased to 0.95% for the next $2 billion and then to 0.9% for assets in excess of $4 billion. For institutional clients with similar investment strategies, the corresponding percentages began at 0.85% and progressed down to 0.5%, with breakpoints from $25 million to $100 million. For the fiscal year ending in September 2004, Global paid $12,245,761 in advisory fees, $9,263,669 more than the year before. According to the Funds' expert, Global paid $7,391,044 during the applicable damages period.

During the relevant time period, the Funds' board of trustees was comprised of nine or ten members: Victor Morgenstern, Gary Wilner, Burton Ruder, Marvin Rotter, Michael Friduss, Allan Reich, Thomas Hayden, Christine Maki, Peter Voss, and, beginning in July 2003, John Raitt. Morgenstern retired from Harris in 2001 after working there for many years. He has social and business relationships with people who continued to work for Harris after his departure. Rotter and Reich also have social and business relationships with Harris employees. Morgenstern, Wilner, and Ruder are neighbors; they have vacationed together, and their children are contemporaries.

Morgenstern, Wilner, Ruder, and Rotter have been partners in different business ventures, some of which Morgenstern introduced to the others. Morgenstern and Friduss are longtime friends. Voss was the CEO and president of Harris's parent company; Raitt became CEO and President of Harris on July 16, 2003.

On August 17, 2004, Plaintiffs filed suit in the Western District of Missouri.*fn3 Plaintiffs brought this action derivatively on behalf of the Funds, alleging that Harris violated § 36(b) of the Investment Company Act of 1940, codified at 15 U.S.C. § 80a-35(b). In pertinent part, § 36(b) provides that "the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid...to such investment adviser or any affiliated person of such investment adviser." Subsection (b)(1) states that "[i]t shall not be necessary to...prove that any defendant engaged in personal misconduct, and the plaintiff shall have the burden of proving a breach of fiduciary duty."

The complaint consisted of two counts. The first alleged that the advisory fees paid to Harris were so disproportionate to the value of its services that it breached its fiduciary duty under § 36(b) by receiving them. The second contended that Harris impermissibly retained savings it realized from economies of scale as the Funds grew, thereby making its effective compensation even higher than the fees listed above.

In November 2004, Harris moved to dismiss the complaint for failure to state a claim. While the motion was pending, the suit was transferred to our district. The following April, we denied the motion and the parties engaged in fact and expert discovery. After that process was completed, the ...


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