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Ingenhutt v. State Farm Investment Management Corp.

United States District Court, C.D. Illinois, Peoria Division

April 17, 2017

AMY L. INGENHUTT and TERESA L. ODELL, Plaintiffs,
v.
STATE FARM INVESTMENT MANAGEMENT CORPORATION, Defendant.

          ORDER AND OPINION

          James E. Shadid Chief United States District Judge

         This matter is before the Court on the Defendant's Motion to Dismiss (Doc. 37) and Motion to Strike Declaration of Steve Pomerantz, Ph.D. (Doc. 39). For the reasons set forth below, the Motion to Dismiss (Doc. 37) and Motion to Strike (Doc. 39) are DENIED.

         BACKGROUND

         This action is for breach of fiduciary duty under Section 36(b) of the Investment Company Act of 1940, 15 U.S.C. § 80a-35(b) (the “ICA”). Defendant, State Farm Investment Management Corporation (“SFIMC”) is the investment adviser for a group of target date mutual funds, known as the “LifePath Funds” (the “Funds”). Target date mutual funds are designed to provide a certain level of risk/return based on the date the investments are expected to be needed for retirement. As the target date approaches, the investments should adjust to become more conservative over time. Plaintiffs Amy Ingenhutt and Teresa Odell bring this action derivatively on behalf of the Funds in which they have invested, [1] alleging that SFIMC breached its fiduciary duties to the Funds by collecting excessive management fees. As a result, the Funds and the shareholders in the Funds have suffered losses.

         The following facts are taken from the Plaintiff's Second Amended Complaint and the briefs. The Funds do not invest directly in stocks, bonds, or money market funds. Instead, each of the Funds is a feeder into a “master-feeder” arrangement, investing all of its assets in a corresponding separate portfolio called a Master Portfolio. Each Master Portfolio is itself one of a series of funds contained within an unaffiliated fund known as the Master Investment Portfolio or Master Fund. The Master Fund then invests in a combination or subset of approximately 12 underlying funds. The Master Fund and each of the Master Portfolios were sponsored or launched by BlackRock, Inc., and are managed by Black Rock Fund Advisors (“BFA”), a private investment management company unaffiliated with SFIMC. Thus, BFA is the investment adviser for each of the Master Portfolios, as well as the underlying funds in the Master Fund in which the Master Portfolios invest. SFIMC relies on BFA to provide portfolio allocations among the asset classes offered through the underlying funds in managing the Funds.

         The fees paid by the Funds include management fees, distribution and/or service fees and other expenses and fees, including administrative fees. Only the management fees received by SFIMC are at issue here. These management fees are for the purpose of compensating SFIMC for its services as the manager or investment advisor to the Funds and are paid as a percentage of the assets under management. As of 2015, the management fees for the Funds ranged from 102 basis points[2] (1.02%) to 110 basis points (1.1%). The management fees paid by the Funds are alleged to include the management fees charged by SFIMC for services provided to the Funds, the fees charged by BFA for its services in managing the underlying funds, and the fees charged by BFA for its services in managing the Master Portfolios. However, due to its status as advisor at both the Master Portfolio and underlying funds levels, BFA has contractually agreed to waive its management fees at the Master Portfolio level in an amount equal to the management fees and administrative fees its affiliate receives from each investment company in which the Master Portfolios invest. SFIMC has also contractually agreed to waive its management fees in an amount required to keep the Fund's Total Annual Operating Expenses at or below a specified amount for each share class. As reported in the 2015 Prospectus, the fee waivers for the Funds ranged from 41 basis points (.41%) to 48 basis points (.48%), causing the net management fee for each fund to be consistently 62 or 63 basis points (.62% or .63%).

         In layman's terms, this arrangement translated into management fees ranging from $1, 361, 772 to $11, 738, 532 among the five Funds and totaling $39, 232, 034 in 2014.[3] The total fees were then apportioned between SFIMC and BFA, with SFIMC receiving $17, 495, 659 (or 28 basis points) and BFA receiving $21, 736, 375 (or 34 basis points). According to Plaintiffs, the net management fee in excess of $17, 000, 000 that SFIMC receives is approximately 44% of the total fee even though BFA provides virtually all of the investment advisory and portfolio management services. Thus, they maintain that the fees retained by SFIMC are so disproportionately large that they bear no reasonable relationship to the services rendered in exchange for those fees, and could not have been negotiated through arm's-length bargaining.

         PROCEDURAL HISTORY

         Plaintiffs brought this action under the ICA claiming excessive or unfair fees under § 36(b) of the Act. 15 U.S.C. § 80a-35(b). On June 22, 2016, the Court granted the Defendant's Motion to Dismiss. (Doc. 34). The Plaintiffs subsequently filed a Second Amended Complaint (“SAC”). (Doc. 35). The Defendant now moves to dismiss the Plaintiffs' SAC. (Doc. 37, 38). The Defendant also filed a Motion to Strike the Declaration of Steve Pomerantz, Ph.D. (Doc. 39). The matter is fully briefed, and this Order follows.

         LEGALSTANDARD

         Courts have traditionally held that a complaint should not be dismissed unless it appears from the pleadings that the plaintiff could prove no set of facts in support of her claim which would entitle her to relief. See Conley v. Gibson, 355 U.S. 41 (1957); Gould v. Artisoft, Inc., 1 F.3d 544, 548 (7th Cir. 1993). Rather, a complaint should be construed broadly and liberally in conformity with the mandate in Federal Rules of Civil Procedure 8(f). More recently, the Supreme Court has phrased this standard as requiring a showing sufficient “to raise a right to relief beyond a speculative level.” Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007). Furthermore, the claim for relief must be “plausible on its face.” Id.; Ashcroft v. Iqbal, 129 S.Ct. 1937, 1953 (2009). For purposes of a motion to dismiss, the complaint is construed in the light most favorable to the plaintiff; its well-pleaded factual allegations are taken as true, and all reasonably-drawn inferences are drawn in favor of the plaintiff. See Albright v. Oliver, 510 U.S. 266, 268 (1994); Hishon v. King & Spalding, 467 U.S. 69 (1984); Lanigan v. Village of East Hazel Crest, 110 F.3d 467 (7th Cir. 1997); M.C.M. Partners, Inc. v. Andrews-Bartlett & Assoc., Inc., 62 F.3d 967, 969 (7th Cir. 1995); Early v. Bankers Life & Cas. Co., 959 F.2d 75 (7th Cir. 1992).

         ANALYSIS

         Defendant seeks dismissal of the Amended Complaint on the grounds that Plaintiffs have failed to state a claim for breach of fiduciary duty. Section 36(b) of the ICA imposes a fiduciary on the investment managers of mutual funds with respect to their receipt of compensation for services:

[T]he 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 by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser. An action may be brought under this subsection . . . by a security holder of such registered investment company on behalf of such company, against such investment advisers, or an affiliated person of such investment adviser . . . for breach of fiduciary duty in respect to such compensation or payments paid by such registered investment company or by the security holders thereof to such investment adviser or person.

15 U.S.C. § 80a-35(b).

         To state a claim under § 36(b), Plaintiffs must plausibly allege that the investment advisor charged 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.” Jones v. Harris Associates L.P., 559 U.S. 335, 346 (2010). The court's function is to use “the range of fees that might result from arm's-length bargaining as the benchmark for reviewing challenged fees” and “identify the outer bounds of arm's length bargaining.” Id.; Jones v. Harris Associates L.P., 611 Fed.Appx. 359, 360 (7th Cir. 2015) (“Jones II). In applying the Jones standard, courts employ the Gartenberg test, which takes into account “all relevant circumstances.” Jones, 559 U.S. at 1420 (citing Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982)). These factors include:

(1) The nature and quality of the services provided to the fund and shareholders;
(2) The profitability of the fund to the adviser;
(3) Any “fall-out financial benefits, ” those collateral benefits that accrue to the adviser because of its relationship with the mutual fund;
(4) Comparative fee structure (meaning a comparison of the fees with those paid by similar funds); and
(5) The independence, expertise, care and conscientiousness of the board in evaluating ...

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