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Washington District Court Orders Trustees to Produce Documents Redacted or Withheld Under Attorney-Client Privilege in Mutual Fund Excessive Fee Litigation

On November 21, 2016, the U.S. District Court for the Western District of Washington issued an order (the Order) granting a plaintiff’s motion to compel certain independent trustees of the PIMCO Total Return Fund (the Fund) to produce documents redacted or withheld under the attorney-client privilege in connection with a mutual fund “excessive fee” case, agreeing with the plaintiff’s argument that a “fiduciary exception” to the attorney-client privilege should apply.  The independent trustees, who are not a party to the litigation, and defendants Pacific Investment Management Company LLC and PIMCO Investments LLC (collectively, PIMCO or the Defendants) each opposed the motion by the plaintiff, a shareholder of the Fund who alleged that PIMCO breached their fiduciary duty owed to the Fund’s shareholders pursuant to Section 36(b) of the 1940 Act by charging the Fund excessive fees.  

On November 30, 2015, the plaintiff issued non-party document subpoenas to the Fund’s independent trustees.  In response, the independent trustees redacted and withheld over 200 documents in reliance on the attorney-client privilege.  The Order indicates that the documents that had been withheld by the independent trustees on the basis of the attorney-client privilege included, among other things, communications relating to confidential legal advice regarding the annual review and approval of the Fund’s advisory agreement, administration agreement and distribution and servicing plan.  Thereafter, the plaintiff filed a motion to compel disclosure of those documents, arguing that a “fiduciary exception” to the privilege should apply.

The attorney-client privilege gives a client the right to maintain the confidentiality of communications between the client and his or her attorney relating to the provision of legal advice; the intention of the privilege is “to encourage full and frank communication between attorneys and their clients in the observance of law and administration of justice.”  Thefiduciary exception to the attorney-client privilege derives from trust law and prohibits the privilege from being used to withhold information from the beneficiary of a trust when a trustee seeks or receives legal advice in connection with his or her administration of the trust; for the privilege to apply to communications between a trustee and his or her attorney, the trustee must show that he or she obtained legal advice for personal protection or otherwise for an individual personal purpose.  The fiduciary exception is intended to ensure full disclosure in the trustee-beneficiary relationship, which courts have viewed as “ultimately more important than the protection of the trustees’ confidence in the attorney for the trust.”

In arguing for the application of the fiduciary exception, the plaintiff pointed out that the Fund is a series of PIMCO Funds Trust, a Massachusetts business trust; that the independent trustees have fiduciary duties under state and federal law; and that the communications at issue were provided to the trustees in their role as fiduciaries and related to the administration of the trust.  Defendants and the independent trustees argued that the exception should not apply, pointing out that the exception has never been applied in mutual fund litigation and arguing that the application of the exception could have a chilling effect on communications between independent trustees of funds and their counsel.  

In issuing the Order, the Court agreed with the plaintiff’s argument that the fiduciary exception to the attorney-client privilege should apply.  The Court explained that the Fund is a series of a trust, that the independent trustees “clearly owed a fiduciary duty to Plaintiff and other shareholders,” that the documents at issue relate to legal advice provided in connection with managing the Fund rather than personal advice to the trustees and that the communications were not made in anticipation of litigation.

The Order was issued in the case Kenny v. Pacific Investment Management Company LLC et al. , Case No. C14-1987-RSM

© 2017 Vedder Price

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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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