December 2, 2021

Volume XI, Number 336

Advertisement
Advertisement

December 01, 2021

Subscribe to Latest Legal News and Analysis

November 30, 2021

Subscribe to Latest Legal News and Analysis

November 29, 2021

Subscribe to Latest Legal News and Analysis

District Court Rules that Great-West Did Not Breach Fiduciary Duties Under Section 36(b)

On August 7, 2020, the U.S. District Court for the District of Colorado issued a judgment in favor of defendants Great-West Capital Management, LLC and Great-West Life & Annuity Insurance Co. (together, Great-West), holding that the plaintiffs, investors in Great-West funds through retirement plans, failed to prove that Great-West breached its fiduciary duties under Section 36(b) of the Investment Company Act of 1940 by charging excessive fees. Based on the evidence presented, the court found that the plaintiffs failed to meet their burden of proof with respect to the factors prescribed in Gartenberg v. Merrill Lynch Asset Management, Inc., and the plaintiffs failed to identify any legitimate damages stemming from Great-West’s alleged breach.

The District Court noted that, as set forth in the U.S. Supreme Court’s decision in Jones v. Harris Associates. L.P., Section 36(b) prohibits fees that are “so disproportionately large that [they] bear[] no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.” Citing Jones, the District Court noted that “the essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm’s length bargain.”

To underscore the arm’s-length nature of the relationship, the District Court noted that the services provided to and fees paid by the plaintiffs were approved by an independent financial adviser, and that the Great-West funds are overseen by independent directors. In reviewing the Gartenberg factors as applied to the fees in question, the District Court noted that (1) the board was independent and qualified, and that it engaged in a “robust process” in approving the fees, as a result of which the board’s decision was afforded substantial deference by the court; (2) Great-West’s advisory and administrative fees were comparable to those of similar funds; (3) the plaintiffs failed to quantify any alleged economies of scale or demonstrate that any such economies of scale were not properly shared with shareholders; (4) Great-West’s profits were comparable to those of its competitors; (5) Great-West provided high-quality services in exchange for its fees; and (6) the plaintiffs failed to identify any material fall-out benefits accruing to Great-West. Importantly, the District Court gave substantial deference to Great-West’s presentation of credible evidence in support of its position.

In addition to failing to prove that Great-West breached its fiduciary duties under Section 36(b), the plaintiffs also failed in their obligation to establish the damages suffered. At trial, the plaintiffs offered expert testimony to establish the amount of damages they allegedly suffered. But when questioned on cross-examination, the plaintiffs’ expert witness was “thoroughly discredited” and his testimony was found to be non-credible.

In conclusion, having failed to prove that Great-West breached any fiduciary duties under Section 36(b), coupled with the failure to establish any damages, a final judgement was entered against the plaintiffs and in favor of Great-West.

The opinion was issued by the U.S. District Court for the District of Colorado under the caption Obeslo v. Great-West Capital Mgmt., LLC, No. 16-cv-00230-CMA-SKC.

The plaintiffs filed a notice of appeal on September 1, 2020.

© 2021 Vedder PriceNational Law Review, Volume X, Number 253
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

John Marten Investment Attorney Vedder Price Law FIrm
Shareholder

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm
Counsel

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney
Shareholder

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

312-609-7697
Tyrique Wilson Investment Attorney Vedder Price Law Firm
Associate

Tyrique J. Wilson is an Associate in the Chicago office of Vedder Price and a member of the firm’s Investment Services group.

Mr. Wilson received his law degree from the Washington University School of Law in St. Louis and his undergraduate degree from The George Washington University. While in law school, Mr. Wilson was Treasurer of the Black Law Students Association, received an award for Excellence in Oral Advocacy and earned a Certificate in Business Law.

312-609-7689
Advertisement
Advertisement
Advertisement