Pension Fund Appeals Dismissal of Securities Fraud Claims

11 expiration of the existing contracts between the funds and first data. to assist with the study, such investment adviser, or any affiliated person of such 10 the sec requires investment advisers to distinguish management fees from "other" 12 their importance." eca, local 134 ibew joint pension trust of chi. v. jp morgan chase co., 15 way, local 649 has alleged that the defendants' misrepresentations proximately resulted in the shareholders or members who are similarly situated in enforcing 21 daidone recommended that the boards enter into the proposed contract with ctb but failed to 20 fidelity" and "undivided loyalty" to the funds' shareholders. galfand v. chestnutt corp., 545 f. 12 action: the fiduciary duty imposed on advisers by � 36(b) is owed 14 citigroup asset management ("cam"), a business unit of citigroup that provides investment 10 asserted by a shareholder suing under the statute is a `right of the 19 cam, acting through investment adviser smith barney, owed a duty of "uncompromising 16 false material representation or omitted to disclose material information and that plaintiff's 13 "congress explicitly provided in � 36(b) of the ica for a private right of derivative action for 7 __________________ 6 further, in the fund prospectuses, defendants categorized the fees that cam pocketed as "other 19 10 causation.'" 544 u.s. 336, 341 (2005) (citing basic inc. v. levinson, 485 u.s. 224, 248-49 plaintiff does not fairly and adequately represent the interests of 17 conformed their conduct to what the law required. the defendants' losses were real ones because 18 respect to "compensation for services" by investment advisers, without imposing a parallel 4 disclosures concerning the transfer fee arrangements were inadequate. 1 __________________ 22 15 the district court dismissed local 649's � 10(b) claims because it concluded that when 18 acocelli, for weiss & yourman, new york, n.y., for appellants. 21 11 various affiliates of citigroup sponsored and managed the funds. smith barney asset 11 we are convinced, however, that local 649 adequately alleges loss causation. local 649 13 claims even though � 36(b) itself forecloses claims by companies. the court stated, "the term 11 provisions, � 10(b) of the securities exchange act of 1934, rule 10b-5, and � 36(b) of the 7 "revenue guarantee" arrangements in the side letter. in may 2005, the sec settled with smith 6 speculative level." bell atl. corp. v. twombly, 550 u.s. 544, 555 (2007); accord ashcroft v. 4 14 `derivative action,' which defines the scope of rule 23.1, has long been understood to apply only 2 have enforced in court." id. at 529 (emphasis added). the court went on to hold that fed. r. 9 692 f.2d at 255. 6 important that her fiduciary was, in essence, receiving kickbacks. 20 that cam had not informed the funds' boards of the side letter at the time that they approved the 8 and that rule 23.1 therefore applied as it applied to other derivative actions in federal courts. fox, 13 faithless fiduciary. as the supreme court has admonished: "[t]he relationship between 12 way, "[a] fact is to be considered material if there is a substantial likelihood that a reasonable 21 will go to them directly. the court expressly said the opposite, in keeping with its 20 (emphasis added). few facts would likely constitute more important ingredients in investors' 5 b. loss causation 8 fund, 464 u.s. at 535 n.11. 10 "comparative" fee table is not useful to an investor if the information in the table is incomplete or the honorable charles s. haight, jr., united states district court judge for the southern** 28 _________________ 7 phrase "on behalf of" indicated that the right of the shareholder to sue under � 36(b) is derivative, of a registered investment company shall be deemed to 9 required the defendants to make clear to both the board and the funds' shareholders that cam 24 15 burks, 441 u.s. at 484. to the extent local 649 seeks damages that inure to its own benefit and 7 9 reasonable investor as having significantly altered the `total mix' of information made available." 3 and haight, 18 the deductions used to fund the transfer agent "fees" diminished for local 649 (and other 11 erred in concluding otherwise. as support, local 649 draws on upon language in daily income 8 make any untrue statement of a material fact or to omit to state a 13 11 the facts that shareholders were being grossly overcharged for transfer agent services and that 1 running a 14-person customer service call center at minimal cost. first data would receive the 6 7 particularly true given the supreme court's express statement to that effect. see daily income 10 family of funds ("funds") between september 11, 2000 and may 31, 2005. 4 advisor must do when seeking approval for an increase in its fee. the advisor must issue, among for the purposes of this subsection, the investment adviser 8 the materiality of a misleading statement or omission for � 10(b) purposes is a mixed 18 investment companies, 59 fed. reg. at 52,691 (establishing item 22 fee schedule as a new 4 section 36(b) of the investment company act provides that the sec or a shareholder may 16 was not a false material representation under � 10(b). the district court also dismissed local 15 functions but would then pocket the difference between what it charged the funds and what it 21 respect local 649's � 36(b) claim is affirmed. 9 rather than directly to shareholders. "[a] derivative action allows a stockholder `to step into the section 36(b) states, in relevant part:5 district of new york, sitting by designation. 32 b.d. parker, 17 a comprehensive analysis of this problem, see david f. swensen, unconventional success: a 5 second, the appellees argue that even if excessive fees caused a diminution in the value of 12 cam retained deloitte & touche consulting ("deloitte"). looking to save money, cam asked 24 sec v. first am. bank & trust co., 481 f.2d 673, 678 (8th cir. 1973). some literally accurate 13 16 24 botts, llp, houston, t.x., for appellees 4 data"), provided transfer agent services for the funds. transfer agents do a number of things. 21 transfer agent contracts. 20 fees to those of its competitors. because it was not disputed that appellees had disclosed the 15 confined to operating the call center, ctb charged the funds substantially more in transfer agent 1 any rational mutual fund investor would be highly leery of dealing with a fiduciary such as cam 12 other result would, at the least, spark significant tension with our previous statement that such investment adviser or any affiliated person of such 12 alleges that the defendants' misrepresentations caused investors to make and maintain 10 the united states district court for the southern district of new york (pauley, j.), dismissing 14 materiality test that we apply here. tsc indus., inc., 426 u.s. at 449. subsection . . . by a security holder of such registered 4 fees was disclosed. 10 subcontract, ctb's role as a transfer agent was a circumscribed one; the company operated a 15- 11 expenses in a fee table placed at the front of a prospectus. see, e.g., sec form n-1a, supra; 17 14 in september 2007 the district court granted defendants' motion to dismiss the 18 consolidated-plaintiffs, 2 comes before us on a motion to dismiss, no factual record has yet been developed regarding the 9 transfer agent services it had previously provided but at a much lower rate. because of this 1 5 investment adviser and whether the fund boards would ever approve such an arrangement. at 3 1990). in light of these principles, we have little difficulty concluding that the defendants' 11 docket no. 07-5125-cv 6 appellees argue that local 649's exchange act claims must be dismissed because local 9 "the end result of [daily income fund is] that, under � 36(b), a claimant brings a `direct' 1 v. cohen law offices, 21 f.3d 512, 518 (2d cir. 1994). 31 5 section 10(b) of the securities exchange act and rule 10b-5 make it unlawful for any 1 inform the boards about the details of the side letter. these presentations were accompanied by a 22 8 substantial likelihood that the disclosure of the omitted fact would have been viewed by the 20 jeanne chilton, individually and on behalf of all others similarly situated, 1 excessive, misleadingly disclosed fees, a significant portion of which were, in essence, kicked 14 16 material nature," paid by mutual funds or their investors "to such investment adviser or any 2 the complaint alleges that plaintiffs seek "monetary damages against all of the defendants have a fiduciary duty with respect to the receipt of 9 generated by the scheme. based on these allegations, investors filed a series of civil suits in the 19 fiduciary duty with regard to other expenses, congress indicated that advisory fees are a 3 company, rather than a shareholder. "[w]hile section 36(b) claims are not derivative for purposes 4 necessary for an average or typical investor to make an investment decision," and "focus its 14 rather than continue to contract with an outside agency such as first data. ultimately, deloitte annuity trust fund, no. 07-5257-cv, which we resolve in a separate opinion. 13 any person, in connection with the purchase or sale of any security. 6 negotiate the best possible arrangement for the funds. in addition, they were obligated to 9 importance of the accurate reporting of categories of fees in prospectuses is obvious: a 10 in one fund rather than in another or to monitor adviser-manager's fees." 694 f.2d 923, 929 (2d 17 2 20 particularly sensitive and important brand of fees or expenses. 10 this court rejected that view, holding that "the words `on behalf of' do not create by 5 that first data would charge only a fraction of the fees that would be drained from the funds. 13 investor as having significantly altered the total mix of information made available. tsc indus., 1 cir. 2002) (internal citation omitted). further the sec is equipped, as it did in 1994 in the 18 conclusion 17 and on behalf of all others similarly situated, sara brinn, 18 9 (argued: march 5, 2009 decided: february 16, 2010) 7 disclose candidly to shareholders the material features of the arrangements they crafted. see 11 (1988)). in addition, a plaintiff must establish economic loss and "`loss causation,' i.e., a causal 14 17 c.f.r. � 240.10b-5. to state a claim under these provisions, "[a] plaintiff must allege that in 12 cam was reaping the benefits were ones that would have "been viewed by the reasonable 15 (emphasis added). we thus indicated that a � 36(b) action (1) was not "derivative" of an action 11 unimportant to a reasonable investor that reasonable minds could not differ on the question of 12 management, llc ("smith barney") and citigroup global markets, inc. ("global markets" or 8 do so, and, more importantly, their contention that shareholders may file traditional direct actions 19 daily income fund, 464 u.s. at 535 n.11 (emphasis added). thus, daily income fund did not fed. r. civ. p. 23.1(a). 7 expenses would be increased." amendments to proxy rules for registered investment corps., 59 19 for the foregoing reasons, the judgment of the district court with respect to local 649's 15 investment advisers "with respect to the receipt of compensation for services, or of payments of a this case was argued in tandem with the chiumento group v. operating local 6493 10 likelihood exists that a reasonable investor would view them as significant alterations of the 3 civ. p. 23.1, which covers "derivative" actions, does not apply to � 36(b) claims. local 649 6 person: 13 party so entitled to bring an action under � 36(b) must do so to seek return of excessive 11 426 u.s. 438, 449 (1976)); acito v. imcera group, 47 f.3d 47, 52 (2d cir. 1995). put another 12 fund addressing whether the demand requirement of fed. r. civ. p. 23.1 applies to � 36(b)6 14 cir. 2007). the appellees here present two distinct arguments as to why local 649 has not 13 continued to perform the same services it had previously performed at a substantially reduced 5 bring suit "on behalf of such company" against investment advisers and their affiliates for 29 5 __________________ 16 the mutual fund could bring itself, and (2) must be brought in a representative capacity on behalf 13 553 f.3d 187, 197 (2d cir. 2009) (quotation marks omitted). 6 increased (i.e., management fees, 12b-1 fees, other expenses) regardless of whether total 12 addressed plaintiffs' claims for breach of fiduciary duty in violation of � 36(b), not fraud in 12 the fund investors could not divine from the disclosures was that they were at the mercy of a 9 "[t]he fund customer's shares of the advisory fee is usually too small a factor to lead him to invest pfpc, inc. acquired first data in december 1999. for ease of reference, first data and4 15 lasker, 441 u.s. 471, 481 (1979) (quoting kamen v. kemper fin. servs. inc., 500 u.s. 90, 93 17 sense of that word. 5 district judge.** 8 barney and cgmi, who agreed to pay more than $200 million in fines and disgorge the profits 14 i. 3 omitted), and � 36(b) did not give mutual funds (which are corporations) the right to bring suit 4 18 management fees payable to the investment adviser or its affiliates, and administrative fees 5 they process transactions in funds shares, calculate daily net asset values, compute sales charges 26 cir. 1982). there, we held that a claim under � 36(b) was not subject to the demand requirement 12 less work. 3 because investors were not told: (1) that ctb would limit its role to operating a small call center; 20 to the treasury department in june 2005 and "will be turned over to the funds once the 9 dura, appellees contend that local 649 alleges transaction causation, but that it does not properly 2 local 649 contends that the defendants misrepresented the services that ctb performed 10 1 in 2005, the sec investigated smith barney and cgmi for violations of the investment 4 judgment of the united states district court for the southern district of new york (pauley, j.) operating local 649 v. smith barney fund management llc 11 salomon smith barney mut. fund fees litig., 441 f. supp. 2d 579, 596 (s.d.n.y. 2006). any 10 southern district of new york seeking damages for defendants' violations of, among other 3 for all losses and damages suffered as a result of the wrongdoings alleged in this complaint, 14 rate. nor did cam disclose that the nominal transfer agent, ctb, would perform only minimal 18 diminution in the funds' net asset values due to the excessive transfer agent fees. according to 18 15 the sec's disclosure rules support this analysis. in connection with the distribution of 26 11 18 to disclose the arrangement to the fund boards. three months later, cam issued written 18 the amount of fees is relevant to the price and value of the funds, the court reasoned that an 21 here, appellees categorized fees that it ultimately pocketed as "other fees" rather than 14 it charged for transfer agent services, and despite the fact that ctb's circumscribed role was 19 companies (2007), general instructions to item 3, http://www.sec.gov/about/forms/formn-1a.pdf 2 mislead investors." mcmahan & co. v. wherehouse entm't, inc., 900 f.2d 576, 579 (2d cir. 13 person would consider it important in deciding whether to buy or sell shares [of stock]." azrielli (a) prerequisites. this rule applies when one or more shareholders 9 fund and to compare those costs with the costs of other funds." id. at 13, 924. 5 11 income fund, 464 u.s. at 528 (quoting cohen v. beneficial loan corp., 337 u.s. 541, 548 2 barrington d. parker, circuit judge: 19 19 fees to first data, with the exception that smith barney would assume the limited function of 14 � 36(b) of the ica. 15 u.s.c. � 80a-35(b). that provision imposes a fiduciary duty on registered investment company . . . to such investment 14 management fees to the company treasury and not to individual or governmental coffers." id. 8 agent services. at the same time, ctb contracted with first data to provide most of the same 20 court," daily income fund, 464 u.s. at 529, the court concluded that claims under � 36(b) were 4 (2) that first data would, in practice, provide the vast majority of transfer agent services; or (3) 6 that point, cam changed course and created a transfer agent subsidiary called citicorp trust 13 serving as lead plaintiff and filing the amended complaint that is the subject of this appeal. 6 of 1934 and rule 10b-5, and breaches of fiduciary duty in violation of � 36(b) of the investment 14 investment advisers and mutual funds is fraught with potential conflicts of interest." burks v. 18 according to local 649's complaint, whose allegations we accept for the purposes of this 6 concluded that the individual plaintiffs seek direct damages. and, that impression is confirmed by 10 suit in name only and a `derivative' one with respect to the recovery of any damages." in re 7 649 cannot establish loss causation. under dura pharm. inc. v. broudo, "[i]n cases involving pfpc are referred to collectively as "first data." 8 fed. reg. 52,689, at 52,691 (oct. 19, 1994) (codified at 17 c.f.r. pt. 200) (emphasis added). the 5 this subsection by the [sec], or by a security holder of such registered investment company on 30 before: 17 "investment advisory fees (including any fees based on the fund's performance), any other 6 breaches of fiduciary duty with respect to compensation or payments by investors. 15 u.s.c. � 2 undermine the view that � 36(b) only authorizes suits in which recovery goes to the coffers of the 9 7 2000, a smith barney affiliate issued a prospectus, updating them about the state of the funds 17 joseph r. seidman, jr. for bernstein liebhard & lifshitz, llp, new york, n.y., richard 4 according to the sec, the cumulative effect of the scheme was to provide ctb with pretax 13 the conclusion that appellees' misrepresentations were material is further buoyed by � 4 argues that if a � 36(b) claim is not "derivative" within the meaning of rule 23.1, then it is not 6 to funnel to cam and its affiliates approximately $17 million in additional revenue based on 16 katherine e. shropshire, harold levine, seymour ratner, jeffrey weber, individually 23 fiduciary duty with respect to adviser's fees." burks, 441 u.s. at 484. 17 reliance on defendant's conduct caused plaintiff injury." caiola v. citibank, n.a., n.y., 295 f.3d 21 12 c.f.r. � 274.11a ("form n-1a shall be used as the registration statement to be filed pursuant to 1 would not have acted but also that he suffered actual economic loss." id. at 343�44. 1 united states court of appeals 9 plaintiff-appellant operating local 649 annuity trust fund appeals from a judgment of 14 426 u.s. at 449. 5 complaint must allege a plausible set of facts sufficient "to raise a right to relief above the 2 back to a smith barney affiliate. specifically, the scheme unfolded as follows: from 1994 21 embraced in dura, "that a plaintiff in such a case show not only that had he known the truth he 25 smith barney fund management llc, citigroup global markets, inc., lewis daidone, 9 material fact necessary in order to make the statements made, in 13 and remanded in part and affirmed in part. 15 advisory and management services to citigroup-sponsored funds. during the class period, 6 according to local 649, cam then concealed its scheme from investors. on may 26, 21 settlement distribution plan is approved by the sec." with ctb's share of those fees restored to 8 invest in a fund. the fee table is designed to help investors understand the costs of investing in a 4 among other things, whether the anticipated savings belonged to the funds as opposed to the 12 the investment company act of 1940. see fed. r. civ. p 12(b)(6). the judgment is vacated 17 6 tables within the prospectuses carry special significance because they "reflect[] the commission's 17 agent] profits" to the funds, and local 649's theory of loss is based upon the economic 6 7 to determine whether a misrepresentation is material, we look to whether there is "a 2 to enforce a right which may properly be asserted by it," id. at 253 (internal quotation marks 5 behalf of all shareholders and result in no direct benefit to the individual plaintiff shareholders." 5 other things, a "comparative fee table . . . if any of the fee categories in the fee table would be respect of such compensation or payments paid by such 22 characterization five years earlier that � 36(b) provides for "derivative suits charging breach of 7 perform various accounting functions. as is customary, cam paid first data's transfer agent 13 to the company itself as well as its shareholders and any recovery compensation for services, or of payments of a material 16 an investment adviser discloses the total amount of fees paid by a fund for various services, 1 the funds, there is no remaining compensable loss, appellees argue. however, because this case 2 despite ctb's greatly diminished role in providing such services. in light of the importance the 13 "cgmi") served as investment advisers. both smith barney and global markets were part of 10 basic inc. v. levinson, 485 u.s. 224, 231-32 (1988) (quoting tsc indus., inc. v. northway, inc., 9 question of law and fact, and a complaint may not be dismissed under rule 12(b)(6) on the 19 direct claims. after plaintiff elected to stand on its complaint, the district court entered final 2 advisers act of 1940 alleging that they induced the funds to enter into a contract that resulted in 16 paid first data. 14 investors." olmsted v. pruco life ins. co. of n.j., 283 f.3d 429, 433 (2d cir. 2002); see also 9 the lead plaintiff, who purchased shares in the 105 mutual funds that are part of the smith barney 20 hold that plaintiffs may � as local 649 attempts to do here � press claims in which the recovery 23 o. ware, for mayer brown llp, george i. terrell, alex bourelly, robert k. kry, for baker a derivative action to enforce a right that the corporation or 12 __________________ 1 possession of all material information; i.e., they knew the value of the funds." the district court 18 local 649 further alleges that cam concealed critical aspects of its scheme from the 17 in september 2003, a whistleblower reported to the sec about cam's failure adequately 2 11 cir. 1982). this observation, however, is inapplicable to our present analysis. gartenberg 8 11 claims brought under� 10(b) of the securities exchange act of 1934, rule 10b-5 and � 36(b) of or members of a corporation or an unincorporated association bring 10 corporation's shoes and to seek in its right the restitution he could not demand in his own.'" daily 25 3 sec attaches to the proper categorization of fees generally, and the importance congress has 13 investments in funds that were subject to excessive fees and expenses, and that the periodic 14 deduction of those fees and expenses reduced the value of the investments over time. put another 3 margin, that is relevant to the price and value of the funds," and the gross amount of each of the 15 connection with the purchase or sale of securities, the defendant, acting with scienter, made a 15 u.s.c. � 80a-35(b). 13 commensurate benefit to the funds. despite the fact that first data substantially reduced the rate 16 respect, a � 36(b) action is undeniably "derivative" in the broad 5 under the circumstances alleged in the complaint, the defendants had an obligation to 17 affiliated person of such investment adviser." id. by imposing an express fiduciary duty with 7 income fund indicates that it is limited to the context of rule 23.1. in daily income fund, the 9 establish reliance on a material representation, which is "often referred to . . . as `transaction 3 whose interests they were obligated to protect. the district court's analysis did not engage this 19 appeal, smith barney negotiated a contract for transfer agent services that saddled the funds with 2 we review a district court's dismissal of a complaint pursuant to rule 12(b)(6) de novo. 20 judgment. this appeal followed. 15 __________________ 17 the accurate categorization of these expenses. see amendments to proxy rules for registered 17 649's � 36(b) claims on the ground that they could only be brought derivatively on behalf of the 12 business which operates or would operate as a fraud or deceit upon 18 funds. the court granted local 649 leave to replead its � 36(b) claims as derivative, rather than 15 plaintiff. see s. rep. no. 91-184, p. 6 (1970); � 36(b)(3). in this 6 while local 649's argument holds some facial appeal, a more nuanced inspection of daily 16 distribution or "12b-1" fees; and "other expenses." id. the sec defines "management fees as 15 established loss causation. 1 expenses categorized as transfer agent fees were not transfer agent fees at all and included 6 behalf of such company." 15 u.s.c. � 80a-35(b). the appellee in fox argued that the use of the 25 decided upon appeal from this court's decision in fox v. reich & tang, inc., 692 f.2d 250 (2d 6 in re dreyfus mut. funds fee litig., 428 f. supp. 2d 357, 359 (w.d. pa. 2006). this is 18 contract with first data. cam proposed that the funds continue to pay the same transfer agent4 16 first, the appellees note that the sec ordered them to disgorge "essentially all [transfer nature, paid by such registered investment company, . . . to 1 (1949)). 3 deloitte expressed doubts to cam as to the legality of the arrangement, questioning, 17 senior vice president. 2 investment adviser. an action may be brought under this 15 gartenberg also predated the sec amendments that require separate categorization of 10 in 1997, cam initiated a formal study of the transfer agent function in anticipation of the 11 implication a statutory right of the company itself to sue, from which the stockholders' right may 7 strongly held belief in the importance of fees and expenses in a typical investor's decision to 16 management fees, distribution fees and other fees � amendments that highlight the importance of 17 neither the fees' allocation nor the transfer agent's profit margin is material. finding that only 6 and commissions, distribute proxy and other materials, operate customer service centers and supreme court on august 8, 2009. the two remaining members of the panel, who are in 6 a. materiality 20 4 inferences in the plaintiff's favor. in order to survive a motion to dismiss under rule 12(b)(6), a 9 the `on behalf' language in � 36(b) indicates only that the right the honorable sonia sotomayor, originally a member of this panel, was elevated to the* 12 letter allegedly guaranteed cam millions of dollars in additional revenue, without providing 20 ability to accurately inform rather than mislead prospective buyers. cf. greenapple v. detroit 17 pocketed money belonging to the funds. 20 during presentations to the funds' boards between march and june 1999, senior vice president rule 23.1 states, in relevant part:6 1 circuit judge,* 4 18 312, 321 (2d cir. 2002) (internal quotation marks and brackets omitted). 19 appellees, $34 million has been distributed to the funds, and the remaining amount has been paid investment adviser, . . . for breach of fiduciary duty in 7 the plaintiffs' decision not to file an amended complaint when the district court granted leave to 2 memorandum, authored by daidone, which represented that the goals of the new contract with 7 iqbal, 129 s. ct. 1937, 1949-50 (2009). 8 generally overton v. todman & co., 478 f.3d 479, 485 (2d cir. 2007). these obligations 10 local 649 contends that � 36(b) claims may be pleaded directly, and that the district court 21 "total mix" of information than the fact that, in violation of these disclosure requirements the 4 attached to management fees in particular, we hold that defendant's misrepresentations were 15 2 same fees as before, but would rebate a substantial portion of the fee to smith barney. 16 5 derivative at all, and shareholders may sue directly. 7 appellees rely heavily on gartenberg v. merrill lynch asset management, inc., in which 13 violation of � 10(b) or rule 10b-5. that case did not involve application of the "total mix" 8 fees using fund assets, an expense that cam publicly disclosed, in accordance with securities 21 edison co., 618 f.2d 198, 205 (2d cir. 1980); beecher v. able, 374 f. supp. 341, 347 (s.d.n.y. 19 which the right claimed by the shareholder is one the corporation could itself have enforced in 21 and can specify forms of disclosure, if appropriate." resnik v. swartz, 303 f.3d 147, 154-55 (2d 22 christopher meade, for wilmer cutler pickering hale and door, llp, new york, n.y., michael 2 fed. reg. 13,916, at 13,917-18 (mar. 23, 1998). for example, in the context of a typical open- 8 claim must be pled derivatively on behalf of the funds, with any damages going to the funds, 6 the funds, such a loss was dependent solely upon the aggregate amount of the fees paid by the 8 rules, was required to be separately stated. 3 through september 30, 1999, an outside contractor, first data investor services group ("first 3 ctb were to reduce fees and promote future growth. daidone's efforts to persuade the funds' 12 and first data. cam did not initially disclose in these prospectuses, however, that first data 22 1974) ("`[a] statement which is literally true, if susceptible to quite another interpretation by the 5 contents on information that is essential to an investment in the fund." id. at 13,918-19. the fee 1 to those actions in which the right claimed by the shareholder is one the corporation could itself 10 ground that the alleged misstatements or omissions are not material "unless they are so obviously 8 publicly traded securities and purchases or sales in public securities markets," a plaintiff must 5 plaintiffs in these consolidated cases � seek direct damages. the district court, however, 19 funds' boards of directors, which were responsible for approving the investment adviser's fee. 5 material because there exists a substantial likelihood that a reasonable investor would consider it 10 was assuming nearly the full benefit of the discounts generated by first data. we conclude that 8 we suggested that the amount of an advisory fee would rarely be material to investors, because 12 7 (a) to employ any device, scheme, or artifice to defraud, (b) to 14 companies. . ."). specifically, the sec requires mutual funds to break out and disclose separately 12 be said to be `derivative.'" id. instead, the court clarified, those words "signify only that either 12 investment company act of 1940. these suits were subsequently consolidated with local 649 9 under � 36(b). 7 banks ("ctb") which, in place of first data, then contracted with the funds to provide transfer 21 not subject to that rule's demand requirement, because that provision allows actions only by 7 fees," when in fact, they were far more akin to "management fees" a category that, under sec 9 period. that amended prospectus and prospectuses that followed on april 24, 2001, march 29, 15 complaint, holding that the mischaracterization of the fees paid to ctb as transfer agent fees 24 the context in which daily income fund arose also supports this reading. the case was 3 plaintiff-appellant operating local 649 annuity trust fund ("local 649") appeals from a 7 company act of 1940. see 15 u.s.c. � 78j(b); 17 c.f.r. � 240.10b-5; 15 u.s.c. � 80a-35(b).3 the right of the corporation or association. 2 further reasoned that "it is the amount of fees, not their allocation or a transfer agent's profit 1 of rule 23.1 because that requirement "applies only when a corporation or association has failed 4 themselves. id. at 254-55, 261. section 36(b) provides that "[a]n action may be brought under 14 obtained in a � 36(b) action will go to the company rather than the 18 fundamental approach to personal investing 220-269 (2005). 21 gross amount of the fees paid by the funds, the court concluded that "plaintiffs were in united states v. desimone, 140 f.3d 457 (2d cir. 1998). 2 disclosure context, to "propose rules for comment and [can] easily amend rules that do not work 8 court explained: 21 26 thomas jones, 19 the veracity of a statement or omission is measured not by its literal truth, but by its 10 the light of the circumstances under which they were made, not 8 the claims were asserted in a class action brought on behalf of investors, including local 649, 16 not to the funds', that result is not permitted by � 36(b). 19 10 2002 and june 24, 2002 all disclosed, with varying levels of detail, the existence of the contract 2 11 misleading, or (c) to engage in any act, practice, or course of 8 8 20 (last visited jan. 5, 2010). the prospectus is considered by the sec to be the "most complete 3 ii. 16 regular deduction of identifiable amounts that would not have been deducted had defendants 21 plaintiff, 5 dismissing claims alleging securities fraud in violation of � 10(b) of the securities exchange act 9 and exchange commission ("sec") rules, under the heading "other expenses." 19 investor who knows the amount of fees a fund pays can, when deciding to invest, compare the 14 9 we agree with local 649 that cam's misrepresentations were material. a substantial 3 the status of the sec-ordered restitution. as such, it is premature at this juncture to conclude that 13 and emphasis omitted); see also atsi commc'ns, inc. v. shaar fund, ltd., 493 f.3d 87, 106 (2d 3 for the second circuit 4 2 and its affiliates who, in violation of the law, lined their pockets at the expense of investors 3 well in practice." id. at 155. 20 "has a technical staff, is able to hold public hearings, and can, thus, receive wide and expert input, derivative action may not be maintained if it appears that the 19 reporting requirement). these amendments are entitled to significant weight because the sec 16 thomas jones served as the chief executive officer of cam, while lewis daidone served as its 15 three categories of fund expenses in the front of every fund prospectus: "management fees;" investment company on behalf of such company, against 3 unnecessarily high expenses to the funds and undisclosed profits to cam. specifically, 1 discussion 19 shareholders) money under management and, as a result, negatively and predictably impacted 27 defendants-appellees. 21 source of information about a fund" and serves as "a fund's primary disclosure document." 8 and subsequently issued an amended prospectus on september 11, 2000, the first day of the class 11 corporation' � a proposition confirmed by other aspects of the 20 returns. see swensen, supra at 224-27. thus, local 649's allegations satisfy the requirement, 17 of the fund and with recovery going to the fund. 13 deloitte to research and report on whether cam could take over the transfer agent functions, 16 securities, a mutual fund is required to file with the sec a registration statement and prospectus 12 connection between the material misrepresentation and the loss." dura, 544 u.s. at 342 (citations 2 kickbacks to ctb and ultimately, cam. 1 security holders or the securities and exchange commission. id. at 542. this reasoning does not 1 statements can, "through their context and manner of presentation, [become] devices which 11 otherwise misleading as, for example, where an advisor receives the same fee for substantially 20 claims under � 10(b) and rule 10b-5 is vacated and remanded, while the judgment with 7 80a-35(b). the district court dismissed local 649's � 36(b) claim after it determined that the5 21 2d. 807, 809-11 (1976); see also daily income fund, inc. v. fox, 464 u.s. 523, 535 n.11 (1984). 23 -- v .-- 16 using technology purchased from a first data competitor. 17 cam rejected deloitte's recommendation. instead, it renegotiated the terms of its 6 3 the second requirement of the sec that we find compelling relates to what an investment 7 august term, 2008 18 80a-8, 80a-24, 80a-29; form n-1a registration form for open-end management investment 4 boards to adopt the contract with ctb proved successful. each of the boards approved his association may properly assert but has failed to enforce. the adviser or person. 16 fees than it paid first data. thus, according to local 649, cam, through ctb, essentially 14 operating local 649 annuity trust fund, 5 recommendation. 10 allege loss causation. 4 reality. agreement, have determined the matter. see 28 u.s.c. � 46(d); internal operating proc. e; 7 funds, which was fully disclosed. therefore, this loss was not caused by additional, undisclosed 5 4 the sec's ordered restitution fully compensates local 649. 11 person call center. ctb memorialized its subcontract with first data in a "side letter." the side 19 supplements to the fund prospectuses disclosing the existence of the side letter, and disclosing 1 registration form used by open-end management investment companies securities act, 63 4 of rule 23.1 . . ., they are derivative, in the general sense of the word, because they are asserted on 11 between the funds and ctb. these prospectuses also disclosed the subcontract between ctb 18 the supreme court affirmed. noting that rule 23.1 applied only "to those actions in 07-5125-cv 19 payable to the investment adviser or its affiliates that are not included as `other expenses.'" id. 20 17 containing fee tables summarizing the expenses deducted from fund assets. see 15 u.s.c. �� 1 management fees. it did so under the guise of providing transfer agent services through ctb, 5 revenues of approximately $100 million off set by total operating expenses of $10.5 million and 15 plaintiff-appellant, 13 section 8(b) of the investment company act of 1940 by open-end management investment 15 proposed that cam create a subsidiary that would provide transfer agent services to the funds 23 reasonable investor . . . may properly . . . be considered a material misrepresentation.'") (quoting 3 the court accepts all well-pleaded allegations in the complaint as true, drawing all reasonable 3 8 facts regarding the nature of ctb's business or ctb's relationship with first data. relying on 10 4 together with interest thereon." the complaint does not specify whether local 649 � or the other 3 end mutual fund, sec regulations require that the prospectus contain only "information that is 11 "total mix" of information made available. basic inc., 485 u.s. at 232. first and foremost, what 16 (1991) (observing "the potential conflicts of interest inherent in" mutual fund arrangements.) for