JOHN E. GALLUS, et al., Plaintiffs-Appellants, -v ......Ameriprise’s dishonesty about the fees it charges and services it provides to its institutional clients, although there were

Case No. 11-1091

United States Court of Appeals for the

Eighth Circuit

JOHN E. GALLUS, et al.,

Plaintiffs-Appellants,

-v-

AMERIPRISE FINANCIAL, INC., et al.,

Defendants-Appellees.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA

(Dist. Court Case No. 04-4498DWF)

REPLY BRIEF OF PLAINTIFFS-APPELLANTS

Appellate Case: 11-1091 Page: 1 Date Filed: 05/27/2011 Entry ID: 3791957

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TABLE OF CONTENTS

INTRODUCTION ...................................................................................................1

ARGUMENT ...........................................................................................................3

I. This Court Was Right to Hold That Section 36(b) Prohibits Dishonesty During the Fee-Approval Process, and Nothing in Jones Abrogates That Holding...................................3

II. Jones Leaves No Doubt That Ameriprise’s Deeply Flawed Fee-Approval Process Requires Its Fees to Be Subjected to “Greater Scrutiny.”.........................................................5

A. Process Has Pride of Place in Both Jones and the Statutory Scheme. .....................................................................5

B. The Requirement of Greater Scrutiny Is Not Separate from the Standard of Jones but Is an Integral Part of It. ......................................................................6

C. Ameriprise Cannot Call for Deference to the Board While Downplaying the Importance of an Honest Fee-Approval Process. ..............................................................8

III. This Court’s Prior Conclusions About the Relevance of Institutional Fees and the Character of Ameriprise’s Fee-Approval Process Remain Entirely Valid. ..........................................9

A. Ameriprise’s “Double-Duty” Argument Fails..........................9

B. There Is a Triable Issue As to Whether the Funds and the Institutional Accounts Receive Essentially the Same Investment Advisory Services for Very Different Fees..........................................................................11

1. The question is whether plaintiffs have raised a genuine issue of fact, not whether they have conclusively proved their case. ....................11


ii

2. This Court’s earlier conclusion is not “obsolete.” ....................................................................12

3. This Court should reject Ameriprise’s reliance on “different services” to explain the fee disparity.............................................................14

4. Ameriprise’s attempt to show that there is no fee disparity is wholly unsuccessful. .......................15

5. The paltry “Performance Incentive Adjustments” did nothing to cure the disparity. .......................................................................21

C. There Is a Triable Issue As to Whether “Ameriprise Purposefully Omitted, Disguised, or Obfuscated Information That It Presented to the Board About the Fee Discrepancy.” .......................................22

1. The information that Ameriprise “purposefully omitted, disguised or obfuscated” was highly material. .................................22

2. Ameriprise focuses on what the Board did, while ignoring what it itself omitted, concealed, and obfuscated. ...........................................24

IV. The Board’s Problematic Fee-Approval Process Indicates That Ameriprise’s Fees Are Not Inside the Arm’s-Length Range.................................................................................................24

V. By Providing the Board with Deceptive Profitability Data, Ameriprise Concealed Important Information About Its Retained Economies of Scale—Information Indicating That Its Fees Are Outside the Arm’s-Length Range.................................................................................................25

A. Section 36(b) Requires That Profitability Information, Like Any Other Information Provided to Boards, Not Be Deceptive. .................................................26


iii

B. The Deceptive Profitability Information Was Material Because It Masked Ameriprise’s Retained Economies of Scale.................................................................27

VI. Ameriprise’s Contentions About the Board’s Consideration of Fall-Out Benefits Miss the Point. ..........................30

VII. The Evidence Must Be Evaluated As a Whole. ................................31

VIII. Plaintiffs Have Created a Genuine Issue of Fact As to Whether the New Dimension Fund’s 12b-1 Fee Violates Section 36(b). ....................................................................................32

CONCLUSION......................................................................................................32

CERTIFICATE OF COMPLIANCE WITH FED. R. APP. P. 32(a) AND EIGHTH CIRCUIT LOCAL RULE 28A(c) .....................................35

CERTIFICATE OF SERVICE ..............................................................................36


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TABLE OF AUTHORITIES

Federal Cases

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)..........................................12

Burks v. Lasker, 441 U.S. 471 (1979)......................................................................8

Conaway v. Smith, 853 F.2d 789 (10th Cir. 1988) ................................................13

DeFabio v. E. Hampton Union Free Sch. Dist., 623 F.3d 71 (2d Cir. 2010) .................................................................................................................13

Gallus v. Ameriprise Fin., Inc., 561 F.3d 816 (8th Cir. 2009) ...................... passim

I.V. Servs. of Am., Inc. v. Inn Dev. & Mgmt., Inc., 182 F.3d 51 (1st Cir. 1999) ..........................................................................................................13

Jones v. Harris Assocs., L.P., 130 S. Ct. 1418 (2010)................................... passim

Pepper v. Litton, 308 U.S. 295 (1939).....................................................................4

Posey v. Skyline Corp., 702 F.2d 102 (7th Cir. 1983) ...........................................13

Shah v. Racetrac Petroleum Co., 338 F.3d 557 (6th Cir. 2003)............................13

Taylor Equip., Inc. v. John Deere Co., 98 F.3d 1028 (8th Cir. 1996).....................4

Varity Corp. v. Howe, 516 U.S. 489 (1996) ............................................................5

Wallace v. DTG Operations, Inc., 442 F.3d 1112 (8th Cir. 2006) ........................12

Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) ..............................................4

Federal Statutes

15 U.S.C. § 80a-15(c) ..............................................................................................9

15 U.S.C. § 80a-35(b) ..................................................................................6, 16, 26


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Federal Regulations

17 C.F.R. § 270.12b-1(e) .......................................................................................32


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INTRODUCTION

In convincing the Funds’ Board of Directors to approve its fees, Ameriprise

was dishonest. The Board asked Ameriprise for a report comparing its institutional

clients with the Funds. (See J.A. 610.) In response, Ameriprise misrepresented

what it was charging its institutional clients—it told the truth to the regulators, but

concealed it from the Board. (Blue Br. 37.) It falsely claimed that the fees it was

charging mutual funds and institutional clients were virtually identical. (Id. 37-

38.) And it pretended that the investment advisory services that it was providing to

the Funds were more complicated than those it provided to the institutional

accounts. (Id. 38.) As a result, the Board thought that the Funds’ investment

management fees were “in line with” those paid by the institutional clients and

approved Ameriprise’s compensation. (J.A. 873.)

Ameriprise denies none of these facts. Instead, it argues that its dishonesty

is a “tidbit” not worth worrying about. It says that the fiduciary duty that section

36(b) imposes, unlike any other fiduciary duty known to the law, condones a

dishonest process so long as the result of the process—the fee—somehow turns out

to be within the arm’s-length range. But Ameriprise fails to explain how

dishonesty that goes to the heart of the fee-approval process could somehow have

no effect on the outcome. It also fails to counter the evidence that the dishonesty

did indeed affect the outcome, leading to fees that were nearly $60 million more


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for the Funds than for the institutional accounts—accounts that received essentially

the same investment advice as the Funds (J.A. 1518-21), and that did bargain with

Ameriprise at arm’s length (J.A. 646). The following diagram, which compares

the institutional fees with the fee charged to the New Dimensions Fund, shows the

fee disparity that Ameriprise’s dishonesty created:

Throughout its Brief, Ameriprise wraps itself in the mantle of Jones v.

Harris Associates, L.P., 130 S. Ct. 1418 (2010), but ignores what the Court

actually said there. Under Jones, there are two independently sufficient reasons to

reverse the district court.


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First, the district court failed to follow the Supreme Court’s instruction:

“where the board’s process was deficient or the adviser withheld important

information, the court must take a more rigorous look at the outcome.” Id. at 1430

(emphasis added). The major deficiency in the fee-approval process was

Ameriprise’s dishonesty about the fees it charges and services it provides to its

institutional clients, although there were others as well. Ameriprise provided the

Board with deceptive profitability information, and the Board itself focused

primarily on a “problematic” comparison with what other mutual funds charge

investors. Id. at 1429. The district court should have taken a more rigorous look at

Ameriprise’s fees, but did not do so.

Second, the district court granted summary judgment to Ameriprise even

though the record shows “a large disparity in fees” between the Funds and the

institutional accounts “that cannot be explained by the different services,” plus

“other evidence that the fee[s are] outside the arm’s-length range.” Id. at 1429 n.8.

Because the record meets these conditions, Plaintiffs are entitled to trial. Id.

ARGUMENT

I. This Court Was Right to Hold That Section 36(b) Prohibits Dishonesty During the Fee-Approval Process, and Nothing in Jones Abrogates That Holding.

In the previous appeal, this Court held, among other things, that section

36(b) prohibits dishonesty during the fee-approval process, “independent from the


4

result of the negotiation.” Gallus v. Ameriprise Fin., Inc., 561 F.3d 816, 824 (8th

Cir. 2009). To decide this appeal, this Court need not determine whether a purely

procedural claim is viable after Jones. Ameriprise’s strenuous argument against

such a claim, however, should not stand uncorrected.

Defendants claim that Pepper v. Litton, 308 U.S. 295 (1939), on which

Jones relied for its standard, does not recognize a process-only claim. (Red Br. 22-

23.) That is just not true. Pepper requires “good faith of the transaction,” 308 U.S.

at 306—a familiar phrase that relates to process, not substance. See Taylor Equip.,

Inc. v. John Deere Co., 98 F.3d 1028, 1033-34 (8th Cir. 1996) (holding that an

implied covenant of “good faith” prohibited dishonesty but not substantive

unreasonableness). Pepper’s standard also corresponds to corporate law’s standard

of “entire fairness,” under which both “fair dealing and fair price” must be shown.

Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983).

Under Ameriprise’s view of the statute, section 36(b) would allow all

manner of dishonesty in the fee-approval process. For example, a mutual fund

adviser would be allowed to bribe five members of a twelve-member board and

still claim that the bribery did not violate section 36(b). Such an adviser could

argue that its bribe left the fee itself unaffected, since the majority of the board was

not bribed.


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No other fiduciary duty works like this. “[L]ying is inconsistent with the

duty of loyalty owed by all fiduciaries . . . .” Varity Corp. v. Howe, 516 U.S. 489,

506 (1996) (quotation marks and citation omitted, emphasis added). “[T]he plain

language of § 36(b) . . . impose[s] on advisers a duty to be honest and transparent

throughout the negotiation process.” Gallus, 561 F.3d at 823.

Furthermore, considerations of judicial administrability favor treating

section 36(b) like other fiduciary duties. Congress surely intended to create a duty

that courts can realistically enforce, and courts are far better positioned to

scrutinize process than they are to do what Ameriprise would have this Court do:

evaluate the fairness of fees in a vacuum.

II. Jones Leaves No Doubt That Ameriprise’s Deeply Flawed Fee-Approval Process Requires Its Fees to Be Subjected to “Greater Scrutiny.”

Ameriprise charges that Plaintiffs are asking this Court to apply something

other than the Jones standard. The Court should not be deceived. Plaintiffs are

arguing for nothing more or less than the language and holding of the Supreme

Court.

A. Process Has Pride of Place in Both Jones and the Statutory Scheme.

While process is not the only factor a court should consider in determining

whether a fee meets Jones’s standard for substantive excessiveness, it is of

paramount importance. If it were not, the Supreme Court would not have bothered


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to say that a flawed process leads to greater scrutiny of the result—something it did

not say of any other relevant factor. Nor would it have repeatedly stressed the

importance of the board of directors, and the board’s scrutiny of an adviser’s fee,

within the statutory scheme. See Jones, 130 S. Ct. at 1423, 1427-28, 1429-30. As

the Supreme Court noted, see id. at 1428, section 36(b) explicitly mentions board

approval of an adviser’s compensation—the only factor, aside from “personal

misconduct,” that the statute deems it necessary to expressly discuss. 15 U.S.C. §

80a-35(b)(1)-(2). This emphasis on process makes a great deal of inherent sense.

(See Blue Br. 23-26.)

B. The Requirement of Greater Scrutiny Is Not Separate from the Standard of Jones but Is an Integral Part of It.

Jones established that a fee violates section 36(b) when it “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,

130 S. Ct. at 1426. Jones did not ask courts to determine disproportionality in a

vacuum. See id., (recognizing that section 36(b) does not give courts “rate-setting

responsibilities”). Instead, it made clear that courts are to decide whether a fee is

“disproportionate” by reference to whether the fee is outside the arm’s-length

range. “Gartenberg uses the range of fees that might result from arm’s-length

bargaining as the benchmark for reviewing challenged fees.” Id. at 1427; see also

id. (noting that under section 36(b), plaintiffs must show that “the fee is outside the


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range that arm’s-length bargaining would produce”); id. at 1429 n.8 (“[P]laintiffs

bear the burden in showing that fees are beyond the range of arm’s-length

bargaining.”); id. at 1430 (noting that courts should not “supplant the judgment of

disinterested directors apprised of all relevant information, without additional

evidence that the fee exceeds the arm’s-length range”).

That is why the board’s “decision to approve a particular fee agreement is

entitled to considerable weight” as long as the process of fee-approval is “robust.”

Id. at 1429; see also id. at 1430 (section 36(b) “does not call for judicial second-

guessing of informed board decisions”). A fully informed board with disinterested

directors will presumably bargain at arm’s length with the mutual fund adviser, and

so the courts may generally assume that the fee that results from such a process is

within the arm’s-length range. But where the process is “deficient”—and certainly

where, as here, it was seriously compromised—“the court must take a more

rigorous look at the outcome” and apply “greater scrutiny.” Id. at 1430.

This “more rigorous look” and “greater scrutiny” does not mean that the

ultimate legal question changes. (Contra Red Br. 24-25.) The question is always

whether a fee is within the arm’s-length range. But Jones’s increased scrutiny

means that when the investment adviser has egregiously “fail[ed] to disclose

material information to the board,” 130 S. Ct. at 1430, a court can no longer use

the fee that the board approved as a benchmark of the arm’s-length range. It can


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no longer defer to the board’s mere approval. See id. (“[C]ompliance or

noncompliance with [an adviser’s] disclosure obligations is a factor that must be

considered in calibrating the degree of deference that is due a board’s decision to

approve an adviser’s fees.” (emphasis added)).

Instead, a court “must take a more rigorous look” elsewhere to find the

arm’s-length range. Id. In this case, as Plaintiffs explain below, the best indication

of the arm’s-length range is the fees that institutional clients pay Ameriprise for the

same services that the Funds receive. (See infra pp. 11-21.)

C. Ameriprise Cannot Call for Deference to the Board While Downplaying the Importance of an Honest Fee-Approval Process.

The importance of the board and its fee-approval process also highlights an

intractable flaw in Ameriprise’s argument. Ameriprise urges this Court to

recognize a board’s role as guardians of investors and defer to its judgment. (E.g.,

Red Br. 30-34.) But Jones makes it clear that deference to a board’s judgment is

important precisely because of the watchdog role the board is supposed to play.

“Under the Act, scrutiny of investment adviser compensation by a fully informed

mutual fund board is ‘the cornerstone of the . . . effort to control conflicts of

interest within mutual funds.’” Jones, 130 S. Ct. at 1427 (emphasis added)

(quoting Burks v. Lasker, 441 U.S. 471, 482 (1979)). It is correspondingly

important, however, to apply greater scrutiny when the all-important watchdog has


9

been muzzled. “When an investment adviser fails to disclose material information

to the board, greater scrutiny is justified because the withheld information might

have hampered the board’s ability to function as ‘an independent check upon the

management.’” Id. at 1430 (quoting Burks, 441 U.S. at 484). This is just common

sense. An informed fee-approval process is an essential ingredient in the statutory

recipe. See 15 U.S.C. § 80a-15(c). An ingredient cannot be essential to a recipe by

its presence, and yet unimportant when absent.

III. This Court’s Prior Conclusions About the Relevance of Institutional Fees and the Character of Ameriprise’s Fee-Approval Process Remain Entirely Valid.

Ameriprise devotes much of its Brief to a sustained attack on what this Court

held in the previous appeal. This Court previously held that there was a genuine

issue of fact as to whether the Funds and the institutional accounts received

comparable, indeed virtually identical, services. Gallus, 561 F.3d at 824. It also

held that there was a genuine issue as to whether Ameriprise had “purposefully

omitted, disguised, or obfuscated information that it presented to the Board about

the fee discrepancy between different types of clients.” Id. Despite Ameriprise’s

attempt to relitigate these holdings, both of them remain valid.

A. Ameriprise’s “Double-Duty” Argument Fails.

Jones states that section 36(b) plaintiffs are entitled to trial when they “have

shown a large disparity in fees” between mutual funds and institutional clients


10

“that cannot be explained by the different services in addition to other evidence

that the fee is outside the arm’s-length range.” Jones, 130 S. Ct. at 1429 n.8. Here

the record shows a large disparity in fees that cannot be explained by different

services. (See infra pp. 11-21.) In addition, the dishonest fee-approval process

constitutes “other evidence that the fee is outside the arm’s-length range.”1

Ameriprise, however, argues that Plaintiffs cannot satisfy Jones’s requirements

because they “attempt to have the institutional fee comparison do double-duty.”

(Red Br. 35.) In sum, Ameriprise is arguing that its dissimulation during the fee-

approval process cannot be “other evidence that the fee is outside the arm’s-length

range.” (See id. 35-36, 40.)

What Ameriprise fails to acknowledge, however, is that (1) the fee disparity

between the Funds and the institutional accounts and (2) its concealment of that

disparity are two separate things. The disparity existed separately from

Ameriprise’s failure to disclose it. Ameriprise could have been honest with the

Board and disclosed the disparity, but it did not. Instead, in response to the

Board’s request for information, it produced a deceptive report about the

institutional accounts and their fees, thus preventing the fee-negotiation process

between Ameriprise and the Board from being truly arm’s-length. It is difficult to

1 Ameriprise’s dishonesty certainly counts as other evidence that the fee is outside

the arm’s-length range, but Plaintiffs have adduced other evidence too. (See infra pp. 24-31.)


11

imagine better evidence that a fee is “outside the arm’s-length range,” Jones, 130

S. Ct. 1429 n.8, than evidence that the process leading to the fee was not, in fact,

arm’s-length. By asserting that process-based evidence cannot be “other evidence

that the fee is outside the arm’s-length range,” Ameriprise is simply choosing to

ignore Jones’s admonition that a court “must take into account both procedure and

substance.” Id. at 1429.

B. There Is a Triable Issue As to Whether the Funds and the Institutional Accounts Receive Essentially the Same Investment Advisory Services for Very Different Fees.

In urging this Court to conclude that the institutional account fees are

irrelevant—and that, in any case, no fee disparity exists—Ameriprise disregards

the governing legal standard while alternately distorting and ignoring the record.

Ameriprise does not argue, for example, that the testimony of Plaintiffs’ experts is

inadmissible or insufficient to create a triable issue. Instead, Ameriprise fails to

mention the testimony at all. This omission by itself shows that there are indeed

genuine issues of fact for trial.

1. The question is whether plaintiffs have raised a genuine issue of fact, not whether they have conclusively proved their case.

Ameriprise makes the extraordinary claim that it is entitled to summary

judgment even if there is a disputed fact about whether the services provided to

mutual funds and institutional clients are comparable. (Red Br. 37.) Thus, in


12

contradiction to the familiar summary judgment standard, in which “the judge’s

function is not himself to weigh the evidence and determine the truth of the

matter,” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986), Ameriprise

says that courts must “weigh competing evidence regarding services when making

their preliminary determination of comparability” (Red Br. 37).

It is not clear where Ameriprise gets this idea from. Jones did not abrogate

the normal summary judgment standard; the Court did not say that a plaintiff must

prove comparability at the summary judgment stage. It is unlikely, moreover, that

the Supreme Court overturned its own case law on summary judgment sub silentio.

Accordingly, this Court should apply the normal summary judgment standard:

Plaintiffs are entitled to trial if a reasonable factfinder could conclude that there is

a large disparity of fees that cannot be explained by a difference in services, even if

a reasonable factfinder could also conclude the opposite. Wallace v. DTG

Operations, Inc., 442 F.3d 1112, 1118 (8th Cir. 2006). Plaintiffs easily meet this

standard.

2. This Court’s earlier conclusion is not “obsolete.”

Ameriprise cobbles together two arguments against this Court’s earlier

conclusion that the investment advice received by the Funds and the institutional

accounts “may have been essentially the same.” Gallus, 561 F.3d at 824.


13

Ameriprise first suggests that the Court’s conclusion must be ignored

because it was “made in the context of analyzing an obsolete process-based claim.”

(Red Br. 38.) But as Plaintiffs have already pointed out, this Court would not have

concluded that Ameriprise’s obfuscation of the fee disparity required reversal

without also concluding that the disparity itself was substantively relevant. (Blue

Br. 24-26.) And sure enough, this Court stated that the comparison between the

institutional accounts and the Funds was itself “relevan[t] . . . evidence.” Gallus,

561 F.3d at 824.

Next, Ameriprise proposes that this Court was only saying “that the

possibility of comparability had yet to be ruled out.” (Red Br. 39.) But this Court

held that Plaintiffs had established “disputed issues of material fact concerning the

similarities and differences between mutual funds and institutional accounts.”

Gallus, 561 F.3d at 824. If Plaintiffs had merely shown that this “possibility” was

not “ruled out,” this Court would not have reversed the district court’s grant of

summary judgment. A “mere possibility” is not enough to survive summary

judgment. E.g., DeFabio v. E. Hampton Union Free Sch. Dist., 623 F.3d 71, 81

(2d Cir. 2010); Shah v. Racetrac Petroleum Co., 338 F.3d 557, 566 (6th Cir. 2003);

I.V. Servs. of Am., Inc. v. Inn Dev. & Mgmt., Inc., 182 F.3d 51, 55 (1st Cir. 1999);

Conaway v. Smith, 853 F.2d 789, 794 (10th Cir. 1988); Posey v. Skyline Corp., 702

F.2d 102, 106 (7th Cir. 1983).


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Ameriprise’s contention that this Court’s earlier conclusion is “obsolete” is

unpersuasive.

3. This Court should reject Ameriprise’s reliance on “different services” to explain the fee disparity.

Ameriprise also argues that because the Funds provide a “multitude of

additional and different services,” their higher investment advisory fees are

justified. (Red Br. 40.) The record does not just fail to support this argument; the

record contradicts it. The “additional and different services” that Ameriprise

points to are offered under the Funds’ Administrative Services Agreements (J.A.

199, 205, 244-47, 337-40), Distribution Agreements (J.A. 199-200, 205, 254, 347),

and Transfer Agent Services Contracts (J.A. 199, 205, 248-253, 341-46). The

services provided under these contracts are paid for separately from the investment

management fee—the fee that Plaintiffs are challenging here. (See J.A. 238-39,

245, 249, 254, 330-31, 338, 342, 347.) Plaintiffs, then, pay for “additional and

different services” with additional and different fees. In contrast, the management

fees that institutional clients pay are all-inclusive. (J.A. 300.)

Ameriprise does cite to a few pages of the record that relate to the Funds’

investment management fee, but these pages either rely on (J.A. 193, 198-99, 204-


15

05), or are part of (J.A. 295-96), the deceptive San Diego Office Review.2

Professor Murdock explained at length why this Review’s comparison of services

is deceptive and does not explain the discrepancy between the fees. (J.A. 1519-21,

1544-47.) Ameriprise does not even attempt to counter Professor Murdock’s

testimony on this point.

Finally, Ameriprise simply asserts that the disparity in fees is explained by

the disparity in size. The funds, being “significantly larger” than the institutional

accounts, supposedly have higher marginal costs. (Red Br. 42.) The record

contradicts this bald assertion. Gordon Fines, who managed both the New

Dimensions Mutual Fund and the institutional account Growth Spectrum III,

described management of “the big fund” as “pretty simple to do” (J.A. 553 at

86:11-15), further stating that “New Dimensions was easier than Growth Spectrum

III because there were no restrictions or few, if any.” (J.A. 554 at 92:15-17.)

4. Ameriprise’s attempt to show that there is no fee disparity is wholly unsuccessful.

Ameriprise denies there is “a ‘disparity’ at all.” (Red Br. 44.) This claim

distorts the record.

Ameriprise first says that the institutional fee schedule that it filed with the

SEC (the “ADV”) does not necessarily represent “the rates actually charged to 2 The other pages that Ameriprise cites (J.A. 237-43, 330-36) are irrelevant; they

discuss the investment management fee but do not compare the services provided under that fee with the services provided to the institutional accounts.


16

institutional clients after negotiation.” (Id.) Quite true—but the record indicates

that this process of arm’s-length negotiation led to fee schedules that were even

lower than the ADV, further increasing the disparity between the Funds and the

institutional accounts. (J.A. 632.) As explained by Ameriprise senior vice

president Bob Richey, “Most often fees are negotiated down so finance would

reflect actual fees as lower than stated.” (J.A. 646.)

If the Funds enjoyed the arm’s-length fee schedules that the institutional

accounts enjoy, the Funds’ effective fee rate, even measured in basis points, would

be more than halved, to around 30% to 40% of what they now pay. (J.A. 1758 tbl.

5.) But the difference should be expressed in dollars, since the statute speaks of a

fiduciary duty “with respect to the receipt of compensation”; compensation is paid

in dollars, not in rates. 15 U.S.C. § 80a-35(b) (emphasis added). The following

chart expresses the disparity in dollars:


17

Ameriprise objects to this method of comparison on the ground that it uses

“illogically unrealistic assumed asset bases” and engages in a “misleading exercise

in arithmetic.” (Red Br. 41 & n.6.) This objection could mean two things, either

of which is wrong.

First, Ameriprise could be arguing that Plaintiffs simply compared the sheer

dollar amounts that the Funds pay with the sheer dollar amounts that the

institutional accounts pay. Because the fees are charged as a percentage of assets

and the Funds have much larger asset levels, such a comparison, according to


18

Ameriprise, would be misleading.3 But that comparison is not what Plaintiffs have

presented. Rather, Plaintiffs took the same asset level as their reference point—the

New Dimensions Fund’s asset level at year-end 2003. They then applied the

different fee schedules—the arm’s-length institutional schedules and the schedule

that the Fund actually paid—to that asset level. Following the method Professor

Murdock used and this Court approved, Plaintiffs have merely “equaliz[ed] the fee

structures.” Gallus, 561 F.3d at 819.

Second, Ameriprise could be arguing that the comparison is not probative

because it applies the fee schedules of the smaller institutional accounts to the asset

levels of the larger Funds. This is merely an argument that the comparison

between the institutional accounts and the Funds is irrelevant or misleading

because the Funds are larger than the institutional accounts. The comparison could

only be irrelevant if the services provided to the two types of clients are different—

but as Plaintiffs have shown, those services are virtually the same. (Blue Br. 34-

38.) The comparison could only be misleading if the advisory services provided to

the larger Funds are more expensive than those provided to the smaller institutional

accounts—that is, if the marginal cost of advisory services rise when asset levels

3 Of course, if, as the record indicates, the portfolio manager was doing the same

kind and amount of work for both the Funds and the institutional clients, then such a comparison would not be misleading.


19

rise. In fact, the opposite is true: due to large economies of scale, the marginal cost

of providing advisory services decreases as asset levels increase. (Id. 47-48.)

Ameriprise also argues that there was no fee disparity because the fee

schedules “vary by only a few basis points.”4 (Red Br. 42.) It points out that the

fee rate for one of the institutional accounts begins at 0.70%, or 70 basis points,

whereas the fee rate for the New Dimensions Fund began lower, at 0.60%, or 60

basis points. (Id. 43.) This, however, is an extraordinarily misleading comparison.

For while the fee schedule for the New Dimensions Fund and its comparable

institutional accounts contain somewhat similar rates for the first few breakpoints,

the breakpoints themselves could not be more disparate. While the first breakpoint

for the institutional accounts occurs at $10 million, the first breakpoint for the New

Dimensions Fund occurs at $1 billion. Moreover, by the time the institutional

accounts hit asset levels of around $40 million, the fee rate drops down to 0.25%—

lower than the fee rate for the New Dimensions Fund ever becomes, and certainly

much lower than 0.60%, which is the fee rate for the New Dimensions Fund at an

4 Plaintiffs do not analyze the institutional account called “42T,” which during the

relevant period had assets of only $8 million. (See Red Br. 43.) This very low level of assets gives 42T little bargaining power compared to the much larger institutional accounts #302 and #402 or to the Funds. Thus, if the assets of 42T “increase significantly, [its current] fee would likely be negotiated down.” (J.A. 1756.) Notably, Gordon Fines, the portfolio manager of both the New Dimensions Fund and Growth Spectrum III, was unfamiliar with 42T. (J.A. 554 at 93:12-14.)


20

asset level of $40 million. The following chart shows this difference in the fee

schedules:

As this Court noted previously: “The difference in fees mostly results from larger

fee breaks for institutional accounts as the amount of assets under management

increases in size.” Gallus, 561 F.3d at 819 n.1.5

5 Comparing the Funds’ effective fee rates with the institutional accounts’ effective

fee rates—as Ameriprise would have this Court do—masks the favorable breakpoints to which the institutional accounts are entitled but which are above those accounts’ current asset levels. Yet, even under this misleading comparison, there is a large disparity in effective fee rates. Using the numbers in Ameriprise’s own brief (Red Br. 43), the effective fee rate paid by the New Dimensions Fund is


21

Finally, Ameriprise, relying on the San Diego Report, claims that the profit

margins of the Funds and the institutional accounts were similar. (Red Br. 44.)

But these numbers are based on a drastically misleading apples-to-oranges

comparison, as Professor Murdock has pointed out. (J.A. 1537-38, 1603-04; Blue

Br. 37-38.)

5. The paltry “Performance Incentive Adjustments” did nothing to cure the disparity.

Ameriprise claims that its “Performance Incentive Adjustments,” which

tweaked Ameriprise’s fees based on the Funds’ performance, “helped ensure” that

Ameriprise’s fees were consistent with section 36(b). (Red Br. 50.) If, however,

the Court compares the adjustments (J.A. 279) with the investment management

fees paid by the Funds’ investors (J.A. 1790), it will see that the adjustments, when

negative, are a tiny fraction of those fees and do little if anything to affect the fee

disparity.6 Further, the adjustments are capped at 12 basis points (J.A. 278) so that

even if the maximum penalty were imposed, Ameriprise would still earn more fees

from the Funds than from any of the comparable institutional accounts. (See supra

p. 20.) Conversely, any positive adjustment would mean additional compensation

for Ameriprise on top of its already excessive fees.

0.52%, whereas the effective fee rates paid by the institutional accounts are considerably lower: 0.34% and 0.37%.

6 The 2003 and 2004 adjustments for the New Dimensions Fund were negative, an indication of poor performance. (J.A. 279, 1186.)


22

C. There Is a Triable Issue As to Whether “Ameriprise Purposefully Omitted, Disguised, or Obfuscated Information That It Presented to the Board About the Fee Discrepancy.”

Ameriprise does not deny that the San Diego Office Review’s comparison of

institutional accounts with the Funds was deceptive. Rather, Ameriprise

minimizes its dissimulation as nothing more than a “tidbit” of wrong information

and not “‘material’ in the summary judgment sense.” (Red Br. 33.) This

contention finds no support in reason or the record.

1. The information that Ameriprise “purposefully omitted, disguised or obfuscated” was highly material.

Ameriprise invents its own standard for whether information is “material”

(see Red Br. 33), but the standard that the Supreme Court has laid down is clear.

The omission, concealment, or obfuscation of information is “material”—and

courts “must take a more rigorous look at the outcome”—if it “might have

hampered the board’s ability to function as an independent check upon the

management.” Jones, 130 S. Ct. at 1430 (quotation marks and citation omitted).

Here, Ameriprise’s deception hampered the Board’s ability to function as an

independent check. The Board had expressly asked Ameriprise for additional

information comparing the Funds and the institutional accounts. (J.A. 610.) It is

therefore clear that the Board itself believed information about comparative fees


23

and services to be “important” to an arm’s-length negotiation process.7 Jones, 130

S. Ct. at 1430. And, as the Board’s own minutes state, the Board approved the

Funds’ investment management fees in part because it erroneously believed that

those fees were “in line with the fees paid by institutional clients for investment

advice.” (J.A. 873.) Ameriprise’s deceptive San Diego Office Review prevented

the Board from using the institutional account fees and services as an important

tool to evaluate the investment management fees that Ameriprise charged the

Funds.

The deception was material not only because it foiled the Board’s own

request for information, but also because it concealed the very different fees that

the Funds and the institutional accounts were paying for virtually identical

services. (See Blue Br. 34-38.) In other words, the concealed information was

inherently material to whether the fees charged to the Funds were excessive. For

that reason too, the deception hampered the Board’s ability to act as the investors’

watchdogs against excessive fees.

7 For that reason, it is false to say that Plaintiffs are just engaging in “after-the-fact

quibbling with the parties’ actual negotiation.” (Red Br. 32.) It was the Board itself that believed comparative fee information to be important. In this respect, Plaintiffs are not “quibbling” with the Board’s negotiation strategy but pointing out that Ameriprise’s dissimulation defeated the negotiation strategy the Board itself had chosen.


24

2. Ameriprise focuses on what the Board did, while ignoring what it itself omitted, concealed, and obfuscated.

Ameriprise emphasizes the materials provided to the Board, the information

it requested, and the disinterested status of its independent members. (Red Br. 31-

33.) A board, however, is only as good as the information it is given. A careful

and conscientious board, if misled by the mutual fund adviser, cannot bargain at

true arm’s length. That is why Jones was careful to specify that “a more rigorous

look” is required “where the board’s process was deficient or the adviser withheld

important information.” Jones, 130 S. Ct. at 1430 (emphasis added). To be sure,

the Board in this case largely focused on an industry comparison that the Supreme

Court has deemed “problematic.” Id. at 1429. (See infra pp. 24-25.) But even if

the Board’s own process had been flawless, “greater scrutiny” would still be

required due to Ameriprise’s dishonesty. Id. at 1430.

IV. The Board’s Problematic Fee-Approval Process Indicates That Ameriprise’s Fees Are Not Inside the Arm’s-Length Range.

The only two independent Board members that Plaintiffs were allowed to

depose testified that the Board relied very heavily on industry comparisons in the

fee-negotiation process. (See J.A. 563 at 127:16-128:10; J.A. 582 at 236:9-12.)

Plaintiffs have taken nothing “out of context.” (Red Br. 45-46.) This Court has

already concluded that “[t]he Board acquiesced in [Ameriprise’s] goal of tethering

fees to the industry median.” Gallus, 561 F.3d at 818. Ameriprise “entered the


25

negotiation with a pricing philosophy wherein it attempted to establish fees that

were ‘in the middle of the pack of funds with a similar size, objective and

distribution model.’” Id. (See J.A. 289; J.A. 591 at 114:14-25.) This pricing

philosophy was developed jointly by Ameriprise and the Board. (Red Br. 10.)

“The record reflects that the negotiation between the Board and Ameriprise

focused on the advisory fees charged by peer mutual funds.” Gallus, 561 F.3d at

818.

The Supreme Court has said that it is “problematic” to “rely too heavily on

comparisons with fees charged to mutual funds by other advisers.” Jones, 130 S.

Ct. at 1429. The Board’s too heavy reliance on such comparisons in this case

constitutes a procedural deficiency. (See Blue Br. 46.) But even if the Board’s

external focus did not by itself make the process “deficient” within the meaning of

Jones and thus deserving of “greater scrutiny,” 130 S. Ct. at 1430, it does mean

that the character of the Board’s process is a factor weighing against, not in favor

of, Ameriprise’s investment management fees.

V. By Providing the Board with Deceptive Profitability Data, Ameriprise Concealed Important Information About Its Retained Economies of Scale—Information Indicating That Its Fees Are Outside the Arm’s-Length Range.

Plaintiffs’ experts concluded that the information Ameriprise presented to

the Board about the Funds’ profitability was deceptive. (See Blue Br. 49-50.)

Ameriprise challenges neither that conclusion nor the subsidiary facts on which the


26

conclusion is based. Instead, Ameriprise asserts that nothing forbade its deceptive

method of cost allocation, and that in any event the deception was immaterial.

(Red Br. 52.) Both of these gambits fail.

A. Section 36(b) Requires That Profitability Information, Like Any Other Information Provided to Boards, Not Be Deceptive.

Ameriprise relies on the district court’s view—expressed in its now

reinstated summary judgment order—that Plaintiffs did not “point to any authority

detailing requirements for the presentation of profitability data.” (Red Br. 52

(quoting J.A. 1907).) In so concluding, however, the district court erred.

The district court, it appears, was saying that Plaintiffs had failed to point to

a regulatory or statutory provision explicitly setting requirements for the

presentation of profitability data. But the question is not whether Ameriprise’s

method of cost allocation is explicitly prohibited. Section 36(b), after all, imposes

a broad “fiduciary duty” rather than enumerating what the adviser may and may

not do. 15 U.S.C. § 80a-35(b). Under Jones, the right question is whether the

profitability information Ameriprise presented to the Board was consistent with

full and fair disclosure. See Jones, 130 S. Ct. at 1430 (requiring “greater scrutiny”

when “an investment adviser fails to disclose material information”); Gallus, 561

F.3d at 824 (recognizing that “[c]andid, transparent negotiation” is required).


27

As Plaintiffs’ experts have testified—testimony that Ameriprise does not

challenge—the profitability information was not consistent with full and fair

disclosure, in that it masked the Funds’ true economies of scale. Bruce Dubinsky

concluded that in the profitability information it prepared, Ameriprise assigned

investment management costs to the Funds “based primarily on total net assets.”

(J.A. 1801 (emphasis added).) And as Dr. Steven Pomerantz showed, even if costs

are assigned to the Funds based partially on total net assets (J.A. 1686 n.36), such

an accounting methodology significantly masks economies of scale (J.A. 1686-87

& tbl. 11). Further, Ameriprise chose to maintain an accounting system that did

not capture or retain historical cost information or cost allocation rules (J.A. 1808-

9), thereby preventing any precise quantification of the effects of its faulty

methodology (J.A. 1782).

B. The Deceptive Profitability Information Was Material Because It Masked Ameriprise’s Retained Economies of Scale.

Next, Ameriprise argues that even if the profitability information was

deceptive, it was immaterial because it supposedly did not cause Ameriprise’s fees

to be outside the arm’s-length range. (Red Br. 51-52.) Under Jones, however, the

question is not whether the profitability information by itself caused Ameriprise’s

fees to be excessive. Jones requires that “all relevant circumstances be taken

account,” not that each relevant circumstance be isolated and analyzed separately.


28

130 S. Ct. at 1427. Here, this Court should ask whether the deceptive profitability

information “might have hampered the board’s ability to function as an

independent check upon the management,” and thus whether “a more rigorous

look” at Ameriprise’s retained economies of scale is therefore required. Id. at 1430

(quotation marks and citation omitted).

The answer to that question is “yes”—or at least a reasonable factfinder

could so conclude. Ameriprise itself states that the Board relied on the profitability

information in approving the fees. (Red Br. 46-47.) More fundamentally, the

deceptive profitability information deprived the Board of the ability to evaluate the

true size of Ameriprise’s retained economies of scale—and it is precisely those

retained economies of scale that show that Ameriprise’s fee is outside the arm’s-

length range.

Ameriprise shares only very small fractions of its realized economies of

scale with investors in the Funds, and it begins to share any economies of scale

only after the Funds reach extremely large asset levels. (J.A. 1689.) For its

institutional clients—clients that receive essentially identical services—

Ameriprise’s practices are strikingly different. The much more favorable fee

schedules that the institutional clients enjoy mean that these clients not only share

significantly larger portions of Ameriprise’s economies of scale, but begin sharing

them at much lower asset levels. While institutional clients begin to benefit from


29

economies of scale at asset levels as low as $10 million (J.A. 1688-89, 1695),

investors in the New Dimensions Fund must wait until asset levels reach $1 billion

before they share any economies of scale at all (J.A. 1689). This dramatic

difference between the Funds and the institutional clients is evidence that

Ameriprise’s fees are outside the arm’s-length range.

Ameriprise denies none of these facts, and instead advances the bold

argument that the mere existence of any breakpoints—of any shared economies of

scale—is enough to defeat a section 36(b) claim at the summary judgment stage.

(Red Br. 54-55.) This argument would eviscerate section 36(b), since breakpoints

are common in the industry. The argument also ignores Jones, under which the

dispositive question is not whether any economies of scale have been shared at all.8

Instead, Jones requires this Court to ask whether the economies of scale that the

adviser has shared with investors through the fee schedule are indicative of a fee

within “the range of fees that might result from arm’s-length bargaining.” Jones,

130 S. Ct. at 1427. (See also J.A. 1570-71.)

Here, from the evidence relating to economies of scale, a reasonable

factfinder could conclude that the Funds’ fees are not within the arm’s-length

8 Ameriprise also believes that it is enough for the Board to have been “aware” of

the economies of scale and “considered” them. (Red Br. 54.) If that process was based on false and misleading profitability information, however, the fact that the Board “considered” that information only makes matters worse.


30

range. This is a reasonable inference from the record evidence that cannot be

casually dismissed as “theorizing.” (Red Br. 55.)

First, the record shows that the institutional accounts bargain at arm’s length.

Ameriprise senior vice president Bob Richey noted: “As you might expect, form

the investors point of view [sic], one advantage to [institutional] accounts is the

ability to negotiate fees.” (J.A. 646.) Second, the fee schedules for the

institutional accounts, which receive virtually the same services as the Funds,

cause those accounts to share a dramatically larger portion of economies of scale

than do the Funds’ fee schedules. (See supra pp. 28-29.) Finally, in evaluating

whether the Funds adequately shared their economies of scale, the Board relied on

false and misleading information and was thus prevented from negotiating at true

arm’s length. (See supra pp. 27-28.) There is indeed a disputed question of

material fact arising from the Funds’ retained economies of scale.

VI. Ameriprise’s Contentions About the Board’s Consideration of Fall-Out Benefits Miss the Point.

Ameriprise’s arguments about fall-out benefits may be dealt with briefly.

Plaintiffs do not deny that the Board was provided with documents relating to

certain kinds of fall-out benefits. But the Board did not consider—indeed, was not

even aware of—the significant fall-out benefits that accrue to Ameriprise due to

the institutional accounts. Nor do the Funds’ investment management fees take

those benefits into account. (Blue Br. 52-53.)


31

Ameriprise’s contends that these unaccounted-for benefits do not, by

themselves, demonstrate that the challenged fees violate section 36(b). (Red Br.

53.) This is a strawman. The relevant point, which Defendants don’t deny, is that

the unshared fall-out benefits are among the circumstances indicating Ameriprise’s

fees are outside the arm’s-length range.

VII. The Evidence Must Be Evaluated As a Whole.

Like the district court, Ameriprise considers each piece of evidence

separately and attempts to show that each piece independently fails to create a

genuine question of fact. Ameriprise is mistaken even under its own standard, but

more importantly, its standard is wrong. Jones requires that “all relevant

circumstances be taken into account.” 130 S. Ct. at 1427 (emphasis added).

Thus, the district court not only should have “take[n] a more rigorous look at

the evidence,” but should have scrutinized all of the relevant circumstances

together. Id. at 1429-30. Furthermore, given the greatly different fees that the

Funds and the institutional clients pay for essentially the same services, the district

court should have examined the record as a whole to determine whether there was

“other evidence that the fee is outside the arm’s-length range.” Id. at 1429 n.8.

Because the district court neither applied greater scrutiny to Ameriprise’s fees nor

viewed the record holistically, its judgment should be reversed.


32

VIII. Plaintiffs Have Created a Genuine Issue of Fact As to Whether the New Dimension Fund’s 12b-1 Fee Violates Section 36(b).

Ameriprise’s arguments against Plaintiffs’ 12b-1 claim rely on the faulty

premise that the Jones standard is somehow separate from the regulatory

requirement that 12b-1 fees have a “reasonable likelihood” of benefiting mutual

fund shareholders. 17 C.F.R. § 270.12b-1(e). But if a 12b-1 fee has no reasonable

likelihood of benefiting shareholders—of providing any useful service to

shareholders—then by definition the fee “is so disproportionately large that it bears

no reasonable relationship to the services rendered.” Jones, 130 S. Ct. at 1426.

Plaintiffs have shown why the New Dimensions Fund’s 12b-1 fee is

disproportionate under that standard. (Blue Br. 57-59.)

CONCLUSION

For the foregoing reasons, this Court should reverse the district court’s

reinstated summary judgment, order that complete discovery proceed for all of the

Funds over the entire damages period, and order that the case be set for trial at the

close of discovery.9

May 26, 2011 Respectfully Submitted,

/s/ Michael D. Woerner_______________ Michael D. Woerner

9 The Court should also reaffirm its earlier holding that the damages period does

not end when a section 36(b) action is filed, since Ameriprise appears to raise this issue once again. (Red Br. 9 n.2.)


33

Lynn Lincoln Sarko Gretchen F. Cappio Benjamin Gould Tana Lin KELLER ROHRBACK, L.L.P. 1201 Third Avenue, Suite 3200 Seattle, WA 98101 (206) 623-1900 Karl L. Cambronne (#14321) Jeffrey D. Bores (#227699) Bryan L. Bleichner (#0326689) CHESTNUT CAMBRONNE PA 17 Washington Avenue North, Suite 300 Minneapolis, MN 55401 (612) 339-7300 Guy M. Burns Jonathan S. Coleman JOHNSON, POPE, BOKOR, RUPPEL & BURNS, LLP 403 East Madison Street, Suite 400 Tampa, FL 33602 (813) 225-2500 Michael J. Brickman James C. Bradley Nina Hunter Fields RICHARDSON PATRICK WESTBROOK & BRICKMAN, LLC 174 East Bay P.O. Box 879 Charleston, SC 29402 (843) 727-6500


34

John M. Greabe 296 Gage Hill Road Hopkinton, NH 03229 (603) 746-6138

Attorneys for Plaintiffs-Appellants


35

CERTIFICATE OF COMPLIANCE WITH FED. R. APP. P. 32(A) AND EIGHTH CIRCUIT LOCAL RULE 28A(H)

The undersigned, counsel of record for the Plaintiffs-Appellants, John E.

Gallus, Alexandria Ione Faller (a/k/a Alexandria Ione Griffin), and Diana Hood,

furnishes the following in compliance with Fed. R. App. P. 32(a) and Eighth

Circuit Local Rule 28A(h):

1. This brief complies with the type-volume limitation of Fed. R. App. P.

32(a)(7)(B) because this brief contains 6,985 words, excluding the parts of the

brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of Fed. R. App. P.

32(a)(5), and the type style requirements of Fed. R. App. P. 32(a)(6) because this

brief has been prepared in a proportionally spaced typeface using Microsoft Word

Version 2003 in 14-pt., Times New Roman.

3. Microsoft Word Version 2003 has been applied specifically to include

in the above word count all text, including headings, footnotes and quotations,

excluding only the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

4. This brief has been scanned for viruses and is virus-free.


- 36 -

CERTIFICATE OF SERVICE

I hereby certify that on May 26th, 2011 I electronically filed the foregoing

with the Clerk of the Court for the United States Court of Appeals for the Eighth

Circuit by using the CM/ECF system. Participants in the case who are registered

CM/ECF users will be served by the CM/ECF system.

I further certify that some of the participants in the case are not CM/ECF

users. I have mailed the foregoing document by First-Class Mail, postage prepaid,

or have dispatched it to a third-party commercial carrier for delivery within 3

calendar days, to the following non-CM/ECF participants:

Mr. John M. Greabe, 296 Gage Hill Road Hopkinton, NH 03229

Ms. Lara A Oravec, ROPES & GRAY 800 Boylston Street Prudential Tower Boston, MA 02199-3600

Dated: May 26, 2011.

/s/Erica J. Knerr Erica J. Knerr, Legal Assistant


Documents

JOHN E. GALLUS, et al., Plaintiffs-Appellants, -v ......Ameriprise’s dishonesty about the fees it charges and services it provides to its institutional clients, although there were