Baker v. American Century Investments, No.04-4039-CV-C-ODS (W.D. Mo. 2006)

Plaintiffs Drop Billion Dollar Securities Action on the Eve of Trial

A team of Milbank litigators successfully defended a derivative action filed by a group of mutual fund shareholders alleging that American Century Investment Management charged excessive management fees to three of its largest mutual funds in violation of Section 36(b) of the Investment Company Act of 1940. Baker v. American Century Investment Mgmt., Inc., No. 04-4039-CV-S-ODS (W.D. Mo.), which challenged over $1 billion in fees paid by the funds from March 2003 through July 2006, was scheduled to go to trial before Judge Ortrie Smith in the Western District of Missouri on August 7, 2006. On July 31, however, plaintiffs voluntarily dismissed the action, expressly acknowledging that the case was without merit and that American Century did not violate Section 36(b) because the fees it received from the funds were reasonable.

The Milbank team consisted of Jim Benedict, Sean Murphy, Andy Tomback, Michael Berg, Ryan Miller, Mia Korot, Andrew Robertson, Eric Fishman, Jennifer Russo, Monica Alston, David Pryor, and Louis Perrotta. The team represented American Century through two-and-a-half years of litigation, including a large-scale document production, depositions of dozens of senior American Century personnel and the independent directors of the mutual funds, expert discovery involving eleven industry and economic experts, and extensive briefing on evidentiary and procedural issues. Last Monday – one week before the scheduled trial date – plaintiffs stipulated to the dismissal of the action with prejudice. The stipulation, signed by counsel for plaintiffs, states that after prosecuting the action, "it is likely that the Defendant will prevail on most of [the relevant] issues," and that "if the case were tried, the Court would likely determine that the compensation Defendant received for managing the Funds was fair and reasonable."

One of the main allegations in plaintiffs' case was that American Century realized the benefits of economies of scale in managing the funds and did not share those benefits with fund shareholders. In the stipulation, plaintiffs acknowledged that American Century was prepared to introduce evidence at trial tending to show that American Century "did not realize significant economies of scale in managing the Funds during the relevant period and, to [the] extent any economies of scale have been realized over time, they have been appropriately shared with the Funds' shareholders through breakpoints in the Funds' fee schedules, by charging low fees since the inception of the Funds, and through reinvestments in shareholder services." The stipulation further recognizes that "American Century has an outstanding and well deserved reputation for client services" and "has been an industry leader on the ethical issues which have faced the mutual fund industry over the past several years." Consequently, the stipulation states, "Plaintiffs have concluded that the Defendant has not violated its fiduciary duties under Section 36(b) of the Investment Company Act of 1940."

The dismissal of the action came just weeks after the court ruled in American Century's favor on several significant pre-trial motions. First, in response to motions to strike filed by the Milbank team, the court severely limited the testimony of three of plaintiffs’ expert witnesses, while at the same time denying plaintiffs' motions to strike experts retained by American Century. Second, a major theme of plaintiffs' case was that American Century's mutual fund fees were excessive in comparison to the fees American Century charged to manage the assets of institutional accounts, such as pension funds and subadvised accounts. On American Century's behalf, Milbank moved to exclude all evidence concerning institutional accounts and fees. Milbank argued, among other things, that mutual fund shareholders receive a wide variety of costly services that are not provided to institutional investors and that the legally relevant comparison was to other comparable mutual funds' fees. The court granted the motion to exclude all evidence concerning American Century's institutional accounts, holding that "such evidence is irrelevant to Plaintiffs' claims involving mutual fund fees under Section 36(b) of the Investment Company Act." Based on plaintiffs' concession that the case had no merit, the court ordered the case dismissed with prejudice. The dismissal could have far-ranging effects on other pending mutual fund litigation, as the case against American Century was one of twelve copy-cat cases filed against different mutual fund advisers, and the first to reach resolution. We are currently defending some of the largest investment advisers in the nation, including Fidelity, Citigroup/Legg Mason, and Capital Research, in similar actions challenging the size of their investment advisory fees.