Gilliam v. Fidelity Management & Research Co., No. 04-11600 (D. Mass. 2006)

Milbank, Tweed Wins Fourth Major Victory for Mutual Fund Industry In As Many Months:

In yet another decisive victory for the mutual fund industry, a Federal judge in Boston dismissed a multi-billion dollar class action filed against Fidelity Management and Research Company, FMR Co., Inc. (“Fidelity”), the international law firm Milbank, Tweed, Hadley & McCloy LLP announced today.

On October 3, 2006, United States District Court Judge Nancy Gertner of the United States District Court for the District of Massachusetts dismissed an eight count class action that claimed Fidelity Management and Research Company made undisclosed and improper payments to unaffiliated broker-dealers to promote the sale of Fidelity-branded funds over other mutual funds. Based upon these purported violations, Plaintiffs sought recovery of billions of dollars in damages.

Milbank, led by partners James N. Benedict and Sean M. Murphy, represented Fidelity throughout the suit. Following the dismissal, Mr. Benedict noted, “This case is just one of several suits that allege undisclosed and improper ‘revenue sharing’ and other distribution practices in the mutual fund industry. Earlier this year, we won an outright dismissal of a similar action against The Dreyfus Corporation, and are currently representing Capital Research and Salomon Smith Barney in yet another similar proceeding. The Fidelity and Dreyfus victories demonstrate that the courts will judge each case on its merits and that sales practice and fee abuses are not endemic to the mutual fund industry.”

Mr. Murphy added, “The decisive outcome of Fidelity follows our recent victory on behalf of American Century in Baker v. American Century Investment Management, Inc., which resulted in the dismissal of plaintiffs’ challenge to the firm’s level of investment advisory fees. The decisiveness of these defense victories should send a clear message to the plaintiffs’ bar who are currently laying siege to the mutual fund industry.”

The Milbank litigation team included New York-based partners James N. Benedict and Sean M. Murphy and New York-based associates C. Neil Gray, Anthony Pellegrino, Robert Miller, Andrew Robertson and Nicole Capuano Ball.

Case background:

On September 18, 2006, Magistrate Judge Marianne Bowler of the United States District Court for the District of Massachusetts issued a 56-page Report and Recommendation in which she recommended dismissal of plaintiffs’ eight-count class action complaint with prejudice, except for a limited leave to seek permission to replead one count. The report and recommendation was adopted and upheld yesterday by Judge Gertner.

The action, styled Gilliam v. Fidelity Management and Research Company, et al., was one of more than twenty similar class actions filed by Milberg Weiss against many of the nation’s leading mutual fund investment advisers. The actions for the most part challenge revenue sharing and other mutual fund distribution practices whereby a mutual fund adviser or its affiliates agreed to pay a broker-dealer fees in return for certain marketing benefits from the broker-dealer.

Plaintiffs were shareholders in 28 of the more than 300 mutual funds offered by Fidelity. The class action named a myriad of individuals and entities, including Fidelity and 206 proprietary mutual funds. The funds at issue had assets close to $1 trillion. Plaintiffs’ complaint alleged that the Defendants, either directly or as control persons, violated various sections of the Investment Company Act of 1940 (the “1940 Act”), the Investment Advisers Act of 1940 (the “IAA”), and common law. Plaintiffs’ primary allegations were that Defendants made undisclosed “revenue sharing” payments to unaffiliated broker-dealers as incentives to sell Fidelity-branded funds over other mutual funds.

In adopting the Magistrate Judge’s report and recommendation, Judge Gertner concluded that (i) there is no implied private right of action to enforce the various sections of the 1940 Act under which plaintiffs asserted claims; (ii) claims under Section 36(b) of the 1940 Act (which imposes a fiduciary duty upon investment advisers in connection with their receipt of compensation) must be brought derivatively on behalf of the funds, rather than directly on behalf of shareholders; and (iii) plaintiffs have standing to sue on behalf of only those funds whose shares they own. Prior to the Court’s issuance of its decision, Plaintiffs voluntarily dismissed their claims under the IAA and state common law. Magistrate Judge Bowler dismissed all of plaintiffs’ claims with prejudice, except for a limited leave to attempt to replead the Section 36(b) claim derivatively and on behalf of a much smaller set of Fidelity mutual funds.