In re Dreyfus Mutual Funds Fee Litigation, 2006 WL 909434 (W.D. Pa. 2006)

Milbank Team Obtains Dismissal of Dreyfus Class Action

The Litigation Department recently obtained a significant victory for the Dreyfus Corporation when Judge Lancaster in the United States District Court for the Western District of Pennsylvania granted Dreyfus' motion for judgment on the pleadings and dismissed the action with prejudice.

The action, entitled In re Dreyfus Mutual Funds Fee Litigation, was one of more than twenty nearly identical class actions filed by Milberg Weiss against many of the nation's leading mutual fund investment advisers. The actions for the most part concern revenue-sharing arrangements whereby a mutual fund sponsor/adviser, or its affiliates, agrees to pay a broker-dealer fees on top of sales commissions and other fees in return for certain marketing benefits from the broker-dealer. In addition to the Dreyfus action, Milbank is also defending Fidelity, Citigroup Asset Management, and Capital Research in similar class actions.

Plaintiffs in the Dreyfus action were shareholders in Dreyfus mutual funds and claimed that Dreyfus and its affiliates made undisclosed, improper, and excessive payments to broker-dealers to promote the sale of the Dreyfus Funds over other mutual funds and that these undisclosed payments created an inherent conflict of interest. Plaintiffs asserted claims under various sections of the Investment Company Act of 1940 (the "ICA") (the primary statutory scheme governing mutual funds), the Investment Advisers Act of 1940, and common law.

In an earlier decision on Defendants' motion to dismiss, Judge Lancaster had dismissed all of plaintiffs' claims, except those claims under Section 36(b) of the ICA (which imposes a fiduciary duty upon investment advisers in connection with their receipt of compensation) and Section 48(a) of the ICA (which imposes control person liability). Although noting it was a "close case,'' Judge Lancaster held that plaintiffs' allegations that cost savings due to economies of scale were not shared with fund shareholders and that the funds' directors were neither independent nor conscientious were sufficient to state a claim under Section 36(b).

The Milbank Litigation team subsequently moved for judgment on the pleadings on the remaining two claims. Defendants argued that claims under Section 36(b) must be brought derivatively on behalf of the Dreyfus Funds, rather than directly as a class action on behalf of investors. Judge Lancaster agreed, finding Defendants' argument to be supported by Supreme Court precedent, the text of the statute, and state law, the last of which traditionally determines whether a claim is direct or derivative. Having dismissed the Section 36(b) claim, Judge Lancaster also dismissed the Section 48(a) claim because that statute does not provide an independent basis for liability.

Litigators Jim Benedict, Neil Gray, and Nicole Capuano defended the case on behalf of Dreyfus.