In re American Mutual Funds Fee Litigation, 2005 WL 3989803 (C.D. Cal. 2005)

Milbank Obtains Dismissal of Major Class Action

The Milbank team of Jim Benedict, Sean Murphy, Tony Pellegrino, Rob Miller, Andrew Robertson, and Nicole Capuano obtained the dismissal of a major securities class action for Capital Research & Management Company, the second largest investment adviser in the nation. The matter, In re American Mutual Funds Fee Litigation, plaintiffs sought several hundred million dollars in damages on behalf of shareholders in 29 funds with aggregate assets in excess of $750 billion. On December 16, 2005, Judge Feess of the United States District Court for the Central District of California issued an opinion dismissing all counts of the complaint, although he potentially left the door open for plaintiffs to replead three claims.

In re American Mutual Funds Fee Litigation is one of more than a dozen mutual fund class actions brought by Milberg Weiss in which plaintiffs have alleged that various investment advisers have unlawfully generated fees from investors in mutual funds by charging excessive management fees and then using that income to allegedly pay “kickbacks” to brokerage firms to push investors into purchasing their mutual funds over those being advised by competitors. (We are also handling similar actions for Citigroup, Dreyfus and Fidelity.) In this case, plaintiffs alleged that Capital Research was engaged in a “scheme” to pay hundreds of millions of dollars to various broker-dealers who sell the American Funds nationwide. Plaintiffs alleged that unbeknownst to customers, Capital Research favored certain broker-dealers with these payments and therefore violated various portions of the Investment Company Act of 1940 (“ICA”) and the Investment Advisor’s Act of 1940 (“IAA”).

Believing the case to be meritless, Capital Research moved to dismiss the complaint in its entirety. Judge Feess held oral argument over two separate and lengthy sessions. The Court held, inter alia, that litigants are not afforded a private right of action under ICA Sections 34(b) and 36(a) because private rights of action are strongly disfavored by recent Supreme Court, Second Circuit and district court jurisprudence. The Court also held that claims with respect to Capital Research’s Massachusetts-organized mutual funds should be dismissed because plaintiffs failed to follow Massachusetts’ new “universal demand” statute which does not allow any exceptions to the requirement that a shareholder must plead demand upon a board before commencing a derivative suit. The Court further dismissed claims against 10 funds in which no plaintiff owned an interest, limited other claims on statute of limitations grounds, and dismissed plaintiffs’ state law claims as barred by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”).

The Court allowed leave to replead plaintiffs’ Sections 36(b) and 48(a) claims, as well as their IAA Sections 206 and 215 claims with respect to funds organized in Maryland and Delaware. The Court, however, cautioned plaintiffs that their existing complaint lacked sufficient facts to state a claim under these causes of action, and admonished them that any amended complaint would need to conform to stringent pleading standards.