In re Salomon Smith Barney Mutual Fund Fees Litigation, 2006 WL 2085979 (S.D.N.Y. 2006)

Milbank Litigation Group Achieves Complete Victory for Citigroup Asset Management

The Litigation Department recently served up a major victory for Citigroup Asset Management, Salomon Brothers Asset Management, and Smith Barney Fund Management—the former asset management subsidiaries of Citigroup, now owned by Legg Mason & Co.—and three individual defendants. Judge Paul A. Crotty of the United States District Court for the Southern District of New York dismissed plaintiffs’ thirteen-count class action complaint with prejudice, except for a limited leave to replead one count.

The action, In re Salomon Smith Barney Mutual Fund Fees Litigation, 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 arrangements whereby a mutual fund adviser or its affiliates agreed to pay broker-dealer fees on top of sales commissions and other fees in return for certain marketing benefits from the broker-dealer. (Milbank also represents Capital Research and Fidelity in similar litigation, and we obtained a complete dismissal of a similar action against The Dreyfus Corporation earlier this year.)

Plaintiffs were shareholders in 20 of the more than 100 mutual funds offered by Salomon Smith Barney and its affiliates. The class action named 203 individuals and entities, including Citigroup, Citigroup’s asset management and other subsidiaries, 88 proprietary mutual funds and the funds’ 36 registrants, and 73 interested and disinterested directors or trustees of the funds. Plaintiffs alleged that the Defendants, either directly or as control persons, violated various sections of the Securities Act of 1933 (the “Securities Act”), the Securities and Exchange Act of 1934 (the “Exchange Act”), the Investment Company Act of 1940 (the “ICA”), and common law. Plaintiffs’ primary allegations were that Defendants engaged in a three-part scheme whereby Defendants: (1) created various undisclosed incentives for brokers to sell proprietary and certain “strategic partner” funds; (2) caused the proprietary funds to pay excessive brokerage commissions and other fees to the funds’ distributor for steering clients toward proprietary funds; and (3) caused the funds to invest in shares of certain Salomon Smith Barney investment banking clients. Plaintiffs challenged billions of dollars in commissions and fees paid by the funds.

Judge Crotty held that (i) plaintiffs failed to state a claim under the Securities and Exchange Acts; (ii) there is no implied private right of action to enforce certain sections of the ICA under which plaintiffs asserted claims; (iii) claims under Section 36(b) of the ICA (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; (iv) plaintiffs failed to state a claim under Section 36(b) of the ICA; (v) plaintiffs have standing to sue on behalf of only those funds whose shares they won; (vi) there can be no control person liability because plaintiffs failed to allege a primary violation; and (vii) federal securities law preempts plaintiffs’ state law claims. Judge Crotty dismissed all of plaintiffs’ claims with prejudice, except for a limited leave to replead the Section 36(b) claim derivatively.

The Milbank team consists of Jim Benedict, David Gelfand, Neil Gray, Ryan Miller, Andrew Robertson, Nicole Capuano, and Kurt Maitland. Contact any team member in New York for further information.