Capital Research Excessive Fee Trial Ends in Decisive Victory

News
January 5, 2010

NEW YORK, January 5, 2010 ― Our securities litigators scored a major victory for Capital Research and Management Company and American Funds Distributors, Inc. on December 28, 2009, when Judge Gary Feess of the United States District Court for the Central District of California, issued his final post-trial Findings of Fact and Conclusions of Law in connection with In re American Mutual Funds Fee Litigation, No. CV 04-5593 GAF (RNBx) (C.D. Cal.). The Plaintiffs in this case challenged the more than $15 billion in investment advisory, transfer agency, Rule 12b-1 and administrative service fees paid by eight of the largest American Funds over the period 2003 to 2009. Judge Feess’ 105 page opinion contains extensive Findings of Fact and Conclusions of Law, and follows the two week trial that we had before the Court this past summer in Los Angeles after more than 5 years of intense litigation.

Judge Feess rejected each of Plaintiffs’ principal theories of liability, did not credit the testimony of Plaintiffs’ expert (Dr. Edward O’Neal), and ruled for Defendants on all of the major substantive issues presented, including the standard for liability under Section 36(b) and each of the Gartenberg factors. The Court ruled that Gartenberg was the legal standard that should be applied to Plaintiffs’ excessive fee claims under Section 36(b). Judge Feess ruled for the Defendants on each of the following six Gartenberg factors: (1) Nature and Quality of Services, (2) Profitability, (3) Comparative Fees, (4) Economies of Scale, (5) Fallout Benefits, and (6) Independence and Conscientiousness of the Independent Directors. The issue concerning the standard of liability under Section 36(b) will be definitively resolved by the Supreme Court later this year when the Court issues its opinion in Jones v. Harris.

Capital Research & Management Company is the world’s largest mutual fund adviser with assets under management of over $1 trillion. This case was one of the largest (if not the largest) securities matters ever to go to trial, and the first securities case to go to trial in the mutual fund industry in more than twenty years. This case is expected to have a widespread impact on the standards used by mutual fund directors in annual contract approvals required under the federal securities laws. There are several other class actions currently pending against Capital Research & Management Company involving similar allegations. This recent opinion will be instrumental in defending those actions.

The Milbank litigation team representing Capital Research and Management Company and American Funds Distributors, Inc. included partners Jim Benedict, Sean Murphy, and James Cavoli, associates Neil Gray, Tony Pellegrino, Rachel Penski, Eric Fishman, Krista Smokowski, Will Gross, and Michael Weiner, case manager Jen Russo and paralegal Bill Ziegelbauer.