Milbank LLP secured a significant trial victory on behalf of clients Great-West Life & Annuity Insurance Company and Great-West Capital Management, LLC (together, “Great-West”) in a consolidated action brought in the United States District Court for the District of Colorado pursuant to Section 36(b) of the Investment Company Act of 1940: Obeslo et al. v. Great-West Capital Management, LLC, et al., No. 16-cv-00230-CMA-SKC.
On August 7, 2020, Judge Christine M. Arguello issued a decision finding in favor of Defendants, dismissing Plaintiffs’ claims, and ordering payment of Defendants’ costs after four years of litigation. Great-West, which does business as Empower Retirement, is the second-largest retirement plan recordkeeper in the country and operates a complex of more than 60 mutual funds with more than $25 billion in assets under management. Plaintiffs, which consisted of a 401(k) retirement plan and individual investors in Great-West-managed funds through their employers’ plans, brought suit in 2016 alleging that the fees Great-West charges on its mutual funds were excessive. Plaintiffs had sought more than $100 million in damages in the form of alleged excessive fees paid by fund shareholders.
Judge Arguello’s decision followed an 11-day bench trial on 17 Great-West Funds that spanned more than two weeks from January 13-28, 2020. The Denver trial was handled by a case team of Milbank litigators evenly mixed between the firm’s New York and Los Angeles offices. The trial featured testimony from 16 witnesses that included three independent directors of the Great-West Funds responsible for approving the challenged fees, five employees of Great-West, Defendants’ expert witnesses, and Plaintiffs’ expert.
In the decision, the Court held not only that Plaintiffs failed to meet their burden of proof, but that Defendants had affirmatively and “overwhelmingly” proved at trial the reasonableness of their fees, concluding: “even though they did not have the burden to do so, Defendants presented persuasive and credible evidence that overwhelmingly proved that their fees were reasonable and that they did not breach their fiduciary duties.” The Court adopted and incorporated by reference Defendants’ proposed findings of fact and conclusions of law, holding in Defendants’ favor with regard to each of the six so-called Gartenberg factors that courts consider in deciding claims under Section 36(b), including finding that Defendants “provided extensive, high-quality services in exchange for their fees.” The Court’s decision found that the Board “was independent, qualified, and engaged in a robust process in approving” Great-West’s fees and, therefore, “the Board’s decision to approve the fees is entitled to substantial deference.” Finally, the Court found that Plaintiffs did not establish any actual damages.
Sean Murphy said: “We are thrilled to have helped Great-West achieve a positive and just outcome at trial. This victory is a testament to how vigorously our litigators defend clients in their most complex, high-stakes disputes.”
This high-profile dispute, closely watched by the mutual fund industry and broader financial community, is one of only about a dozen cases that have proceeded to trial in the 50-year history of Section 36(b). The Obeslo trial is part of the culmination of a wave of federal lawsuits against notable fund managers throughout the industry challenging the fees paid under sub-advisory relationships, a common practice within the industry that these lawsuits threatened. Plaintiffs in these cases, including Obeslo, have typically alleged that mutual fund “managers-of-managers” collected fees from fund shareholders that exceeded those of contracted sub-advisers that allegedly performed the same services. Milbank has successfully defended similar claims against a number of fund managers, including two prior post-trial victories on behalf of AXA Equitable and Hartford Financial Services in precedent-setting cases that were the first “manager-of-managers” cases to proceed to trial, and the first cases to be tried under Section 36(b) following the Supreme Court’s decision in Jones v. Harris Associates, L.P., which affirmed the applicable standard under the statute.
Following the Great-West trial, Milbank recently secured victory on behalf of Putnam Investment Company LLC (“Putnam”), a subsidiary of Great-West, in a three-and-a-half week virtual trial from July 6-30, 2020 before Judge Lewis J. Liman in U.S. District Court for the Southern District of New York. The Putnam trial was one of the first remote bench trials conducted in the US in complex securities litigation. It involved fraud and negligence claims from plaintiff Financial Guaranty Insurance Company against Putnam arising out of its role as collateral manager of a collateralized debt obligation with assets of approximately $1.5 billion, known as the “Pyxis” CDO.
The Milbank team representing Great-West was led by Litigation partners Robert Liubicic and Sean Murphy and included Litigation associates Benjamin Reed, James Whooley, Kevin Maggio, Ayana Sumiyasu, and Jacqueline Rosen.