08-0038-cv
In Re: Salomon Smith Barney Mutual Fund Fees Litigation
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY
ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE
OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY
ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL
APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY
CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY
COUNSEL.
1 At a stated term of the United States Court of Appeals for the Second Circuit, held at the Daniel
2 Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on the 9th day
3 of June, two thousand eleven,
4
5 PRESENT:
6 RALPH K. WINTER
7 BARRINGTON D. PARKER,
8 Circuit Judges,*
9 CHARLES S. HAIGHT, JR.
10 District Judge.**
11 __________________________________________
12
13 The R.W. Grand Lodge of F. & A.M. of Pennsylvania, Larry D. Turner, Kathleen Fitzgerald, Chanda
14 Maxwell, Ryan Maxwell, Tony C. Evans, Michelle Gomez, Barbara Kopf, Lorraine Steele, Linda
15 Rotskoff, Julie A. May, Carol Chiumento, Ruth Kurby, Eric J. Clark, Vera Gould, R. Alan Mauer,
16 Nickolas J. Borders, Jerome Caplan, Dale E. Warfield, Jerome Frizzle, Magnoria R. Frizzle, Claus
17 Naehrig, Philip J. Rosewarne,
18
19 Plaintiffs-Appellants,
20
21 Salomon Funds Lead Plaintiff Movants, No. 08-0038-cv
22
23 Plaintiff,
*
The Honorable Sonia Sotomayor, originally a member of this panel, was elevated to the
Supreme Court on August 8, 2009. The Honorable Ralph K. Winter was designated as the third
member of this panel. See 2nd Cir. Internal Operating Procedures E(b).
**
The Honorable Charles S. Haight, Jr., United States District Court Judge for the Southern
District of New York, sitting by designation.
1
2 Smith Barney Massachusetts Municipals,
3
4 Debtor,
5
6
7 v. No. 08-0038-cv
8
9 Salomon Brothers All Cap Value Fund, Salomon Brothers Balanced Fund, Salomon Brothers California
10 Tax Free Bond Fund, Salomon Brothers Capital Fund, Salomon Brothers High Yield Bond Fund,
11 Salomon Brothers International Equity, Salomon Brothers Investors Value Fund, Salomon Brothers
12 Large Cap Growth Fund, Salomon Brothers Mid Cap Fund, Salomon Brothers National Tax Free Bond,
13 Salomon Brothers New York Tax Free Bond Fund, Salomon Brothers SB Capital and Income Fund,
14 Salomon Brothers SB Growth & Income Fund, Salomon Brothers Short/Intermediate U.S. Government
15 Fund, Salomon Brothers Small Cap Growth Fund, Salomon Brothers Strategic Bond Fund, Smith Barney
16 Aggressive Growth Fund, Smith Barney All Cap Growth and Value Fund, Smith Barney Appreciation
17 Fund, Smith Barney Arizona Municipals Fund, Smith Barney Balance Portfolio, Smith Barney California
18 Municipals Fund, Smith Barney Classic Values Fund, Smith Barney Conservative Portfolio, Smith
19 Barney Diversified Large Cap Growth Fund, Smith Barney Diversified Strategic Income Fund, Smith
20 Barney Dividend and Income Fund, Smith Barney Financial Services Fund, Smith Barney Florida
21 Portfolio, Smith Barney Fundamental Value Fund, Smith Barney Georgia Portfolio, Smith Barney Global
22 All Cap Growth and Value Fund, Smith Barney Global Government Bond Portfolio, Smith Barney
23 Global Portfolio, Smith Barney Government Securities Fund, Smith Barney Group Spectrum Fund,
24 Smith Barney Growth Portfolio, Smith Barney Hansberger Global Value Fund, Smith Barney Health
25 Sciences Fund, Smith Barney High Growth Portfolio, Smith Barney High Income Fund, Smith Barney
26 Income Portfolio, Smith Barney Intermediate Maturity California Municipals Fund, Smith Barney
27 Intermediate Maturity New York Municipals Fund, Smith Barney International All Cap Growth
28 Portfolio, Smith Barney International Large Cap Fund, Smith Barney Investment Grade Bond Fund,
29 Smith Barney Large Cap Core Fund, Smith Barney Large Cap Growth and Value Fund, Smith Barney
30 Large Cap Value Fund, Smith Barney Large Capitalization Growth Fund, Smith Barney Limited Term
31 Portfolio, Smith Barney Managed Governments Fund, Smith Barney Managed Municipals Fund, Smith
32 Barney Mid Cap Core Fund, Smith Barney Municipal High Income Fund, Smith Barney National
33 Portfolio, Smith Barney New Jersey Municipals Fund, Smith Barney New York Portfolio, Smith Barney
34 Oregon Municipals Fund, Smith Barney Pennsylvania Portfolio, Smith Barney S & P 500 Index Fund,
35 Smith Barney SB Adjustable Rate Income Fund, Smith Barney SB Capital and Income Fund, Smith
36 Barney SB Convertible Fund, Smith Barney Short-Term Investment Grade Bond Fund, Smith Barney
37 Small Cap Core Fund, Smith Barney Small Cap Growth Fund, Smith Barney Small Cap Growth
38 Opportunities Fund, Smith Barney Small Cap Value Fund, Smith Barney Social Awareness Fund, Smith
39 Barney Technology Fund, Smith Barney Total Return Bond Fund, Smith Barney U.S. Government
40 Securities Fund, Collectively Known as the “Proprietary Funds,” Citigroup Global Markets, Inc.,
41 formerly known as Salomon Smith Barney, Inc., formerly known as Salomon Smith Barney Holdings
42 Inc., Salomon Brothers Asset Management, Inc., Smith Barney Fund Management LLC, Citigroup Asset
43 Management, Catherine N. Gray, Jay R. Gerken, Clifford M. Kirtland Jr., Rosalind A. Kochman, Riordan
44 Roett, Jeswald W. Salacuse, Thomas F. Schlafly, Irving Sonnenschein, Elliot J. Berv, Donald M. Carlton,
2
1 A. Benton Cocanougher, Mark T. Finn, Diana Harrington, Susan B. Kerley, C. Oscar Morong Jr.,
2 Richardson Pettit, E. Kirby Warren, William Woods Jr., Les Gelb, Riley C. Gilley, Stephen Randolph
3 Gross, Alan G. Merten, Walter E. Robb III,
4
5 Defendants-Appellees,
6
7 Smith Barney Adjustable Rate Government Income Fund, Smith Barney Concert Series Inc., Smith
8 Barney Equity Funds, Smith Barney Funds Inc., Smith Barney Institutional Cash Management Fund,
9 Smith Barney Investment Funds Inc., Smith Barney Investment Series, Smith Barney Investment Trust,
10 Smith Barney Money Funds Inc., Smith Barney Multiple Discipline Trust, Smith Barney Muni Funds,
11 Smith Barney Municipal Money Market Fund Inc., Smith Barney Sector Series Funds, Smith Barney
12 Principal Return Fund, Greenwich Street Series Fund, Smith Barney Shearson Aggressive Growth Fund
13 Inc, Smith Barney Shearson Fundamental Value Fund Inc, Smith Barney Shearson Managed
14 Governments Fund Inc., Smith Barney Shearson New Jersey Municipals Fund, Smith Barney Shearson
15 Telecommunications Trust, Travelers Series Fund Inc., Smith Barney Trust II, Smith Barney World
16 Funds Inc., Salomon Brothers Opportunity Fund Inc., Salomon Brothers Series Funds Inc., Smith Barney
17 Income Funds, Salomon Funds Trust, Smith Barney Allocation Series, Inc., Collectively Known as
18 “Proprietary Funds Registrants,” Citigroup Global Markets Holdings, Inc., formerly known as Salomon
19 Smith Barney Holdings, Inc., CitiGroup, Inc., Dwight B. Crane, Joseph J. McCann, Burt N. Dorsett, Rose
20 C. Cornelius, Elliot S. Jaffe, John Does 1-100, Andrew L. Breech, William R. Hutchinson, Paul Hardin,
21 Lee Abraham, Paul Ades, Lloyd J. Andrews, Victor K. Atkins, Walter E. Auch, Herbert Barg, Allan J.
22 Bloostein, Martin Brody, Abraham E. Cohen, Paolo Cucchi, Jane F. Dasher, John Ellis, Donald R. Foley,
23 Robert A. Frankel, Robert M. Frayn Jr., Leon P. Gardner, Michael Gellert, Rainer N. Greeven, Richard
24 E. Hanson, Susan M. Heilbron, Frank G. Hubbard, Howard J. Johnson, Armon R. Kamesar, Stephen E.
25 Kaufman, David E. Maryatt, Jerome H. Miller, Ken Miller, John J. Murphy, George M. Pavia, Roderick
26 C. Rasmussen, John P. Toolan, Jerry A. Viscione, Julie W. Weston, Robert Lawless, Salomon Brothers
27 Emerging Markets Debt Fund Inc., Salomon Brothers Appreciation Fund Inc., Smith Barney Investment
28 Funds Inc/MD/, Smith Barney Shearson Oregon Municipal Fund,
29
30 Defendants.***
31 __________________________________________
***
The Clerk of Court is respectfully directed to amend the official caption as shown above.
3
1 APPEARING FOR APPELLANTS: JAMES J. SABELLA, Grant & Eisenhofer P.A., New York,
2 NY (Jerome M. Congress, Janine L. Pollack, and John
3 McFarlane, Milberg Weiss LLP, New York, NY; Charles
4 J. Piven, Brower Piven, A Professional Corporation,
5 Baltimore, MD; Jay W. Eisenhofer, Sidney S. Liebesman,
6 and Naumon Amjed, Grant & Eisenhofer P.A., New York,
7 NY, on the brief), for Plaintiffs-Appellants.
8
9 APPEARING FOR APPELLEES: SEAN M. MURPHY (James N. Benedict, C. Neil Gray, and
10 Andrew W. Robertson, on the brief), Milbank, Tweed,
11 Hadley & McCloy LLP, New York, NY, for Defendants-
12 Appellees Citigroup Asset Management, Citigroup Global
13 Markets Holdings Inc., Citigroup Global Markets Inc.,
14 Citigroup Inc., Phillip W. Coolidge, Heath B. McLendon,
15 R. Jay Gerken, Salomon Brothers Asset Management, Inc.,
16 and Smith Barney Fund Management LLC.
17
18 JEANNE M. LUBOJA, Willkie Farr & Gallagher LLP, New
19 York, NY (Joanna Rotgers, and Nancy McCabe, Willkie
20 Farr & Gallagher LLP, New York, NY; Marc De Leeuw,
21 Sullivan & Cromwell LLP, New York, NY, on the brief),
22 for Proprietary Fund, Registrant, and Independent
23 Director Defendants-Appellees.
24
25 Appeal from an order of the United States District Court for the Southern District of New York
26 (Crotty, J.). UPON DUE CONSIDERATION it is hereby ORDERED, ADJUDGED, AND DECREED
27 that the December 3, 2007 order of the district court be AFFIRMED in part and VACATED in part, and
28 the case REMANDED for further proceedings consistent with this order.
29 Plaintiffs-Appellants, investors in various mutual funds organized by Salomon Smith Barney
30 (n/k/a Citigroup Global Markets Inc.) (“SSB”), appeal from a December 4, 2007 final judgment of the
31 United States District Court for the Southern District of New York (Crotty, J.) dismissing two complaints
32 for failure to state a claim. Plaintiffs’ First Consolidated Amended Class Action Complaint (the “CAC”)
33 asserted thirteen claims for relief under various state and federal laws including, sections 11 and 12(a)(2)
34 of the Securities Act of 1933 (the “1933 Act”), 15 U.S.C. §§ 77k and 77l(a)(2), section 10(b) of the
4
1 Securities Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated
2 thereunder, 17 C.F.R. § 240.10b-5, and section 36(b) of the Investment Company Act of 1940 (the
3 “ICA”), 15 U.S.C. § 80a-35(b).
4 In a decision and order entered July 26, 2006, Judge Crotty granted Defendants’ motion to
5 dismiss all claims raised in the CAC. In re Salomon Smith Barney Mut. Fund Fees Litig., 441 F. Supp.
6 2d 579 (S.D.N.Y. 2006) (“SSB I”). The court dismissed the ICA section 36(b) claim on three grounds:
7 (1) Plaintiffs were required to, but did not, plead those claims derivatively; (2) Plaintiffs did not clearly
8 allege that the compensation complained of was received by investment advisers or affiliates, the only
9 people liable under section 36(b), and (3) Plaintiffs failed to allege sufficient factual allegations as to why
10 the total amount of fees was so disproportionately large that it could not have been the product of arm’s-
11 length bargaining. Id. at 597-603. However, the court granted Plaintiffs leave to replead their section
12 36(b) claim derivatively. Id. at 603.
13 The court dismissed Plaintiffs’ federal securities claims because Plaintiffs failed to properly
14 allege loss causation. Id. at 588-91. The court also found that Plaintiffs did not have standing to assert
15 federal securities claims with respect to funds in which they did not own shares, and on that basis,
16 dismissed all claims against Defendants whose only connection to the suit was to those funds. Id. at 608.
17
18 In a Second Consolidated Amended Complaint (the “SCAC”) filed on October 16, 2006,
19 Plaintiffs repleaded their section 36(b) claim derivatively. In a decision and order entered December 3,
20 2007, the district court again dismissed the section 36(b) claim, this time with prejudice, because
21 Plaintiffs’ allegations failed to satisfy the standard established by this Court in Gartenberg v. Merrill
22 Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982). In re Salomon Smith Barney Mut. Fund
23 Fees Litig., 528 F. Supp. 2d 332 (S.D.N.Y. 2007) (“SSB II”).
5
1 We assume the parties’ familiarity with the underlying facts, which are aptly summarized by the
2 district court in SSB I, and the issues presented on appeal.
3 We review a district court’s dismissal of a complaint pursuant to Federal Rule of Civil Procedure
4 12(b)(6) for failure to state a claim de novo. DiFolco v. MSNBC Cable LLC, 622 F.3d 104, 110 (2d Cir.
5 2010).
6
7 I. Securities Fraud Claims
8 We affirm dismissal of Plaintiffs’ securities fraud claims for substantially the same reasons
9 articulated by the district court. Plaintiffs have failed to adequately tie a material misrepresentation or
10 omission to an economic loss. See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 346-47 (2005); see also
11 Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 173 (2d Cir. 2005) (“[T]o establish loss causation,
12 a plaintiff must allege that the subject of the fraudulent statement or omission was the cause of the actual
13 loss suffered . . . .” (internal quotation mark and alteration omitted)). In other words, Plaintiffs do not
14 plead sufficient facts to support an inference that the information omitted or misrepresented regarding
15 improper steering, excessive fees, and conflicted transactions proximately caused a decline in the value
16 of their mutual fund shares.
17
18 II. ICA Claims
19 Section 36(b) of the ICA imposes a fiduciary duty on a mutual fund’s investment adviser “with
20 respect to the receipt of compensation for services.” 15 U.S.C. § 80a-35(b). Section 36(b) also provides
21 a private right of action to a mutual fund investor, against the fund’s investment adviser, “for breach of
22 fiduciary duty in respect of such compensation” paid to the investment adviser by the fund. Id. In Jones
23 v. Harris Associates L.P., the Court adopted this Circuit’s approach in Gartenberg as a proper
6
1 formulation for determining whether mutual fund fees violate section 36(b). 130 S. Ct. 1418, 1425-26
2 & n.5 (2010) (citing Gartenberg). Under Gartenberg, “the test is essentially whether the fee schedule
3 represents a charge within the range of what would have been negotiated at arm’s-length in the light of
4 all of the surrounding circumstances.” 694 F.2d at 928. In applying this test, “all pertinent facts must
5 be weighed” to determine whether an investment adviser’s compensation constitutes a breach of
6 fiduciary duty to mutual fund investors. Jones, 130 S. Ct. at 1425 (citing Gartenberg, 694 F.2d at 929).
7 Applying this standard, we find that dismissal of most of Plaintiffs’ section 36(b) claims was
8 warranted. However, Plaintiffs’ allegations regarding fees for transfer agent services state a claim. See
9 SCAC ¶¶ 85-86. Plaintiffs allege that Defendants caused the SSB Funds to negotiate a contract with an
10 SSB affiliate to replace the Funds’ existing transfer agent. Once it replaced the existing agent, the SSB
11 affiliate then sub-contracted with that agent to continue to perform virtually the same services that it had
12 previously performed, but at a steep discount. Rather than pass the resulting savings on to investors in
13 the form of lower fees, SSB’s affiliate kept the windfall, permitting Defendants to profit at the expense
14 of the SSB Funds and their investors.
15 In our view, the transfer agent arrangement alleged in the SCAC constitutes a garden variety
16 breach of fiduciary duty.1 We recently considered similar allegations in a case argued in tandem with
17 this one, and involving some of the same defendants. See Operating Local 649 Annuity Trust Fund v.
18 Smith Barney Fund Mgmt. LLC, 595 F.3d 86 (2d Cir. 2010). In Operating Local 649, we determined
19 that, as a result of the alleged transfer agent arrangement, the “shareholders were being grossly
20 overcharged for transfer agent services and [the investment adviser] was reaping the benefits.” Id. at 93.
21 In effect, “the Fund investors . . . were at the mercy of a faithless fiduciary.” Id. We have little trouble
1
See generally, Press Release, Securities and Exchange Commission, Citigroup to Pay $208
Million to Settle Charges Arising from Creation of Affiliated Transfer Agent to Serve Its
Proprietary Mutual Funds (May 31, 2005), http://www.sec.gov/news/press/2005-80.htm (last
visited June 8, 2011).
7
1 concluding that, as alleged, transfer agent services fees resulting from this particular arrangement bear
2 no reasonable relationship to the services rendered, could not have been the product of arm’s length
3 bargaining, and as a result, adequately support an alleged violation of section 36(b). This conclusion is
4 reinforced by reference to certain Gartenberg factors. See Amron v. Morgan Stanley Inv. Advisors Inc.,
5 464 F.3d 338, 340 (2d Cir. 2006) (listing Gartenberg factors). For example, with respect to the nature
6 and quality of services provided, the alleged transfer agent scheme suggests that Plaintiffs overpaid for
7 the transfer agent services that they received under the renegotiated contract. Defendants knowingly
8 inflated the price of the transfer agent services provided to Plaintiffs and pocketed the difference between
9 what they charged and what the services were worth.2 Thus, we remand to the district court for
10 reconsideration of Plaintiffs’ section 36(b) claim regarding the transfer agent fees.
11 We have considered the parties’ remaining claims and find them to be without merit.3
12 Accordingly, for the foregoing reasons, the judgment of the district court with respect to Plaintiffs’ 1933
13 Act and 1934 Act claims is AFFIRMED, while the judgment with respect to their ICA section 36(b)
14 claim is VACATED and REMANDED for further proceedings consistent with this order.
15 FOR THE COURT:
16 Catherine O’Hagan Wolfe, Clerk
2
Because the transfer agent services arrangement was only vaguely referenced, if at all, in the
CAC, our conclusion with respect to Plaintiffs’ securities fraud claims remains unchanged.
3
Because we affirm dismissal of Plaintiffs’ securities fraud claims, we do not consider whether
the named Plaintiffs can bring securities claims on behalf of investors in SSB Funds in which the
named Plaintiffs did not invest.
8