UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA ) ) ) ) ) ) ) ) ) ) ) )

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1 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 J. MICHAEL HENNIGAN (SBN ) hennigan@mckoolsmithhennigan.com MIKE MCKOOL (Admitted Pro Hac Vice) mmckool@mckoolsmith.com MCKOOL SMITH HENNIGAN, P.C. 00 South Grand Avenue, Suite 00 Los Angeles, California 00 Telephone: () -00 Facsimile: () - ZWERLING, SCHACHTER & ZWERLING, LLP ROBIN F. ZWERLING (pro hac vice) rzwerling@zsz.com JEFFREY C. ZWERLING (pro hac vice) jzwerling@zsz.com SUSAN SALVETTI (pro hac vice) ssalvetti@zsz.com ANDREW W. ROBERTSON (pro hac vice) arobertson@zsz.com ANA M. CABASSA-TORRES (pro hac vice) acabassa@zsz.com Madison Avenue New York, NY 000 Telephone: () -00 Facsimile: () - Attorneys for Plaintiff Thomas J. Kennis UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA 0 THOMAS J. KENNIS, v. Plaintiff, METROPOLITAN WEST ASSET MANAGEMENT, LLC Defendant. ) ) ) ) ) ) ) ) ) ) ) ) Case No. :-cv- PLAINTIFF S MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT S MOTION TO DISMISS Date: March, 0 Time: :0 a.m. Courtroom: 0 Judge: Hon. George H. Wu

2 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 TABLE OF CONTENTS PRELIMINARY STATEMENT... BACKGROUND REGARDING SECTION (b)... STATEMENT OF RELEVANT FACTS... ARGUMENT... I. THE APPLICABLE PLEADING STANDARD... II. III. RULE (a) IS SATISFIED WHERE THE ALLEGATIONS SUPPORT A PLAUSIBLE INFERENCE THAT THE FEES ARE DISPROPORTIONATELY LARGE TO THE SERVICES PROVIDED AND ARE OUTSIDE AN ARM S-LENGTH NEGOTIATED RANGE... DEFENDANT CHARGES ADVISORY FEES TO THE FUND OUTSIDE THE RANGE OF WHAT COULD BE NEGOTIATED AT ARM S LENGTH... A. The Large Disparity Between the Fees Charged to the Fund and Subadvised Funds Cannot Be Explained by Differences in the Advisory Services..... The Large Disparity in Fees Charged..... The Higher Fees Charged to the Fund Are Not Justified by Any Meaningful Difference in the Investment Advisory Services Provided The Subadvised Funds Fees Were Negotiated at Arm s Length..... The Fee Comparisons to the Subadvised Funds Support a Plausible Inference that the Fees Charged to the Fund Are Excessive.... B. Defendant s Argument that the Subadvised Fund Fee Comparisons Are Inapt Is Contrary to Applicable Law.... C. Defendant s Alternative Fee Comparisons Are Inapt.... i

3 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 IV. D. Plaintiff s Claim Is Not Based Upon a Lack of Fee Parity.... E. The Court Should Reject Defendant s Request for Judicial Notice... DEFENDANT REALIZED ECONOMIES OF SCALE AND HAS NOT APPROPRIATELY SHARED THOSE BENEFITS WITH THE FUND... A. The Complaint Adequately Alleges that MetWest Realized Economies of Scale and Failed to Share the Benefits.... B. Defendant s Cases Do Not Support Its Position.... V. APPROVAL OF THE ADVISORY FEES BY THE BOARD IS ENTITLED TO LITTLE OR NO DEFERENCE... A. Plaintiff Has Alleged a Deficient Board Approval Process.... B. Board Approval Process Cannot Be the Basis for Dismissal.... C. Shareholder Approval is Irrelevant.... VI. RESCISSION IS AVAILABLE PURSUANT TO SECTION (b)... 0 VII. PLAINTIFF IS ENTITLED TO A TRIAL BY JURY... 0 CONCLUSION... 0 ii

4 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 Cases TABLE OF AUTHORITIES Am. Cab, LLC v. Sunline Servs. Group, No. CV --GW (OPX), 0 WL (C.D. Cal. Apr., 0)... Am. Chem., Inc. 0(k) Ret. Plan v. Principal Mgmt. Corp., No. :-CV-000-JAJ, 0 WL 0 (S.D. Iowa Sept. 0, 0)... 0,,, Amron v. Morgan Stanley Inv. Advisors Inc., F.d (d Cir. 00)... Ashcroft v. Iqbal, U.S. (00)... Bell Atl. Corp. v. Twombly, 0 U.S. (00)... Curd ex rel. SEI Int l Equity Fund v. SEI Inv. Mgmt. Corp., No. -, 0 WL (E.D. Pa. July, 0)...,, Curran v. Principal Mgmt. Corp. LLC, No. :0-cv-00, 00 WL (S.D. Iowa June, 00)... passim Daily Income Fund, Inc. v. Fox, U.S. ()... Davis v. Bailey, No. CIVA0CV000-WYD-OES, 00 WL (D. Colo. Dec., 00)... 0 Garcia v. Mortgage Elec. Registration Sys., Inc., No. EDCV -0-GW (AJWx), 0 WL 00 (C.D. Cal. July 0, 0)... Gartenberg v. Merrill Lynch Asset Mgmt., Inc., F. Supp. 0 (S.D.N.Y. )... Gartenberg v. Merrill Lynch Asset Mgmt., Inc., F.d (d Cir. )... iii

5 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 Gerritsen v. Warner Bros. Entm't Inc., No. CV -00 MMM (CWx), 0 WL 0 (C.D. Cal. Jan. 0, 0)... 0 Goodman v. J.P. Morgan Inv. Mgmt., Inc., No. :-cv-, 0 WL (S.D. Ohio Mar., 0)... passim Hunt v. Invesco Funds Group, Inc., No. H-0-0, 00 WL (S.D. Tex. June, 00)... In re BlackRock Mutual Funds Advisory Fee Litig., Civ. No. -, 0 WL (D.N.J. Mar., 0)... passim In re Davis New York Venture Fund Fee Litig., No. CV -LTS-HBP, 0 WL 00 (S.D.N.Y. Nov., 0)... passim In re Federated Mutual funds Excessive Fee Litig, No. :0cv, 00 WL 0 (W.D. Pa. Sept. 0, 00)...,,, In re Gartenberg, F.d, (d Cir. 0)... In re Goldman Sachs Mutual Funds, No. 0 Civ. (NRB), 00 WL n. (S.D.N.Y. Jan., 00)..., In re LDK Solar Sec. Litig., No. C-0-0-WHA (N.D. Cal. filed Apr., 00)... 0 In re Scudder Mutual Funds Fee Litig., No. 0 Civ. (DAB), 00 WL (S.D.N.Y. Aug., 00)... Jones v. Harris Assocs. L.P., F.d (th Cir. 00)..., Jones v. Harris Assocs. L.P., U.S. (00)... passim Jones v. Harris Assocs. L.P., F. Appx. (th Cir. 0)... iv

6 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 Jones v. Harris Assocs. L.P., No. 0 C 0, 00 WL 0 (N.D. Ill. Apr., 00)... Kalish v. Franklin Advisers, Inc., F. Supp. (S.D.N.Y. 0)... Kamen v. Kemper Fin. Servs., Inc., 00 U.S. 0 ()... Kasilag v. Hartford Inv. Fin. Servs., LLC, Civ. No. -0 (RMB/KMW), 0 WL 0 (D.N.J. Dec., 00)... passim Krantz v. Prudential Ins. Fund Mgmt. LLC, F. Supp. d (D.N.J. )... Krinsk v. Fund Asset Mgmt., Inc., F.d 0 (d Cir. )... Migdal v. Rowe Price-Fleming Int l, Inc., F.d (th Cir. 00)...,, Moreno v. Ross Island Sand & Gravel Co., No. :-CV-00-KJM-KJN, 0 WL 0 (E.D. Cal. Sept., 0)... 0 Pereira v. Farace, F.d 0 (d Cir. 00)... R.W. Grand Lodge of F. & A.M. of Penn. v. Salomon Bros. All Cap Value Fund, F. App x (d Cir. 0)... Redus-Tarchis v. New York Life Inv. Mgmt. LLC, -, 0 WL (D.N.J. Oct., 0)...,, Reso v. Artisan Partners Ltd. P ship, No. -CV--JPS, 0 WL 0 (E.D. Wis. Nov., 0)...,,, S.E.C. v. Rind, F.d (th Cir.)... 0 v

7 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 Schuyt v. Rowe Price Prime Reserve Fund, Inc., F. Supp. (S.D.N.Y. )... Sprewell v. Golden State Warriors, F.d (th Cir. 00)... Strigliabotti v. Franklin Res., Inc., No. C 0-00 SI, 00 WL (N.D. Cal. Mar., 00)... The Lynn M. Kennis Trust u/a DTD 0/0/00 v. First Eagle Inv. Mgmt., LLC, No. --SLR-SRF, 0 WL (D. Del. Oct., 0) (... passim Troy Group, Inc. v. Tilson, F. Supp. d (C.D. Cal. 00)... 0 Turner ex rel. Davis New York Venture Fund v. Davis Selected Advisers, LP, No. -, 0 WL (th Cir. Sept., 0)...,,,, 0 Zehrer v. Harbor Capital Advisors, Inc., No. C, 0 WL 0, * (N.D. Ill. Nov., 0)...,,, 0 Statutes U.S.C. 0a-(b)... Rules Fed. R. Civ. P. (a)...,, Fed. R. of Evid vi

8 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 Other Authorities David Swensen, Unconventional Success: A Fundamental Approach to Personal Investment (00)... Senate Committee on Banking & Currency, S. REP. NO., st Cong., st Sess. ()..., U.S. SECURITIES AND EXCHANGE COMMISSION, DIVISION OF INVESTMENT MANAGEMENT, PROTECTING INVESTORS: A HALF CENTURY OF INVESTMENT COMPANY REGULATION (May )... University of Pennsylvania s Wharton School of Finance and Commerce, A STUDY OF MUTUAL FUNDS, H.R. REP. NO. - ()... 0 vii

9 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 PRELIMINARY STATEMENT Defendant s investment advisory fee arrangements with the Metropolitan West Total Return Bond Fund (the Fund ) epitomize the conflicts of interest and potential for abuse that led Congress to enact (b) of the Investment Company Act of 0 (the ICA ). Unconstrained by competitive pressures, Defendant charges the Fund advisory fees that are as much as % higher than the fees negotiated at arm s length by other, independent mutual funds (the Subadvised Funds ) for investment advisory services. As the Fund has grown to substantial asset levels, Defendant has captured for itself the benefits of economies of scale in the form of higher fees and profits, without sharing those benefits with the Fund. Approval of the fees by the Fund s Board of Trustees (the Board ) has not served as an effective check on the fees charged. The facts and circumstances pertaining to the advisory fees charged to the Fund fall squarely within the standard of liability for evaluating (b) claims established by the U.S. Supreme Court in Jones v. Harris Assocs. L.P., U.S. (00). The large disparity between fees charged to the Fund and the Subadvised Funds supports a plausible inference that the fees charged to the Fund are disproportionate to the services provided and outside the range of what could be negotiated at arm s length. Every district court that has recently considered similar allegations has found them to satisfy the applicable pleading standard under Fed. R. Civ. P. (a). Unable to credibly contest Plaintiff s fee comparisons, Defendant instead proffers comparisons using fees charged by other investment advisers to their captive mutual funds. However, Jones cautions against exactly those types of comparisons, and holds that the arm s-length range of fees as those charged to the Subadvised Funds is the benchmark for evaluating challenged fees. Defendant s remaining arguments would compel far greater detail than is

10 Case :-cv-0-gw-ffm Document Filed 0// Page 0 of Page ID #:0 0 0 required by notice pleading and raise questions of fact that cannot be the basis for a motion to dismiss. In short, Defendant would require Plaintiff to prove his claim rather than plead it. BACKGROUND REGARDING SECTION (b) Congress adopted the ICA to regulate investment companies, including mutual funds. Typically, a mutual fund is created by an investment adviser, which is an entity separate from the fund. See Jones, U.S. at. The adviser selects the fund s directors, manages the fund s investments, and provides other services. Id. In this sense, a mutual fund is often referred to as captive of its adviser. Id. at. Recognizing that that relationship is fraught with potential conflicts of interest, and concerned about the potential for abuse in this structure, Congress enacted protections for mutual fund shareholders in the ICA. Daily Income Fund, Inc. v. Fox, U.S., - () (quotation marks and citations omitted). Congress amended the ICA in 0 to provide additional protections to shareholders. Among other amendments, Congress added a new (b): [T]he investment adviser of a [mutual fund] shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by [the mutual fund], or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser. U.S.C. 0a-(b). Section (b) creates a private right of action for fund shareholders to enforce the fiduciary duty created by the statute on behalf of the fund. See id. Section (b) reflects Congress s determination that the forces of arms-length bargaining do not work in the mutual fund industry in the same manner as they do in other sectors of the American economy. S. REP. NO. -, at (), reprinted in 0 U.S.C.C.A.N., 0. [I]nvestment advisers often charged mutual funds higher fees than those charged the advisers other clients, Daily Income Fund,

11 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 U.S. at (citing A STUDY OF MUTUAL FUNDS, H.R. REP. NO. -, at - 0 () ( Wharton Report )) and the principal reason for the differences in rates was that competitive factors which tend to influence rates charged other clients have not been substantially operative in fixing the advisory fee rates paid by mutual funds. Wharton Report at -. Section (b) also reflects Congress s intent to ensure that investors share equitably... in the economies available as a result of the growth and general acceptance of mutual funds. S. REP. NO. -, at (), reprinted in 0 U.S.C.C.A.N., 0. Congress recognized that investment advisers realize economies of scale because as mutual funds grew larger, it became less expensive for investment advisers to provide additional services. Migdal v. Rowe Price- Fleming Int l, Inc., F.d, - (th Cir. 00). Finally, (b) reflects Congress s conclusion that shareholders should not have to rely solely on the fund s directors to assure reasonable adviser fees. Kamen v. Kemper Fin. Servs., Inc., 00 U.S. 0, 0 () (quotation marks and citation omitted). Congress established (b) as a mechanism by which the fairness of the investment advisory fees could be tested in court. S. REP. NO. -, at (), reprinted in 0 U.S.C.C.A.N., 0. STATEMENT OF RELEVANT FACTS Nature and Quality of Defendant s Investment Advisory Services to the Fund Defendant serves as investment adviser to the Fund pursuant to an Investment Management Agreement between Metropolitan West Funds and MetWest (the IMA ).. The IMA requires MetWest to provide investment advisory services, including (a) supervising and managing the Fund s portfolio of investments; (b) Also available at All references are to the Complaint (Dkt. No. ).

12 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 providing advice and recommendations with respect to the investment of the Fund s assets; (c) placing orders for the purchase or sale of securities on behalf of the Fund; (d) reporting to the Board; and (e) overseeing the administration of the Fund s business and affairs. -0. For those services, the IMA requires the Fund to pay Defendant an annual fee that is calculated as a percentage of the Fund s assets under management or AUM.. At all relevant times, the Fund s investment advisory fee rate has been basis points or 0.% of the Fund s AUM.. The Fund paid Defendant $0,0,000 in investment advisory fees in fiscal year 0.. Fees Paid by Other Clients for MetWest s Investment Advisory Services MetWest also provides investment advisory services to other mutual funds. 0-. These mutual funds ( Subadvised Funds ) are organized and sponsored by financial institutions independent of MetWest (the adviser-sponsors ).. The Subadvised Funds are independent, rather than captive mutual funds of Defendants. Each adviser-sponsor has subcontracted with MetWest to provide investment advisory services to its funds.. Pursuant to those agreements, MetWest provides investment advisory services to each Subadvised Fund in exchange for a fee which is paid by the adviser-sponsor. Id. The investment advisory services provided to the Subadvised Funds are the same or substantially the same as the services provided to the Fund.. For example, like the Fund s IMA, the subadvisory agreement for the AZL Subadvised Fund requires MetWest to: (a) manage the investment operations and the composition of the assets of the AZL Subadvised Funds; (b) determine... what investment and securities will be purchased, retained, or sold by the AZL Subadvised Fund; (c) place orders for the purchase and sale of securities on behalf of the AZL Subadvised Fund; and (d) render to the Board such periodic and special reports as the Board or Manager may request. Compare 0 with.

13 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 For both the Fund and the Subadvised Funds, MetWest employs the same or substantially the same investment strategies and invests in the same types of securities.. The same portfolio managers and other investment professionals who manage the Fund also manage the corresponding Subadvised Funds.. MetWest uses the same or substantially the same investment strategies, research and analysis, and systems, technology, and other resources in providing investment advisory services to the Subadvised Funds as it uses in providing investment advisory services to the Fund.. The same or substantially the same legal, compliance, and administrative personnel are responsible for ensuring that MetWest s investment advisory services for both the Fund and the Subadvised Funds comply with applicable law, and for maintaining books and records relating to MetWest s provision of investment advisory services to both the Fund and the Subadvised Funds. -. Despite the virtually complete overlap in services provided, the fees that MetWest receives for providing services to the Subadvised Funds are significantly lower than the fees paid by the Fund for those same services, resulting in the Fund paying up to $. million annually in excessive fees. -. The higher fees paid by the Fund for advisory services pursuant to the IMA are not justified by any additional services provided to the Fund by Defendant or its affiliates.. Even Defendant admits that services provided to the Fund, other than investment advisory services, are provided pursuant to separate contracts with separate entities for separate compensation. 0. Economies of Scale Realized by MetWest While the Fund s assets have increased dramatically over the past several See Defendant s Memorandum of Points and Authorities in Support of Motion to Dismiss (Dkt. No. ) ( Def. Br. ) at n..

14 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 years, Defendant has benefitted from economies of scale that are not shared with the Fund. From 00-0, the Fund s AUM increased from approximately $. billion to $. billion, resulting in an increase in the advisory fees of more than % from approximately $ million to more than $0 million. -. This increase in advisory fees was not accompanied by a proportionate increase in the work or cost required to provide advisory services to the Fund.. As a result, MetWest realized economies of scale, which reduced the cost as a percentage of the Fund s AUM of providing advisory services to the Fund.. Because of the economies of scale realized as AUM increase, mutual fund advisory fee schedules often include breakpoints, which reduce a fund s fee rate as AUM increase.. Absent breakpoints, or if the breakpoints do not appropriately reduce the effective fee rate, the benefits of economies of scale accrue to a fund s investment adviser in the form of higher fees and profits.. Here, the Fund s investment advisory fee schedule does not include any breakpoints whatsoever, and requires the Fund to pay a rate of basis points on all AUM, resulting in the Fund not benefiting from economies of scale. -0. Board Approval of the Advisory Fees Charged to the Fund The Fund s Board has approved the IMA each year without devoting the time and attention necessary to assess the advisory fees charged to the Fund.. The Board passively accepted MetWest s rationalization for the fees charged and did not appropriately examine, among other things, the disparity between fees charged to the Fund and to the Subadvised Funds or any purported justification for such disparity. -. ARGUMENT I. THE APPLICABLE PLEADING STANDARD While Defendant attempts to impose a heightened pleading requirement referring to an exacting standard and an extremely high bar (Def. Br. at, ) it

15 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 is Rule s liberal pleading standard that governs the sufficiency of a (b) claim. See Strigliabotti v. Franklin Res., Inc., No. C 0-00 SI, 00 WL, at * (N.D. Cal. Mar., 00); see also The Lynn M. Kennis Trust u/a DTD 0/0/00 v. First Eagle Inv. Mgmt., LLC, No. --SLR-SRF, 0 WL, at * (D. Del. Oct., 0) ( First Eagle ), report and recommendation adopted sub nom. The Lynn M. Kennis Trust U/A DTD 0/0/00 v. First Eagle Inv. Mgmt., LLC, No. CV --SLR/SRF, 0 WL (D. Del. Dec., 0); Goodman v. J.P. Morgan Inv. Mgmt., Inc., No. :-cv-, 0 WL, at * (S.D. Ohio Mar., 0). Rule (a)() requires only a short and plain statement of the claim showing that the pleader is entitled to relief. Fed. R. Civ. P. (a)(). This standard do[es] not require heightened fact pleading of specifics.... Bell Atl. Corp. v. Twombly, 0 U.S., 0 (00) ( Twombly ). To survive a motion to dismiss, a complaint must simply contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, U.S., (00) ( Iqbal ) (quoting Twombly, 0 U.S. at 0). While this plausibility standard requires a plaintiff to show that success on the merits is more than a sheer possibility, it is not a probability requirement. Id. Under Rule (b)(), a court must: () construe the complaint in the light most favorable to the plaintiff, and () accept all well-pleaded factual allegations as true, as well as all reasonable inferences to be drawn from them. See Garcia v. Mortgage Elec. Registration Sys., Inc., No. EDCV -0-GW(AJWx), 0 WL 00, at * (C.D. Cal. July 0, 0) (citing Sprewell v. Golden State Warriors, F.d, (th Cir. 00)). II. RULE (a) IS SATISFIED WHERE THE ALLEGATIONS SUPPORT A PLAUSIBLE INFERENCE THAT THE FEES ARE DISPROPORTIONATELY LARGE TO THE SERVICES PROVIDED AND ARE OUTSIDE AN ARM S-LENGTH NEGOTIATED RANGE [T]o face liability under (b), an investment adviser must charge a fee that

16 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm s length bargaining. Turner ex rel. Davis New York Venture Fund v. Davis Selected Advisers, LP, No. -, 0 WL, at * (th Cir. Sept., 0) (citing Jones, U.S. at ). Plaintiff may state a (b) claim by alleging any combination of facts that plausibly support an inference that a particular fee, given all of the surrounding facts and circumstances, is disproportionately large to the services rendered in exchange for that fee. In re BlackRock Mutual Funds Advisory Fee Litig., Civ. No. -, 0 WL, at * (D.N.J. Mar., 0) (citation omitted). Numerous recent district court decisions have denied motions to dismiss (b) claims founded upon allegations similar to those here. See, e.g., In re Davis New York Venture Fund Fee Litig., No. CV -LTS-HBP, 0 WL 00 (S.D.N.Y. Nov., 0) ( In re Davis ); First Eagle, 0 WL ; In re BlackRock, 0 WL ; Goodman, 0 WL ; Reso v. Artisan Partners Ltd. P ship, No. -CV--JPS, 0 WL 0 (E.D. Wis. Nov., 0); In re Federated Mutual funds Excessive Fee Litig, No. :0CV, 00 WL 0 (W.D. Pa. Sept. 0, 00). Defendant simply ignores these decisions and relies instead on inapposite cases founded upon different allegations. III. DEFENDANT CHARGES ADVISORY FEES TO THE FUND OUTSIDE THE RANGE OF WHAT COULD BE NEGOTIATED AT ARM S LENGTH The Supreme Court in Jones held that courts considering claims under (b) must use[] the range of fees that might result from arm s-length bargaining as the benchmark for reviewing challenged fees. Jones, U.S. at. The Court explained that the fees paid by the adviser-defendant s other clients should be given the weight that they merit in light of the similarities and differences between the services that the clients in question require.... Id. at 0 (emphasis added). The

17 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 fees paid by other clients are probative of a breach of fiduciary duty under (b) where plaintiffs have shown a large disparity in fees that cannot be explained by the different services provided to other clients. Id. at 0 n.. The Supreme Court emphasized that, in order to be probative under (b), the fees used as comparison points must have been the result of negotiations conducted at arm s length (like the Subadvised Funds fees). Id. at 0-. Contrary to Defendant s position, Jones cautioned that courts should not rely too heavily on comparisons with fees charged to mutual funds by other advisers. Id. at 0. These comparisons are problematic because these fees, like those challenged, may not be the product of negotiations conducted at arm s length. Id. at 0- (citing Jones v. Harris Assocs. L.P., F.d, (th Cir. 00) (Posner, J., dissenting)). A. The Large Disparity Between the Fees Charged to the Fund and Subadvised Funds Cannot Be Explained by Differences in the Advisory Services. Consistent with Jones, Plaintiff has alleged that: () there is a large disparity between the investment advisory fees charged to the Fund by MetWest and the investment advisory fees charged to the Subadvised Funds by MetWest; () the disparity cannot be explained by any purported differences in the services provided because MetWest provides the same or substantially the same investment advisory services to the Fund and to the Subadvised Funds; and () the fees charged to the Subadvised Funds were the result of arm s-length negotiations.. The Large Disparity in Fees Charged. Defendant repeatedly asserts that the Complaint does not identify what the relevant bargaining range is. (Def. Br. at.) Yet, the Complaint clearly identifies the fees charged to the Subadvised Funds as the appropriate arm s-length negotiated fee rate from which Plaintiff draws his comparison. See -, -.

18 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 The Complaint further alleges that fee rates charged by Defendant to the Fund are as much as % higher than the fee rates charged by Defendant to the Subadvised Funds. See. The difference in fees is even more pronounced in dollars paid, with the Fund paying as much as $. million more in fees per year than they would pay pursuant to the fee schedules of the Subadvised Funds. See.. The Higher Fees Charged to the Fund Are Not Justified by Any Meaningful Difference in the Investment Advisory Services Provided. At the heart of a (b) claim is the relationship between the fees charged to the fund and the services rendered to the fund. Am. Chem., Inc. 0(k) Ret. Plan v. Principal Mgmt. Corp., No. :-CV-000-JAJ, 0 WL 0, at * (S.D. Iowa Sept. 0, 0). Because MetWest provides the same or substantially the same investment advisory services to the Fund and to the Subadvised Funds, there is no justification for charging significantly higher fees. Here, the IMA and the subadvisory agreements both require MetWest to provide the same or substantially the same types of investment advisory services. Compare with 0. The significantly higher fees charged to the Fund, therefore, cannot be justified by any meaningful difference in MetWest s investment advisory services. -0. The disclosures in the prospectuses of the Fund and the Subadvised Funds also show that the services are substantively identical. Defendant employs substantially the same investment strategies and invests in substantially the same types of securities for both the Fund and the Subadvised Funds.. The same portfolio managers and other investment professionals are involved in providing investment advisory services to both sets of funds and use the same research and analysis, systems, technology, and other resources. See -. Finally, because both the Fund and the Subadvised Funds are mutual funds registered under the ICA (see 0

19 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0, ) the same laws and regulations govern MetWest s provision of investment advisory services to both sets of funds. See. Assessing strikingly similar allegations, the court in Goodman explained: Plaintiffs have pled a notable disparity in the fees obtained for servicing the three funds with which they are involved and the subadvised funds, while concurrently pleading that the services provided to and resources involved in all of the funds are substantially the same. This latter point is important because it is the work done and not the label given to the work that will likely and ultimately prove dispositive of Plaintiffs claims. The prospectus disclosures and involvement by the same portfolio managers and investment professionals support the similarity allegations. 0 WL, at *; see also In re Davis, 0 WL 00, at *; In re BlackRock, 0 WL, at *.. The Subadvised Funds Fees Were Negotiated at Arm s Length. Defendant does not contest that the fees charged by MetWest to the Subadvised Funds were the result of arm s-length negotiations. See,,. Thus, the substantially lower fees charged by it to the Subadvised Funds provide the range of fees that could be negotiated at arm s length. See Jones, U.S. at.. The Fee Comparisons to the Subadvised Funds Support a Plausible Inference that the Fees Charged to the Fund Are Excessive. That the Fund pays as much as % higher fee rates for advisory services than the independent Subadvised Funds pay for the same or substantially the same services supports the inference that the Fund s fees are disproportionately large and outside the range of what could be negotiated at arm s length. See Jones, U.S. at 0 & n.. Every district court that has recently addressed similar allegations has agreed. See In re Davis, 0 WL 00, at * (denying motion to dismiss where

20 Case :-cv-0-gw-ffm Document Filed 0// Page 0 of Page ID #:0 0 0 Plaintiffs allege that, although [defendant] provides or provided substantially the same services to certain Subadvised Funds, the fees charged to those funds are lower than those charged to the Fund ); First Eagle, 0 WL, at * (finding allegations of the disparity between advisory fees charged to the funds and subadvised fund for substantially the same services sufficient to withstand a Rule (b)() motion to dismiss ); In re BlackRock, 0 WL, at * ( [A]ssuming that the Funds pay as much as 0% higher fees for BlackRock advisory services than the Sub-Advised Funds pay for the same or substantially the same services, Plaintiffs allegations support the inference that the Funds fees are disproportionately large and outside the range of what could be negotiated at arm s length for BlackRock s advisory services. ); Goodman, 0 WL, at * (noting the disparity in fees charged by defendant for servicing the funds at issue and certain subadvised funds while accepting allegations that the services provided to all of the funds are substantially the same ); see also Reso, 0 WL 0, at * (comparing fees charged by defendant to other funds that it managed for providing similar services and holding that the higher fees charged to the captive funds give rise to the inference that [defendant] has comparatively over-charged the funds in this case ); In re Federated, 00 WL 0, at *- (denying motion to dismiss where complaint alleged, inter alia, that defendants provide the same advisory services to other clients, who are able to negotiate at arm s-length, for substantially lower fees). Courts have also denied motions to dismiss in analogous cases where an investment adviser charged its captive funds an advisory fee rate substantially higher than the fee rate it paid to an independent subadviser to perform the same or substantially the same services. See, e.g., Curd ex rel. SEI Int l Equity Fund v. SEI Inv. Mgmt. Corp., No. -, 0 WL, at * (E.D. Pa. July, 0)(upheld claims based on investment adviser subcontracting the majority of its

21 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 investment advising duties to sub-advisers and keeping 0% of the investment management fees); Redus-Tarchis v. New York Life Inv. Mgmt. LLC, -, 0 WL, at * (D.N.J. Oct., 0) (denying motion to dismiss where investment adviser delegated substantially all of its management and advisory duties to subadvisers but retained nearly half of the management fees); Zehrer v. Harbor Capital Advisors, Inc., No. C, 0 WL 0, * (N.D. Ill. Nov., 0) (upholding claim alleging that defendant delegated primary investment management responsibilities to subadvisor yet retained almost half of the fees); Kasilag v. Hartford Inv. Fin. Servs., LLC, Civ. No. -0 (RMB/KMW), 0 WL 0, at * (D.N.J. Dec., 00) (where plaintiffs alleged that defendant charged the funds an average of three times what it cost to provide essentially the same investment management services, a plausible inference that the fees are excessive under (b) was raised); Curran v. Principal Mgmt. Corp. LLC, No. :0-CV-00, 00 WL, at * (S.D. Iowa June, 00) (finding allegations that adviser-sponsor charges more than the subadvisors, who allegedly provide the bulk of investment advice support the reasonable inference that adviser collected excessive advisory fees). B. Defendant s Argument that the Subadvised Fund Fee Comparisons Are Inapt Is Contrary to Applicable Law. Defendant derides the Subadvised Fund fee comparisons as inapt based upon mere nomenclature: that is, the MetWest Bond Fund pays what is called an advisory fee and the Subadvised Funds pay what is called a subadvisory fee. In a parallel situation, the Second Circuit had little trouble concluding that plaintiffs had adequately alleged a claim under (b) where defendant charged its captive funds a transfer agency fee that was significantly higher than the rate it negotiated at arm s length with an unaffiliated entity. R.W. Grand Lodge of F. & A.M. of Penn. v. Salomon Bros. All Cap Value Fund, F. Appx., 0 (d Cir. 0). The court held that the transfer agent arrangement... constitutes a garden variety breach of fiduciary duty and stated a claim under (b). Id. at 0-.

22 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 (Def. Br. at -.) But this is a distinction without a difference. [I]t is the work done and not the label given to the work that will likely and ultimately prove dispositive of Plaintiffs claims. Goodman, 0 WL at *. Therefore, regardless of whether the label is adviser or subadviser, Plaintiff has alleged the correct comparison Defendant provides the same or substantially the same services. See Jones, U.S. at 0 (fee comparisons should be given the weight that they merit in light of the similarities and differences between the services that the clients in question require (emphasis added)). Every district court that has addressed the same, so-called apples-to-oranges (Def. Br. at ) argument raised here by Defendant has rejected it. For example, the court in In re BlackRock explained: This argument, however, misses the mark.plaintiffs fee comparison is appropriate, as they have alleged that BRIM, in its capacity as a sub-adviser to the Sub-Advised Funds, provides the same or substantially the same investment advisory services as all the Defendants provide to the Funds. For purposes of this claim, the ultimate weight of this comparison is not before the Court. 0 WL, at *. Similarly, In re Davis held: Factual support for Defendants contention that advisor fees are not aptly compared to subadvisory fees is not apparent on the face of the Amended Complaint or in the disclosure documents referenced therein. Indeed, Plaintiffs affirmatively allege that Defendants provide their additional services to the Fund pursuant to separate contracts and for separate compensation, and that any additional services that are not separately compensated are not materially significant additional cost items for Defendants. These allegations, taken together with Plaintiffs showing of fee disparities and their allegations that the services provided at the disparate fee levels are substantially similar and the total compensation is excessive are sufficient, when taken as true for purposes of this motion practice, to state plausibly Plaintiffs Section (b) claims....

23 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: WL 00, at *; see also First Eagle, 0 WL, at * ( Although [defendant] disputes whether the comparison with the Subadvised Fund is relevant the ultimate weight of the comparisons is not before the court). Defendant argues that, as a subadviser to the Subadvised Funds, it only provides a portion or fraction of the services that it provides as an adviser to the Fund (see Def. Br. at, ). However, Defendant s arguments cannot be reconciled with the express terms of the relevant agreements, which require Defendant to provide the same or substantially the same investment advisory services to the Subadvised Funds as they provide to the Fund. Indeed, in Defendant s own description of the services that it provides as adviser, nearly all are also provided to the Subadvised Funds. (Compare Def. Br. at with 0.) Defendant s arguments that it has a more limited role when serving as a subadviser or bears greater liabilities as adviser (Def. Br. at ), raise evidencedependent contention[s] that cannot be afforded dispositive force in today s motionto-dismiss context. Goodman, 0 WL, at *. Other courts have consistently agreed. See In re Davis, 0 WL 00, at *; Redus-Tarchis, 0 WL, at *; First Eagle, 0 WL, at *; In re BlackRock, 0 WL, at * & n.; Curd, 0 WL, at *; Zehrer, 0 WL 0, at *; Am. Chem., 0 WL 0, at *; Kasilag, 0 WL 0, at *. In any event, even assuming Defendant provides additional services to the Fund that are not provided to the Subadvised Funds, including the amorphous other operational and management matters MetWest purports to perform (Def. Br. at ), Notably, while Defendant attaches exhibits to its motion, including the IMA, Defendant does not attach the subadvisory agreements, which would demonstrate that the investment advisory services provided to both the Fund and the Subadvised Funds are the same or substantially the same.

24 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 those services are either provided pursuant to separate contracts with separate entities for separate compensation, see 0, or do not justify the more than $ million in annual fees. As the court in In re BlackRock explained: While BlackRock argues that Plaintiffs assertions are clearly rebutted by the IMAs, the Court disagrees. Even if the Court were to assume that BRA [BlackRock] provided additional services under the IMA, the Court would also have to assume that the fee retained by BRA was proportionate to the services it performed. Having reviewed the relevant agreements, there is nothing in either the agreements or the pleadings that establish or assert that BRA s responsibilities in supervising the Funds are so plainly substantial as to warrant retaining its portion of the advisory fee, meaning that the Court would have to assume-based on the size of the Funds only-that the advisory fee was reasonable. 0 WL, at * n. (emphasis added). Defendant s reliance on the Ninth Circuit s decision in Turner is misplaced. That court did not consider, much less reject, comparisons to fees charged by the defendant to unaffiliated, subadvised mutual funds. Unlike the comparisons here, the Turner plaintiff compared: the performance of the fund in question to the performance of an index fund; and the advisory fees charged to the fund to the advisory fees charged by other advisers to other mutual funds, but he fails to allege that these other funds advisers provided the same services or pursued a similar investment strategy. 0 WL, at *. The Ninth Circuit rejected both comparisons because there were no allegations that the investment strategies of, or the services provided to, those other funds were comparable. Id. In contrast, different plaintiffs brought a (b) claim challenging the advisory fees charged to the same fund in Turner relying on subadvised fund fee comparisons, such as those See also Def. Br. at n..

25 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 alleged here. The court upheld the claims in the face of many of the same arguments raised by Defendant here. See In re Davis, 0 WL 00. C. Defendant s Alternative Fee Comparisons Are Inapt. Defendant submits alternative fee comparisons that it contends support a competing inference that the advisory fees charged to the Fund are within the range that could be negotiated at arm s-length. However, just as in Reso, such comparisons are of little value. Reso, 0 WL 0, at *. Defendant s comparison (see Def. Br. at -0) of fees charged by other advisers to their captive mutual funds is exactly the type of comparison that the Supreme Court in Jones cautioned against because such fees may not be negotiated at arm s-length and may themselves violate (b). See Jones, U.S. at 0-; see also Kasilag, 0 WL 0, at *; Curran, 00 WL, at *. Therefore, Defendant s reliance on such peer fund comparisons set forth in the Fund s annual reports (Def. Br. at ) are not probative. The record before the Court on this Motion does not include any facts: that the fees charged by the advisersponsors to the other so-called peer group funds were negotiated at arm s-length; that any services provided by those adviser-sponsors are the same or substantially the same as the services provided by MetWest to the Fund; or that those fees are not excessive themselves. As Judge Posner explained in a dissenting opinion cited favorably by the Supreme Court in Jones: The governance structure that enables mutual fund advisers to charge exorbitant fees is industry-wide, so [comparisons to fees charged to other mutual funds] would if widely followed, allow those fees to become the industry s floor. Jones v. Harris Assocs. L.P., F.d, (th Cir. 00). Even Defendant s authority rejects its arguments and recognizes that comparisons to the fees charged by other adviser-sponsors to their captive mutual funds are not particularly meaningful precisely because [they] do[] not address the particular

26 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 The Seventh Circuit s decision in Jones, on remand, is not to the contrary. As an initial matter, the Seventh Circuit dismissed the plaintiffs claims in Jones on summary judgment, and its decision does not address the pleading requirements for a Section (b) claim under Fed. R. Civ. P. (a). Compare Jones v. Harris Assocs. L.P., No. 0 C 0, 00 WL 0 (N.D. Ill. Apr., 00). Further, the plaintiffs in Jones relied on different types of fee comparisons not at issue here, comparing the fees charged by defendant to its captive mutual funds to fees paid by pension funds and other non-mutual fund clients. The Seventh Circuit found such comparisons lacking because the Plaintiffs have not proffered evidence that would tend to show that Harris provided pension funds (and other non-public clients) with the same sort of services that it provided to the Oakmark funds, or that it incurred the same costs when serving different types of clients. Jones v. Harris Assocs. L.P., F. Appx., (th Cir. 0). Here, in contrast, Plaintiff alleges that MetWest s fees for investment advisory services are excessive by comparing those fees with the arm s length bargained-for fees charged to other mutual funds (i.e., the Subadvised Funds) and have alleged that the services provided by Defendant to the Fund and the Subadvised Funds are the same or substantially the same. D. Plaintiff s Claim Is Not Based Upon a Lack of Fee Parity. Defendant s argument that (b) does not require fee parity (Def. Br. at ) is irrelevant because there are no such allegations in the Complaint. Plaintiff does not merely allege that the Fund s fee was higher than some of MetWest s other independent clients. Nor does Plaintiff allege that Defendant must negotiate the best deal possible. (Def. Br. at (quotations omitted).) Rather, consistent with services offered by the defendants in this case. Migdal, F.d at. Defendants reliance on Krinsk v. Fund Asset Mgmt., Inc., F.d 0 (d Cir. ) is unavailing. Krinsk was a post-trial decision dismissing claims where plaintiff failed to allege or prove that fees were excessive.

27 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 Jones, Plaintiff alleges facts demonstrating that the Fund pays advisory fees to Defendant that are disproportionately higher than the fees negotiated at arm s length by the Subadvised Funds for Defendant s advisory services, and that the difference in fees are not explained by any difference in the services provided. Such allegations cannot be characterized as a fee parity claim. Defendant s argument that the allegations regarding the fees paid by the Subadvised Funds are not enough to state a claim, notwithstanding Plaintiff s showing that the services provided by Defendant are the same or substantially the same, cannot be squared with the Supreme Court s holding in Jones that such comparisons should be given the weight that they merit in light of the similarities and differences between the services that the clients in question require, Jones, U.S. at 0; cannot be squared with Jones repeated instruction that courts should use[] the range of fees that might result from arm s-length bargaining as the benchmark for reviewing challenged fees, id. at ; and cannot be squared with the numerous cases after Jones, discussed herein, holding that such comparisons are probative of a claim under (b), all of which Defendant ignores. In any event, as discussed below, Plaintiff does not rely solely on comparisons to the Subadvised Funds, but also to facts supporting an inference of disproportionality, including Defendant s realization of economies of scale, and the failure of the Board to negotiate at arm s length. E. The Court Should Reject Defendant s Request for Judicial Notice Under Federal Rule of Evidence 0, the Court can take judicial notice of a fact that is not subject to reasonable dispute because it... can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned. Am. Cab, LLC v. Sunline Servs. Group, No. CV --GW (OPX), 0 WL, at * (C.D. Cal. Apr., 0). The Morningstar reports attached to the Declaration of Robert A. Skinner (Exhibits P and T (Dkt. Nos. - and -)) are

28 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 not capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned. In fact, the Terms of Use hyperlink contained in Exhibits P and T states: Neither Morningstar nor its Information Providers can guarantee the accuracy, completeness, timeliness, or correct sequencing of any of the Information on the Web site, including, but not limited to Information originated by Morningstar, licensed by Morningstar from Information Providers, or gathered by Morningstar from publicly available sources. There may be delays, omissions, or inaccuracies in the Information. See Thus, taking judicial notice of the Morningstar material is improper. See, e.g., First Eagle, 0 WL, at * (declining to consider similar Morningstar material in (b) action at the motion to dismiss stage). Moreover, it would be improper to take judicial notice for the truth of the contents of such documents. See Gerritsen v. Warner Bros. Entm t Inc., No. CV - 00 MMM (CWx), 0 WL 0, at * (C.D. Cal. Jan. 0, 0); see also Troy Group, Inc. v. Tilson, F. Supp. d, (C.D. Cal. 00) ( Similarly, SEC filings should be considered only for the purpose of determining what statements the documents contain, not to prove the truth of the documents contents. (citation omitted)). The two cases relied upon by Defendant do not support taking judicial notice of the Morningstar publications and analyses. With respect to the documents cited by Defendant, the requests for judicial notice were unopposed. See Curran, 00 WL, at * n.; Plaintiff s Opp n to Defs. Request for Judicial Notice (Dkt. No. ), In re LDK Solar Sec. Litig., No. C-0-0-WHA (N.D. Cal. filed Apr., 00) ( In re LDK ). Further, in In re LDK, the analyst report sought to be judicially notice was referenced in plaintiffs complaint. See In re LDK, Consol. Class Action Compl. (Dkt. No. ) (filed Mar. 0, 00 ). 0

29 Case :-cv-0-gw-ffm Document Filed 0// Page of Page ID #: 0 0 IV. DEFENDANT REALIZED ECONOMIES OF SCALE AND HAS NOT APPROPRIATELY SHARED THOSE BENEFITS WITH THE FUND Section (b) was enacted in large part because Congress recognized that as mutual funds grew larger, it became less expensive for investment advisers to provide the additional services. Congress wanted to ensure that investment advisers passed on to fund investors the savings that they realized from these economies of scale. Migdal, F.d at -. The work required to operate a mutual fund does not increase proportionately with the assets under management. [I]nvestment management efforts, the most important (and most expensive) input into portfolio management, do not increase along with portfolio size. A portfolio manager can invest $ billion nearly as easily as $ billion and $0 billion nearly as easily as $0 billion. (Size may impair performance, but it imposes little logistical challenge.) DAVID SWENSEN, UNCONVENTIONAL SUCCESS: A FUNDAMENTAL APPROACH TO PERSONAL INVESTMENT (00). Therefore, [a]s scale increases, fees as a percentage of assets ought to decline, allowing both fund manager and fund shareholders to benefit. Id. When coupled with the historical growth in AUM, Defendant s failure to institute breakpoints in the Fund s fee schedules has allowed Defendant to reap a windfall in the form of increased profits that are not justified by any change in the nature or quality of the services provided. A. The Complaint Adequately Alleges that MetWest Realized Economies of Scale and Failed to Share the Benefits. The factual allegations in the Complaint draw the plausible inference that Defendant benefitted from economies of scale and profited in managing the Fund while not sharing those benefits with the Fund. Plaintiff has alleged that (i) the Fund s AUM grew and remained substantially above historic assets levels, resulting in significant increases in the advisory fees charged to the Fund by Defendant; (ii)

30 Case :-cv-0-gw-ffm Document Filed 0// Page 0 of Page ID #:0 0 the increase in the Fund s AUM and advisory fees was not accompanied by a proportionate increase in the nature and quality of the services provided by Defendant or the effort required to perform those services; and (iii) the Fund s fee rate was not reduced through breakpoints or otherwise to reflect the economies of scale realized by Defendant. -, District courts, assessing substantially the same allegations regarding mutual fund fee schedules lacking any breakpoints, have found them sufficient to support a (b) claim. See First Eagle, 0 WL, at * ( The allegations in the complaint, taken as true at this stage of the proceedings, are sufficient to establish that FEIM did not adequately share the benefits of economies of scale with the Funds. ); Curd, 0 WL, at * ( Despite substantial growth in the SEI Funds net assets, SIMC has never applied any breakpoints. These allegations support a plausible claim for relief under (b). ); In re Federated, 00 WL 0, at * ( [D]efendants have completely failed to pass along any economies of scale gained by the fund s growth over recent years... and instead have consumed these savings for their own benefit... a practice which section (b) was aimed at curtailing. ). 0 0 See also U.S. SECURITIES AND EXCHANGE COMMISSION, DIVISION OF INVESTMENT MANAGEMENT, PROTECTING INVESTORS: A HALF CENTURY OF INVESTMENT COMPANY REGULATION n. (May ) ( An advisory fee that does not scale down as company assets increase consequently may yield enormous profits to the adviser, to the detriment of shareholders. ), available at Even where mutual fund fee schedules contain breakpoints, courts have found economies of scale allegations similar to those here sufficient. See Redus-Tarchis, 0 WL, at *0; BlackRock, 0 WL, at *; Kasilag, 0 WL 0, at *; Am. Chem., 0 WL 0, at *; Zehrer, 0 WL 0, at *.