Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 1 of 48 UNITED STATES DISTRICT COURT DISTRICT OF MARYLAND ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

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1 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 1 of 48 UNITED STATES DISTRICT COURT DISTRICT OF MARYLAND NORTH VALLEY GI MEDICAL GROUP, CHRISTOPHER EVANS, JOHN KERNAN, JAMES GRUGAN, KAREN GRUGAN, -and- JOSEPH LIPOVICH, v. Plaintiffs, PRUDENTIAL INVESTMENTS LLC, Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No.: 1:15-cv JKB PLAINTIFFS' MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT'S MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

2 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 2 of 48 TABLE OF CONTENTS I. INTRODUCTION...1 II. STATEMENT OF THE FACTS...4 A. Regulation of Mutual Fund Advisory Fees...4 B. Defendant Prudential Charges Excessive Fees Relative to Services Provided...5 C. Defendant Prudential's Fees Are Excessive Based on the Limited Administrative Services Provided...6 D. Despite the Existence of Economies of Scale and Significant Increase in Advisory Fees, Defendant Has Failed to Share These Benefits with Shareholders...7 E. The Board of Trustees of the Funds...9 III. ARGUMENT...9 A. Legal Standard...9 B. Plaintiffs May Rely on Any Combination of Facts to State a Section 36(b) Claim...11 C. Plaintiffs Have Properly Pled a Section 36(b) Claim for Excessive Fees for Advisory Services Plaintiffs Have Properly Pled Section 36(b) Claims Based on Allegations that Prudential Delegated Its Investment Advisory Duties to the Subadvisers Yet Retained a Substantial Portion of the Advisory Fees...13 a. Plaintiffs' Sub-adviser Allegations Alone Demonstrate that Prudential Charged Excessive Fees...13 b. Defendant Resorts to Improper Factual Arguments to Attack Plaintiffs' Sub-adviser Allegations Plaintiffs Have Pled Sufficient Facts to Support an Inference that Defendant Prudential Enjoyed Economies of Scale and Did Not Share the Benefits with the Funds...20 a. Plaintiffs Have Pled Facts Demonstrating that Significant Economies of Scale Exist as to the Funds...20 b. Plaintiffs Adequately Allege that Prudential Did Not Share the Benefits of Economies of Scale with the Funds i -

3 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 3 of Plaintiffs Have Pled Sufficient Facts that Prudential's Advisory Fee Is Excessive Compared to the Fees Charged by the Funds' Sub-advisers...26 a. Plaintiffs Allege Sufficient Facts Demonstrating the Funds Underperformed Plaintiffs Have Pled Sufficient Facts Demonstrating that Prudential's Profits Are Excessive Plaintiffs Allege Facts Questioning the Care and Conscientiousness of the Board...35 IV. CONCLUSION ii -

4 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 4 of 48 TABLE OF AUTHORITIES CASES... PAGE(S) Acampora v. Birkland, 220 F. Supp. 527 (D. Colo. 1963) Am. Chems. & Equip., Inc. 401(K) Ret. Plan v. Principal Mgmt. Corp., No. 4:14-CV JAJ, 2014 WL (S.D. Iowa Sept. 10, 2014)... passim Amron v. Morgan Stanley Investment Advisors Inc., 464 F.3d 338 (2d Cir. 2006)... 22, 33, 38 Anand v. Ocwen Loan Servicing, LLC, 754 F.3d 195 (4th Cir. 2014) Ashcroft v. Iqbal, 556 U.S. 662 (2009) Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) Chill v. Calamos Advisors LLC, No. 15 CIV. 104 (ER), 2016 WL (S.D.N.Y. Mar. 28, 2016)... 11, 35, 39 Curd ex rel. SEI Int'l Equity Fund v. SEI Inv. Mgmt. Corp., No. CIV.A , 2015 WL (E.D. Pa. July 14, 2015)... passim Curran v. Principal Mgmt. Corp., LLC, No. 4:09-CV-00433, 2010 WL (S.D. Iowa June 8, 2010)... passim Doe v. Salisbury Univ., 123 F. Supp. 3d 748, 762 (D. Md. 2015) Dumond v. Mass. Fin. Servs. Co., No. Civ.A GAO, 2006 WL (D. Mass. Jan. 19, 2006)... 21, 37 Forsythe v. Sun Life Fin., Inc., 417 F. Supp. 2d 100 (D. Mass. 2006) Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982) Goodman v. J.P. Morgan Inv. Mgmt., Inc., No. 2:14-cv-414, 2015 WL (S.D. Ohio Mar. 4, 2015)... 18, 27, 28, 36 - iii -

5 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 5 of 48 Hoffman v. UBS-AG, 591 F. Supp. 2d 522 (S.D.N.Y. 2008)... 16, 23, 33, 38 In re Advanced Series Trust, et. al., SEC Release No , 2014 WL (Dec. 16, 2014) In re AllianceBernstein Mut. Fund Excessive Fee Litig., No. 04 CIV (SWK), 2006 WL (S.D.N.Y. Jan. 11, 2006) In re American Mutual Funds Fee Litigation, No. CV GAC, 2009 WL (C.D. Cal. Dec. 28, 2009) In re Blackrock Mut. Funds Advisory Fee Litig., No. CIV.A FLW, 2015 WL (D.N.J. Mar. 27, 2015)... 11, 18, 24, 27 In re Davis New York Venture Fund Fee Litig., No. 14CV4318-LTS-HBP, 2015 WL (S.D.N.Y. Nov. 18, 2015)... 18, 27 In re Eaton Vance Mut. Funds Fee Litig., 380 F. Supp. 2d 222 (S.D.N.Y. 2005) In re Federated Mut. Funds Excessive Fee Litig., No. 2:04CV352, 2009 WL (W.D. Pa. Sept. 30, 2009) In re Franklin Mut. Funds Fee Litig., 478 F. Supp. 2d 677 (D.N.J. 2007)... 26, 27, 32 In re Goldman Sachs Mut. Funds, No. 04 CIV (NRB), 2006 WL (S.D.N.Y. Jan. 17, 2006)... 16, 25, 26 In re Scudder Mut. Funds Fee Litig., No. 04 CIV (DAB), 2007 WL (S.D.N.Y. Aug. 14, 2007)... 16, 26 Intri Plex Techs., Inc. v. Crest Grp., Inc., 499 F.3d 1048 (9th Cir. 2007) Jones v. Harris Associates L.P., 611 F. App'x 359 (7th Cir. 2015)... 12, 28 Jones v. Harris Assocs. L.P., 537 F.3d 728 (7th Cir. 2008) Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010)... passim - iv -

6 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 6 of 48 Jones v. Harris Assocs., L.P., No. 04C8305, 2005 WL (N.D. Ill. Apr. 7, 2005) Kasilag v. Hartford Inv. Fin. Servs., LLC, No. CIV RMB/KMW, 2012 WL (D.N.J. Dec. 17, 2012)... passim Krantz v. Fid. Mgmt. & Research Co., 98 F. Supp. 2d 150 (D. Mass. 2000) Krantz v. Prudential Inv. Fund Mgmt. LLC, 305 F.3d 140 (3d Cir. 2002) Migdal v. Rowe Price-Fleming Int'l, Inc., 248 F.3d 321 (4th Cir. 2001)... 20, 32, 33, 38 Migdal v. Rowe Price-Fleming Int'l, Inc., No. AMD , 2000 WL (D. Md. Mar. 20, 2000) aff'd, 248 F.3d 321 (4th Cir. 2001)... 16, 17 Presley v. City of Charlottesville, 464 F.3d 480 (4th Cir. 2006)... 4, 10 Redus-Tarchis v. New York Life Inv. Mgmt. LLC, No. CV , 2015 WL (D.N.J. Oct. 28, 2015)... passim Reso ex rel. Artison Int'l Fund v. Artisan Partners Ltd. P'ship, No. 11-cv-873-JPS, 2011 WL (E.D. Wis. Nov. 18, 2011)... 11, 21, 25, 37 Ritz Camera & Image, LLC v. SanDisk Corp., 772 F. Supp. 2d 1100 (N.D. Cal. 2011) aff'd, 700 F.3d 503 (Fed. Cir. 2012) Sins v. Janus Capital Mgmt., LLC, No. 04-cv WDM-MEH, 2006 WL (D. Colo. Dec. 15, 2006)... 21, 22 Strigliabotti v. Franklin Res., Inc., No. C SI, 2005 WL (N.D. Cal. Mar. 7, 2005) Strougo v. BEA Assocs., 188 F. Supp. 2d 373 (S.D.N.Y. 2002)... 28, 33 Sylmark Holdings Ltd. v. Silicone Zone Int'l Ltd., 783 N.Y.S.2d 758 (N.Y. Sup. Ct. 2004) The Lynn M. Kennis v. First Eagle Inv. Mgmt. LLC, No SLR-SRF, 2015 WL (D. Del. Oct. 8, 2015)... passim - v -

7 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 7 of 48 Turner ex rel. Davis New York Venture Fund v. Davis Selected Advisers, LP, 626 F. App'x 713 (9th Cir. 2015)... 11, 16, 27, 28 Wicks v. Putnam Inv. Mgmt, LLC, No. CIV.A GAU, 2005 WL (D. Mass. Mar. 28, 2005) Zehrer v. Harbor Capital Advisors, Inc., No. 14 C 789, 2014 WL (N.D. Ill. Nov. 18, 2014)... passim STATUTES, RULES & OTHER AUTHORITIES 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure 1216 (3d ed. 2004) U.S.C. 80a-35(b)... 5 Federal Rules of Civil Procedure Rule 8(a)(2) Rule 12(b)(6)... 9 S. REP. NO , at 4 (1969), as reprinted in 1970 U.S.C.C.A.N , 5 - vi -

8 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 8 of 48 I. INTRODUCTION Plaintiffs North Valley GI Medical Group, Christopher Evans, John Kernan, James and Karen Grugan, and Joseph Lipovich (collectively, "Plaintiffs") are security holders in the Funds. 1 As detailed in the Complaint, Plaintiffs maintain that Prudential Investments LLC ("Defendant" or "Prudential"), 2 which was hired as investment adviser to the Funds to manage the investments, charged the Funds $201,743,012 for investment advisory services but delegated nearly all of its advisory responsibilities to its Sub-advisers, 3 while retaining for itself a staggering $103,045,188 in advisory fees. By retaining this substantial portion of the proceeds and charging excessive fees, Prudential has violated its fiduciary duties pursuant to section 36(b) of the Investment Company Act of 1940 ("ICA"), as amended by 15 U.S.C. 80a-35(b) ("Section 36(b)"). To support their Section 36(b) claims, Plaintiffs allege, inter alia, that: (i) Prudential retains a disproportionate amount of the investment advisory fee despite passing off nearly all of its primary investment advisory duties to Sub-advisers ( 25-44, 51-55); 4 (ii) Prudential realizes significant economies of scale which it fails to share with the Funds ( 56-71); (iii) Prudential's advisory fees are excessive when compared to the fees charged by the Sub-advisers, which perform substantially all of the 1 "Funds" refer to Prudential Jennison Growth Fund ("Growth Fund"), Prudential Jennison Mid Cap Growth Fund, Inc. ("Mid-Cap Fund"), Prudential Global Real Estate Fund ("Real Estate Fund"), Prudential Jennison Equity Income Fund ("Income Fund"), Prudential Short-Term Corporate Bond Fund, Inc. ("Short-Term Fund"), and Prudential Jennison Natural Resources Fund, Inc. ("Resources Fund"). 2 Defendant was formerly known as Prudential Investments Fund Management LLC and Prudential Mutual Fund Management LLC. 3 "Sub-advisers" refer to Jennison Associates LLC, Prudential Investment Management, Inc., and Prudential Real Estate Investors. 4 All paragraph references (" " or " ") are to Plaintiffs' Complaint (the "Complaint") filed on October 30,

9 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 9 of 48 Funds' investment management services ( 35-44, 47-55); (iv) Prudential receives huge profits for providing minimal services ( 35-55); and (v) the Funds' Board of Trustees (the "Board") has failed to act conscientiously and independently in reviewing, negotiating, and approving the Advisory Agreements (defined herein) with Prudential ( 72-77). Taken together, and construed in the light most favorable to Plaintiffs, these detailed allegations state a claim for relief under Section 36(b). Nonetheless, defendant Prudential has moved to dismiss Plaintiffs' claims contending that Plaintiffs cannot adequately state a claim under any set of facts (the "Motion"). Defendant's Motion, however, runs contrary to well-established authority interpreting Section 36(b), and improperly asks the Court to conduct an extensive fact-based inquiry at the pleading stage before any fact discovery has been taken. As set forth herein, Defendant's Motion must fail. Every single district court to recently consider similar sub-adviser allegations (i.e., that the investment adviser subcontracted most of its advisory services and improperly retained an excessive portion of the advisory fees for itself) has found them to satisfy the applicable pleading standard and largely denied the investment advisers' motions to dismiss. See, e.g., Redus-Tarchis v. New York Life Inv. Mgmt. LLC, No. CV , 2015 WL , at *6 (D.N.J. Oct. 28, 2015) ("New York Life") (denying motion to dismiss where investment adviser delegated substantially all of its management and advisory duties to sub-advisers but retained nearly half of the management fees); Curd ex rel. SEI Int'l Equity Fund v. SEI Inv. Mgmt. Corp., No. CIV.A , 2015 WL , at *5 (E.D. Pa. July 14, 2015) ("SEI Investments") (upholding claims based on investment adviser subcontracting the majority of its investment advisory duties to sub-advisers and keeping 40% of the investment management fees); Zehrer v. Harbor Capital Advisors, Inc., No. 14 C 789, 2014 WL , at *2 (N.D. Ill. Nov. 18, - 2 -

10 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 10 of ) ("Harbor") (upholding claim alleging that defendant delegated primary investment management responsibilities to subadvisor yet retained almost half of the fees). 5 Defendant ignores the weight of this authority and instead contends that the Complaint fails to state a claim under Section 36(b) because it lacks sufficient facts to show that Prudential charged the Funds' shareholders disproportionately large fees relative to the services rendered for the past year. This argument attempts to transform the standards of proof set forth in Gartenberg v. Merrill Lynch Asset Management, Inc. and Jones v. Harris Associates, L.P. into heightened pleading requirements. Specifically, Defendant misreads these and other decisions as requiring Plaintiffs to plead facts that demonstrate: (i) the Funds' fees were higher than those charged by other mutual funds; (ii) the Funds underperformed; and (iii) the Board lacked independence and engaged in a deficient decision-making process. MTD at 26-31, Neither Gartenberg nor Jones require Plaintiffs to plead such facts. Further, Defendant asks the Court to undertake an inappropriate fact-based inquiry into the nature, quality, and quantity of services performed by Prudential, based solely on the multitude of attorney-prepared, self-serving brochures, prospectuses, proxy statements and U.S. Securities and Exchange Commission ("SEC") orders improperly attached to or referenced in the Motion. MTD at 27-5 Several other Section 36(b) decisions addressing similar sub-adviser allegations are in accord. Kasilag v. Hartford Inv. Fin. Servs., LLC, No. CIV RMB/KMW, 2012 WL , at *3 (D.N.J. Dec. 17, 2012) (finding plaintiffs' allegation defendant charged the funds an average of three times what it cost to provide "essentially the same investment management services" raises a plausible inference its fees are excessive under Section 36(b)); Curran v. Principal Mgmt. Corp., LLC, No. 4:09-CV-00433, 2010 WL , at *9 (S.D. Iowa June 8, 2010) (finding allegations adviser "charges more than the subadvisors, who allegedly provide the bulk of investment advice" support the reasonable inference that adviser collected excessive advisory fees). Here, as throughout, all emphasis is deemed added and citations and footnotes are deemed omitted unless otherwise noted. 6 "MTD" refers to Defendant's Memorandum of Law in Support of Its Motion to Dismiss for Failure to State a Claim (filed Jan. 29, 2016)

11 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 11 of Courts have repeatedly held that this type of fact-driven inquiry Defendant advocates is wholly improper on a motion to dismiss, where Plaintiffs can state a Section 36(b) claim merely by "alleging any combination of facts that plausibly support an inference that a particular fee, given [the totality of] circumstances, is disproportionately large to the services rendered in exchange for that fee." Curran, 2010 WL , at *9; see Harbor, 2014 WL , at *4 (recognizing that defendant's factual assertions about the nature and quality of its advisory services were "better suited for summary judgment"); Kasilag, 2012 WL , at *9 (rejecting similar factual arguments raised by defendants). In sum, Plaintiffs' factual allegations against Prudential, which must be taken as true and interpreted in the "light most favorable" to Plaintiffs, satisfy Rule 8's liberal pleading requirement and sufficiently state claims for relief under Section 36(b). The Court should deny the Motion and reject Prudential's efforts to turn its Motion into a '"contest[] surrounding the facts, the merits of a claim, or the applicability of defenses."' Presley v. City of Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006) (discussing purpose of Rule 12(b)(6)). 7 II. STATEMENT OF THE FACTS A. Regulation of Mutual Fund Advisory Fees As early as 1935, Congress recognized that the regular capitalistic market forces "do not work in the mutual fund industry in the same manner as they do in other sectors of the American economy" because of the special relationship between a mutual fund and its investment adviser. S. REP. NO , at 4 (1969), as reprinted in 1970 U.S.C.C.A.N. 4897, "The adviser selects the fund's 7 While Plaintiffs believe they have alleged sufficient facts to state their breach of fiduciary claims, should the Court find otherwise, Plaintiffs request the right to amend the Complaint to cure any pleading deficiencies the Court may identify

12 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 12 of 48 directors, manages the fund's investments, and provides other services." Jones v. Harris Assocs. L.P., 559 U.S. 335, 338 (2010). In this sense, a mutual fund is often referred to as "captive" of its adviser. Id. at 349. This creates potential conflicts of interest between a mutual fund and its adviser that precludes them from negotiating their advisory agreement at arm's-length. Id. Because of concerns about the potential for abuse inherent in the structure of investment companies, Congress enacted the ICA, which regulates the relationship between a mutual fund and its adviser, and creates certain protections for mutual fund shareholders. Id. at 339; S. REP. NO , 1970 U.S.C.C.A.N. 4897, Among them, Section 36(b) of the ICA imposes upon advisers, and its affiliates, a fiduciary duty not to overcharge fund shareholders for any services it provides and provides shareholders with a private right of action to enforce this duty. 8 See Section 36(b); see also Jones, 559 U.S. at In addition, boards of directors are required to '"review and approve the contracts of the investment adviser'" annually. See id. B. Defendant Prudential Charges Excessive Fees Relative to Services Provided Defendant Prudential is the investment adviser to the Prudential family of mutual funds, which includes the Funds. 2, Under its advisory agreements with the Funds, Prudential was hired primarily to perform investment management services (i.e., to select an investment strategy, to research which assets are undervalued or are likely to appreciate, and to implement an investment plan by deciding what assets or securities to buy, retain, and sell for the fund) (hereinafter "Advisory 8 In 1970, Congress amended the ICA to provide additional protections to shareholders. Among other amendments, Congress added a new Section 36(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." 15 U.S.C. 80a-35(b). Section 36(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

13 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 13 of 48 Agreement" or "Advisory Agreements") In return for these services, defendant Prudential receives substantial fees $201,743,012 million in fiscal year 2014 for the named Funds, which constitute only six of the sixty-five funds in the Prudential fund complex , 55. Prudential, however, does not perform these investment advisory services itself. Instead, Prudential hires and delegates its investment decision-making responsibilities to its three Sub-advisers, pursuant to sub-advisory agreements (hereinafter "Sub-advisory Agreements") The substantial services provided by the Sub-advisers, which include evaluating and implementing the investment strategies for each of the Funds, are the most expensive, time consuming, and important investment management activities for any mutual fund Having wholly subcontracted its investment decision-making duties to the Sub-advisers, defendant Prudential's only remaining responsibilities under the Advisory Agreements include low cost administrative tasks, supervision and oversight of the Sub-advisers, and other minimal duties it shares with the Board , Despite subcontracting its investment advisory responsibilities to the Sub-advisers, defendant Prudential retains more than half of the advisory fees it receives from the Funds, which amounted to $103,045,188 million (a 104.4% mark-up) in fiscal year 2014 for the Funds alone C. Defendant Prudential's Fees Are Excessive Based on the Limited Administrative Services Provided The Advisory Agreements require Prudential to perform certain services that are encompassed by the investment advisory fee but are administrative in nature. 51. Under the Advisory Agreements, Prudential is required to provide back office-type administrative services, such as office space, bookkeeping, and regulatory reporting However, Prudential also delegates its responsibility for these services to its Sub-advisers. Id. Any remaining administrative services under the Advisory Agreement are limited to supervision and oversight of the Sub-advisers. Id

14 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 14 of 48 Further, the Funds assume direct responsibility for substantially all of the administrative costs associated with operating each of the Funds The Funds assume directly the substantial cost of: (i) share distribution; (ii) transfer agency; (iii) custody; (iv) shareholder reports; (v) trustee compensation; (vi) registration; (vii) insurance; (viii) legal; (ix) audit; (x) loan interest expense; (xi) commitment fees; and (xii) other miscellaneous expenses Prudential's Advisory Agreements disclaim any responsibility for these administrative services and directly allocate the substantial cost of these services to the Funds. Id. In fiscal year 2014, the Funds paid more than $134 million for administrative services outside of (and in addition to) the amount paid to Prudential under the Advisory Agreements. Id. As a result, the de minimis administrative expenses Prudential incurs do not justify the mark-up charged by Prudential to the Funds , D. Despite the Existence of Economies of Scale and Significant Increase in Advisory Fees, Defendant Has Failed to Share These Benefits with Shareholders Pursuant to its Advisory Agreements with the Funds, Prudential receives fees in the form of fixed percentages of the assets under management ("AUM") of the Funds The fee rates for these Funds have remained largely unchanged since inception although one of the Funds was started as early as the late-1980s, and several others during the mid-1990s. 56, Over the years, however, the AUM of the Funds has skyrocketed by tens of billions of dollars, resulting in corresponding increases in the investment advisory fees paid to Prudential through the fixed fee rates in the Advisory Agreements. Id. For example, between 2009 and the most recently reported fiscal year, the aggregate amount of advisory fees paid by the Funds to Prudential has increased by more than 400%, growing from approximately $40,274,619 to $201,743,012, respectively. 5. Mutual funds realize economies of scale which reduce the costs (as a percentage of AUM) of providing services as a fund grows in size. 57. Based on these well-established economies of scale, - 7 -

15 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 15 of 48 Prudential's fees (and profits) have grown exponentially while its costs have remained comparatively stable. Id. Indeed, the costs of Defendant's oversight and compliance responsibilities have remained the same, or have not meaningfully increased, despite the Funds' dramatic AUM growth. 58. Prudential continues to rely on the same or substantially similar reports to evaluate the Funds' Sub-advisers, and must comply with the same regulatory requirements regardless of a fund's AUM. Id. Further, Prudential has not retained a single new or additional sub-adviser for any of the Funds, despite tens of billions in AUM growth. Id. Where, as here, economies of scale are found to exist, investment advisers typically share these benefits with fund shareholders in one of two ways: (i) the adviser institutes (or revises) breakpoints in the fee schedule in the Advisory Agreements (whereby the adviser's fee rate decreases as AUM reaches certain levels); or (ii) the adviser grants the funds a fee waiver each year as AUM increases The Board has declined to negotiate either benefit for the Funds. 9 72, 75. Indeed, the breakpoint schedules for the Growth Fund, Mid-Cap Fund, and Resources Fund have remained unchanged since each Fund's inception in 1995, 2000, and 2004, respectively in the face of the billions in growth of the Funds' AUM , Further, the Advisory Agreements for the Short-Term Fund and the Real Estate Fund fail to include any breakpoints, regardless of how much Prudential's fees grow See also U.S. Securities and Exchange Commission, Division of Investment Management, Protecting Investors: a Half Century of Investment Company Regulation at 256 n.12 (May 1992) ("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 online at guidance/icreg50-92.pdf (last viewed Apr. 19, 2016). 10 Prior to July 1, 2014, the management fee rate for the Short-Term Fund was 0.40% regardless of AUM. After July 1, 2014, the advisory fee rate for the Short-Term Fund was set at 0.40% up to $10 billion and 0.39% over $10 billion. See Prudential Short-Term Corporate Bond Fund, Annual Report (Form N-CSR), at 62 (Feb. 25, 2015), available online at - 8 -

16 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 16 of , And, notably, Prudential has declined to waive any portion of the advisory fees it collects from the Funds. 60, 71. E. The Board of Trustees of the Funds Under the ICA, the board of trustees of each mutual fund is required to carefully review and either approve or, if necessary, renegotiate the terms of each advisory fee agreement on an annual basis. Jones, 559 U.S. at 340. The directors of the Funds, who work only part-time in these positions, have the responsibility for managing the sixty-five mutual funds in Prudential's fund complex at the same time, meaning they have minimal time and resources to devote to reviewing, much less renegotiating, the Advisory Agreements for each of the Funds Even if they had the time and resources to do so, the Board lacks the motivation to renegotiate these agreements to ensure the fee structures are fair and proportionate because of the conflicted relationship between the Board and Prudential As recognized by Congress in enacting the ICA, there is an inherent conflict of interest between the boards of directors and the investment adviser as a result of the influence wielded by investment advisers over the funds they create and the boards of directors they appoint. Jones, 559 U.S. at ; 77. This conflicted relationship is demonstrated here by the Board's failure to negotiate for lower fees or breakpoints despite the Funds' growth, their underperformance, and the Defendant's subcontracting of its primary advisory services. 72, III. ARGUMENT A. Legal Standard A court must deny a motion to dismiss based on Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Rule 12(b)(6)") so long as plaintiffs plead sufficient factual allegations "to raise a right to (last viewed Apr. 20, 2016)

17 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 17 of 48 relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citing 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure 1216, at (3d ed. 2004)). A complaint that demonstrates anything "more than a sheer possibility" that plaintiff is entitled to relief will survive a motion to dismiss. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The court must accept all factual allegations contained in the complaint as true, and construe them in the light most favorable to the plaintiffs. See id.; Presley, 464 F.3d at 483 ('"[T]he purpose of Rule 12(b)(6) is to test the sufficiency of a complaint' and not to 'resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses."'); Anand v. Ocwen Loan Servicing, LLC, 754 F.3d 195, 198 (4th Cir. 2014) (In deciding a Rule 12(b)(6) motion the court is required to "tak[e] the facts alleged in the complaint to be true and interpret[] them in the light most favorable to the plaintiff."); Doe v. Salisbury Univ., 123 F. Supp. 3d 748, 762 (D. Md. 2015) (Bredar. J.) (to avoid dismissal, "[p]laintiffs need only draft a complaint containing factual allegations that raise a plausible claim to relief"); Bell Atl. Corp., 550 U.S. at 556 ("[A] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and 'that a recovery is very remote and unlikely.'"). Rule 8(a)(2) only requires "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). This standard "do[es] not require heightened fact pleading of specifics." Bell Atl. Corp., 550 U.S. at 570. "Rule 8's liberal pleading standard" governs the sufficiency of a Section 36(b) claim. SEI Investments, 2015 WL , at *4; Forsythe v. Sun Life Fin., Inc., 417 F. Supp. 2d 100, 114 (D. Mass. 2006) ("there is no heightened pleading standard for claims under [Section] 36(b), the plaintiffs [ ] need only comply with the usual notice pleading requirements of [Rule] 8"); Am. Chems. & Equip., Inc. 401(K) Ret. Plan v. Principal Mgmt. Corp., No. 4:14-CV JAJ, 2014 WL , at *3-4 (S.D. Iowa Sept. 10, 2014) ("In stating a claim for

18 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 18 of 48 breach of fiduciary duty under 36(b), Plaintiff 'must meet no more rigorous a burden than that found in Federal Rule of Civil Procedure 8(a).'"). B. Plaintiffs May Rely on Any Combination of Facts to State a Section 36(b) Claim '"[T]o face liability under 36(b), an investment adviser must charge a fee that 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, 626 F. App'x 713, 716 (9th Cir. 2015) (citing Jones, 559 U.S. at 346). Plaintiff '"may state a [Section] 36(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."' See, e.g., Reso ex rel. Artison Int'l Fund v. Artisan Partners Ltd. P'ship, No. 11-cv-873-JPS, 2011 WL , at *5 (E.D. Wis. Nov. 18, 2011). Plaintiffs need not plead any particular fact, or set of facts, to satisfy Section 36(b)'s "relatively low standard of plausibly." Id. at *7 n.1; see also Chill v. Calamos Advisors LLC, No. 15 CIV. 104 (ER), 2016 WL , at *3 (S.D.N.Y. Mar. 28, 2016) (denying defendants motion to dismiss and noting that "Courts must look to all pertinent circumstances to determine if fees are excessive"); In re Blackrock Mut. Funds Advisory Fee Litig., No. CIV.A FLW, 2015 WL , at *4 (D.N.J. Mar. 27, 2015) ('"The plaintiff need not address all of the Gartenberg factors to survive a motion to dismiss if, when taken as a whole, the complaint demonstrates a plausible claim for relief under 36(b)."'). In the Motion, defendant Prudential attempts without support to transmute a recent decision by the Seventh Circuit into heightened pleading requirements for a Section 36(b) claim. MTD at Relying on Jones II (defined herein), Defendant contends that Plaintiffs were required to "allege" that:

19 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 19 of 48 (i) the Funds' advisory fees "were higher than comparable funds"; and (ii) the Funds "did not perform as well as comparable funds." MTD at 27. Notwithstanding that Plaintiffs' Complaint does in fact allege an appropriate fee range and underperformance, Defendant's reliance on Jones II for this proposition is misguided. See infra Section III.C.3. The decision in Jones II involved the standard of review on summary judgment, 11 not the pleading requirements under Rule 8 for a Section 36(b) claim, and the plaintiffs in Jones II, unlike Plaintiffs here, did not challenge the reasonableness of the fee disparity between the investment adviser and its sub-advisers. Jones v. Harris Associates L.P., 611 F. App'x 359, 361 (7th Cir. 2015) (hereinafter, "Jones II"). Further, Defendant's reading of Jones II is contrary to the Supreme Court's decision in Jones and several cases that have interpreted the pleading requirements for Section 36(b) claims. See Jones, 559 U.S. at ; see also Kasilag, 2012 WL , at *3; Curran, 2010 WL , at *9. In Jones, the Supreme Court explicitly recognized that Section 36(b) "requires consideration of all relevant factors" and rejected "any categorical rule" regarding comparisons. Jones, 559 U.S. at 349. Justice Alito, writing for the majority, warned that "courts should not rely too heavily on comparisons with fees charged to mutual funds by other advisers," noting that such "comparisons are problematic 11 In fact, many of the cases Defendant cites for the proposition that the Section 36(b) standard is a "heavy burden" involved standards of review at summary judgment or trial, or arose in other inapposite contexts. MTD at For example, Defendant cites to In re American Mutual Funds Fee Litigation for the proposition that the Gartenberg standard "establishes a 'very high hurdle to overcome'" but to the extent this is true, it refers to the standard of proof as opposed to the pleading standard. See No. CV GAC (RNBx), 2009 WL , at *3 (C.D. Cal. Dec. 28, 2009) (applying the Gartenberg standard and factors at trial); MTD at 26; Jones, 559 U.S. at 353 (examining the proper standard for Section 36(b) cases in an appeal of a motion for summary judgment); see also Jones, 559 U.S. at 354 (Thomas J., concurring) (recognizing that the Gartenberg approach should be used "principally in deciding which cases may proceed past summary judgment"); Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923, 933 (2d Cir. 1982) (analyzing a Section 36(b) case at the motion for summary judgment stage)

20 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 20 of 48 because these fees may not be the product of negotiations conducted at arm's length." Id. at Defendant seemingly invites this Court to abandon Jones' admonition and codify "problematic" fee and performance comparisons into "categorical" pleading requirements for Section 36(b) claimants. MTD at The Court should decline this invitation. As shown below, Plaintiffs have pled sufficient facts that, taken together, support their claims that Defendant charged the Funds excessive fees when compared to the services rendered. C. Plaintiffs Have Properly Pled a Section 36(b) Claim for Excessive Fees for Advisory Services Plaintiffs' well-plead allegations are sufficient to show that defendant Prudential charged an excessive fee because: (i) Prudential retains a disproportionate amount of the investment advisory fee despite passing off nearly all of its primary investment management duties to Sub-advisers ( 25-44, 51-55); (ii) Prudential realizes significant economies of scale which it fails to share with the Funds ( 56-71); (iii) Prudential's advisory fees are excessive in comparison to the fees charged by the Sub-advisers to perform substantially all of the Funds' investment management services ( 35-44, 47-55); (iv) Prudential receives huge profits for providing minimal services ( 35-55); and (v) the Board has failed to act conscientiously and independently in reviewing, negotiating, and approving the Advisory Agreements with Prudential ( 72-77). 1. Plaintiffs Have Properly Pled Section 36(b) Claims Based on Allegations that Prudential Delegated Its Investment Advisory Duties to the Sub-advisers Yet Retained a Substantial Portion of the Advisory Fees a. Plaintiffs' Sub-adviser Allegations Alone Demonstrate that Prudential Charged Excessive Fees "At the heart of a 36(b) claim is the relationship between the fees charged to the fund and the services rendered to the fund." Am. Chems., 2014 WL , at *5. Plaintiffs' Complaint directly assails this relationship alleging Prudential charged the Funds $201,743,012 for investment advisory

21 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 21 of 48 services where it delegated substantially all of its investment advisory responsibilities to the Subadvisers, but retained for itself a staggering $103,045,188 in fees As noted above, several recent district court decisions have denied motions to dismiss Section 36(b) claims founded on sub-adviser allegations similar to those here. 12 New York Life, 2015 WL , at *6; SEI Investments, 2015 WL , at *5; Harbor, 2014 WL , at *2; Kasilag, 2012 WL , at *3; Curran, 2010 WL , at *9. For example, in SEI Investments, the court denied a motion to dismiss where the complaint alleged the adviser "subcontracts the majority of its investment advising duties to sub-advisers" leaving it "largely without any asset management responsibilities." 2015 WL , at *1. In SEI Investments, plaintiffs claimed defendant's advisory "fees [were] not based on [the] quality of services nor on the cost of providing services" to the funds. Id. at *5. The court found these allegations "raise[d] a plausible claim that [the adviser] charges fees that are disproportionately large in comparison to the services it provides to the [at issue] Funds, and could not have been the product of arm's length bargaining." Id. Similarly, in Harbor, plaintiffs alleged the adviser performed only general oversight duties that were '"minimal compared to the day-to-day responsibilities of managing [the Fund's] portfolio,"' which it assigned to the sub-adviser. See Harbor, 2014 WL , at *4 (alteration in original). The Harbor court found that these sub-adviser allegations supported "a plausible claim that [defendant's] fee 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"' and denied defendant's motion dismiss. Id. 12 Because the Sub-advisers provide all or substantially all of the Funds' investment advisory services, there is no justification for Prudential's significantly higher fees ( 35-55). Indeed, the court in American Chemicals, when confronted with a similar arrangement, stated: defendant's advisory fee "constitutes 'something for nothing'" as defendant in the capacity of investment adviser is "'mainly acting as a fee conduit'" to the Sub-advisers. Am. Chems., 2014 WL , at *

22 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 22 of 48 Here, Plaintiffs' core sub-adviser allegations ( 25-55) are analogous to those in SEI Investments and Harbor where the claims survived motions to dismiss. Plaintiffs similarly allege that Prudential delegated its most costly and important "day-to-day" investment advisory services to the Sub-advisers, 13 and that Prudential's "primary responsibilities of supervising and overseeing the Sub-advisers are minimal" compared to the "day-to-day implementation of the [Funds'] investment program," and therefore cannot justify the "mark-up charged by Defendant to the Funds over the fees paid to the Subadvisers." However, in certain key respects, Plaintiffs' claims are even stronger than those in SEI Investments and Harbor. 37, First, Prudential retains approximately 50% of the investment advisory fees it charges the Funds after paying the Sub-advisers to perform substantially all of its duties under the Advisory Agreements. 37, 53. This retained percentage, which largely amounts to profit for Prudential, is actually higher than the percentage of advisory fees retained by the defendant advisers in both SEI Investments and Harbor. See SEI Investments, 2015 WL , at *1 (where investment adviser retained 40% of the total advisory fees while Prudential retains approximately 50% of the total advisory fees); Harbor, 2014 WL , at *4 (where investment adviser retained 45% of the total advisory fees while Prudential retains approximately 50% of the total advisory fees). There are also additional supporting allegations not present in SEI Investments or Harbor In particular, Plaintiffs allege that Prudential requires the Funds to directly "assume substantially all of the 13 In particular, the Complaint recites the language from the applicable contracts to demonstrate that Prudential passed off substantially all of its advisory and administrative responsibilities to its Subadvisers, including: (i) the management of investment operations; (ii) security selection; (iii) brokerdealer selection and oversight; (iv) reporting to the Board; (v) book and record keeping; (vi) daily reporting and coordination with the Funds' custodian; (vii) maintenance of Funds' invested and uninvested cash assets; and (vii) various compliance functions

23 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 23 of 48 administrative costs associated with operating the [] Fund[s]." 45; supra Section II.C. In fiscal year 2014, the Funds collectively paid more than $100 million for these additional administrative services that were carved out of Prudential's Advisory Agreements. 46. Defendant cannot cite a single case where similar sub-adviser-based allegations were dismissed at the pleading stage. See MTD at Instead, Defendant relegates this line of applicable authority to a single footnote in its Motion and fails to articulate why these decisions are purportedly "distinguishable." MTD at 33. Throughout the Motion, Defendant also cites to a number of cases dismissing Section 36(b) claims but not one of these decisions contained sub-adviser allegations of the type alleged here, and many of the cited cases pre-date the Supreme Court's decision in Jones. See, e.g., Turner ex rel. Davis New York Venture Fund, LP, 626 F. App'x at 716 (post-jones decision affirming dismissal of complaint that did not contain any allegations related to adviser and sub-adviser fee disparity, and where plaintiff conceded defendant supplied the board with all the "relevant information"); Hoffman v. UBS-AG, 591 F. Supp. 2d 522, 539 (S.D.N.Y. 2008) (dismissing complaint that "offers no allegations about the actual services provided by the funds"); In re Scudder Mut. Funds Fee Litig., No. 04 CIV (DAB), 2007 WL , at *13-18 (S.D.N.Y. Aug. 14, 2007) (dismissing complaint that failed to allege that defendants' fees were disproportionately large); In re Goldman Sachs Mut. Funds, No. 04 CIV (NRB), 2006 WL , at *9 (S.D.N.Y. Jan. 17, 2006) (granting motion to dismiss because allegations regarding Rule 12b-1 fees do not suffice as allegations regarding advisory fees); Migdal v. Rowe Price-Fleming Int'l, Inc., No. AMD , 2000 WL , at *3 (D. Md. Mar. 20, 2000) aff'd, 248 F.3d 321 (4th Cir. 2001) (dismissing complaint that did not address what "relation exists between the disputed fees and the services provided in consideration for their payment")

24 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 24 of 48 Thus, Plaintiffs' well-pled sub-adviser allegations alone are sufficient to state a Section 36(b) claim against defendant Prudential. b. Defendant Resorts to Improper Factual Arguments to Attack Plaintiffs' Sub-adviser Allegations Unable to offer any reasoned basis for the Court to deviate from the host of decisions upholding Section 36(b) claims based on sub-adviser allegations, Defendant retreats to the same fact-based arguments that courts have rejected as inappropriate on a motion to dismiss. MTD at First, Defendant argues that it provides "important" supervisory and administrative responsibilities which justify its enormous fees. MTD at In support, Defendant offers statements from self-serving documents outside the four corners of the Complaint, such as SEC filings and orders, annual reports, and prospectuses, in an attempt to contradict the allegations of the Complaint. 14 Id. Defendant also points to vague contractual language in the Advisory Agreements that Prudential "continue[s] to have responsibility for all investment advisory services furnished pursuant to any Subadvisory Agreement." MTD at 12-13, 35. At the pleadings stage, however, the court is "in no position to determine what services Plaintiffs receive from [the adviser] or how much they can fairly be worth." Jones v. Harris Assocs., L.P., No. 04C8305, 2005 WL , at *2 (N.D. Ill. Apr. 7, 2005). 14 Even if properly subject to judicial notice, the SEC filings and other public records offered by Defendant may be considered by the Court for the sole purpose of showing they exist, not for the truth of the facts asserted therein, as Defendant is attempting to do here. MTD at 34-37; See Ritz Camera & Image, LLC v. SanDisk Corp., 772 F. Supp. 2d 1100, 1109 (N.D. Cal. 2011) aff'd, 700 F.3d 503 (Fed. Cir. 2012) (holding that a court may take judicial notice merely of the existence of SEC filings, but not for the truth of facts asserted therein); Intri Plex Techs., Inc. v. Crest Grp., Inc., 499 F.3d 1048, 1052 (9th Cir. 2007) (permitting courts to consider matters of public record only to the extent they contain undisputed facts)

25 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 25 of 48 Identical fact-driven arguments were roundly rejected in other recent Section 36(b) cases as "merit-based" and "better suited for summary judgment." Blackrock, 2015 WL , at *5 & n.5; 15 New York Life, 2015 WL , at *6; In re Davis New York Venture Fund Fee Litig., No. 14CV4318-LTS-HBP, 2015 WL , at *5 (S.D.N.Y. Nov. 18, 2015); The Lynn M. Kennis v. First Eagle Inv. Mgmt. LLC, No SLR-SRF, 2015 WL , at *5 (D. Del. Oct. 8, 2015); SEI Investments, 2015 WL , at *5; Harbor, 2014 WL , at *4; Am. Chems., 2014 WL , at *6; Kasilag, 2012 WL , at *3. For example, in New York Life, the defendant adviser argued that under the applicable advisory agreements it was required to: (i) "retain responsibility for all Fund management decisions"; (ii) "continually evaluate the performance of each subadvisor"; and (iii) "periodically make recommendations to the Board" whether "one or more subadvisors should be renewed, modified, or terminated." 2015 WL , at *6. In the Motion, Prudential asserts nearly the same argument, touting its "unique" responsibilities under the Advisory Agreements and noting: Once PI retains a subadviser, the Management Agreements each require PI to "(i) continually evaluate the performance of the Subadviser.; (ii) periodically make recommendations to the Fund's Board as to whether the contract with one or more Subadvisers should be renewed, modified, or terminated; and (iii) periodically report to the Fund's Board regarding the results of its evaluation and monitoring functions." 15 In Blackrock, the court rejected yet another argument now advanced by Prudential that there are "crucial differences between the responsibilities that PI shoulders and those the subadvisers undertake." MTD at 35. The Blackrock court recognized that the issue of "[w]hether or not [defendant's] fee bears a reasonable relationship to the services it performs in discharging any responsibilities it alone has as the adviser is beyond the scope of this motion" and denied defendant's motion to dismiss. Blackrock, 2015 WL , at *5 n.5; see also Goodman v. J.P. Morgan Inv. Mgmt., Inc., No. 2:14-cv-414, 2015 WL , at *5 (S.D. Ohio Mar. 4, 2015) (sustaining motion to dismiss and noting that "it is the work done and not the label given to the work that will likely and ultimately prove dispositive of Plaintiffs' claims")

26 Case 1:15-cv JKB Document 35 Filed 04/20/16 Page 26 of 48 MTD at 13. The court in New York Life denied defendants' motion to dismiss, even after it judicially noticed the advisory agreements, recognizing that: "courts have held in similar contexts that a defendant's claim that it 'provides the Funds with extensive administrative and investment services that are not delegated to the sub-advisers,' even if convincing, is a 'merits argument... that is more appropriate at summary judgment.'" New York Life, 2015 WL , at *7; see also Harbor, 2014 WL , at *4 (denying motion to dismiss Section 36(b) claim where plaintiff alleged that defendant adviser "delegates investment management responsibilities to [subadvisor] but retains almost half of the fees," despite defendant's claim that the allegation was "clearly rebutted" by advisory agreements); Kasilag, 2012 WL , at *3. Finally, Defendant mischaracterizes Plaintiffs' well-pled Section 36(b) claims as an "attack" on the "Manager of Managers" structure. MTD at 3-4, 15-16, But Defendant misapprehends the basis of this action; the Complaint challenges neither the legality nor propriety of Prudential's decision to hire sub-advisers for the Funds. Instead, Plaintiffs maintain that it is unreasonable for Prudential to assign substantially all of its investment advisory duties to the Sub-advisers while still retaining for itself more than $103 million of the investment advisory fees it charges the Funds. 53. For this reason, Defendant's reliance an on exemptive order from the SEC is misplaced. MTD at 15-16, 31-32, 37. The three-page SEC Order merely permits Prudential to retain affiliated sub-advisers without obtaining shareholder approval a fact that Plaintiffs do not contest. See In re Advanced Series Trust, et. al., SEC Release No , 2014 WL , at *2 (Dec. 16, 2014). The SEC Order does not address however: (i) the nature and quality of Prudential's advisory services; or (ii) the reasonableness of Prudential's retained advisory fees. Id. And Prudential does not claim, nor can it, that the SEC Order