Recent Section 36(b) Post-Trial Ruling Awards Complete Victory to Mutual Fund Investment Adviser

October 10, 2019

The U.S. District Court for the Southern District of New York issued a comprehensive post-trial ruling on September 30, 2019 in Chill v. Calamos Advisors LLC, holding that Plaintiffs failed to meet their burden to show that Calamos Advisors LLC (CAL) charged excessive advisory fees to the Growth Fund (Fund) in violation of Section 36(b) of the Investment Company Act of 1940. The Court’s 111-page post-trial ruling represents a complete victory for CAL, and it also will have important and favorable implications for the mutual fund industry going forward. Dechert LLP served as counsel to Defendant Calamos Advisors LLC.


Section 36(b) imposes a fiduciary duty on an investment adviser to a mutual fund “with respect to the receipt of compensation,” and gives mutual fund shareholders a private right of action to enforce that duty. The statute expressly assigns to any such plaintiff the burden of proof, and subsequent case law makes clear that a breach may be shown only where the fee charged 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.”3 Plaintiffs Saul and Sylvia Chill, shareholders in the Fund, filed suit in February 2015, claiming that CAL charged “excessive” advisory fees in violation of its fiduciary duty under Section 36(b).

The Court had granted partial summary judgment to CAL in September 2018, concluding that Plaintiffs had failed to raise triable issues of fact related to “fall-out benefits” and economies of scale, two of the six Gartenberg factors that courts typically consider in addressing Section 36(b) claims. Thus, at trial, evidence centered on whether the compensation received by CAL was excessive in light of the remaining Gartenberg factors – the nature and quality of services provided to the Fund and its shareholders, the profitability of the Fund to CAL, comparative fee structures, and the care and conscientiousness of the Fund’s board of trustees in evaluating the adviser’s fees. Having declined to rule on the parties’ motions to exclude certain expert testimony at the summary judgment stage, the Court also considered, following testimony at trial, whether each parties’ experts were qualified and offered admissible testimony


Following a two-week bench trial, the Court held that Plaintiffs had failed to come forth with evidence sufficient to meet their burden. The Court held that CAL’s witnesses provided credible, helpful testimony, while Plaintiffs’ witnesses and evidence entirely failed to support their claim that the Fund’s fee is excessive. The Court further found that neither of Plaintiffs’ career anti-mutual fund experts (Dr. Steven Pomerantz, Professor Mercer Bullard) were qualified to offer many of their purported opinions, and afforded little weight to their remaining opinions. In so finding, the Court recognized that Plaintiffs’ experts had failed to consider relevant evidence, were “wholly unqualified” to opine on several matters, and offered “evasive and inconsistent” testimony at trial.

The Court then addressed each of the Gartenberg factors in turn, starting first with the care and conscientiousness of the Independent Trustees’ review of the Fund’s advisory agreement. The Court concluded that the trial testimony confirmed that the Independent Trustees requested, received, and considered extensive information relating to the Fund, and followed a strong Board process.

Turning next to comparative fee structures, the Court rejected Plaintiffs’ contention that the Fund’s fees should be limited to fees charged to institutional or sub-advised accounts, finding that comparison “inapt” because managing the Fund entails greater services and risks than advising other types of accounts. Calamos is now the ninth consecutive decision to conclude that the services provided to and risks associated with managing a mutual fund are substantively different from those provided to and associated with institutional or sub-advisory accounts.

With respect to profitability, the Court rejected Plaintiffs’ attacks on the manner in which CAL calculated profitability for purposes of the Board’s annual consideration of the advisory fee. The Court concluded that although both parties presented competing profitability estimates, those estimates each fell within the range of profitability that had been approved by other courts. Even so, the Court held that CAL’s calculation (which allocated indirect costs according to assets under management) was consistent with industry standards and accepted accounting principles, and was therefore more appropriate than Plaintiffs’ alternative calculation (which, as the Court recognized, had nothing to do with accounting).

Finally, the Court concluded that the Independent Trustees were fully informed about the Fund’s performance history, which reflected that while the Fund had superb long-term performance, it had suffered more recent periods of underperformance. The Court noted that the Independent Trustees received detailed information concerning CAL’s efforts to “right the ship.” The Court credited the Board’s evaluation of CAL’s efforts to improve Fund performance, including the “numerous significant and costly” steps CAL took to enhance the quality of the services provided to the Fund. The Court held that the Board permissibly concluded that giving CAL additional time to improve the Fund’s performance record was in the best interests of the Fund and its shareholders.

Significance and impact on mutual fund industry

The Calamos ruling emphasizes the importance of credible witness testimony. The Court accorded significant weight to CAL’s fact witnesses and its experts, while finding that the testimony of Plaintiffs’ experts was entitled to little or no weight. Among other things, the Court noted that one of Plaintiffs’ experts was impeached at least nine times on the stand. The opinion also highlights the importance of preparation and presenting a clear and consistent narrative. The Court’s ruling recognizes the importance of the role of the Independent Trustees and the need for a transparent and robust Board process. The Court found that the Board was “fully informed, conscientious, and careful in approving [the Fund’s] annual advisory fee.”

This decision also may spell the end of the argument advanced by the plaintiffs’ bar that fees charged to other types of client accounts (e.g., institutional or sub-advisory accounts) should form the upper boundary of the fee charged to a mutual fund. The Court fully rejected Plaintiffs’ core contention that fees charged to institutional or sub-advisory clients should act as a ceiling for fees charged to a mutual fund, finding that significantly greater services and risks were entailed in advising the Fund than in advising CAL’s institutional or sub-advisory accounts.


1) Dkt. 235, No. 15-cv-1014(ER) (S.D.N.Y.). 
2) All factual statements are from public sources.
3) Jones v. Harris Associates, L.P., 559 U.S. 335, 346 (2009).

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