Excessive-Fee Suits Not Fading Away

Despite the Supreme Court’s 2010 industry-friendly ruling in Jones v. Harris, excessive-fee lawsuits against fund firms are still being filed, says Dechert’s Matthew Larrabee. Such lawsuits are one subject covered in Larrabee’s new book on fund litigation and insurance, co-authored by David Kotler, also a partner at Dechert, and Eric Barber and Timothy Burns, partners at Perkins Coie.

Ignites: “Matt has just written a book about fund litigation and insurance coverage and so, just a basic question is, what are the biggest areas of liability for funds that you’re seeing right now in the industry?”

Larrabee: “In terms of things that are quite active right now in the trial courts, which is I think where people are paying a lot of attention right now, where we are getting and will continue to get new decisions, one of the areas where’s the most focus is on excessive-fee litigation.”

“Since Jones v. Harris, which I think most people would say was a decision that was relatively favorable to the industry, you might have expected that excessive-fee litigation would fade away. That has not been what we’ve experienced. There have been at least five cases filed since the Supreme Court ruled, and the rulings have been very mixed for the industry. A number of cases, including most recently the Axa Equitable case, trial courts have declined to dismiss these cases. And the problem from an industry perspective is, once that happens, the plaintiffs are allowed to engage in discovery, which is expensive and time-consuming, and you really do face the prospect of a long, protracted fight.”

“And even if a fund would expect to win — and it is worth noting the industry has prevailed in every case that’s been litigated to conclusion so far — even if you expect to prevail eventually, the cost and distraction of it can produce a lot of pressure to settle. And there have been some private settlements of those cases.”

“The Axa Equitable case was important because there was an argument made by Axa Equitable that, with respect to the life insurance industry or variable annuity products, the plaintiffs in those cases, the investors, did not have legal standing to bring a claim under the relevant statute, which is Section 36-b of the ‘40 Act.”

“And I think a lot of industry participants were watching to see which way that legal ruling would come out. And the judge in that case declined to follow that argument, rejected that argument and ruled that the plaintiffs did have standing. And so now there’s a lot of interest, maybe bordering on anxiety, people trying to watch and find out if that is going to induce additional lawsuits to be filed.”