25 Professors Submit Amicus Brief in Supreme Court Investment Advisory Case

Editor’s Note: This post is by John Coates of Harvard Law School.

On September 3, 2009, twenty-five corporate law and finance professors and scholars – including several contributors to this blog – filed an amici curiae brief in the case of Jones et al. v. Harris Associate L.P. The case is now pending before the United States Supreme Court. The brief is available here, and the names of those joining the brief are listed at the bottom of this post. The Supreme Court is currently scheduled to hear the case on November 2, 2009.

The Harris case is an appeal of the Seventh Circuit, in an opinion written by Judge Frank Easterbrook, noted previously on this blog here and here. That decision upheld the trial court’s dismissal of the case against Harris Associates, a mutual fund advisor, on the ground that as long as a mutual fund adviser does not breach the fiduciary duty owed to shareholders by failing to disclose all pertinent facts or otherwise hindering the fund’s directors from negotiating a favorable price, no judicial review of the reasonableness of the adviser’s fee is required to dismiss a claim under Section 36(b) of the Investment Company Act (ICA).

Judge Easterbrook’s opinion rejected the long-followed Second Circuit decision in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982). Gartenberg, while respecting deliberations of independent directors, required courts to consider those deliberations in light of multiple factors in determining whether investment adviser fees were excessive and, in dicta, suggested that evidence of comparable fees and competition among advisors should not be given much weight. A decision by the Seventh Circuit declining to rehear the case en banc generated a dissent from Judge Richard Posner.

The scholars’ amici curiae brief, filed in support of the defendant’s position, (1) addresses misperceptions regarding competition in the mutual fund industry today, (2) reviews facts about the industry that demonstrate that competition for investors is now an important force that constrains mutual fund advisory fees, and (3) suggests that the Supreme Court, in articulating the legal standard applicable to an assessment of whether mutual fund advisory fees are excessive under Section 36(b) of the ICA, should specify that two sets of facts relating to competition and advisory fees should be considered: (a) evidence of competition for investors by funds similar to the type of fund at issue; and (b) evidence of the extent to which such competition constrains the fees charged by the adviser and approved by the fund’s directors, and whether that competition is likely to produce fees similar to those generated by arm’s-length bargaining. Information about competition, the brief suggests, should inform the decisions of independent directors, evaluating advisory fees in the first instance, and of courts in the event of a fee challenge.

The brief was written by a team of lawyers at Bingham McCutchen LLP led by Frances S. Cohen that included David C. Boch, W. Hardy Callcott, T. Peter Pound, Jennifer L. Holden, and R. Matthew Prasse. The scholars joining the brief, listed alphabetically, are:

William J. Baumol
Academic Director
Berkley Center for Entrepreneurial Studies
Professor of Economics
New York University Stern School of Business

Michael H. Bradley
Professor of Law
Duke University School of Law
F.M. Kirby Professor of Investment Banking
Duke University Fuqua School of Business

William J. Carney
Charles Howard Candler Professor
Emory Law School

Stephen J. Choi
Murray and Kathleen Bring Professor of Law
New York University School of Law

Robert C. Clark
Harvard University Distinguished Service Professor and Austin Wakeman Scott Professor of Law
Harvard Law School

John C. Coates IV
John F. Cogan, Jr. Professor of Law and Economics
Harvard Law School

Allen Ferrell
Greenfield Professor of Securities Law
Harvard Law School

Joseph A. Grundfest
William A. Franke Professor of Law and Business
Stanford Law School
Co-Director of the Arthur and Toni Rembe Rock Center on Corporate Governance

Ehud Kamar
Professor of Law
University of Southern California Gould School of Law

Steven N. Kaplan
Neubauer Family Professor of Entrepreneurship and Finance
University of Chicago Booth School of Business

Edmund W. Kitch
Mary and Daniel Loughran Professor of Law
University of Virginia School of Law

Katherine Litvak
Professor of Law
Northwestern University School of Law

Simon M. Lorne
Vice Chairman and Chief Legal Officer of Millennium Management LLC
Co-Director
Stanford Law School’s Director’s College

Thomas Z. Lys
Eric L. Kohler Chair in Accounting and Professor of Accounting Information and Management
Northwestern University Kellogg School of Management
Professor of Law (by courtesy)
Northwestern University School of Law

Jonathan Macey
Sam Harris Professor of Corporate Law
Corporate Finance and Securities Law
Yale Law School

Fred S. McChesney
Class of 1967 James B. Haddad Professor of Law
Northwestern University School of Law
Professor
Northwestern University Kellogg School of Management

Adam C. Pritchard
Frances and George Skestos Professor of Law
University of Michigan Law School

J. Mark Ramseyer
Mitsubishi Professor of Japanese Legal Studies
Harvard Law School

Larry E. Ribstein
Mildred Van Voorhis Jones Chair
University of Illinois College of Law

Eric Roiter
Lecturer at Law
Boston University School of Law

Steven L. Schwarcz
Stanley A. Star Professor of Law and Business
Duke University School of Law
Founding Director
Global Capital Markets Center

Kenneth E. Scott
Ralph M. Parsons Professor of Law and Business, Emeritus
Stanford Law School

J.W. Verret
Assistant Professor of Law
George Mason University School of Law

Sunil Wahal
Jack D. Furst Professor of Finance
Arizona State University W.P. Carey School of Business

Roman L. Weil
V. Duane Rath Professor Emeritus of Accounting
University of Chicago Booth School of Business
Board Member
MainStay Group of Funds

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One Comment

  1. Phil Goldstein, Bulldog Investors
    Posted Monday, September 7, 2009 at 6:20 pm | Permalink

    How can 25 brilliant professors, lots of well paid securities defense lawyers and every judge that has considered this case all be blind to the obvious fact that the plaintiffs do not have constitutional standing to pursue it and the case must be dismissed, if necessary, sua sponte by the Supreme Court. See FW/PBS, Inc. v. Dallas, 110 S. Ct. 596 (1990) (“Although neither side raises the issue [of constitutional standing] here, we are required to address the issue even if the courts below have not passed on it, Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 1848-49, 23 L.Ed.2d 404 (1969), and even if the parties fail to raise the issue before us. The federal courts are under an independent obligation to examine their own jurisdiction, and standing ‘is perhaps the most important of [the jurisdictional] doctrines.’ Allen v. Wright, 468 U.S. 737, 750, 104 S.Ct. 3315, 3324, 82 L.Ed.2d 556 (1984).”)
    To establish standing under Article III of the Constitution the following is required:
    The “case or controversy” clause of Article III of the Constitution imposes a minimal constitutional standing requirement on all litigants attempting to bring suit in federal court. In order to invoke the court’s jurisdiction, the plaintiff must demonstrate, at an “irreducible minimum,” that: (1) he/she has suffered a distinct and palpable injury as a result of the putatively illegal conduct of the defendant; (2) the injury is fairly traceable to the challenged conduct; and (3) it is likely to be redressed if the requested relief is granted. See Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 472 (1982); Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 99 (1979); Simon v. Eastern Kentucky Welfare Rights Organization, 426 U.S. 26, 37 (1976).
    The fact that section 36(b) of the ICA of 1940 provides for a private right of action is not a substitute for establishing constitutional standing. The plaintiffs in this case have incurred no concrete injury. They chose to invest in a mutual fund which disclosed its fees in advance. Moreover, those fees were previously approved by the fund’s stockholders (as well the directors). In short, they got precisely what they bargained for, there was no deception and they suffered no injury at all.
    I took the liberty of sending an email to the defendants’ lawyers at Ropes and Gray advising them to file a motion for dismissal but they obviously did not take my advice. Is it because they don’t want to have to explain why they did not file a motion to dismiss right after the lawsuit was filed? Or am I missing something? You decide.

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