Investors in various mutual funds managed by Principal Financial Group filed a derivative action under Section 36(b) of the Investment Company Act of 1940 in Iowa federal court in late October, alleging that the company charged excessive fees. The complaint in Curran et al. v. Principal Management Corporation & Principal Funds Distributor, Inc., S.D. Iowa No. 12-513, is available here. The investors’ lawsuit is the fourth iteration of a claim that dates back to late October 2009. The original complaint, Curran v. Principal Management Corporation, et al., S.D. Iowa No. 09-433, was superseded by an Amended Complaint, which was in turn followed by an “Anniversary Complaint” in October 2010 and a “Second Anniversary Complaint” in October 2011. The latest complaint is styled the “Third Anniversary Complaint.”
The named plaintiffs, Judith Curran and Michael Earp, filed the derivative action on behalf of investors in two funds managed by Principal Management Corporation: the Principal SAM Balanced Portfolio, and the Principal SAM Strategic Growth Portfolio. Each is a “fund of funds,” meaning that the mutual funds invest only in other mutual funds. At the heart of the lawsuit is a claim that Principal breached its fiduciary duties to investors by charging an investment management fee that was not commensurate with the advisory services actually performed – in this case, by charging a fee that was a fixed percentage of the assets of a given fund. The complaint alleges that, as the assets underlying the mutual funds increased, Principal failed to reduce its fees, thereby violating what the complaint characterizes as industry-standard economies of scale.
In light of recent Supreme Court precedent, the action would appear to face serious headwinds. Readers may recall that the Supreme Court’s decision in Ameriprise Financial, Inc. v. Gallus, 130 S.Ct. 2340 (2010), essentially adopted the demanding multi-factor test for claims under Section 36(b) first articulated by the Second Circuit in Gartenberg v. Merrill Lynch Asset Management, 694 F.2d 923 (2d Cir. 1982). And law review commentary as recently as last year confirms our memory that no plaintiff has ever successfully prevailed at trial on a Section 36(b) claim – though many fund managers (and their E&O carriers) have settled, rather than defend such a case to verdict.
What is interesting about the latest Curran complaint is that it is a transparent attempt by the plaintiffs to circumvent a central part of both Section 36(b) and the Supreme Court’s holding in Ameriprise, which limited the recovery of any damages for excessive fees to those paid during the one-year period prior to the filing of the complaint. One can only surmise that the Curran plaintiffs filed their suit in Iowa in 2009 following the Eighth Circuit’s ruling in Gallus v. Ameriprise Financial, Inc., which held to the effect that the “damage limitation yields only a retrospective limitation” on the claim, before the Supreme Court considered the case. See 561 F.2d 816, 825 (8th Cir. 2009). The Curran plaintiffs thus take the position that the Eighth Circuit’s holding that a Section 36(b) damages claim can continue to address fees paid up to the moment that final judgment is entered remains good law, because (they contend) the Supreme Court vacated the Eighth Circuit’s decision on different grounds.