In August 2016, following a 25-day non-jury trial, the U.S. District Court for the District of New Jersey issued an opinion under the caption Sivolella v. AXA Equitable Life Insurance Company dismissing with prejudice claims brought under Section 36(b) of the Investment Company Act of 1940 (the 1940 Act) against AXA Equitable Funds Management Group, LLC (FMG) by holders of variable annuity contracts with AXA Equitable Life Insurance Company who had allocated assets to twelve mutual funds advised by FMG. The plaintiffs alleged that FMG had charged exorbitant fees for investment management and administrative duties while delegating substantially all of those same duties to sub-advisers and sub-administrators for nominal fees. In a lengthy analysis of testimony and evidence and a review of the facts through the framework outlined in Gartenberg v. Merrill Lynch Asset Management, Inc., the District Court concluded that the plaintiffs failed to meet their burden (1) to demonstrate that the defendants breached their fiduciary duty in violation of Section 36(b) of the 1940 Act, and (2) to have shown any actual damages. Following this decision, the plaintiffs appealed the decision of the District Court to the U.S. Court of Appeals for the Third Circuit.
On July 10, 2018, the U.S. Court of Appeals for the Third Circuit issued a non-precedential opinion affirming the decision of the U.S. District Court for the District of New Jersey to dismiss the claims brought by the plaintiffs (i.e., the petitioners in the Third Circuit appeal).
The Third Circuit stated that the petitioners were effectively requesting that the Third Circuit overturn the District Court’s factual findings and credibility determinations, which the Third Circuit refused to do. In considering the petitioners’ arguments, the Third Circuit evaluated the District Court’s findings with respect to five of the six Gartenberg factors. Specifically, the Third Circuit reviewed the District Court’s conclusions with respect to (1) the independence, expertise, care and conscientiousness of the board in evaluating adviser compensation; (2) the nature and quality of the services provided to the funds; (3) any fall-out benefits; (4) comparative fee structures; and (5) the profitability of the funds to the adviser.4 After reviewing the District Court’s conclusions, the Third Circuit affirmed the District Court’s decision, stating that “the District Court wrote a thorough and comprehensive opinion that the Petitioners have failed to undermine.”
The Third Circuit’s opinion was issued under the caption Sivolella v. AXA Equitable Life Ins. Co., Case No. 16-4241.