Earlier this month, U.S. District Judge William Alsup certified a plaintiff class in a lawsuit challenging fees and alleged “revenue sharing” practices with respect to mutual funds. Siemers v. Wells Fargo & Co., et al., No. C 05-04518 WHA (N.D. Cal. June 1, 2007). The court limited the class to claims relating to three mutual funds. Although the named plaintiff had sought to include more than 100 Wells Fargo funds, Judge Alsup limited the class on manageability grounds to the three funds owned by the named plaintiff.
Plaintiff claimed that defendants engaged in allegedly improper revenue sharing practices designed to increase the size of the funds and thereby increase the fees (calculated as a percentage of fund assets) received by defendants. Specifically, plaintiff challenged payments allegedly made to brokerage houses to induce them to steer clients into the mutual funds. Plaintiff asserted that, during a five-year period, payments totaling $372 million were made to 472 brokers. The complaint further alleged that the mutual funds concealed information about the nature and scope of the revenue sharing payments. After earlier rulings on motions to dismiss, the claims at issue at the time of the certification decision were those brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 36(b) of the Investment Company Act of 1940.
The named plaintiff, Ronald Siemers, invested in three Wells Fargo mutual funds. Plaintiff sought certification, however, of a class including investors in more than 100 Wells Fargo mutual funds, not just the funds in which Siemers invested.
Judge Alsup found that plaintiff Siemers had established all four prerequisites for class certification under Federal Rule of Civil Procedure 23(a), but focused much of his analysis on 23(a)(2), which requires commonality of the class members’ claims. He explained that, of the six elements necessary to establish a Section 10(b) claim, as outlined in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341-42 (2005), the first three – alleged material misrepresentation (or omission); scienter; and a connection with the purchase or sale of a security – were each common to all the mutual funds and thus lent themselves to common class-wide proof. Siemers at 5:17-24. He also found that the fifth and sixth elements – economic loss and “loss causation” – would be common across the class. Id. at 8:5-15.
Judge Alsup discussed at some length the fourth element, which requires reliance (referred to as “transaction causation”). Id. at 5:13-15. In some cases, plaintiffs are permitted to show reliance without regard to whether they actually read the alleged fraudulent materials, on the theory that the market price for a security was affected by the alleged fraud. Because mutual fund prices are determined based on net asset value rather than information in the market, however, the court found that the fraud-on-the-market theory would not apply here.
Plaintiff contended that, under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972), he did not need to show individual reliance where the putative class members were relying on alleged material omissions. Although Judge Alsup found this to be a mixed case involving both alleged misrepresentations and alleged omissions, he found that the case primarily rests on a key alleged omission – “the alleged studied refusal of the Wells Fargo sponsors to disclose their massive system of revenue sharing and its consequent financing [of] such ongoing distribution from the investor’s common fund (via sham fees) rather than from the sponsor’s own money.” Siemers at 7:10-12. Accordingly, he found that plaintiff’s claim met the test established by the Ninth Circuit for application of the Affiliated Ute rule with respect to reliance.
Having determined that the prerequisites for a class action under Rule 23(a) were satisfied, Judge Alsup then concluded that a class action was maintainable under Rule 23(b)(3) because, in his view, questions of fact common to the members of the class predominated over any questions affecting only individual members, and a class action was superior to other available methods for adjudication. Id. at 10:4-7. In considering the manageability of a class action as required by Rule 23(b)(3)(D), however, Judge Alsup concluded that a class action addressing all of the more than 100 Wells Fargo mutual funds would be unmanageable.
Accordingly, he limited the class to investors in the three funds in which plaintiff Siemers had invested:
Cutting a much larger figure is the final factor: ‘The difficulties likely to be encountered in the management of a class action.’ This factor decidedly militates against the massive class proposed by plaintiffs, a proposal to include all purchasers in all 100+ Wells Fargo mutual funds over the five-year period. To include such a large agenda would mean examination at trial of the fee structure and justifiability of one hundred or more separate funds over five years. It is true that many of the funds had similar fee structures and all had the same board and advisors. Yet, what might be an excessive fee for one fund might be fair for another. The difficulties and risks of advising and managing one fund versus another must be considered. The multiple Gartenberg factors must be weighed, fund by fund, fee by fee. And, the varying prospectuses (with their progressively better disclosures) for the 100+ funds, although many were identical while others differed, would be a mess to track, even more so to track and to overlay on the fee scenarios. This can be managed for three funds but not for 100+ funds.
A jury must decide this case. A jury must be able to comprehend and to keep straight the evidence and the contentions. In the Court’s judgment, it would be very hard for a jury, however conscientious, to manage the massive program served up by counsel. It would also be extremely difficult for the Court to manage such a project. It is not so simple as proving up liability and then later allowing a claims process. Proving up the amount of any excess/sham fee is and will be part of the liability case at trial, for if there were no sham fees then there can be no liability in the first place. Therefore, the Court will limit the class to the purchasers of the three funds actually purchased by our lead plaintiff.
Id. at 10:18-27 to 11:1-2. (The court had earlier ruled that plaintiff Siemers had no standing to pursue Section 36(b) claims as to funds he did not own. Judge Alsup does not appear to have addressed, however, whether Siemers would have had standing to pursue the 1934 Act claims as to funds he never owned.)