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Courts to Reject More Excessive Fee' Cases

NEW YORK-Fund companies can anticipate fewer lawsuits from shareholders over what they claim are excessive fees, according to panelists at the Practising Law Institute's "Investment Management Institute 2007" here.

A recent case cemented the shift that started in 2002 that has turned the courts from the patron saints of shareholders to strict adherents to the letter of the law. Although the "excessive fee" provisions of the Securities Act of 1934 does not address shareholders' rights, the courts had, traditionally, considered their right to bring "excessive fee" charges implicit. Scores of shareholders sued fund companies, citing differences in share classes, among competitors and between retail and institutional customers.

But in 2002, in Olmstead v. Pruco, the Second Circuit Court ruled that there is no implied right allowing for shareholders to sue funds in which they have no direct holdings. "Implied rights were referred to as the ancient regime,'" said James N. Benedict, a partner at Millbank Tweed Hadly & McCloy. Since then, 50 such cases have been tossed out by 30 separate judges, he added.

Last July, in Baker v. American Century, the plaintiff argued that American Century, who Benedict represented, charged a different, lower fee to institutional investors. The court found the price difference "irrelevant" and dismissed the complaint with prejudice. Only last month, the courts threw out another case, again, with prejudice, against Eaton Vance.

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