By Rodney F. Tonkovic, J.D.
The district court sitting in Manhattan has dismissed a breach of fiduciary duty claim against Calamos Advisors LLC. According to the court, the majority of the Gartenberg factors weighed decisively in the adviser's favor. The court accordingly concluded that the shareholder plaintiffs failed to prove that Calamos breached its duty under Section 36(b) and dismissed the complaint (Chill v. Calamos Advisors LLC, October 9, 2019, Ramos, E.).
This suit was filed in early 2015 on behalf of the Calamos Growth Fund. Calamos Advisors serves as adviser to the fund under an investment management agreement that provides for an annual advisory fee. The complaint brought a claim under Investment Company Act Section 36(b) that the fees received by Calamos were, and remain, so disproportionately large that they bore no reasonable relationship to the services rendered and could not have been the product of arms-length bargaining.
Calamos has twice been unsuccessful in seeking dismissal of the claims. In March 2016, the court denied the firm's motion to dismiss the shareholders' claims alleging excessive compensation for investment adviser and distribution services. After 18 months of discovery, the plaintiffs dropped the challenge to distribution fees, and Calamos again filed a motion for summary judgment. In October 2018, the court granted Calamos' motion in part, but concluded that triable issues of fact remained as to the allegations concerning comparative fee structures, profitability, the nature and quality of services provided, and the overall conscientiousness of the trustees' evaluation of the fees (i.e., four of the six Gartenberg factors).
No breach. After a bench trial commencing in November 2018, the court concluded that the shareholder plaintiffs failed to prove that Calamos breached its duty under Section 36(b). The court first considered the trustees' evaluation of the fees and concluded that this factor weighed in favor of Calamos. According to the court, the weight of the credible evidence showed that the trustees were "fully informed, conscientious, and careful" in approving the annual fee. The evidence presented at trial was far in excess of what had been presented at the summary judgment stage and showed a robust review of the differences between services rendered to the fund versus Calamos' non-fund clients.
The court next found that Calamos' fees were not excessive when compared to fees charged by peer mutual funds or what Calamos charged its non-fund clients. First, while Calamos' fees were above industry average, they were still within the range charges by its peers; charging an above-average fee does not, without more, show a violation of Section 36(b). And, the higher fees charged to the fund versus Calamos' other accounts reflected the substantial difference in the administrative, legal, regulatory and compliance services provided plus the greater risks involved in the management of the fund, the court said.
Next, the profitability of the fund to Calamos also did not support a conclusion that the advisory fees were excessive. Here, the estimates of Calamos' profitability fell well within the ranges approved by other courts, and there was no other evidence indicating that the profit margins were excessive.
Finally, in considering the nature and quality of the services provided to the fund, the court noted that the fund's performance was "often underwhelming." While this factor supported the contention that the fees were excessive, it did so weakly because investors are usually more concerned with future performance over past performance. In this case, Calamos made numerous changes to its investment team and investment process in an effort to improve. The court also considered the fund's long-term performance, which included periods in which it outperformed peer funds.
Of the six Gartenberg factors, only one—the quality of services provided—even marginally supported the shareholders' claim, the court concluded. The five remaining factors weighed decisively in Calamos' favor. The court accordingly found that there was no breach of the fiduciary duty under Section 36(b), dismissed the complaint, and directed that the case be closed.
The case is No. 15 CIV. 1014.