In re American Funds Fee
Analysis Group provided economic analysis and expert testimony in the American Funds mutual funds fee litigation -- the first securities case to go to trial in the mutual fund industry in more than 20 years, and one of the largest securities matters ever to go to trial.
The plaintiffs had challenged more than $15 billion in fees that eight American Funds mutual funds paid to Capital Research and Management Company (CRMC) and American Funds Distributors (AFD) during 2003-2009. After a two-week trial, Judge Gary Feess of the US District Court for the Central District of California rejected all of the plaintiffs' theories of liability, concluding that "[p]laintiffs have failed to sustain their burden of proving that CRMC charged fees that were 'so disproportionately large that [they bore] no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining.'"
CRMC and AFD counsel Milbank, Tweed, Hadley & McCloy LLP retained Analysis Group and testifying experts to evaluate the merits of the plaintiffs' claims that the defendants had charged excessive investment advisory, transfer agency, Rule 12b-1, and administrative service fees to the funds at issue. Analysis Group's role included supporting testifying experts Dr. R. Glenn Hubbard, Dr. John W. Peavy III, and Dr. Michael W. Maher.
Dr. Hubbard, dean of the Columbia Business School, opined on the economic reasonableness of challenged fees and on economies of scale. He showed that the defendants charged the American Funds at issue some of the lowest fees in the industry. He also testified about competition in the mutual fund industry and showed that the defendants had shared substantial portions of any benefits from economies of scale. Dr. Hubbard's economies-of-scale analyses exposed fundamental flaws in the plaintiffs' expert's analysis. Judge Feess stated that the plaintiffs' expert's evaluation of economies of scale did not withstand Dr. Hubbard's critique.
Dr. Peavy, founder and chief executive officer of Peavy Financial Services, Inc., testified that the funds at issue performed well, and that the performance of the funds did not support the plaintiffs' assertions that growth in the funds' assets under management had harmed fund performance. Judge Feess noted that the plaintiffs' expert's attempt to support the claim that fund growth adversely affected investment performance was "flawed for a number of reasons, and failed to withstand the challenges of Defendants' expert, Dr. John Peavy, whose testimony the Court credits."
Dr. Maher, professor of management at the University of California, Davis, testified in response to plaintiffs' allegations that for the purposes of evaluating profitability one should ignore any expenses associated with employee compensation labeled profit sharing. Dr. Maher also testified that the relatively high proportion of costs that are joint-and-common to multiple American Funds mutual funds means that fund-level analyses of costs or profitability would be highly sensitive to choices made among reasonable cost allocation assumptions, that no single correct allocation method existed, and that any choice of an allocation method would be inherently arbitrary.
The Analysis Group case team included Managing Principals Michael Beauregard, Mark Egland, D. Lee Heavner, and Marc Van Audenrode; Principal Jimmy Royer; and Vice Presidents Peter Simon and Andrew Stichman.