Reasonable Doubt

A federal judge in New York has rejected claims by investors in nine Salomon Smith Barney mutual funds that the funds’ fees were too high.

U.S. District Judge Paul A. Crotty of the U.S. District Court for the Southern District of New York dismissed with prejudice the investors’ suits that claimed excessive fees charged by the funds’ advisers and distributors ended up costing the funds millions of dollars in losses.

Lacking Substance

Crotty asserted in his ruling that, even though the plaintiffs’ case had been “reconfigure(d)” after an earlier version also was thrown out, it still did not contain enough substance to sustain a charge of violating Section 36(b) of the Investment Company Act.

The plaintiffs—five individual investors—held shares in the funds between May 2003 and March 2004. They accused Salomon Smith Barney of the Section 36(b) violations as a fund distributor and four corporate affiliates that operated, managed, and advised the funds. One of the plaintiffs’ allegations was that the funds underperformed as compared with their peers, which meant that the fees “did not translate into superior investment advice.”

The suit charged defendants committed the 36(b) violations in relation to four types of fees: investment advisory fees; Rule 12b-1 fees; transfer agency fees, paid either to an affiliate or an independent third party to handle sales and redemptions of fund shares; and administrative fees.

Crotty said that, in deciding whether a fee is so excessive as to represent a fiduciary breach, a judge had to keep in mind the six factors laid out in a 1982 case from the 2nd U.S. Circuit Court of Appeals involving Merrill Lynch Asset Management.