A Win for Great-West; Legislation Aimed at Frivolous 36(b) Suits

On August 7, a district court in Colorado continued a string of victories for defendant advisers in Section 36(b) litigation. The court in Obeslo v. Great-West Capital Management, LLC et al. issued an opinion in favor of the adviser, concluding that the plaintiffs failed to meet their burden of proof that Great-West breached its fiduciary duty under Section 36(b) of the 1940 Act. As explained by lawyers from Dechert, the court ultimately adopted and incorporated by reference Great-West’s proposed findings of fact and conclusions of law based on the Gartenberg factors and found, among other things, that: the board was independent, qualified and engaged in a robust process in approving defendants’ fees; the advisory and administrative fees challenged by plaintiffs were within the range of fees paid by comparable funds; and the defendants’ profits were within the range of their competitors. The plaintiffs appealed the ruling on September 1. Additionally, Great-West has returned to court, seeking reimbursement from the plaintiffs’ counsel for as much as $1.5 million for pursuing legally flawed claims, according to media reports. Meanwhile, on Capitol Hill, Minnesota Congressman Tom Emmer, introduced the Mutual Fund Litigation Reform Act, which seeks to reduce “frivolous lawsuits against firms who are already heavily regulated to ensure investor protection.” Major industry groups praised the proposed legislation, which they said would help federal courts terminate before trial abusive lawsuits against mutual fund advisers, while preserving the right of shareholders to bring meritorious actions. The bill requires plaintiffs in Section 36(b) suits to spell out the factual basis for their claims with “clear and convincing evidence.” This standard is used for adjudicating claims under several federal statutes and would curb the growth of lawsuits brought without the evidence available to win on the merits, according to a release from Emmer’s office. The Mutual Fund Litigation Reform Act passed the House Financial Services Committee during the 115th Congress.