In re: DAVIS NEW YORK VENTURE FUND FEE LITIGATION

• Court: District Court, S.D. New York
• Decided: July 2, 2019
• Docket: 1:14-cv-04318
• Status: Unknown

Opinion

FILED UNDER SEAL PENDING PARTY REVIEW

f UNITED STATES DISTRICT COURT 2 SOUTHERN DISTRICT OF NEW YORK 4 5 6 Inre DAVIS NEW YORK VENTURE FUND No, 14 CV 4318-LTS-HBP 7 FEE LITIGATION 8 9

12 MEMORANDUM OPINION AND ORDER 13 14 Plaintiffs, who are shareholders of the Davis New York Venture Fund (the 15 “Fund”), bring suit on behalf of and for the benefit of the Fund under section 36(b) of the 16 Investment Company Act of 1940 (the “1940 Act”), 15 U.S.C. § 80a-35(b) (“Section 36(b)”), 17 against Davis Selected Advisers, L.P. (“Davis Advisers”), and Davis Selected Advisers-NY, Inc. (“Davis-NY,” and together with Davis Advisers, “Defendants” or “Davis”), alleging that 19 Defendants charged excessive advisory fees to the Fund and thereby violated their fiduciary duty 20 as investment advisers. Defendants move for summary judgment dismissing this action (Docket Entry No. 102) and to preclude certain opinions and testimony of Plaintiffs’ expert, Dr. Ian 22 Ayres (Docket Entry No. 118). Plaintiffs move to preclude the opinions and testimony of 23 Defendants’ expert Jeffrey Keil and evidence regarding Davis’ distribution services. (Docket 24 Entry No. 133.) 25 This Court has subject matter jurisdiction of this action pursuant to 28 26 U.S.C. § 1331. 27 The Court has reviewed the submissions of the parties carefully and, for the 28 following reasons, denies Plaintiffs’ motion to preclude evidence and testimony, and grants in 29 part and denies in part Defendants’ motion to preclude expert testimony. The Court grants 30 Defendants’ motion for summary judgment dismissing the case.

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l BACKGROUND!

2 The Fund 3 The Fund is a series of Davis New York Venture Fund, Inc., an SEC-registered 4 open-ended investment company. (Def. 56.1 St. 4.1.) The Fund is benchmarked to the S&P 500, 5 but is actively managed in accordance with a long-term growth strategy that is focused on 6 particular sectors. (Id. Jf 1-2.) 7 The Fund is governed by an eight-member board (the “Board”), which includes 8 members who have no employment or other affiliation with Defendants. (id. J 6.) The Board’s primary counsel is the Greenberg Taurig law firm. (Id. { 8.) In order to manage the 10 Fund, the Board contracts with several entities to provide services necessary for the Fund’s 11 operation. 12 Services Provided By Davis to the Fund; Other Service Provider Agreements 13 Since January 1, 2001, the Fund has retained Davis “to supervise and assist in the 14 management of the Fund’s business, and to provide investment advisory services” through an

The facts recited herein are undisputed unless otherwise indicated. Facts recited as undisputed are identified as such in the parties’ statements pursuant to S.D.N.Y. Local Civil Rule 56.1 or drawn from evidence as to which there is no non- conclusory contrary factual proffer. Citations to the parties’ respective Local Civil Rule 56.1 Statements “PI. 56.1 St.” (Docket Entry No, 113), “Def. 56.1 St.” (Docket Entry No. 105), “PL. 56.1 Resp.” (Docket Entry No. 114), “Def. 56.1 Resp.” (Docket Entry No. 125), and “Def. 56.1 Reply” (Docket Entry No. 126)) incorporate by reference the parties’ citations to underlying evidentiary submissions. 2 Plaintiffs proffer no evidence to indicate that any of the six board members whom Defendants characterize as independent was interested in or affiliated with the Fund within the meaning of 15 U.S.C. sections 80a-2(a)(3) (defining “affiliated person) or 80- a2(a)(19) (defining “interested person”). Jeffrey Keil, Defendant’s expert, identifies only Christopher and Andrew Davis as interested directors, each holding a partnership interest in Davis. (Keil Rep., Topetzes Decl., Ex. 14, App’x C.)

Investment Advisory Agreement (“IAA”). (id. J 10 (internal quotation marks and alterations omitted).) The Board also entered into other [AAs with Davis to advise the twelve other funds it 3 oversees, although the Fund is by far the largest as measured by assets under management. (PI. 4 56.1 Resp. 4 65; Robertson Decl., Ex. 2, at DSA-0014877.) 5 The [AA is approved by the Board annually in accordance with Section 15(c) of 6 the 1940 Act, 15 U.S.C. § 80a-15(c), and was amended in 2001, 2004, 2006, 2007, 2008, and 7 2009. (Def. 56.1 St. 710.) Davis is compensated with a fee equal to a certain percentage, 8 quantified as basis points, of the Fund’s assets under management. (Id. 11.) At all relevant 9 times, the number of basis points charged with respect to the assets varied according to a 10 schedule of breakpoints. (Id.) The rates ranged from 55 basis points for the first $3,000,000,000 Il under management to 48.5 basis points for assets under management over $18,000,000,000. 12 (Id.) Between June 16, 2013, and July 30, 2018 (the “Relevant Period”), the effective fee rates 13 were between 50.3 and 50.1 basis points. (Id. § 12.) In 2013, Davis earned $101.5 million in 14 fees, in 2014 it earned $101 million, in 2015 it earned $83.2 million, and in 2016 it earned $62.7 15 million, for a total of $348.4 million during the Relevant Period. (Pl. 56.1 St. 61.) 16 The Board entered into several contracts, outside of the IAA, to provide specific 17 services to the Fund with third parties or Davis and its affiliates. Davis Advisers and the Fund 18 entered into a Shareholder Services Agreement (“SSA”) that obligated Davis Advisers to 19 maintain a service to answer shareholder and broker-dealer inquiries, provide general 20 correspondence for mutual find redemption and exchanges, provide for account maintenance 2! and transfers, and supply all necessary supporting technology. (Def. 56.1 St. 13.) Davis

3 For example, in 2012, the Fund had over $19 billion of assets under management, whereas the other Davis funds individually managed between approximately $28 million and $515 million.

1 Advisers and the Board also executed a Fund Administrative Services Agreement (“FASA”), 2. which the Board also approved annually, to address the preparation of Securities and Exchange 3 Commission (“SEC”) filings, review tax returns, approve expense disbursements, coordinate with auditors, verify the security ledger, and maintain corporate books and records. (Id. J 15.) 5 The Fund also entered into a Transfer Agency and Service Agreement (the “Transfer 6 Agreement’) with Boston Financial Data Services, Inc. (“BFDS”), in 2006, under which BFDS 7 is to act as a transfer agent and establish shareholders’ accounts, issue their shares, process 8 redemption requests and dividend and distribution payments, and maintain shareholder records. 9 (PI. 56.1 St. 4 13.) The Board executed a Custodian Agreement with State Street Bank and Trust i0 Company (‘State Street”) fo provide a variety of accounting and custodial services, including 11 maintaining custody of Fund assets, collecting portfolio income, calculating daily net asset value, 12. making cash disbursements, reporting cash transactions, and maintaining Fund books and 13. records, (PI. 56.1 St. § 16; Form N-CSR for fiscal year ending on July 31, 2013, Robertson Decl, Ex. 33 at 20 (stating that State Street “is the Fund’s primary accounting provider’’).) 15 Davis Distributors LLC, pursuant to a distribution agreement (the “Distribution Agreement”), 16 underwrites, distributes for sale, and markets Fund shares. (PI. 56.1 §f 18-19.) The parties offer 17 divergent perspectives as to the type and scope of services procured by these agreements and 18 whether and to what degree the compensation for providing the services falling into categories 19 covered by the agreements was covered under the particular agreement or subsumed into Davis’ 20 duties and compensation as advisor under the IAA. (See Def. 56.1 St. qf] 10-18; PL 36.1 St. 7] 21 10-18; Def. 56.1 Reply ff 10-18.)

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1 Advisory Agreements with Unaffiliated Funds 2 In 1993, Selected Funds elected to replace its adviser with Davis after considering 3 17 other applicants. (Robert McGough, Directors Revolt, Switch Adviser for Selected Funds, 4 the Wall Street Journal, May 3, 1993, Topetzes Decl., Ex. 59.)* In 2006, the Clipper Fund 5 decided to replace its adviser with Davis, agreeing to a fee ranging from 65 basis points for the 6 first $500 million of assets under management to 48.5 basis points for assets under management 7 exceeding $10 billion. (Def. 56.1 St. 88.) During the Relevant Period, both of these funds 8 agreed to pay Davis advisory fees ranging from 55 basis points for the first $3 billion of assets 9 under management to 48.5 basis points for assets exceeding $10 billion under management. (Topetzes Decl., Ex. 24 at DSA-001509-10.) These fee structures differ from that of the Fund 11 during the Relevant Period only in that the Fund agreed to 48.5 basis points for assets exceeding 12 $48 billion, rather than the $10 billion breakpoint agreed to by the Clipper and Selected Funds. 13. (Def. 56.1 St. 11.) According to its prospectus, the Clipper Fund focuses on capital growth and 14 income and is non-diversified, holding between 15 and 35 stocks. (PI. 56.1 Resp. 190.) No 15 Davis personnel were on the boards of Selected Funds or Clipper Fund at the time those funds 16 initially selected and retained Davis as adviser. (Clipper Fund 2017 Annual Rep., Robertson 17 Decl., Ex. 148, at 7; Selected Fund 2017 Annua! Report, Robertson Decl., Ex. 151, at 6-7; Def. 18 56.1 St. §§] 88-89.) Christopher and Andrew Davis, both of whom are Davis officers and 19 members of the Fund’s Board, now sit on the boards of both the Clipper and Selected Funds. (Id.) They have sat on the Clipper Fund’s board since 2014 and on the Selected Fund’s board since 1998. (Clipper Fund 2017 Annual Rep., Robertson Decl., Ex. 148, at 33; Selected Fund

4 This Wall Street Journal article is admissible as an ancient document produced prior to 1998 for which authenticity is established. Ped. R. Evid. 803(16); see Fed. R. Evid. 902(6) (newspaper articles are self-authenticating).

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1 2017 Annual Report, Robertson Decl., Ex. 151, at 6-7.) It is undisputed that the members of the 2 boards of the Clipper and Selected Funds were independent when they first contracted with 3 Davis. (Def. 56.1 St. 7 88-89; PL. 56.1 St. 88-89.) It is also undisputed that the members of the 4 boards of the Clipper and Selected Funds, other than Christopher and Andrew Davis, were 5 disinterested as to Davis and thus independent within the meaning of the 1940 Act during the 6 Relevant Period. (Def. 56.1 St. 7 90; PI. 56.1 Resp. § 90.) 7 Sub-Advisory Agreements with and Services Provided to Unaffiliated Funds 8 Davis also acted as a sub-adviser to other, unaffiliated open-ended funds that were 9 managed by other investment advisory companies (each, a “Subadvised Fund Adviser”), 10 including AXA EQ/Davis New York Venture Portfolio, AZL Davis New York Venture Fund, I} ING Davis New York Venture Portfolio, Metropolitan Series Funds Davis Venture Value 12 Portfolio, and SunAmerica Series Trust Davis Venture Value Portfolio (collectively, the 13. “Subadvised Funds”).> (Def. 56.1 St. 918.) The Subadvised Fund Advisers subcontracted to 14 Davis their responsibilities to manage the Subadvised Funds’ investment operations in a manner 15 consistent with Subadvised Funds’ objectives and guidance, (P1. 56.1 Resp. 18.) The 16 Subadvised Funds also contracted directly with other service providers for, inter alia, accounting 17 and shareholder services similar to the Fund’s contractual arrangements. (PI. 56.1 St. 26.) 18 At all relevant times, although there were some variations in the Subadvised 19 Funds’ holdings, the Subadvised Funds were managed by the same principal Davis staff 20 according to a long-term large-cap-focused strategy patterned after that employed by Davis on

5 During the relevant period, Davis also acted as a sub-adviser for other funds, although the parties do not focus on those for the purposes of this motion practice. (Def. 56.1 St. $18 n.3.) Some evidentiary proffers apportioning costs or services provided to the Subadvised Funds may include these other funds in their analyses.

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| behalf of the Fund. (id. Jf 34, 36-38; see also Def. 56.1 Resp. 38.) All Subadvised Funds used 2 the S&P 500 as a benchmark. (PI. 56.1 St. €35.) 3 Subadvised Fund Advisers received higher rates of compensation from their 4 respective funds than Davis received from the Fund during the Relevant Period, (Def. 56.1 St. 5 920-21.) Because of different fees negotiated® with the Subadvised Funds’ primary advisers 6 and the operation of different breakpoints, the fees charged over the Relevant Period ranged from 7 30 to 35.6 basis points. (PI. 56.1 St. 60 (providing a chart of effective fees charged per fund 8 every year during the Relevant Period).) Depending on whether the Fund negotiated a rate 9 comparable to the lowest or highest fee charged by a Subadvised Fund in a given year, the Fund 10 would have saved between $106.8 million and $141.8 million in fees during the Relevant Period. li (Id. 961; Def. 56.1 Resp. 61 (stating that this analysis rests on the assumption that the Fund’s 12 assets under management would have remained constant despite a change in fees).) The parties 13 offer divergent perspectives on the scope of services that Davis provided pursuant to its duties as 14 sub-adviser. (Def. 56.1 St. J] 19-55; Pl. 56.1 Resp. J] 19-55; Def. 56.1 Reply fff 19-55.) Section 15(c) Annual Contract Approval Process for the Fund 16 In connection with the annual Section 15(c) approvals for the Fund and the other 17 twelve advised funds supervised by the Board, the Board considered information from Davis, 18 primarily in the form of the “Section 15(c) book,” and from other sources. (Def. 56.1 St. { 63.) 19 Ryan Charles, a member of Davis’ legal department, described the Section 15(c) process as a

6 Defendants object to Plaintiffs’ assertion in their Local Rule 56.1 Statement that Davis’ contracts with the Subadvised Funds were negotiated at arm’s length, as a mischaracterization of their answer, in which they admitted that Davis negotiated with the Subadvised Funds. (See PJ. 56.1 St. 58; see also Def. 56.1 Resp. § 58; Answer, Docket Entry No. 80, ff 110-111.) Defendants have, however, proffered no evidence from which the Court could infer that the Subadvised Fund Advisers were somehow conflicted or otherwise interested.

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1 “year-round compilation of material in advance of” the meeting, including material that Davis 2 anticipated the Board would require and information in response to questions or requests from 3. Board members or its independent counsel.’ (Charles Tr., Topetzes Ex. 4, at 130:9-22.) In 4 particular, the Board’s independent directors would, after conferring with their counsel, submit a 5 questionnaire to Davis and consider its answers in deciding whether to approve the IAA. (Def. 6 56.165; Marsha Williams, Topetzes Decl,, Ex. 6, at 34:15-25.) This questionnaire has evolved 7 over time to include new topics. (Def. 56.1 { 66.) 8 The Board considered both the short- and long-term performance of the Fund, 9 although, according to one director, long-term performance was more a more apt measure of 10 performance and was better aligned with the Fund’s historical focus on long-term growth, (See 11 Def. 56.1 St. € 68; see Pl. 56.1 Resp. { 68; see also Williams Tr., Topetzes Decl., Ex. 6, at 64:7- 12 65:10 (stating that Marsha Williams, a director, found long-term performance to be a more 13. valuable performance metric).) 14 The Board reviewed reports, by Lipper, Inc.® (“Lipper”), and Morningstar, 15 comparing the Fund’s performance and expenses to those of other peer firms.” (Def. 56.1 St. □ 16 69.) According to Lipper, it seeks to provide a comparator group of approximately seven to 17. twenty funds chosen based on a variety of criteria, including fund type, investment objectives,

7 Russel Wiese, a Davis employee, stated that it was typical for a director to engage him throughout the year on particular issues. (Wiesse Tr., Topetzes Decl., Ex. 9, at [80:5- § Duting the Relevant Period, Lipper became Broadridge, Inc. (Def. 56.1 St. § 12 n.2.) 9 Charles testified that it was standard industry practice for a board to review expense information provided by a third party such as Lipper during the Section 15(c) process. (Charles Tr., Topetzes Decl., Ex. 66, at 169;6-15.)

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1 asset comparability, expenses, etc.'° (See e.g., Lipper Report attached to 2012 Section 15(c) 2 book, Robertson Decl., Ex. 1, at DSA-000558-564.) According to the Lipper reports submitted 3. to the Board each year during the Relevant Period, the management fees and expense ratios 4 incurred by the Fund were below the average and median for their peer groups. (Def, 56.1 St. □□□ 5 12, 69.) The Board also considered Morningstar reports that generally rated the Fund’s fees as 6 “positive” with respect to its Class A shares, through analysis of its expense ratio.'! (See Def. 7 «56.1 St. J] 61, 69.) 8 The Board also reviewed materials comparing the fees that Davis charged the 9 Fund to those it charged other clients, such as the Subadvised Funds. (Def. 56.1 St. 7 70.) 10 Davis’ legal department wrote memoranda to the Board detailing the extra work 11 that Davis had to perform for a directly-advised client that was not performed for other types of 12 clients, including interpreting new statutes and rules, but did not quantify this work in terms of 13. time or money expended . (Charles Tr., Topetzes Decl., Ex. 4 ,at 176:22-180:6.) During the 14. Section 15(c) process, Davis communicated to the Board that, as an adviser for a mutual fund, it 15 incurred greater risk than it did with respect to its other clients due to the increasing complexity 16 and more rigorous enforcement of relevant SEC regulations. (Def. 56.1 St, 951.) Defendant 17 also disclosed in its Form NI-A dated June 9, 2017, that such oversight entails “investment risk,

10 Lipper describes its reports as non-consultative and intended to reflect its unbiased view and to simultaneously meet minimum content requirements of the board, advisor, and legal counsel in the discharge of their Section 15(c) duties. (See e.g., Lipper Report attached to March 2012 Section 15(c) Book, Robertson Decl., Ex, I, at DSA-00443.) Lipper also states that it “does not attempt to measure or assess levels of service or the general quality of services rendered.” (Id.) Plaintiffs assert that the Morningstar reports analyzed the total expense ratio incurred by the Fund, not just the advisory fees incurred under the [AA, which would not include other expenses incurred pursuant other agreements. (See Pl. 56.1 Resp. ff 61, 69.)

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1 valuation risk, reputational risk, risk of operational failure or lack of business continuity, and 2 legal, compliance, and regulatory risk.” (Topetzes Decl., Ex. 19, at 28; Def. 56.1 St. q 51; see 3 Cronin Rep., Topetzes Decl., Ex. 16, [§] 58-61; see also Reuter Rep., Topetzes Decl., Ex. 15, | 4 51.) 5 The Section 15(c} books explained that Davis incurred greater costs as a direct 6 adviser to a mutual fund than it did in advising other types of clients. (See ¢.g., Robertson Decl., 7 Ex, 2, at DSA-001206-1209.) In particular, the books stated that Davis’ clients included 8 Mutual funds, sub-advised accounts, private advisory accounts, and managed 9 money/wrap accounts. These clients differ in important and fundamental ways, 10 which affects the services, which Davis Advisers provides. Mutual funds and 11 private advisory accounts (a) have different missions, (b) serve different 12 clienteles, (c) provide different services, and (d) are subject to different laws and 13 regulations. 14 (Id. at DSA-001208.} The books then note that Davis does not (1) provide the same level of 1S shareholder or compliance services, (2) have the same responsibility for maintaining liquidity, 16 (3) incur the same amount of administrative expenses, (4) have oversight responsibility over 17 _ third-party service providers contracted by the board, (5) bear responsibility for hiring and 18 paying Fund officers, (6) assume greater risk as an adviser, or (7) provide the same level of 19 compliance services in connection with its private advisory accounts as it does with respect to its directly-advised mutual fund clients. (Id, at DSA-001208-9; see also Williams Tr,, Robertson 21 = Decl. Ex. 166, at 118:3-119:10 (Williams, a director, testified that she understood that, for the 22 purposes of the foregoing comparison, sub-advised account services differed from directly 23 advised mutual fund services in the same way as did private advisory accounts).) The books 24 — further stated that, although Davis (or its affiliates) provided services pursuant to the SSA and FASA, the fees paid by the Fund did not cover all of the expenses Davis incurred in the 26 performance of these duties. (See e.g., Robertson Decl., Ex. 2, at DSA-001208-1209.}

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l The Board also received information on Davis’ profit margins under the IAA, 2 which, during the Relevant Period, were between 73.33% and 81.43% before tax. (Def, 56.1 St. 3. 74-75.)"* The Board received a memorandum, as well as additional information, analyzing 4 the JAA under the factors described in Gartenberg y. Merrill Lynch Asset Mgmt., 694 F.2d 923 5 (2d Cir, 1982). (See Def. 56.1 St. J] 70-79.) 6 Approximately ten to fourteen days before the annual Section 15(c) meetings each 7 March, the Board would receive the Section 1 5(c) materials. (Def. 56.1 St. {§[ 62, 80.) Prior to 8 the Board meetings, the independent directors would meet with their counsel and develop topics 9 to discuss at the meeting. (Id. J 82.) At the meetings, the independent directors asked multiple 10 questions of Davis’ representatives about topics including the Fund’s performance, the Fund’s positions in certain securities, fee levels of identified peer funds, Davis staff changes, and Davis’ 12 shareholder education initiatives. (Id. [J 83-84.) Although the breakpoint schedule was last amended in 2009 to reduce the Fund’s expense ratio at higher breakpoints, Thomas Gayner, 14 another director, testified that the independent directors would discuss and consider the fee 15 schedule at each annual Section 15(c) meeting. (Gayner Tr., Topetzes Decl., Ex. 11, at 223:6-19; 16 Williams Tr., Topetzes Decl., Ex, 6, at 188:19-189:7.) The Board has not requested nor has 17 Davis offered a further fee reduction. (PI. 56.1 Resp. § 85.) Christopher Davis, a Davis officer, 18 characterized Davis’ interaction with the independent directors as a dialogue rather than a 19 negotiation as to the appropriate terms of the IAA, and noted that, while the Board has never

12 Davis’ profit margin for its work for the Fund during the Relevant Period would have been between $32.2 and $52.2 annually if the Fund had been billed at the rate Davis charged for sub-advisory services. (Pi. 56.1 St. 77.) Although, as explained below, the Court will preclude Dr. Ayres’s testimony on this matter, the Court accepts the mathematical formulation proffered. Defendants do not object to the aforementioned calculations, but state that these calculations are hypothetical and assume that the Pund would have provided the same services under this fee schedule. (Def. 56.1 Resp. {| 77.)

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| made any formal fee proposals, they engaged in discussion about fee trends in the industry and independently-selected comparator funds. (Davis Tr., Robertson Decl., Ex. 156, at 65:23-73:15.) 3. The Board also considered the fees paid by the Clipper and Selected Funds. (Def. 56.1 { 90.) 4 During the Relevant Period, the independent directors annually approved the IAA. 5 (Def. 56.1 St. 86.) Jeffrey Keil, Defendants’ expert, opines that, in his experience, the Board, 6 which consisted of highly qualified members, considered sufficient materials and acted 7 independently in reaching its business decisions to renew the JAA, in accordance with industry 8 standards. (Keil Rep., Topetzes Decl., Ex. 14.) 9 Performance 10 Defendants’ expert Dr. Jonathan Reuter states that there was no statistical 11 difference in monthly returns between the Fund and the S&P 500 benchmark during the Relevant 12 Period. (Def. 56.1 St. 9 58.) Between 1978 and 2016, the Fund’s ten-year rolling returns have 13 outperformed its S&P 500 benchmark in 34 of 39 years. (Id. | 56.) Plaintiffs proffer figures

_ 14 — showing that the Fund’s Class A shares underperformed the benchmark from .68% up to 12.2% 15 on an annual basis from 2007 through 2016, although Defendants note that these figures include 16 one-time charges that were only applicable to a small subset of investors who were not enrolled 17 in a wrap fee program, who held Class A shares, and did not hold their shares for more than one 18 year. (See Pl, 56.1 St. § 63; Def. 56.1 Resp. § 63.) Plaintiffs’ expert, Dr, Ayres, also concluded 19 that the Fund exhibited a negative Alpha, a metric that seeks to measure the excess monthly 20 return that is attributable to the adviser, from November 2005 through March 2013. (Ayres Rep., Topetzes Decl., Ex. 17, {] 65, 72-73.)

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I DISCUSSION 2 Motions to Preclude 3 Plaintiffs move to preclude the testimony of Defendants’ expert, Jeffrey Keil, and 4 Defendants move to exclude the opinions of Plaintiffs’ expert, Dr. Ayres. Pursuant to Federal 5 Rule of Evidence 702, expert testimony should be admitted if the expert is (1) qualified, through 6 requisite knowledge, skill, training, or experience, (2) his opinion is reliable, and (3) the testimony is relevant and would be helpful to the finder of fact. See United States v. Lesniewski, 8 No. 11 CR 1091, 2013 WL 3776235, at *8 (S.D.N.Y. July 12, 2013), aff'd sub nom. United 9 States v. Rutigliano, 614 F. App’x 542 (2d Cir. 2015).

10 Keil opines about the sufficiency of the Board’s process in approving the IAAs, 11 often based on his experience or in comparison to “industry standards.” Keil’s experience is 12 gleaned from prior consulting work and his attendance at over 150 board meetings. Plaintiffs contend that reliance on his practical experience is unreliable and deprives them of the ability to 14. compare the Board’s process to those of all the other boards that Keil has observed or advised 15 and which collectively make up his experience and to test his opinions in a reproducible and 16 verifiable manner. Nor, Plaintiffs argue, did Keil articulate what industry standards he measured 17 the Board’s actions against.

18 An industry expert, however, need not offer scientifically testable opinions, nor 19 need he correlate his opinions to specific instances of industry practice that he observed or 20 articulate an objective industry benchmark; the reliability of such an expert’s opinion may be 21 inferred from his experience. See Pension Comm. of Univ. of Montreal Pension Plan v. Banc of 22 Am, Sec., LLC, 691 F. Supp. 2d 448, 464-65 (S.D.N.Y. 2010) (permitting experts to opine on 23 industry due diligence practices); see also Equal Employment Opportunity Comm’n & Bailey,

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1 No. 10 € 6139, 2016 WL 5796890, at *9 (ND. Ill. Sept. 30, 2016) (finding that an expert need 2 set out an explicit benchmark for industry practice and that her long experience satisfied the 3. court as to the reliability of her ability to conduct such an assessment). As Plaintiffs do not 4 challenge Keil’s qualifications,"* the Court finds that his opinions are sufficiently reliable and § helpful, although Plaintiffs could seek to undermine his credibility at a trial. Accordingly, 6 Plaintiffs’ motion to exclude Keil’s testimony is denied."

7 Defendants seek to exclude certain expert opinions and testimony of Dr. Ayres, 8 arguing (1) that he is not qualified to opine on whether the services Davis provided to the Fund 9 and the Subadvised Funds were substantially the same; (2) that Dr. Ayres is not qualified to 10 opine on what fees the Fund would have incurred had Davis charged it at the Subadvised Fund

13 in their reply brief, Plaintiffs seemingly clarify that they attack only Keil’s reliability, not his qualifications. (Reply Br., Docket Entry No. [30, at 1.) i Plaintiffs also request that the Court preclude evidence of educational outreach and education services that Davis provided to the Fund insofar as they can be characterized as distribution services, which are primarily intended to sell shares in the Fund, pursuant to the IAA. Plaintiffs contend that such evidence is irrelevant because an adviser may not use fees, except those received under a separate distribution plan pursuant to 17 C.F.R. § 270.12b-1 or through the use of its legitimate profits, to fund programs intended to promote the sale of shares. See Bearing of Distribution Expenses by Mutual Funds, 45 F.R. 73898, 73902-903 (Nov, 7, 1980). Defendants assert that the proffered evidence represents efforts to educate and foster relationships with current shareholders, Although Plaintiffs point to evidence indicating that Davis engaged in outreach efforts to promote the sale of shares or foster relationships with broker-dealers, Defendants have proffered evidence that Davis also engages in education efforts with current shareholders. Moreover, some of the evidence describes efforts which could be variously classified as being designed to engaged prospective shareholders, current shareholders, or both. (See e.¢,, Memorandum re Annual Review of Each Davis Fund’s Rule 12b-1 Distribution Plan and Distribution Agreement, Robertson Decl. in Supp, of Pl. Mot. to Preclude, Ex. 6, at DSA-003671.) Given the ambiguity in this evidence, the Court cannot conclude that the evidence cited in Defendants’ Local Rule 56.1 Statement (ff 45-46) for shareholder education and outreach is irrelevant and denies Plaintiffs’ motion to preclude it.

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1 rate; (3) that Dr. Ayres is not qualified to opine on whether Davis would have still made a profit 2 at the Subadvised Fund rate; (4) that Dr. Ayres’s testimony about the similarity between the 3 strategy of the Fund and the Subadvised Funds and the Fund’s performance is not disputed and is 4 thus irrelevant; (5) that Dr. Ayres’ opinion that the Subadvised Fund Advisers contracted with 5 Davis through an arm’s length transaction is a legal conclusion; and (6) that Dr. Ayres’ opinion on the level of competition in the mutual fund industry is based on an unreliable methodology.

7 Plaintiffs argue that Dr. Ayres’ general expertise in economics, econometrics, and 8 industrial organizations qualifies him to offer opinions on the similarity of services offered by 9 the Fund and the Subadvised Funds. Defendants argue that he has no particular expertise in the 10 mutual fund industry, and thus is not qualified to opine on the differences in such services, and {1 that he simply reviewed the contracts, prospectuses, other documents, and testimony proffered 12 by Plaintiffs in support of this motion. Plaintiffs have failed to explain how Dr. Ayres’ economic 13. training and experiences will assist the trier of fact; his report simply catalogues and 14 characterizes Plaintiffs’ evidence. Accordingly, Dr. Ayres will be precluded from offering his opinion on this issue.

i6 Defendants next argue that Dr. Ayres is not qualified to testify about the difference in fees Davis would have earned had it charged the Fund a rate similar to what it 18 charged for its sub-advisory services, and whether Davis would have made a profit at these sub- 19 advisory rates. Defendants point out that Dr, Ayres is not an accountant and that Plaintiffs have 20 failed to explain how his economics background would provide expertise helpful to the trier of fact in connection with this issue. The Court agrees and will preclude Dr. Ayres from testifying 22 on this subject. Defendants, however, do not dispute these calculations, so the Court will 23. consider them for the purposes of this motion practice. (See Def. Mem. in Supp. of its Mot. to

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i Preclude at 18 (Dr. Ayres “offers several opinions about matters that Defendants do not 2 ~~ contest.”).)

3 To the extent that Defendants contend that Dr. Ayres should be precluded from 4 testifying about the Fund’s performance and the similarities between the Fund and the 5 Subadvised Funds’ investment strategies because the matter is uncontested, the Court denies the 6 motion. In the absence of a stipulation, such information could prove useful and relevant to the trier of fact, and any objection to its redundancy can be made pursuant to Federal Rule of 8 Evidence 403.

9 Defendants next argue that Dr. Ayres should be precluded from offering his 10 opinion as to whether the fees charged to the Fund were excessive or beyond those that could be 11 procured by an arm’s length transaction, as an impermissible legal conclusion. See Hygh v. 12 Jacobs, 961 F.2d 359, 36-64 (2d Cir. 1992). Plaintiffs assert that Dr. Ayres is simply using terms 13 accepted in his field and making factual conclusions, rather than opining on the final issue of 14 liability. Cf, Andrews v. Metro N. C. R. Co., 882 F.2d 705, 709 (2d Cir. 1989) (excluding 15 testimony that defendant was “negligent”), While terms such as “arm’s length” may indeed have 16 economic meaning, Dr. Ayres’ report offers his opinion as to each step of the analysis set 17. forth by the Supreme Court in Jones y. Harris Assocs. L.P., 559 U.S. 335 (2010), and arrives at a 18 conclusion couched in terms of the ultimate legal standard, namely whether the Fund charged an 19 arm’s length fee, and would thus not assist the trier of fact, which is capable of weighing the 20. various factual comparisons offered by Plaintiffs and reaching a legal conclusion. Accordingly, 21 Dr. Ayres is precluded from offering testimony as to the ultimate legal conclusion.

22 Defendants also contend that Dr. Ayres’ conclusion that, based on his review of 23 behavioral economic research, the “[m]utual fund industry is characterized by imperfect

IN RE DAVIS MSJ.DOCX VERSION May 30, 2019 16

1 competition due to a number of cognitive flaws and biases . . . [that] limited the impact of 2 competition on mutual fund fees relative to a truly competitive market” is not reliable insofar as it is not supported by or connected to the research cited. (Ayres Rebuttal Rep, § 16.) Defendants 4 — assert that, although some of the cited articles apply the relevant statistical theories or models to 5 ahypothetical investor, none apply their reasoning to fee competition among mutual fund 6 advisers and/or sub-advisers, To the extent Dr. Ayres’ opinion is offered for the proposition that retail! investors are likely to remain with a mutual fund despite incentives to remove their 8 investments, the Court finds that the cited literature relied upon provides sufficient support to 9 render Dr. Ayres’ opinion reliable enough for admission under Federal Rule of Evidence 702, 10 and that Defendants’ objections to the applicability of the supporting research can be addressed lf assailing the weight that his opinions warrant. See Danley v. Bayer (In re Mirena IUD Prods. 12 Liabl. Litig,), 169 F. Supp. 3d 396, 425 (S.D.N.Y. 2016) (objections to conclusions that expert 13. drew from scientific literature may be addressed by cross-examination to impugn the weight of 14 the expert’s testimony). To the extent Dr. Ayres’ opinion is offered to assert that cognitive flaws 15 and biases limit competition among advisers and sub-advisers for the business of mutual funds, 16 the Court agrees that Dr. Ayres fails to connect his recitation of research finding the lack of 17 competition in the mutual fund industry to attract retail investors to that conclusion, and that any 18 such opinion is not sufficiently reliable to be admitted. (See id. /§ 17-37.)

19 Accordingly, Dr. Ayres will be precluded from testifying on the similarities and 20 differences between the services provided by Davis to the Fund and to the Subadvised Funds, the 21 level of competition in the mutual fund industry for advisory and sub-advisory services, whether 22 Davis would still have made a profit at the rates it charged the Subadvised Funds, and whether 23. the Fund’s fees were excessive or were not the product of an arm’s length transaction.

IN RE DAVIS MSJ.pocx VERSION MAY 30, 2019 17

1 = =Motion For Summary Judgment 2 The pending motion is brought pursuant to Rule 56(a) of the Federal Rules of 3. Civil Procedure. Under Rule 56(a), summary judgment is appropriate when the “movant shows 4 that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed R. Civ. P. 56(a), The moving party bears the burden of demonstrating the 6 absence of a material issue of fact, see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 7 (1986), and the court must be able to find that, “after drawing all reasonable inferences in favor 8 ofanon-movant, no reasonable trier of fact could find in favor of that party.” Marvel] Entin’t, 9 Inc. v. Kellytoy (USA), Inc., 769 F. Supp. 2d 520, 523 (S.D.N.Y. 2011) (quoting Heublein v. United States, 996 F. 2d 1455, 1461 (2d Cir, 1993)) (internal quotation marks omitted). A fact is 11 considered material “if it might affect the outcome of the suit under the governing law,” and an 12 issue of fact is “genuine” where “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Holtz v. Rockefeller & Co. Inc., 258 F.3d 62, 69 (2d Cir, 14 2001) (internal quotation marks and citations omitted), “[Mjere conclusory allegations or denials . .. cannot by themselves create a genuine issue of material fact where none would 16 otherwise exist.” Hicks v. Baines, 593 F.3d 159, 166 (2d Cir. 2010) (quoting Fletcher v. Atex, 17 Inc., 68 F.3d 1451, 1456 (2d Cir, 1995)). A party that is unable to “make a showing sufficient to 18 establish the existence of an element essential to that party’s case, and on which that party will 19 bear the burden of proof at trial” will not survive a Rule 56 motion. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986), 24 Plaintiffs contend that Davis charged the Fund excessive fees for its advisory 22 services, based on a comparison to the dramatically lower fees Davis charged the Subadvised - Fund Advisers for what, Plaintiffs assert, were substantially similar services. Defendants argue

IN RE DAVIS MSJ.DoCXx VERSION MAY 30, 2019 18

| that Davis provided a much narrower set of services to the Subadvised Funds and assumed a 2 much greater risk in its role as a primary adviser. Defendants also proffer comparisons to other 3. “peer” funds and two other non-affiliated funds that have hired Davis as primary adviser. 4 Section 36(b) of the 1940 Act, 15 U.S.C.S. § 80a-35(b) (LexisNexis 2010), 5 provides that the investment adviser of a registered investment company “shall be deemed to 6 havea fiduciary duty with respect to the receipt of compensation for services.” The Supreme 7 Court has articulated the standard for a Section 36(b) breach of fiduciary duty claim for 8 excessive fees in Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010). In Jones, the Supreme Court 9 held that a Section 36(b) plaintiff must prove that “an investment adviser . . . charge[d] a fee that 10 so disproportionately large that it bears no reasonable relationship to the services rendered and 11 could not have been the product of arm’s-length bargaining.” 559 U.S. at 346. Resolving a 12 circuit split, the Supreme Court endorsed the Second Circuit’s decision in Gartenberg v. Merrill 13. Lynch Asset Mgmt., Inc., 694 F.2d at 928, as “correct” in holding that “all relevant 14 circumstances” must be considered when determining Section 36(b) liability. Id, at 346-47. The 15 Gartenberg court specifically identified several factors for consideration in weighing “all 16 pertinent” facts: (1) the nature and quality of services provided to the fund shareholders; (2) the 17 profitability of the fund to the adviser-manager; (3) fall-out benefits; (4) economies of scale; (5) 18 comparative fee structures; and (6) the independence and conscientiousness of the trustees, 694 19 F.2d at 929-32, 20 The Jones court, recognizing that “Congress rejected a ‘reasonableness’ 2] requirement that was criticized as charging the courts with rate-setting responsibilities,” stated 22 that “it is important to note that the standard for fiduciary breach under § 36(b) does not call for 23 judicial second-guessing of informed board decisions.” Jones, 559 U.S. at 352. Consistent with

IN RE DAVIS MSJ.DOCX VERSION MAY 30, 2019 19

1 these principles, Jones outlines a two-step analytical process in which a court first examines the 2 adequacy of the procedures employed by an investment fund’s board in approving the challenged 3. agreement with a fund’s adviser in order to determine the level of deference that should be 4 accorded to the board’s business judgment, and then applies the Gartenberg factors in reviewing 5 the substance of the agreement to determine whether the challenged fee was outside of the range 6 of fees that could have been the product of an arm’s length negotiation. 559 U.S, at 351-52 7 (“[A] court’s evaluation of an investment adviser’s fiduciary duty must take in to account both 8 procedure and substance,”’). 9 The Board’s Process 10 Section 15(c) provides that a mutual fund’s board may only approve a contract for 11 advisory services by a vote of the majority of non-interested directors.'* The board’s directors have an affirmative duty to “request and evaluate . . . such information as may be reasonably necessary to evaluate the terms of the contract,” which an adviser must furnish. Id.

14 “Where disinterested directors consider all of the relevant factors, their decision to 15 approve a particular fee agreement is entitled to considerable weight, even if the court might weigh the factors differently.” Jones, 559 U.S. at 336. However, the decision of a board reached 17 based upon a deficient process or without the benefit of important information withheld by the 18 adviser requires a court to examine more rigorously the substance of the agreement. Id. “In 19 general, a plaintiff should not be able to survive summary judgment through armchair 20 quarterbacking and captious nit-picking. Such a standard would put defendants in the untenable

5 An interested person is defined to include, inter alia, people who directly or indirectly own or control the power to vote at least five percent of outstanding company securities. 15 U.S.C. §§ 80a-2(a}(3) (defining “affiliated person), (19) (defining “interested person’).

IN RE DAVIS MSJ.p0ocx VERSION MAY 390, 2019 20

1 posture of defending interminable, manufactured, and protracted litigation involving second- 2 guessing a board’s process.” Kasilag v. Hartford Inv, Fin. Serys., LLC, No. CV 11-1083 3 (RMB/KMW), 2016 WL 1394347, at *14 (D.N.J. Apr. 7, 2016), aff'd, 745 F. App’x 452 (3d Cir. 4 2018).

5 Here, it is undisputed that six of the Fund’s eight Board members were at all relevant times disinterested, as required by the statute, and that the requisite majority voted to 7 approve the Fund’s [AA with Davis. It is also undisputed that matters relevant to the approval 8 decision were considered at Board meetings, that Davis compiled an extensive “Section 15(c) 9 book” covering information relevant to the Gartenberg factors that was reviewed by all directors, 10 and responded to additional questions propounded informally and in a questionnaire issued by 11 directors. The independent directors had their own independent counsel with whom they met 12 separately from the Davis-affiliated directors. The information that the Board considered included comparisons of advisory fee rates and expense ratios of the Fund and other “peer” funds selected by Lipper and Morningstar, as well as the advisory fees paid to Davis by the other 15 unaffiliated funds for which Davis served as investment adviser—Clipper and Selected Funds. 16 Plaintiffs do not dispute that the Board consisted of qualified and independently- {7 advised directors who engaged with Davis and were provided with information on each 18 Gartenberg factor, They contend that there are nonetheless material issues of fact concerning the 19 integrity of the process and the weight to be afforded the Board’s decision because the six Board 20 members who qualify as disinterested under the statutory criteria had deep ties to the financial services industry; the Board did not attempt to negotiate a lower advisory fee; and the Board did 22 not inquire about issues Plaintiffs contend were important. Plaintiffs also assert that Davis 23. withheld critical information from the Board.

IN RE DAVIS MSJ.DOcx VERSION MAY 39, 2019 al

I Plaintiffs’ objection to the recognition of the six directors as independent is 2 baseless in fact and law. Plaintiffs’ generalized assertion that persons associated with the mutual 3 fund industry cannot function as independent evaluators of mutual fund advisers is conclusory 4 and speculative. 5 Plaintiffs next contend that Davis withheld from the Board (1) an accurate 6 description of the services Davis provided to the sub-advised funds, (2) an explanation of the services that are provided under the LAA as opposed to separate contracts with the Board, and (3) 8 anestimation of the level of profits Davis would have attained on its Fund advisory services had 9 been paid at the fee rates charged to the Subadvised Funds. None of these contentions raises a 10 genuine issue of material fact. Plaintiffs assert that the Section 15(c) books submitted to the 1} Board compared the services provided by Davis to its directly-advised mutual fund accounts only to those provided to Davis’ private advisory clients, and did not address the services 13 provided to Davis’ sub-advisory clients, and cite a portion of the deposition testimony of Board 14 member Marsha Williams for the proposition that Davis’ documentation did not discuss the 15 services provided to sub-advised clients. Plaintiffs’ reading ignores the context in which the 16 comparison they cite was presented. The paragraph opens by referring to the fact that there are differences in services provided between mutual funds and sub-advised accounts, private 18 advisory accounts, and managed money/wrap accounts, Furthermore, the Plaintiffs’ selective 19 citation to Williams’s deposition omits her testimony that she understood the reference to private 20 advisory accounts in the cited passage of the memorandum to encompass the Subadvised Funds. 21 Therefore, even drawing all reasonable inferences in Plaintiff's favor, a rational factfinder could 22 not conclude that information was withheld from the Board with respect to the differences

IN RE DAVIS MSJ.DOCX VERSION MAY 30, 2019 22

| between services provided to the Fund and those provided to the Subadvised Funds.'® The same 2 sections of the annual Section 15(c} memoranda also disclose that Davis provided services to the 3 Fund pursuant to the SSA and FASA and stated that the fees paid under those contracts did not 4 compensate Davis for the full costs of providing those services, Plaintiffs have not controverted 5 Defendants’ proffer that the service contracts undercompensated Davis’ work by more than $3.8 6 million. 7 Finally, Plaintiffs’ assertion that Davis withheld a computation of the hypothetical 8 profits it would have generated if it had charged the Fund fees comparable to those paid by the 9 Subadvised Funds does not raise a material fact issue. Plaintiffs do not dispute that the Board 10 was apprised of Davis’ profit margin under the existing [AA and of the fee rates paid by the 11 Subadvised clients. Plaintiffs have failed to explain why this information was insufficient to 12. enable the Board to reach a conclusion that Davis could have turned a profit even at a lower rate 13. of compensation. The Court therefore concludes that Plaintiffs have not raised an issue of 14. material fact as to whether Davis withheld important information from the Board. 15 Plaintiffs’ contention, based in part on the fact that there has been no fee 16 reduction since 2009, that the Board failed to assertively negotiate with Davis, is also

16 To the extent that Plaintiffs assert that these Section 15(c) memoranda, even if understood to compare the services Davis provided to the Fund with those it provided to the Subadvised Funds, contained insufficient detail, such an argument is ineffective to frame a genuine disputed fact issue in light of the disclosures of significant differences in services that were included in the memoranda. See In re BlackRock Mut, Funds Advisory Fee Litig., 327 F, Supp. 3d 690, 720 (D.N.J. 2018) (quoting Kasilag, 2016 WL 1394347, at *14 (“Although Plaintiffs may disagree with the level of detail or format of the Services Checklist, such carping, if sufficient{,] would eviscerate the deference that is to be paid to an informed Board . . . under Jones.”) (internal quotation marks and alterations omitted)); (See e.g., Robertson Deci., Ex. 2, at DSA-001206-1209).

IN RE DAVIS MSJ.DOCX VERSION MAY 30, 2019 23

1 insufficient to demonstrate that the Board’s process was deficient. Plaintiffs also point to testimony that they contend demonstrates that the Board focused on the fees paid to other peer 3 funds, which fees, Plaintiffs assert, were themselves not the product of arm’s Jength transactions. 4 It is undisputed, however, that the Board secured several amendments to the IAA, including a 5 reduction in fees in 2009, and kept abreast of compensation trends in the industry, including the 6 compensation levels paid under the arm’s length advisory contracts Davis maintained with the 7 Selected and Clipper funds.'? Because the 1940 Act does not impose a duty on a board to 8 negotiate assertively, Plaintiffs’ assertion that the Board could have negotiated more aggressively 9 does not provide a basis for a rational finding that the Board’s review process was less than 10 robust.'® See Chill v. Calamos Advisers LLC, No. 15 CIV, 1014 (ER), 2018 WL 4778912, at 11 *14(S.D.N.Y. Oct, 3, 2018) (“It is well settled that Section 36(b) does not require negotiation

As explained in the “Background” section above, the Clipper and Selected Funds chose to replace their prior advisers with Davis at times when the companies were unaffiliated with Davis. While Plaintiffs proffer that the Boards of the two funds have changed since Davis began to advise them and now overlap substantially, it is undisputed that the majority of the Board members are independent as a statutory matter and that there are only two Davis-affiliated individuals on each board. Plaintiff cites no other evidence indicative of less than arm’s length dealings between Davis and those funds in the matter of fee-setting. 18 Plaintiffs cite Gallus v. Ameriprise Fin. Inc., 675 F.3d 1173, 1180 (8th Cir, 2012), in support of the proposition that a board is not entitled to deference if it only focuses on the rates that peer funds, who also may not be in arm’s length advisory relationships, charge their clients. That case is distinguishable on the grounds that the Eighth Circuit found that less deference was due because the adviser withheld relevant information about the differences between its direct advisory service and the services provided to institutional clients. Here, there has been no such showing. Furthermore, there is evidence that the Fund’s Board considered the fees paid by the Clipper and Selected Funds, which, despite Plaintiffs’ arguments that they had become “captive,” were indisputably independent when they first contracted with Davis and continued to have board majorities comprised of independent directors.

IN RE DAVIS MSJ.DOCX VERSION MAY 30, 2019 24

{between a board of trustees and [a] fund investment adviser.”); see also Zehrer v, Harbor Capital 2 Advisers, Inc., No. 14 C 00789, 2018 WL 1293230, at *7 (N.D. fll. Mar. 13, 2018) (same).

3 With respect to Plaintiffs’ further argument that the Board failed to exercise the 4 requisite diligence in seeking out further information from Davis and other third parties, Plaintiffs do not identify any additional deficits of information that they contend the Board 6 should have obtained. The Board reviewed material concerning the fees paid in comparison to the fees paid to Lipper peers and other clients, including the Subadvised Funds. The Board 8 issued a questionnaire to Davis, requested further additional information, were advised by 9 independent counsel, and reviewed reports by third parties such as Lipper and Morningstar. 10 ‘Plaintiffs’ generalized assertion that the directors should have asked for more does not, on this 1] record, frame a genuine issue of material fact or undermine Defendants’ demonstration of the sufficiency of the process that was employed.

13 Accordingly, Plaintiffs have failed to frame a genuine issue of material fact as to i4 whether the Board’s review process was sufficiently robust to warrant a significant degree of 15 deference to the Board’s decision to approve Davis’ advisory fee. The Board’s business decision is thus entitled to substantial deference as a matter of law. Having determined the degree of deference to be accorded to the Board in connection with the holistic Gartenberg analysis, the 18 Court must now examine whether Plaintiffs can prove, on this record, that the advisory fee paid 19 to Davis during the Relevant Period was so disproportionately large that it bore no reasonable 20 relationship to the services rendered and was outside the range that could have been produced 21 through arm’s-length bargaining. 22 Gartenberg Analysis

IN RE Davis MSJ.DOCX VERSION MAY 30, 2019 25

| The Court now examines, through an evaluation of the Gartenberg factors, 2 whether a factfinder, drawing all reasonable inferences in Plaintiffs’ favor, could determine that 3 the advisory fees paid to Davis by the Fund bore “no reasonable relationship to the services 4 rendered and could not have been the product of arm’s length bargaining.” Jones, 559 U.S. at 5 346. Ultimately, the plaintiffs bear the burden of establishing that the “fees are beyond the range 6 of arm’s-length bargaining.” Id. at 350 n.8. Although courts tend to focus on a comparison of 7 the fees charged by a defendant in relation to those charged by comparable funds, “a dispute of 8 fact... regarding the comparative fees factor, without additional evidence does not ‘doom’ 9 [d]efendants to trial.” In re BlackRock Mut. Funds Advisory Fee Litig. (“In re Blackrock”), 327 10 F. Supp. 3d 690, 729 (D.N.J. 2018) (citing Jones, 559 U.S, at 350 n.8).

I] Comparative Fees

12 A plaintiff may offer other funds as comparators to demonstrate that a defendant’s 13 fees are excessive. The Supreme Court has stated that Section 36(b) requires a court to take all 14 relevant considerations into account when conducting its inquiry. Jones, 559 U.S, at 349. A court must, therefore, take into account the differences in the services provided to each fund and 16 “give such comparisons the weight that they merit in light of the similarities and differences 17 between the services that the clients in question require.” Id. a 349-50. If the comparisons are inapt, insofar as the examination of the comparator fund is not probative, a court should disregard the comparison. Id. at 350. “By the same token, courts should not rely too heavily on 20 comparisons with fees charged to mutual funds by other advisers .. . [because] these fees, like 21 those challenged, may not be the product of negotiations conducted at arm’s length.” Id. at 350.

22 Plaintiffs offer the rates paid to Davis by the Subadvised Funds, which no party 23 disputes were the product of arm’s length bargaining, as the relevant exemplar of an appropriate

IN RE Davis MSJ.DOCcx VERSION MAY 30, 2019 26

t arm’s length advisory fee structure, arguing that the substantially lower fees Davis charged to the Subadvised Funds cannot be explained by any substantial difference in the services provided by 3 Davis, Plaintiffs point to the close similarities in management of the investment portfolios of the 4 Fund and the Subadvised Funds, which Plaintiffs contend is the most important service an 5 adviser offers, and contend that Davis provides the same or similar categories of other 6 “ancillary” services to the Subadvised Funds as well as to the Fund. Plaintiffs also contend that many of the services Davis provides only as a primary adviser to the Fund were performed 8 pursuant to a separate contract or by a third-party provider. Defendants argue that Plaintiffs’ 9 comparison to the Subadvised Funds is inapt because Davis provides substantially more services 10 to the Fund pursuant to the IAA but only a narrower set of investment-focused services to the 11 Subadvised Funds. Defendants offer favorable comparisons to fees charged to “peer” funds, 12 such as those featured in the Lipper Reports, and comparisons to the Selected and Clipper Funds’ 13. fees as conclusive evidence that Davis’ advisory fees were within the range that would be 14 secured through an arm’s length transaction.

15 Although the parties have contested the relative scope of services rendered 16 pursuant to the [AA and under Davis’ agreements with the Subadvised Funds, even assuming that Plaintiffs have met their burden of showing that a comparison with the Subadvised Funds is 18 apt, Plaintiffs have not adduced evidence showing that a comparison with the Clipper and 19 Selected Funds, whose fee structures are nearly identical to that of the Fund, is inapt and thus 20 cannot demonstrate that a reasonable trier of fact could conclude that Davis charged the Fund a 21 fee beyond the range of what could be negotiated at arm’s length. Defendants’ comparisons with 22 fees Davis charged to the Selected Fund and, particularly, the Clipper Fund, for primary

IN RE DAVIS MSJ.DOCX VERSION May 30, 2019 27

| advisory services establish that the Fund’s fee structure is within the range of fees derived from anarm’s-length transaction for primary advisory services.

3 Plaintiffs’ efforts to raise a genuine issue of material fact as to the aptness of the 4 comparison to the Clipper Fund are unavailing. Plaintiffs offer only speculation that the Selected 5 and Clipper Funds initially selected Davis through anything other than an arm’s length 6 transaction. See Millennium Pipeline Co., LLC v. Certain Permanent and Temp. Easements, 552 7 Fed. App’x 37, 39 (2d Cir. 2014) (stating that “speculation is insufficient to defeat summary 8 judgment”). The Clipper Fund agreed to a fee schedule with Davis when it initially named Davis 9 adviser, and in 2009 the Clipper and Selected Funds agreed to a lower fee schedule in line 10 with the 2009 IAA revision between Davis and the Fund. Plaintiffs argue that the Clipper Fund 11 had become “captive” to Davis and that the Court should thus be wary when using it as an arm’s 12. length comparator. See Jones, 559 U.S. at 336 (“[C]ourts should not rely too heavily on 13. comparisons with fees charged to mutual funds by other advisers, which may not result from 14 arm’s length negotiations.”). Plaintiffs have presented no evidence that the Clipper Funds’ 15 independent board members, who had shown that they were willing remove their adviser only a 16 few years earlier, were no longer independent or capable of selecting a different adviser when 17 they agreed to the initial fee schedule or when they agreed with Davis to a reduced fee similar to

IN RE Davis MSJ.DOCcx VERSION MAY 306, 2019 28

1 that charged to the Fund.'? If anything, this fee reduction supports an inference of 2 independence. 3 Plaintiffs’ arguments concerning the differences in services provided by the 4 Clipper Fund are also unavailing. While the Fund and the Clipper and Selected Funds may 5 employ different investment strategies, Plaintiffs have failed to explain how this indicates any 6 relevant difference in the scope of advisory services provided. See Pirundini v. J.P. Morgan Inv. 7 Mgmt. Inc., 309 F. Supp. 3d 156, 165 (S.D.N.Y, 2018), aff'd, No. 18-733, 2019 WL 1254817 8 (2d Cir. Mar. 18, 2019) (“In any event, even if the two funds do have different 9 investment strategies, there is no basis in law or logic for concluding that the investment 10 advisory services JPMIM provides them are different.”). The fact that Clipper is a non- 11 diversified fund, holding only 15-35 stocks, supports an inference that, if anything, it is less expensive to manage and that the fees Davis charges to manage the diversified Fund could 13. properly be even higher than those charged to Clipper.

14 Thus, the Clipper Fund and Selected Fund provide an uncontroverted apt 15 comparison, establishing that the range of arm’s length fees encompasses those paid by the Fund

9 Based on the available evidence proffered, Andrew and Christopher Davis, who each hold a partnership interest in Davis, did not begin their tenure as interested directors for the Clipper Fund until 2014, and two of the five independent directors of the Clipper Fund were replaced in 2006. (Clipper Fund 2017 Annual Rep., Robertson Decl., Ex. 148, at 6-7.) 20 Plaintiffs’ proffer evidence that Andrew and Christopher Davis had been appointed as interested directors for the Selected Fund well before the 2009 negotiation for lower fees and that, by 2017, all but one of the independent board members who was in office when the fund decided to hire Davis as an adviser had been replaced, (Selected Fund 2017 Annual Report, Robertson Decl., Ex. 151, at 6-7.) Plaintiffs have, however, failed to offer any evidence that a majority of these independent directors were too beholden to Davis to exercise independent judgment or replace Davis if necessary,

IN RE DAVIS MSJ.DOCX VERSION May 30, 2019 29

1 to Davis, even if the Subadvised Funds could be found to be probative as to the lower end of this 2 range. Although the choice of which comparators are most probative ofien involves credibility 3 determinations not appropriate for summary judgment, no such determination is required here, as 4 Plaintiffs have not proffered sufficient evidence to permit a rational trier of fact to exclude the 5 Clipper and Selected Funds from the range of fees that could be generated from an arm’s length 6 transaction. Cf, In re Blackrock, 327 F. Supp. 3d at 729 (declining, on summary judgment, to 7 consider defendants’ Lipper data as countervailing evidence to the sub-advised funds offered by 8 plaintiffs as comparators.) Accordingly, this factor weighs against a finding of a Section 36(b) 9 violation.

10 ‘The Fund’s Performance

11 Although performance is not a Gartenberg factor,’’ courts have considered the 12 performance of funds as part of a holistic analysis under Jones. Sivolella v. AXA Equitable Life 13 Ins. Co., No. 11-CV-4194-PGS-DEA, 2016 WL 4487857, at *68 (D.N.J. Aug. 25, 2016), aff'd 14 sub nom. Sivolella for use & benefit of EQ/Common Stock Index Portfolio v. AXA Equitable Life Ins. Co., 742 F. App’x 604 (3d Cir. 2018) (“While underperformance of the mutual fund 16 may be considered, it is not a Gartenberg factor, and courts have been ‘wary about attaching too 17. much significance to a fund's financial performance.’ (quoting In re Franklin Mut, Funds Fee 18 Litig., 478 F. Supp. 2d 677, 687 (D.N.J. 2007))).

21 Some Courts have considered fund performance as part of the nature and quality factor. See, e.g., Pirundini, 309 F. Supp. 3d at 167-68. Because the parties have not argued the nature and quality factor, nor put forth a broader argument as to whether the objective nature and quality of Davis’ service support liability, the Court considers performance separately.

"INRE DAVIS MSJ.DOCX oo ~ VERSION MAY 30, 2019 - me me □□ □□

| The parties proffer conflicting evidence as to appropriate performance 2 measurements and whether the Fund performed favorably in relation to its benchmark, with 3. Defendant focusing on rolling 10-year returns, contending that these are most relevant to Davis’ 4 long-term strategy, and Plaintiffs focusing on annualized returns,” Plaintiffs’ expert also proffers evidence that the Fund exhibited a negative Alpha, meaning that Davis’ services did not 6 positively contribute to the Fund’s performance, prior to the Relevant Period. Plaintiffs point to 7 evidence that some of the Subadvised Fund Advisers may have terminated Davis’ sub-advisory 8 contracts due to poor performance, which is relevant because the Subadvised Funds employed 9 the same investment strategy as the Fund. Although Defendants point to positive evidence 10 concerning the Fund’s performance, Plaintiffs have proffered sufficient facts to enable a rational lf factfinder to conclude that Davis’ performance was below standard to at least some degree. Ch 12 Kasilag, 2016 WL 1394347, at *16. Plaintiffs have not, however, proffered evidence that the 13. Fund’s deviation from its benchmark or negative Alpha was particularly dramatic or unusual, 14 and this factor does not strongly favor liability even when all reasonable inferences are drawn in 15 Plaintiffs’ favor.

16 Profitability

17 Plaintiffs also point towards Davis’ profitability as a factor in favor of liability. 18 The parties generally agree that, within the Relevant Period, Davis’ operating profits derived 19 from its management of the Fund were annually between $66.3 million and $82.6 million, with a 20 profit margin ranging from 73.33% to 81.43%, and that Davis would have generated between

2 Defendants contend that Plaintiffs’ statistics are misleading because they reflect expenses peculiar to a small subset of Fund shareholders who own Class A shares, are not enrolled in a wrap program, and held their shares for less than a year. (Def. 56.1 Resp. { 63.)

me IN RE DAVIS MSJ.DOCXx VERSION MAY 30, 2019 □ 31

1 $32.2 million and $52.5 million in profits annually if Davis had billed the Fund at the sub- 2 advisory rate. Defendant cautions that the 1940 Act was not intended to enable courts to set fees 3 nor was it designed to impose a cost-plus-style billing regime. See Gartenberg, 694 F.2d at 928, 4 As explained below, Plaintiffs have not proffered evidence to demonstrate that, when viewed 5 holistically in the context of the other Gartenberg factors, Davis’ profits were out of proportion 6 to the services rendered. See Schuyt v. Rowe Price Prime Reserve Fund, Inc., 663 F. Supp. 962, 7 989.77 (S.D.N.Y.), aff'd, 835 F.2d 45 (2d Cir. 1987) (finding that a profit margin of 77.3% 8 was not excessive, but noting that it could be depending on other factors, such as the quality of 9 the services or the strength of the board’s process).

10 Impact of the Gartenberg Factors

1] Having considered ail the relevant Gartenberg factors, in light of the substantial 12 deference owed to the Board based on its strong Section 15(c) process, the Court concludes that 13 Plaintiffs have failed to proffer sufficient facts to permit a rational trier of fact to find that Davis 14 breached its Section 36(b) fiduciary duties, Plaintiffs have not demonstrated that the fees Davis 15 charged to the Fund were beyond the range charged by comparable funds, leaving the Court to 16 consider only the factors of performance and profitability. That Davis could have still made a 17 profit had it charged the Fund less, where the aggregate fees that it charged fell within the range 18 paid by comparable funds, is insufficient to support a breach of fiduciary duty claim, and finding 19 a violation on this record would effectively amount to imposing a billing regime. See 20 Gartenberg, 694 F.2d at 928. Underperformance alone is also insufficient to support a breach of

23 Plaintiffs have not proffered any argument as to the remaining Gartenberg factors. These factors thus do not support Plaintiffs’ claim of breach of fiduciary duty.

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fiduciary duty claim, and imposing liability based on profits during periods of poor performance, 2 which Plaintiffs have not established was particularly marked, would similarly put the Court in 3. the position of setting fees in a performance-based billing regime. See Amron v, Morgan 4 Stanley Inv. Advisers Inc., 464 F.3d 338, 344 (2d Cir. 2006) (“{U]nderperformance alone [is] 5 insufficient to prove that an investment adviser’s fees are excessive.” (internal quotation marks 6 and citation omitted)).

7 Here, the Board followed a conscientious IAA approval process, warranting 8 substantial deference to its decision, and relevant comparator funds charge similar fees. See 9 Schuyt, 663 F. Supp. at 979, 988-89 (77.3% profit margin was not excessive enough to support a 10 positive finding on profitability);“ see also Pirundini, 2019 WL 1254817, at *3 (2d Cir. 2019) {1 (dismissing case where plaintiff made at least some showing with respect to three Gartenberg 12 factors, but did not make sufficient allegations of comparable funds). Furthermore, Plaintiffs 13 have not proffered sufficient evidence to support a rational conclusion that Davis’ performance 14 was so deficient and its profits so great that its fees were disproportionate to its services. 15 Accordingly, Plaintiffs have failed to raise a genuine issue of material fact as to whether the fees paid by the Fund were outside of the range that could have been produced through arm’s-length 17 bargaining.

a4 The Schuyt court noted that its holding was not based only on the magnitude of the profit margin and explained that a similar margin could be excessive in other circumstances, such as if the quality of the services was poor or if the board was less qualified. Id. at 989 n.77. Here, as explained above, significant countervailing factors, including the evidence that the total fees were within the range of comparable funds and the lack of evidence that the Fund’s underperformance was drastic, preclude liability based on a profit margin similar to the 77.3% at issue in Schuyt.

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l CONCLUSION

2 For the foregoing reasons, Defendants’ motion for summary judgment dismissing Plaintiffs’ complaint is granted. Defendants’ motion to preclude is granted in part and denied in 4 part and Plaintiffs’ motion to preclude is denied.

5 The Clerk of Court is respectfully requested to enter judgment dismissing the 6 complaint and to close the case.

7 Docket Entry Nos, 102, 118, and 133 are resolved,

8 9 SO ORDERED, 10 11 Dated: New York, New York 12 May 30, 2019 13 14 /s/ Laura Taylor Swain 15 LAURA TAYLOR SWAIN 16 United States District Judge

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