Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-00883/USCOURTS-cand-3_04-cv-00883-4/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1331 Fed. Question

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SUSAN STRIGLIABOTTI, et al.,

Plaintiffs,

 v.

FRANKLIN RESOURCES, INC., et al.,

Defendants.

 /

No. C 04-00883 SI

ORDER PARTIALLY GRANTING AND

PARTIALLY DENYING DEFENDANTS’

MOTION FOR JUDGMENT ON THE

PLEADINGS

On November 4, 2005, the Court heard oral argument on defendants’ motion to dismiss, which was

re-noticed as a motion forjudgment on the pleadings pursuant to FederalRule ofCivil Procedure 12(c). After

careful consideration of the arguments of counsel and the papers submitted, the Court hereby GRANTS

defendant’s motion to the extent it seeks dismissal of defendant Franklin Templeton Services with respect to

plaintiffs’ claims under Section 36(b) of the Investment Company Act, and DENIES the remainder of

defendant’s motion.

 

BACKGROUND

1. Factual background

 This action is brought by shareholders of several mutual funds (“Funds”) created, sold, advised, and

managed as part of the Franklin Templeton fund family (“the Fund Complex”). Specifically, the Funds are

TempletonGrowth Fund, Franklin Balance SheetInvestment Fund, Franklin FlexCap Growth Fund, Franklin

Income Fund, Franklin Small-Mid Cap Growth Fund, Franklin Biotechnology Discovery Fund, MutualShares

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 On March 4, 2004, plaintiffs filed this action on behalf of five funds; they amended the complaint on

June 3, 2004, adding Franklin Income Fund, Franklin Small-Mid Cap Growth Fund, Franklin Biotechnology

Discovery Fund, Mutual Shares Fund, and Franklin Utilities Fund as plaintiffs, and adding as defendants

Franklin Mutual Advisers, LLC, and Franklin Templeton Services, LLC. 

2

 Plaintiffs added the class allegations to the Third Amended Complaint. This order does not address

whether plaintiffs’state law claims should be certified, and the Court will resolve that issue in connectionwith

plaintiffs’ motion for class certification, currently scheduled for argument in January 2006.

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Fund, and Franklin Utilities Fund. Third Am. Compl. (“Compl.”) at ¶ 1.1 Plaintiffs are nine individuals who

bring suit both in their own rights and for the use and benefit of the aforementioned funds. Id. Plaintiff Susan

Strigliabotti also brings this case on behalf of a class consisting of all residents of the State of California who

were shareholders of the Templeton Growth Fund, the Franklin Balance Sheet Investment Fund, and/or the

Franklin Flex Cap Growth Funds at any time from March 4, 2000 to the present. Id. at ¶ 45.2

Defendants are Franklin Resources, Inc., Templeton Global Advisors, Ltd., Franklin Advisory

Services, LLC, Franklin Advisers, Inc., Franklin TempletonDistributors,Inc.,Franklin MutualAdvisers, LLC,

and Franklin Templeton Services, LLC. Id. at ¶ 2. They are various investment advisors affiliated with a single

parent company, also a defendant, Franklin Resources, Inc. (“Franklin Resources”), a publicly traded company

incorporated in Delaware and headquartered in San Mateo, California. Id. 

Plaintiffs allege that defendants receive advisory fees fromthe Funds for investment advisory services

and administrative services, and these fees are based on a percentage of the net assets of each of the Funds.

Id. at ¶ 6. Defendants also charge distribution fees for marketing, selling, and distributing mutual fund shares

to new shareholders under “Distribution Plans” adopted pursuant to Rule 12b-1, 17 C.F.R. § 270.12b-1. Id.

at ¶ 9. These distribution fees are based on a percentage of the net assets of each of the funds in the Fund

Complex and amount to more than $7 million annually. Id. Plaintiffs allege that the advisory fees charged by

defendants are higher than those for other fundsfor which defendants performequivalentservices, and that the

distributionfees are excessive, in violationofRule 12b-1 and § 36(b) ofthe Investment Company Actof1940.

Plaintiffs specifically claim that, despite significantgrowth inthe Funds since 1983, they have not benefitted from

the economies ofscale and instead have been charged advisory and distributionfeesthat are disproportionately

large in relation to the services provided. Id. at ¶¶ 13-15. 

Plaintiffs seek to either rescind the investment advisory agreements and Distribution Plans and recover

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the total fees charged by defendants, or, in the alternative, to recover the excess profits resulting from

economies of scale wrongfully retained by defendants, and any other excessive compensation or improper

payments received and retained by defendants in breach of their fiduciary duty under § 36(b), 15 U.S.C. §

80a-35(b), and state law. Id. at ¶ 28. The Third Amended Complaint allegesindividualand derivative claims

for: (Count I) breach of fiduciary duty under § 36(b) for excessive investment advisory fees; (Count II) breach

offiduciary duty under § 36(b) for excess profitsfromeconomies of scale; and (Count III) breach of fiduciary

duty under § 36(b) for excessive Rule 12b-1 distribution fees and extraction of additional compensation for

advisory services. The Complaint also alleges individual, derivative, and class claims for: (Count IV) breach

offiduciary duty under California law; (Count V) civil conspiracy to breach fiduciary duty under California law;

(Count VI) common law aiding and abetting breaches of fiduciary duty by Franklin Resources; (Count VII)

“acting in concert” under § 876(b) of the Restatement (Second) of Torts; (Count VIII) breach of Cal. Business

& Professions Code § 17200; and (Count IX) common law unjust enrichment. 

2. Procedural background

Plaintiffsfiledtheir complaint on March 4, 2004, and filed a First Amended Complaint on June 3, 2004.

Defendants filed a motion to dismissthe First Amended Complaint pursuant to FederalRule ofCivil Procedure

12(b)(6). In thatmotion to dismiss, defendants contended, inter alia, that plaintiffs’ claims in Counts I, II, and

III under Section 36(b) of the Investment Company Act of 1940 were deficient because the complaint

contained vague allegations that did not sufficiently detail the excessiveness of fees charged in relation to

services provided. In an order filed March 7, 2005, the Court rejected that argument and held that plaintiffs

had sufficiently pled their claims under Section 36(b). The Court also dismissed certain claims without leave

to amend and dismissed other claims with leave to amend.

Plaintiffs filed a Second Amended Complaint on March 21, 2005. That complaint made a few

substantive changes in response to the Court’s March 7, 2005 order. Defendants filed an answer to the

Second Amended Complaint on April 11, 2005. Pursuant to a stipulated order by the Court, plaintiffs filed

a Third Amended Complaint on August 17, 2005. The Third Amended Complaint is identical to the Second

Amended Complaint except for the addition of class action allegations based on California law (Counts IV

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through IX), and the deletion of claims related to two funds. 

On September 29, 2005, defendants filed a motion to dismissthe Third Amended Complaint pursuant

to Rule 12(b)(6). After plaintiffs filed their opposition to the motion to dismiss, in which they argue, inter alia,

that the motion to dismiss is procedurally improper, defendants filed an answer to the Third Amended

Complaint on October 20, 2005. Defendants also re-noticed their Rule 12(b)(6) motion as an alternative

motion for judgment on the pleadings pursuant to Rule 12(c). 

Defendants’ instant motion contends that plaintiffs’ Section 36(b) claims must be dismissed because

plaintiffs have failed to plead any facts that the fees charged to any particular fund were excessive in relation

to any particularfund. Defendants also contend that plaintiffs’ newly asserted California class claims must be

dismissed either for lack of jurisdiction (assuming dismissal of the federal claims), or dismissed because they

are preempted by the Securities Litigation Uniform Standards Act(“SLUSA”). Plaintiffs oppose defendants’

motion on the grounds that it is an improper “second bite at the apple” in violation of Rule 12 and barred by

the law of the case. On the merits, plaintiffs contend they have adequately pled claims under Section 36(b),

and that their state law claims are not preempted by SLUSA.

LEGAL STANDARD

“After the pleadings are closed but within such time as not to delay the trial, any party may move for

judgment on the pleadings.” Fed. R. Civ. Proc. 12(c). Rules 12(b)(6) and 12(c) are substantially identical.

See WilliamW. Schwarzer, A. Wallace Tashima & James M. Wagstaffe, FederalCivil Procedure Before Trial

§ 9:319. Under either provision, a court must determine whether the facts alleged in the complaint, to be taken

for these purposes as true, entitle the plaintiff to a legalremedy. Id. If the complaint fails to articulate a legally

sufficient claim, the complaint should be dismissed or judgment granted on the pleadings.

While Rule 12(c) of the Federal Rules of Civil Procedure does not expressly provide for partial

judgment on the pleadings, neither does it bar such a procedure; it is common to apply Rule 12(c) to individual

causes of action. Moran v. Peralta Community College Dist., 825 F.Supp. 891, 893 (N.D. Cal. 1993);

Schwarzer et al.,§ 9:340 (1997) (common practice to permit “partial judgment on the pleadings”).

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DISCUSSION

1. Section 36(b) claims

Plaintiffs bring Counts I, II, and III under Section 36(b) of the Investment Company Act of 1940.

Defendants’ motion attacks these claims on the ground that plaintiffs have failed to plead any specific facts that

the fees charged for each ofthe eight funds at issue are excessive. Instead, defendants contend, the Complaint

simply contains a generalized attack on the Franklin Fund Complex, and that even if plaintiffs’ allegations were

true, they would not prove that the fees charged to any particular fund were excessive under Section 36(b).

Defendants also contend that defendantsFranklin Resources and Franklin Templeton should be dismissed with

prejudice because the Third Amended Complaint still does not allege that these defendants were “recipients”

of compensation or payments as required by Section 36(b). 

A. Sufficiency of allegations for Section 36(b) claims 

The parties dispute the propriety ofdefendants’ second motion under Rule 12(b)(6) given the fact that

defendants answered plaintiffs’ Second Amended Complaint. In an effort to avoid plaintiffs’ argument that the

motion is procedurally improper, defendants have also filed an answer to the Third Amended Complaint and

re-noticed the motion as an alternative motion for judgment on the pleadings under Rule 12(c), which can be

filed any time after an answer is filed. Thus, although plaintiffs are correct that defendants’ motion is not

properly filed pursuant to Rule 12(b)(6), defendants may pursue their motion under Rule 12(c). 

Plaintiffs also contend that defendants’ challenges to their Section 36(b) claims are foreclosed by the

law of the case. The Court agrees. Defendants acknowledge that their present arguments regarding plaintiffs’

Section 36(b) claims are a “refined”version oftheir earlier arguments. Defendants’ Second Motion to Dismiss

at 1. A comparison of the first motion to dismiss with the current motion shows that both motions rely on the

same case law and advance the same general attack on plaintiffs’ Section 36(b) claims. For example,

defendants’ first motion contended that the Section 36(b) claims were deficient because “[p]laintiffs simply

name a number ofFunds on whose behalf they claim to be proceeding, and list a series ofdefendants they claim

received ‘excessive or inappropriate compensation.’” Defendants’ First Motion to Dismiss at 2. Defendants

further contended that “plaintiffs ask the Court to assume thatwhatever services any defendant rendered to any

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3

 See Plaintiffs’ Opposition Exh. 2 at 16 (transcript of July 12, 2005 hearing in Berdat v. Invesco

Funds Group, Inc., H-04-CV-2555).

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Fund, ofwhatever nature orquality, producingwhateverresults, under whatever circumstances, must have been

worth less than the Fund paid, whatever that amount may have been.” Id. at 3 (emphasis in original). 

Defendants’ instant challenge to plaintiffs’ Section 36(b) claims is essentially the same, but with a

different emphasis. Whereas defendants previously argued that the complaint lacked specific allegations

regarding the excessiveness offees in relation to services provided, defendants’ current argumentsfocus on the

lack ofsuch specific allegations for each fund. The fact that defense counsel believes that the previous motion

to dismiss was erroneously decided, and erroneously presented by his co-counsel,3is not a persuasive reason

forthe Court to exercise its discretion to revisit an issue that “must have been decided explicitly or by necessary

implicationin the previous disposition.” Lower Elwha Band of S’Kallams v. LummiIndian Tribe, 235 F.3d

443, 452 (9th Cir. 2000). Accordingly, the Court holds that the law of the case doctrine bars defendants’

instant motion for judgment on the pleadings with respect to plaintiffs’ Section 36(b) claims.

 

B. Franklin Resources and Franklin Templeton Services as defendants

Defendants also argue that Franklin Resources and Franklin Templeton Services should be dismissed

with prejudice because plaintiffs have failed to allege that either is “the recipient of such compensation or

payments,” as Section 36(b) requires. Plaintiffs’ opposition essentially concedes that the Third Amended

Complaint does not contain any such allegation against Franklin TempletonServices, and indeed states that “in

the Third Amended Complaint, plaintiffs intended to include defendant Franklin Templeton Services as a

defendant in the state class action allegations only.”Plaintiffs’ Opposition at 15 n. 8. Accordingly, defendants’

motion for judgment on the pleadings on Counts I, II and III with respect to defendant Franklin Templeton

Services is GRANTED. 

With respect to defendant Franklin Resources, plaintiffs contend that they have sufficiently amended

the complaint to include allegations that Franklin Resources is a recipient of compensation or payments under

Section 36(b). The Third Amended Complaint alleges, inter alia, that “Franklin Resources receives

compensation from each of the funds identified herein and earns investment management fee revenues by

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providing, inter alia, investment advisory services pursuant to investment management agreements with each

fund.” Compl. at ¶ 5. The Court holds the Third Amended Complaint adequately alleges that Franklin

Resources receives compensation within the meaning of Section 36(b). 

2. State law claims (Counts IV - IX)

Defendants contend that plaintiffs’ state law claims, Counts IV through IX, are preempted under

SLUSA and thus should be dismissed. SLUSA provides, in pertinent part,

(b) Class action limitations

No covered class action based upon the statutory or common law of any State orsubdivision

thereof may be maintained in any State or Federal court by any private party alleging –

(1) an untrue statement or omission of material fact in connection with the

purchase or sale of a covered security; or

(2) that the defendant used or employed any manipulative or deceptive device

or contrivance in connection with the purchase or sale of a covered security.

15 U.S.C. § 77p(b); see also 15 U.S.C. § 78bb(f)(1). 

Plaintiffs do not dispute that this is a “covered class action” involving a “covered security.” Instead,

the parties’ debate centers on whether plaintiffs’ state law claims are (1) based on allegations of a fraudulent

scheme or an untrue statement or omission of material fact on the part of defendants, (2) “in connection with

the purchase orsale” of a covered security. Plaintiffs contend that the gravamen of their state law claims is not

a claim for fraud, but instead a claim that defendants were under a duty to charge only reasonable fees for the

services they provided; thatthey breached this duty by charging unreasonable and excessive fees; and that by

reason of these overcharges, plaintiffs and other investors were damaged. 

A. Fraud or misrepresentation

Defendants cite paragraphs 54, 55, 73, 93, 98, 111, 119, 121 and 122 of the Third Amended

Complaint for their contention that plaintiffs have alleged that defendants have omitted or misrepresented

material facts in connection with the purchase or sale of covered securities. A review of these paragraphs

demonstrates that plaintiffs have alleged that defendants have omitted or misrepresented facts. See e.g., ¶ 73

(“[T]he soft dollar arrangements are concealed from the shareholders of the Funds in breach of Defendants’

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 See 15 U.S.C. § 78j(b) (prohibiting fraud “in connectionwith the purchase orsale of any security”);

17 C.F.R. § 240.10b-5 (prohibiting, inter alia, materialmisrepresentations and omissions “in connectionwith

the purchase or sale of any security”).

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fiduciary duty); ¶ 121 (“Documents circulated by Class Defendants are unfair and misleading in that they

represent implicitly or expressly that the fees charged by or on behalf of Class Defendants are fair and proper

when they are exorbitant and excessive. In effect, Class Defendants have masked the true extent of the fees

they charge, thereby lulling investors into a false sense of security that they are trustworthy fiduciaries . . . .”).

Plaintiffs contend that although there are various allegations in the complaint that mention certain

misrepresentations and omissions made by defendants, these allegations do not go to the heart of their

complaint. Plaintiffs’ Opposition at 17. However, this argument ignores the plain language of SLUSA, which

preempts claims alleging “an untrue statement or omission of material fact” in connectionwith the purchase or

sale of a covered security. 15 U.S.C. § 77p(b). Plaintiffs contend that their claims are not dependent in any

way on proving fraud or misrepresentation, and in the event the Court concludes that plaintiffs have alleged “an

untrue statement or omission of material fact” under SLUSA, plaintiffs seek leave to amend their state law

claims.

B. “In connection with the purchase or sale of securities”

However, even if plaintiffs have alleged misrepresentations or omissions on the part ofdefendants, such

acts must be “in connection with the purchase or sale of securities” in order for plaintiffs’ state law claims to

be preempted. Id. Courts interpreting SLUSA’s “in connection” requirement have looked to the case law

interpreting nearly identical language as used in Section 10(b) and Rule 10b-5 of the Securities and Exchange

Act of 1934.4 See Falkowski v. Imation Corp., 309 F.3d 1123, 1129 (9th Cir. 2002), as amended, 320

F.3d 905 (9th Cir. 2003). 

The Supreme Court recently interpreted this language in SEC v. Zandford, 535 U.S. 813 (2002), an

action under Section 10(b) and Rule 10b-5. The Court held that the requisite connection is established where

a “fraudulent scheme” and a securities transaction “coincide.” Id. at 825. The Court noted that although this

language should be interpreted “flexibly to effectuate itsremedialpurposes,” it “does not transformevery breach

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offiduciary duty into a federalsecurities violation.” Id. at 819, 825 n.4. Following Zandford, the Ninth Circuit

analyzed the “in connection with” requirement and held:

The fraud in question must relate to the nature of the securities, the risks associated with their

purchase or sale, or some other factor with similar connection to the securities themselves.

While the fraud in question need notrelate to the investment value ofthe securitiesthemselves,

it must have more than some tangential relation to the securities transaction.

Falkowski, 309 F.3d 1130-31 (quoting Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017, 1026

(9th Cir. 1999)). 

Defendants contend that plaintiffs’ claims are preempted under Falkowski because “[b]y allegedly not

disclosing all the facts about the alleged conflict of interest and the lack of a basis for the costly Distribution

Plans, defendants allegedly failed to disclose a risk to investorsthat the returns on their investmentsin the Funds

would be reduced by the excessive fees that defendants would continue to charge.” Defendants’ Reply at 8.

However, defendants’ argument misses the point because in order to be preempted by SLUSA, plaintiffs’

claims must be “in connection with the purchase or sale” of securities; plaintiffs’ allegations that defendants

charge excessive fees in relation to the advisory services performed does not turn on the purchase or sale of

a security.

Further, most of the cases cited by defendants are distinguishable because the claims at issue more

directly involved sales or purchases of securities. See, e.g., Prof’l Mgmt. Assocs. Inc. Employees’ Profit

Sharing Plan v. KPMG LLP, 335 F.3d 800, 803 (8th Cir. 2003) (preempting claims alleging plaintiffs relied

on defendant’s false financial reports when buying and retaining stock); In re Enron Corp. Securities

Derivative & ERISA Litig., 284 F. Supp. 2d 511, 636 (S.D. Tex. 2003) (preempting claims that plaintiffs

were fraudulently induced into purchasing and retaining employee stock options); Feitelberg v. Merrill Lynch

& Co., 234 F. Supp. 2d 1043, 1052 (N.D. Cal. 2002) (preempting claims that plaintiffs purchased stock in

reliance on defendant’s unfair and/or deceptive company ratings); Kenneth Rothschild Trust v. Morgan

Stanley Dean Witter, 199 F. Supp. 2d 993, 999 (C.D. Cal. 2002) (preempting claims alleging defendant

failed to pay interest on monies temporarily deposited in mutual fund prior to purchase of CD); Prager v.

Knight/Trimark Corp., 124 F. Supp. 2d 229, 234 (D.N.J. 2000) (preempting claims alleging defendant

improperly used information about retail customers’ trades for its own profit before executing customers’

trades).

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The only cases cited by defendants that are somewhatsimilar to the instant one are the Third Circuit’s

decision in Rowinski v. Salomon Smith Barney, 398 F.3d 294 (3rd Cir. 2005), and a New Jersey district

court case In re Lord Abbett Mutual Funds Fee Litigation, 385 F. Supp. 2d 471 (D.N.J. 2005). In

Rowinski, an investor brought a state-court class action against an investment brokerage firm alleging that the

firm had disseminated biased analyses of certain securities in order to favor the firm’s investment banking

clients. The plaintiff alleged that Salomon Smith Barney breached the parties’ services contract, unjustly

enriched Solomon Smith Barney, and violated state consumer protection law. After Salomon Smith Barney

removed the case to federal court, the district court dismissed the plaintiff’s claims based on SLUSA

preemption, and the Third Circuit affirmed, holding that the complaint alleged a fraudulent scheme coinciding

with the purchase or sale of securities:

Salomon Smith Barney systematically misrepresented the value of securities to the investing

public in order to curry favorwith investment banking clients and reap hundreds of millions of

dollars in investment banking fees. For this purported scheme to work, investors must

purchase the misrepresented securities. Absent purchases by duped investors and a

corresponding inflation in the share price, Salomon Smith Barney’s biased analysis would fail

to benefit its banking clients and, in turn, would fail to yield hundreds of millions of dollars in

investment banking fees. The scheme, in other words, necessarily ‘coincides’ with the

purchase or sale of securities.

Id. at 302 (citing Zandford, 535 U.S. at 825).

In the Lord Abbett case, plaintiffs were shareholders in mutual funds who brought a class and

derivative action challenging broker compensation practices employed by Lord Abbett pursuant to which

brokers were allegedly compensated excessively as an incentive for them to steer new investors into Lord

Abbett mutual funds. 385 F. Supp. 2d at 474. Relying on Rowinski, the court in Lord Abbett held that the

plaintiffs’ claims were preempted by SLUSA: 

The gravamen of Plaintiffs’ Complaint in this case is that Lord Abbett made improper,

undisclosed, and excessive payments to brokers to induce them to aggressively market the

Funds, which practices caused Fund shareholders to suffer a decline in net asset value per

share despite also causing overall Fund growth (which growth, coincidentally, boosted Lord

Abbett’s management fees). For this scheme to work and cause harm to Plaintiffs, however,

new investors must purchase shares of the Fund. This scheme, therefore, like the scheme in

Rowinski, necessarily “coincides” with the purchase or sale of securities. 

Id. at 484.

Here, plaintiffs allege that defendants charge excessive fees in relation to the advisory services they

provide to the Funds, and they do not allege that they were induced into purchasing or selling any securities,

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 This paragraph, which is contained in Count III (ICA § 36(b) – Breach of Fiduciary Duty), is

incorporated by reference in the state law causes of action. 

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or that defendants’ actions led them to hold on to their securities longer than theywould have otherwise. The

only transactions that are described or referred to in the complaint are the following:

• “Another example is where Defendants use fund assets, in violation of Rule 12b-1, to

participate in pay-to-play schemes such as ‘directed brokerage,’ where the Defendants cause

the Funds to make payments over and above the payments permitted under the Funds’ 12b-1

plan limits. Defendants direct the Funds’ brokerage business to brokerage firms and pay them

above market rates to promote Defendants’ mutual funds over other funds sold by the

brokerage firms. On information and belief, payments are also improperly channeled to

employee benefit fund fiduciaries and/or advisors to compensate them for selecting Franklin

Templeton funds on their retirement plan menus. These payments are illegal and improper

under federal law and the common law.” ¶ 56. 

• “Other, easier to quantify, benefits include ‘soft dollars’ payable from broker-dealers.

Essentially, ‘soft dollars’ are credits furnished to Defendants from broker-dealers and other

securities-industry firms in exchange for routing the Funds’ securities transaction orders and

other business to paying firms. These soft dollar credits should be used to purchase research

and other goods or services that benefit the shareholders of the Funds. On information and

belief, however, the soft-dollar arrangements benefit Defendants and result in increased costs

to the shareholders of the Funds with little to no corresponding benefits to the shareholders of

the Funds. On information and belief, the soft dollar arrangements are concealed from the

shareholders of the Funds in breach of Defendants’ fiduciary duty.” ¶ 73.

• “The distribution fees charged and received by Defendants or their affiliates were designed to,

and did, extract additional compensation for Defendants’ advisory services in violation of

Defendants’ fiduciary duty under § 36(b). When Defendants first initiated the Distribution

Plans, they represented that the distribution fees were being collected in order to, at least in

part, grow the assets ofthe Funds in order to reduce the cost to Plaintiffs and the shareholders

of the Funds of providing advisory services. Although the distribution fees may have

contributed to the growth in assets of the Funds, the resulting economies ofscale benefits only

Defendants, and not Plaintiffs or the Funds.” ¶ 93.5

The transactions at issue in the instant case are betweendefendants and third parties, and do not involve

any purchase or sale of securities by plaintiffs (or classmembers) themselves. The gravamen of plaintiffs’

complaint does not concern the purchase orsale ofsecurities by the third parties; the “scheme” challenged by

plaintiffs does not turn on the purchase or sale of securities, although the purchase or sale ofsecurities may be

tangentially related. Instead, plaintiffs allege that defendants have engaged in transactions that should have

reduced defendants’ costs in providing advisory services to the Funds, but that defendants did not pass these

savings along to plaintiffs and the Funds and instead defendants kept the savings as additional compensation

forthemselves. Here, to the extent plaintiffs allege defendants misrepresented or omitted facts, such allegations

do not have more a “tangential relation to the securities transaction.” Falkowski, 309 F.3d 1130-31.

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Accordingly, the Court concludes that plaintiffs’ state law claims are not preempted by SLUSA, and hereby

DENIES defendants’ motion to dismiss these claims. 

CONCLUSION

For the foregoing reasons and for good cause shown, the Court hereby PARTIALLY GRANTS and

PARTIALLY DENIES defendant’s motion. [Docket No. 127].

IT IS SO ORDERED.

Dated: November 8, 2005 

 

SUSAN ILLSTON

United States District Judge

Case 3:04-cv-00883-SI Document 145 Filed 11/09/05 Page 12 of 12