*

The Honorable Sonia Sotomayor, originally a member of this panel, was elevated to the

Supreme Court on August 8, 2009. The Honorable Ralph K. Winter was designated as the third

member of this panel. See 2nd Cir. Internal Operating Procedures E(b).

** The Honorable Charles S. Haight, Jr., United States District Court Judge for the Southern

District of New York, sitting by designation. 

08-0038-cv

In Re: Salomon Smith Barney Mutual Fund Fees Litigation

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY

ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE

OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY

ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL

APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY

CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY

COUNSEL.

1 At a stated term of the United States Court of Appeals for the Second Circuit, held at the Daniel

Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on the 9th 2 day

3 of June, two thousand eleven,

4

5 PRESENT:

6 RALPH K. WINTER

7 BARRINGTON D. PARKER,

Circuit Judges,* 8

9 CHARLES S. HAIGHT, JR.

District Judge.

** 10

11 __________________________________________

12

13 The R.W. Grand Lodge of F. & A.M. of Pennsylvania, Larry D. Turner, Kathleen Fitzgerald, Chanda

14 Maxwell, Ryan Maxwell, Tony C. Evans, Michelle Gomez, Barbara Kopf, Lorraine Steele, Linda

15 Rotskoff, Julie A. May, Carol Chiumento, Ruth Kurby, Eric J. Clark, Vera Gould, R. Alan Mauer,

16 Nickolas J. Borders, Jerome Caplan, Dale E. Warfield, Jerome Frizzle, Magnoria R. Frizzle, Claus

17 Naehrig, Philip J. Rosewarne,

18

19 Plaintiffs-Appellants, 

20

21 Salomon Funds Lead Plaintiff Movants, No. 08-0038-cv

22

23 Plaintiff, 
2

1

2 Smith Barney Massachusetts Municipals,

3

4 Debtor, 

5 

6

7 v. No. 08-0038-cv

8

9 Salomon Brothers All Cap Value Fund, Salomon Brothers Balanced Fund, Salomon Brothers California

10 Tax Free Bond Fund, Salomon Brothers Capital Fund, Salomon Brothers High Yield Bond Fund,

11 Salomon Brothers International Equity, Salomon Brothers Investors Value Fund, Salomon Brothers

12 Large Cap Growth Fund, Salomon Brothers Mid Cap Fund, Salomon Brothers National Tax Free Bond,

13 Salomon Brothers New York Tax Free Bond Fund, Salomon Brothers SB Capital and Income Fund,

14 Salomon Brothers SB Growth & Income Fund, Salomon Brothers Short/Intermediate U.S. Government

15 Fund, Salomon Brothers Small Cap Growth Fund, Salomon Brothers Strategic Bond Fund, Smith Barney

16 Aggressive Growth Fund, Smith Barney All Cap Growth and Value Fund, Smith Barney Appreciation

17 Fund, Smith Barney Arizona Municipals Fund, Smith Barney Balance Portfolio, Smith Barney California

18 Municipals Fund, Smith Barney Classic Values Fund, Smith Barney Conservative Portfolio, Smith

19 Barney Diversified Large Cap Growth Fund, Smith Barney Diversified Strategic Income Fund, Smith

20 Barney Dividend and Income Fund, Smith Barney Financial Services Fund, Smith Barney Florida

21 Portfolio, Smith Barney Fundamental Value Fund, Smith Barney Georgia Portfolio, Smith Barney Global

22 All Cap Growth and Value Fund, Smith Barney Global Government Bond Portfolio, Smith Barney

23 Global Portfolio, Smith Barney Government Securities Fund, Smith Barney Group Spectrum Fund,

24 Smith Barney Growth Portfolio, Smith Barney Hansberger Global Value Fund, Smith Barney Health

25 Sciences Fund, Smith Barney High Growth Portfolio, Smith Barney High Income Fund, Smith Barney

26 Income Portfolio, Smith Barney Intermediate Maturity California Municipals Fund, Smith Barney

27 Intermediate Maturity New York Municipals Fund, Smith Barney International All Cap Growth

28 Portfolio, Smith Barney International Large Cap Fund, Smith Barney Investment Grade Bond Fund,

29 Smith Barney Large Cap Core Fund, Smith Barney Large Cap Growth and Value Fund, Smith Barney

30 Large Cap Value Fund, Smith Barney Large Capitalization Growth Fund, Smith Barney Limited Term

31 Portfolio, Smith Barney Managed Governments Fund, Smith Barney Managed Municipals Fund, Smith

32 Barney Mid Cap Core Fund, Smith Barney Municipal High Income Fund, Smith Barney National

33 Portfolio, Smith Barney New Jersey Municipals Fund, Smith Barney New York Portfolio, Smith Barney

34 Oregon Municipals Fund, Smith Barney Pennsylvania Portfolio, Smith Barney S & P 500 Index Fund,

35 Smith Barney SB Adjustable Rate Income Fund, Smith Barney SB Capital and Income Fund, Smith

36 Barney SB Convertible Fund, Smith Barney Short-Term Investment Grade Bond Fund, Smith Barney

37 Small Cap Core Fund, Smith Barney Small Cap Growth Fund, Smith Barney Small Cap Growth

38 Opportunities Fund, Smith Barney Small Cap Value Fund, Smith Barney Social Awareness Fund, Smith

39 Barney Technology Fund, Smith Barney Total Return Bond Fund, Smith Barney U.S. Government

40 Securities Fund, Collectively Known as the “Proprietary Funds,” Citigroup Global Markets, Inc.,

41 formerly known as Salomon Smith Barney, Inc., formerly known as Salomon Smith Barney Holdings

42 Inc., Salomon Brothers Asset Management, Inc., Smith Barney Fund Management LLC, Citigroup Asset

43 Management, Catherine N. Gray, Jay R. Gerken, Clifford M. Kirtland Jr., Rosalind A. Kochman, Riordan

44 Roett, Jeswald W. Salacuse, Thomas F. Schlafly, Irving Sonnenschein, Elliot J. Berv, Donald M. Carlton,
*** The Clerk of Court is respectfully directed to amend the official caption as shown above.

3

1 A. Benton Cocanougher, Mark T. Finn, Diana Harrington, Susan B. Kerley, C. Oscar Morong Jr.,

2 Richardson Pettit, E. Kirby Warren, William Woods Jr., Les Gelb, Riley C. Gilley, Stephen Randolph

3 Gross, Alan G. Merten, Walter E. Robb III,

4

5 Defendants-Appellees,

6

7 Smith Barney Adjustable Rate Government Income Fund, Smith Barney Concert Series Inc., Smith

8 Barney Equity Funds, Smith Barney Funds Inc., Smith Barney Institutional Cash Management Fund,

9 Smith Barney Investment Funds Inc., Smith Barney Investment Series, Smith Barney Investment Trust,

10 Smith Barney Money Funds Inc., Smith Barney Multiple Discipline Trust, Smith Barney Muni Funds,

11 Smith Barney Municipal Money Market Fund Inc., Smith Barney Sector Series Funds, Smith Barney

12 Principal Return Fund, Greenwich Street Series Fund, Smith Barney Shearson Aggressive Growth Fund

13 Inc, Smith Barney Shearson Fundamental Value Fund Inc, Smith Barney Shearson Managed

14 Governments Fund Inc., Smith Barney Shearson New Jersey Municipals Fund, Smith Barney Shearson

15 Telecommunications Trust, Travelers Series Fund Inc., Smith Barney Trust II, Smith Barney World

16 Funds Inc., Salomon Brothers Opportunity Fund Inc., Salomon Brothers Series Funds Inc., Smith Barney

17 Income Funds, Salomon Funds Trust, Smith Barney Allocation Series, Inc., Collectively Known as

18 “Proprietary Funds Registrants,” Citigroup Global Markets Holdings, Inc., formerly known as Salomon

19 SmithBarney Holdings,Inc.,CitiGroup,Inc., DwightB.Crane,Joseph J. McCann, Burt N. Dorsett, Rose

20 C. Cornelius, Elliot S. Jaffe, John Does 1-100, Andrew L. Breech, William R. Hutchinson, Paul Hardin,

21 Lee Abraham, Paul Ades, Lloyd J. Andrews, Victor K. Atkins, Walter E. Auch, Herbert Barg, Allan J.

22 Bloostein, MartinBrody, AbrahamE.Cohen, PaoloCucchi,Jane F. Dasher,John Ellis, DonaldR. Foley,

23 Robert A. Frankel, Robert M. Frayn Jr., Leon P. Gardner, Michael Gellert, Rainer N. Greeven, Richard

24 E. Hanson, Susan M. Heilbron, Frank G. Hubbard, Howard J. Johnson, Armon R. Kamesar, Stephen E.

25 Kaufman, David E. Maryatt,Jerome H. Miller, Ken Miller,John J. Murphy, George M. Pavia, Roderick

26 C. Rasmussen, John P. Toolan, Jerry A. Viscione, Julie W. Weston, Robert Lawless, Salomon Brothers

27 Emerging Markets Debt Fund Inc., Salomon Brothers Appreciation Fund Inc., SmithBarney Investment

28 Funds Inc/MD/, Smith Barney Shearson Oregon Municipal Fund,

29

Defendants.

*** 30

31 __________________________________________ 
4

1 APPEARING FOR APPELLANTS: JAMES J. SABELLA, Grant & Eisenhofer P.A., New York,

2 NY (Jerome M. Congress, Janine L. Pollack, and John

3 McFarlane, Milberg Weiss LLP, New York, NY; Charles

4 J. Piven, Brower Piven, A Professional Corporation,

5 Baltimore, MD; Jay W. Eisenhofer, Sidney S. Liebesman,

6 and Naumon Amjed, Grant & Eisenhofer P.A., New York,

7 NY, on the brief), for Plaintiffs-Appellants.

8

9 APPEARING FOR APPELLEES: SEAN M. MURPHY (James N. Benedict, C. Neil Gray, and

10 Andrew W. Robertson, on the brief), Milbank, Tweed,

11 Hadley & McCloy LLP, New York, NY, for Defendants12 Appellees Citigroup Asset Management, Citigroup Global

13 Markets Holdings Inc., Citigroup Global Markets Inc.,

14 Citigroup Inc., Phillip W. Coolidge, Heath B. McLendon,

15 R. Jay Gerken, Salomon Brothers Asset Management, Inc.,

16 and Smith Barney Fund Management LLC. 

17

18 JEANNE M. LUBOJA, Willkie Farr & Gallagher LLP, New

19 York, NY (Joanna Rotgers, and Nancy McCabe, Willkie

20 Farr & Gallagher LLP, New York, NY; Marc De Leeuw,

21 Sullivan & Cromwell LLP, New York, NY, on the brief),

22 for Proprietary Fund, Registrant, and Independent

23 Director Defendants-Appellees.

24

25 Appeal from an order of the United States District Court for the Southern District of New York

26 (Crotty, J.). UPON DUE CONSIDERATION it is hereby ORDERED, ADJUDGED, AND DECREED

27 that the December 3, 2007 order of the district court be AFFIRMED in part and VACATED in part, and

28 the case REMANDED for further proceedings consistent with this order. 

29 Plaintiffs-Appellants, investors in various mutual funds organized by Salomon Smith Barney

30 (n/k/a Citigroup Global Markets Inc.) (“SSB”), appeal from a December 4, 2007 final judgment of the

31 United States District Court for the Southern District of New York (Crotty, J.) dismissing two complaints

32 for failure to state a claim. Plaintiffs’ First Consolidated Amended Class Action Complaint (the “CAC”)

33 asserted thirteen claims for relief under various state and federal laws including, sections 11 and 12(a)(2)

34 of the Securities Act of 1933 (the “1933 Act”), 15 U.S.C. §§ 77k and 77l(a)(2), section 10(b) of the
5

1 Securities Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated

2 thereunder, 17 C.F.R. § 240.10b-5, and section 36(b) of the Investment Company Act of 1940 (the

3 “ICA”), 15 U.S.C. § 80a-35(b).

4 In a decision and order entered July 26, 2006, Judge Crotty granted Defendants’ motion to

5 dismiss all claims raised in the CAC. In re Salomon Smith Barney Mut. Fund Fees Litig., 441 F. Supp.

6 2d 579 (S.D.N.Y. 2006) (“SSB I”). The court dismissed the ICA section 36(b) claim on three grounds:

7 (1) Plaintiffs were required to, but did not, plead those claims derivatively; (2) Plaintiffs did not clearly

8 allege that the compensation complained of was received by investment advisers or affiliates, the only

9 people liable under section 36(b), and (3) Plaintiffs failed to allege sufficient factual allegations as to why

10 the total amount of fees was so disproportionately large that it could not have been the product of arm’s11 length bargaining. Id. at 597-603. However, the court granted Plaintiffs leave to replead their section

12 36(b) claim derivatively. Id. at 603. 

13 The court dismissed Plaintiffs’ federal securities claims because Plaintiffs failed to properly

14 allege loss causation. Id. at 588-91. The court also found that Plaintiffs did not have standing to assert

15 federal securities claims with respect to funds in which they did not own shares, and on that basis,

16 dismissed all claims against Defendants whose only connection to the suit was to those funds. Id. at 608.

17

18 In a Second Consolidated Amended Complaint (the “SCAC”) filed on October 16, 2006,

19 Plaintiffs repleaded their section 36(b) claim derivatively. In a decision and order entered December 3,

20 2007, the district court again dismissed the section 36(b) claim, this time with prejudice, because

21 Plaintiffs’ allegations failed to satisfy the standard established by this Court in Gartenberg v. Merrill

22 Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982). In re Salomon Smith Barney Mut. Fund

23 Fees Litig., 528 F. Supp. 2d 332 (S.D.N.Y. 2007) (“SSB II”). 
6

1 We assume the parties’ familiarity with the underlying facts, which are aptly summarized by the

2 district court in SSB I, and the issues presented on appeal. 

3 We review a district court’s dismissal of a complaint pursuant to Federal Rule of Civil Procedure

4 12(b)(6) for failure to state a claim de novo. DiFolco v. MSNBC Cable LLC, 622 F.3d 104, 110 (2d Cir.

5 2010). 

6

7 I. Securities Fraud Claims

8 We affirm dismissal of Plaintiffs’ securities fraud claims for substantially the same reasons

9 articulated by the district court. Plaintiffs have failed to adequately tie a material misrepresentation or

10 omission to an economic loss. See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 346-47 (2005); see also

11 Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 173 (2d Cir. 2005) (“[T]o establish loss causation,

12 a plaintiff must allege that the subject of the fraudulent statement or omission was the cause of the actual

13 loss suffered . . . .” (internal quotation mark and alteration omitted)). In other words, Plaintiffs do not

14 plead sufficient facts to support an inference that the information omitted or misrepresented regarding

15 improper steering, excessive fees, and conflicted transactions proximately caused a decline in the value

16 of their mutual fund shares.

17

18 II. ICA Claims

19 Section 36(b) of the ICA imposes a fiduciary duty on a mutual fund’s investment adviser “with

20 respect to the receipt of compensation for services.” 15 U.S.C. § 80a-35(b). Section 36(b) also provides

21 a private right of action to a mutual fund investor, against the fund’s investment adviser, “for breach of

22 fiduciary duty in respect of such compensation” paid to the investment adviser by the fund. Id. In Jones

23 v. Harris Associates L.P., the Court adopted this Circuit’s approach in Gartenberg as a proper
1 See generally, Press Release, Securities and Exchange Commission, Citigroup to Pay $208

Million to Settle Charges Arising from Creation of Affiliated Transfer Agent to Serve Its

Proprietary Mutual Funds (May 31, 2005), http://www.sec.gov/news/press/2005-80.htm (last

visited June 8, 2011).

7

1 formulation for determining whether mutual fund fees violate section 36(b). 130 S. Ct. 1418, 1425-26

2 & n.5 (2010) (citing Gartenberg). Under Gartenberg, “the test is essentially whether the fee schedule

3 represents a charge within the range of what would have been negotiated at arm’s-length in the light of

4 all of the surrounding circumstances.” 694 F.2d at 928. In applying this test, “all pertinent facts must

5 be weighed” to determine whether an investment adviser’s compensation constitutes a breach of

6 fiduciary duty to mutual fund investors. Jones, 130 S. Ct. at 1425 (citing Gartenberg, 694 F.2d at 929).

7 Applying this standard, we find that dismissal of most of Plaintiffs’ section 36(b) claims was

8 warranted. However, Plaintiffs’ allegations regarding fees for transfer agent services state a claim. See

9 SCAC ¶¶ 85-86. Plaintiffs allege that Defendants caused the SSB Funds to negotiate a contract with an

10 SSB affiliate to replace the Funds’ existing transfer agent. Once it replaced the existing agent, the SSB

11 affiliate then sub-contracted with that agent to continue to perform virtually the same services that it had

12 previously performed, but at a steep discount. Rather than pass the resulting savings on to investors in

13 the form of lower fees, SSB’s affiliate kept the windfall, permitting Defendants to profit at the expense

14 of the SSB Funds and their investors. 

15 In our view, the transfer agent arrangement alleged in the SCAC constitutes a garden variety

breach of fiduciary duty.1 16 We recently considered similar allegations in a case argued in tandem with

17 this one, and involving some of the same defendants. See Operating Local 649 Annuity Trust Fund v.

18 Smith Barney Fund Mgmt. LLC, 595 F.3d 86 (2d Cir. 2010). In Operating Local 649, we determined

19 that, as a result of the alleged transfer agent arrangement, the “shareholders were being grossly

20 overcharged for transfer agent services and [the investment adviser] was reaping the benefits.” Id. at 93.

21 In effect, “the Fund investors . . . were at the mercy of a faithless fiduciary.” Id. We have little trouble
2

 Because the transfer agent services arrangement was only vaguely referenced, if at all, in the

CAC, our conclusion with respect to Plaintiffs’ securities fraud claims remains unchanged. 

3

 Because we affirm dismissal of Plaintiffs’ securities fraud claims, we do not consider whether

the named Plaintiffs can bring securities claims on behalf of investors in SSB Funds in which the

named Plaintiffs did not invest. 

8

1 concluding that, as alleged, transfer agent services fees resulting from this particular arrangement bear

2 no reasonable relationship to the services rendered, could not have been the product of arm’s length

3 bargaining, and as a result, adequately support an alleged violation of section 36(b). This conclusion is

4 reinforced by reference to certain Gartenberg factors. See Amron v. Morgan Stanley Inv. Advisors Inc.,

5 464 F.3d 338, 340 (2d Cir. 2006) (listing Gartenberg factors). For example, with respect to the nature

6 and quality of services provided, the alleged transfer agent scheme suggests that Plaintiffs overpaid for

7 the transfer agent services that they received under the renegotiated contract. Defendants knowingly

8 inflated the price of the transfer agent services provided to Plaintiffs and pocketed the difference between

what they charged and what the services were worth.2 9 Thus, we remand to the district court for

10 reconsideration of Plaintiffs’ section 36(b) claim regarding the transfer agent fees. 

We have considered the parties’ remaining claims and find them to be without merit.3 11

12 Accordingly, for the foregoing reasons, the judgment of the district court with respect to Plaintiffs’ 1933

13 Act and 1934 Act claims is AFFIRMED, while the judgment with respect to their ICA section 36(b)

14 claim is VACATED and REMANDED for further proceedings consistent with this order.

15 FOR THE COURT:

16 Catherine O’Hagan Wolfe, Clerk