* 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.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Daniel 1 Patrick Moynihan United States Courthouse, 500 Pear l Street, in the City of New York, on the 9 th day 2 of June, two thousand eleven, 3 4 PRESENT: 5 RALPH K. WINTER 6 BARRINGTON D. PARKER, 7 Circuit Judge s, * 8 CHARLES S. HAIGHT, JR. 9 District Judge

. ** 10

__________________________________________ 11 12 The R.W. Grand Lodge of F. & A.M. of Pennsylvania, Larry D. Turner, Kathleen Fitzgerald, Chanda 13 M axwell, Ryan Maxwell, Tony C. Evans, Michelle Gomez, Barbara Kopf, Lorraine Steele, L inda 14 Rotskoff, Julie A. Ma y, Carol Chiumento, Ruth Kurby, Eric J. Clark, Vera Gould, R. Alan Mauer, 15 Nickolas J. Borders, Jerome Caplan, Dale E. Warfield, Jerome Frizzle, Magnoria R. Frizzle, Claus 16 Naehrig, Philip J. Rosewarne, 17 18 Plaintiffs-Appellant s, 19 20 Salomon Funds Lead Plaintiff Movants, No. 08-0038-cv 21 22 Plaintiff
, 232 1 Smith Barney Massachusetts Municipals, 2 3 Debtor
, 4 5 6 v. No. 08-0038-cv 7 8 Salomon Brothers All Cap Value Fund, Salomon Brot hers Balanced Fund, Salomon Brothers California 9 Tax Free Bond Fund, Salomon Brothers Capital Fund, Salomon Brothers High Yield Bond Fund, 10 Salomon Brothers International Equity, Salomon Brothers Investors Value Fund, Salomon Brothers 11 Large Cap Growth Fund, Salomon Brothers Mid Cap Fund, Salomon Brothers National Tax Free Bond, 12 Salomon Brothers New York Tax Free Bond Fund, Sa lomon Brothers SB Capital and Income Fund, 13 Salomon Brothers SB Growth & Income Fund, Salo mon Brothers Short/Intermediate U.S. Government 14 Fund, Salomon Brothers Small Cap Growth Fund, Sa lomon Brothers Strategic Bond Fund, Smith Barney 15 Aggressive Growth Fund, Smith Barney All Cap Gr owth and Value Fund, Smith Barney Appreciation 16 Fund, Smith Barney Arizona Municipals Fund, Smith Barney Balance Portfolio, Smith Barney California 17 Municipals Fund, Smith Barney Classic Values Fund, Smith Barney Conservative Portfolio, Smith 18 Barney Diversified Large Cap Growth Fund, Smith Barney Diversified Strategic Income Fund, Smith 19 Barney Dividend and Income Fund, Smith Barney Financial Services Fund, Smith Barney Florida 20 Portfolio, Smith Barney Fundamental Value Fund, Smith Barney Georgia Portfolio, Smith Barney Global 21 All Cap Growth and Value Fund, Smith Barney Global Government Bond Portfolio, Smith Barney 22 Global Portfolio, Smith Barney Government S ecurities Fund, Smith Barney Group Spectrum Fund, 23 Smith Barney Growth Portfolio, Smith Barney Hansberger Global Value Fund, Smith Barney Health 24 Sciences Fund, Smith Barney High Growth Portfo lio, Smith Barney High Income Fund, Smith Barney 25 Income Portfolio, Smith Barney Intermediate Maturity California Municipals Fund, Smith Barney 26 Intermediate Maturity New York Municipals Fund, Smith Barney International All Cap Growth 27 Portfolio, Smith Barney International Large Cap Fund, Smith Barney Investment Grade Bond Fund, 28 Smith Barney Large Cap Core Fund, Smith Barney Large Cap Growth and Value Fund, Smith Barney 29 Large Cap Value Fund, Smith Barney Large Capita lization Growth Fund, Smith Barney Limited Term 30 Portfolio, Smith Barney Managed Governments F und, Smith Barney Managed Municipals Fund, Smith 31 Barney Mid Cap Core Fund, Smith Barney Municipal High Income Fund, Smith Barney National 32 Portfolio, Smith Barney New Jersey Municipals Fund, Smith Barney New York Portfolio, Smith Barney 33 Oregon Municipals Fund, Smith Barney Pennsylvani a Portfolio, Smith Barney S & P 500 Index Fund, 34 Smith Barney SB Adjustable Rate Income Fund, Smith Barney SB Capital and Income Fund, Smith 35 Barney SB Convertible Fund, Smith Barney Shor t-Term Investment Grade Bond Fund, Smith Barney 36 Small Cap Core Fund, Smith Barney Small Cap Growth Fund, Smith Barney Small Cap Growth 37 Opportunities Fund, Smith Barney Small Cap Value Fund, Smith Barney Social Awareness Fund, Smith 38 Barney Technology Fund, Smith Barney Total Retu rn Bond Fund, Smith Ba rney U.S. Government 39 Securities Fund, Collectively Known as the “Proprietary Funds,” Citigroup Global Markets, Inc., 40 formerly known as Salomon Smith Barney, Inc., formerly known as Salomon Smith Barney Holdings 41 Inc., Salomon Brothers Asset Management, Inc., Smith Barney Fund Management LLC, Citigroup Asset 42 Management, Catherine N. Gray, Jay R. Gerken, Cli fford M. Kirtland Jr., Rosalind A. Kochman, Riordan 43 Roett, Jeswald W. Salacuse, Thomas F. Schlafly, Irv ing Sonnenschein, Elliot J. Berv, Donald M. Carlton, 44*** The Clerk of Court is respectfully directed to amend the official caption as shown above. 3 A. Benton Cocanougher, Mark T. Finn, Diana Harrington, Susan B. Kerley, C. Oscar Morong Jr., 1 Richardson Pettit, E. Kirby Warren, William Woods Jr., Les Gelb, Riley C. Gilley, Stephen Randolph 2 Gross, Alan G. Merten, Walter E. Robb III, 3 4 Defendants-Appellees
, 5 6 Smith Barney Adjustable Rate Gover nment Income Fund, Smith Barney Concert Series Inc., Smith 7 Barney Equity Funds, Smith Barney Funds Inc., Smith Barney Institutional Cash Management Fund, 8 Smith Barney Investment Funds Inc., Smith Barney Investment Series, Smith Barney Investment Trust, 9 Smith Barney Money Funds Inc., Smith Barney Multiple Discipline Trust, Smith Barney Muni Funds, 10 Smith Barney Municipal Money Market Fund Inc., Smith Barney Sector Series Funds, Smith B arney 11 Principal Return Fund, Greenwich Street Series Fund, Smith Barney Shearson Aggressive Growth Fund 12 Inc, Smith Barney Shearson Fundamental Value Fund Inc, Smith Barney Shearson Managed 13 Governments Fund Inc., Smith Barney Shearson New Jersey Municipals Fund, Smith Barney Shearson 14 Telecommunications Trust, Travelers Series Fund Inc., Smith Barne y Trust II, Smith Barney World 15 Fun ds Inc., Salomon Brothers Opportunity Fund Inc., Salomon Brothers Series Funds Inc., Smith Barney 16 Income Funds, Salomon Fund s Trust, Smith Barney Allocation Series, Inc., Collectively Known as 17 “Proprietary Funds Registrants,” Citigroup Global Markets Holdings, Inc., formerly known as Salomon 18 Smith Barney Holdings, Inc., CitiGroup, Inc., Dwight B. Crane, Joseph J. M cCann, Burt N. Dorsett, Rose 19 C. Cornelius, Elliot S. Jaffe, John Does 1-100, Andrew L. Breech, William R. Hutchinson, Paul Hardin, 20 Lee Abraham, Paul Ades, Lloyd J. Andrews, Victor K. Atkins, Walter E. Auch, Herbert Barg, Allan J. 21 Bloostein, Martin Brody, Abraham E. Cohen, Paolo Cucchi, Jane F. Dasher, John Ellis, Donald R. Foley, 22 Robert A. Frankel, Robert M. Frayn Jr., Leon P. Gardner, Michael Gellert, Rainer N. Greeven, Richard 23 E. Hanson, Susan M. Heilbron, Frank G. Hubbard, Howard J. Johnson, Armon R. Kamesar, Stephen E. 24 Kaufman, David E. Maryatt, Jerome H. Miller, Ken Miller, John J. Murphy, George M. Pavia, Roderick 25 C. Rasmussen, John P. Toolan, Jerry A. Viscione, Julie W. Weston, Robert Lawless, Salomon Brothers 26 Emerging Markets Debt Fund Inc., Salomon Brothers Appreciation Fund Inc., Smith Barney Investment 27 Funds Inc/MD/, Smith Barney Shearson Oregon Municipal Fund, 28 29 Defendants

. *** 30

__________________________________________ 314 APPEARING FOR APPELLANTS: J AMES J. S ABELLA , Grant & Eisenhofer P.A., New York, 1 NY (Jerome M. Congress, Janine L. Pollack, and John 2 McFarlane, Milberg Weiss LLP, New York, NY; Charles 3 J. Piven, Brower Piven, A Professional Corporation, 4 Baltimore, MD; Jay W. Eisenhofer, Sidney S. Liebesman, 5 and Naumon Amjed, Grant & Ei senhofer P.A., New York, 6 NY, on the brief ), for Plaintiffs-Appellants

. 7 8 APPEARING FOR APPELLEES: S EAN M. M URPHY (James N. Benedict, C. Neil Gray, and 9 Andrew W. Robertson, on the brief ), Milbank, Tweed, 10 Hadley & McCloy LLP, New York, NY, for Defendants11 Appellees Citigroup Asset Management, Citigroup Global 12 Markets Holdings Inc., Citigroup Global Markets Inc., 13 Citigroup Inc., Phillip W. Coolidge, Heath B. McLendon, 14 R. Jay Gerken, Salomon Brothers Asset Management, Inc., 15 and Smith Barney Fund Management LLC

. 16 17 J EANNE M. L UBOJA , Willkie Farr & Gallagher LLP, New 18 York, NY (Joanna Rotgers, and Nancy McCabe, Willkie 19 Farr & Gallagher LLP, New Yo rk, NY; Marc De Leeuw, 20 Sullivan & Cromwell LLP, New York, NY, on the brief ), 21 for Proprietary Fund, Registrant, and Independent 22 Director Defendants-Appellees

. 23 24

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

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

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

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

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

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

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

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

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

of the Securities Act of 1933 (the “1933 Act”), 15 U.S.C. §§ 77k and 77 l (a)(2), section 10(b) of the 345 Securities Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated 1

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

“ICA”), 15 U.S.C. § 80a-35(b). 3

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

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

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

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

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

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

the total amount of fees was so disproportionately la rge that it could not have been the product of arm’s10

length bargaining. Id. at 597-603. However, the court granted Plai ntiffs leave to replead their section 11

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

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

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

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

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

17

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

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

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

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

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

Fees Litig. , 528 F. Supp. 2d 332 (S.D.N.Y. 2007) (“ SSB II ”). 236 We assume the parties’ familiarity with the underlying facts, which are aptly summarized by the 1

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

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

12(b)(6) for failure to state a claim de novo

. DiFolco v. MSNBC Cable LLC , 622 F.3d 104, 110 (2d Cir. 4

2010). 5

6

I. Securities Fraud Claims 7

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

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

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

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

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

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

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

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

of their mutual fund shares. 16

17

II. ICA Claims 18

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

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

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

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

v. Harris Associates L.P. , the Court adopted this Circuit’s approach in Gartenberg as a proper 231 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 formulation for determining whether mutual fund fees violate section 36( b). 130 S. Ct. 1418, 1425-26 1

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

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

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

be weighed” to determine whet her an investment adviser’s co mpensation constitutes a breach of 5

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

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

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

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

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

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

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

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

of the SSB Funds and their investors. 14

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

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

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

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

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

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

In effect, “the Fund investors . . . were at the mercy of a faithless fiduciary.” Id. We have little trouble 212 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’ s ecurities 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 concluding that, as alleged, transfer agent services fees resulting from this particular arrangement bear 1

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

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

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

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

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

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

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

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

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

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

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

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

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

FOR THE COURT: 15 Catherine O’Hagan Wolfe, Clerk 16