[Dkt. No. 236] 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF NEW JERSEY 

CAMDEN VICINAGE 

JENNIFER L. KASILAG, et al.,

 Plaintiffs, Civil No. 11-1083 (RMB/KMW)

v.

HARTFORD INVESTMENT FINANCIAL 

SERVICES, LLC,

 Defendant.

JENNIFER L. KASILAG, et al.,

 Plaintiffs, Civil No. 14-1611 (RMB/KMW)

v.

HARTFORD FUNDS MANAGEMENT 

COMPANY, LLP,

 Defendant.

JENNIFER L. KASILAG, et al.,

JENNIFER L. KASILAG, et al.,

 Plaintiffs,

v. Civil No. 15-1876 (RMB/KMW)

HARTFORD FUNDS MANAGEMENT 

COMPANY, LLP,

OPINION

 Defendant.

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BUMB, United States District Judge: 

This case was brought pursuant to Section 36(b) of the 

Investment Company Act of 1940. Plaintiffs are shareholders in 

six mutual funds (the “Funds”) managed by Defendants Hartford 

Investment Financial Services, LLC and Hartford Funds Management 

Company, LLP (the “Defendants”).

 Beginning November 9, 2016 and concluding November 16, 

2016, the Court conducted a four-day bench trial. Thereafter, 

the parties submitted proposed findings of fact and post-trial 

briefs. On February 1, 2017, the Court heard closing arguments 

from the parties. At that time, the Court reserved judgment. 

This Opinion sets forth the findings of fact and conclusions of 

law of the Court.1

I. LEGAL STANDARD 

This case was tried pursuant to Section 36(b) of the 

Investment Company Act of 1940. Section 36(b) imposes a 

“fiduciary duty” on investment advisers with respect to the 

compensation they receive for providing services to mutual 

funds. 15 U.S.C. § 80a-35(b). The most recent Supreme Court 

case to interpret this statute, Jones v. Harris Associates L.P., 

559 U.S. 335 (2010) interpreted an earlier Second Circuit 

decision in Gartenberg v. Merrill Lynch Asset Management, Inc., 

 

1 The Court compliments counsel on their professionalism and 

excellent advocacy throughout the course of these proceedings. 

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694 F.2d 923 (2d Cir. 1982). In so doing, Jones resolved a 

split among the Courts of Appeals over the proper standard under 

§ 36(b). Specifically, the Jones Court held that in order to 

face liability under Section 36(b), the investment adviser’s fee 

must be so disproportionate that it does not bear a reasonable 

relationship to the service the defendant rendered and could not 

have been negotiated at arm’s-length. Jones, 559 U.S. at 344. 

In essence, that is the fundamental inquiry underlying the trial 

that this Court examined. 

 In applying this overarching standard, courts look to the 

multifactor test outlined in Gartenberg. Those factors are: 

“(1) the nature and quality of the services provided by the 

adviser to the shareholders; (2) the profitability of the mutual 

fund to the advisers; (3) “fall-out” benefits; (4) the economies 

of scale realized by the adviser; (5) comparative fee structures 

with similar funds; and (6) the independence and 

conscientiousness of the independent trustees.” Gallus, 497 F. 

Supp. 2d at 979. It is important to note that the Gartenberg 

factors embody a non-exclusive list of considerations. Courts 

should instead consider “all relevant circumstances.” Id. at 

347 (citing Gartenberg, 694 F.2d at 929); see also Sivolella v. 

AXA Equitable Life, Civ. A. No. 11-cv-4194 (PGS)(DEA), 2016 WL 

4487857, at *4 (“The Court weighs all of the evidence presented 

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and the gravity of each factor adjudicate the case.” (citation 

omitted)). 

It is also important to note that “the standard for 

fiduciary breach under Section 36(b) does not call for judicial 

second-guessing of informed board decisions.” Jones, 130 S. Ct. 

at 1429 (citations omitted). Put differently, the Gartenberg 

multifactor standard reflects Congress’s decision to “rely 

largely upon independent director ‘watchdogs’ to protect 

shareholders’ interests.” Id. (citations omitted). Indeed, if 

“the disinterested directors considered the relevant factors, 

their decision to approve a particular fee agreement is entitled 

to considerable weight, even if a court might weigh the factors 

differently.” Jones, 559 U.S. at 351. Nevertheless, a fee may 

still “be excessive even if it was negotiated by a board in 

possession of all relevant information, but such a determination 

must be based on evidence that the fee is so disproportionately 

large that it bears no reasonable relationship to the services 

rendered and could not have been the product of arm’s-length 

bargaining.” Jones, 559 U.S. at 351 (quoting Gartenberg, 528 F. 

Supp. at 928). 

This Court first addressed the evidence in this case at 

summary judgment. Upon the showing that was put forward at that 

time, the Court identified several issues that were not in 

dispute to limit the issues to be resolved at trial. The Court 

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first analyzed the evidence as it related to the Board approval 

of the fees. Consistent with Jones’s instruction to give 

considerable weight to a disinterested approval, and viewing the 

facts under the requisite standard, this Court held that the 

independent director’s approval was entitled to substantial 

weight.2

 Nevertheless, as cautioned above, a determination of an 

informed and disinterested Board is entitled to considerable, 

but not conclusive weight. Consequently, the Court also looked 

to the Gartenberg multifactor analysis to determine if there 

existed a triable issue of fact under those factors and Jones’s

guidance. Due to the presence of disputed facts, the Court 

ruled that Defendants’ motion for summary judgment should be 

denied. Op. 54 (“[W]hile the Board’s process is entitled to 

substantial weight, disputed facts permeate the Gartenberg

factors. Therefore, a grant of summary judgment in favor of 

either party would be improper.”).

 

2 As the Court’s summary judgment Opinion set forth, much of 

Plaintiffs’ argument seeking to undermine the Board’s decision 

hinged on “captious nitpicking.” Op. 40 [ECF No. 40]. The 

Court’s ruling that the approval was entitled to substantial 

weight is, of course, consistent with the notion that 

disinterested Board approval may be given considerable weight. 

Jones, 559 U.S. at 351. 

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 In so ruling, the Court held that five Gartenberg factors 

remained in genuine dispute.3 The Court at that time noted that 

it did not expect the trial would be a “far-flung foray into the 

annals of accounting procedures or mutual fund administration,”

as discovery was. Instead, the Court believed an adequate trial 

would resolve these remaining, narrow factual disputes: 

 The nature of the services provided by the Hartford 

Defendants with regard to the Funds.

 The quality of the services provided, as measured by the 

performance of the Funds. 

 The profitability of the Funds, including testimony 

concerning the proper method of accounting for sub-adviser 

services. 

 What, if any, fall-out benefits existed and their 

magnitude. 

 Whether economies of scale were realized and the extent to 

which those realized economies of scale were passed along 

to the Funds. 

 What comparative fee structures indicate about the size of 

the fee.

Id. at 53-54. These were fundamentally the grounds upon which 

the Court proceeded at trial.4

 

3 The only factor that was not genuinely disputed was the 

independence and conscientiousness of the trustees, which 

dovetailed with the Court’s analysis of the Board’s process.

4 The Court notes that, although the trial was limited to these 

issues, the parties engaged in a much broader trial. In an 

abundance of caution, and consistent with the relevant case 

law’s instruction to consider all relevant circumstances, the 

Court permitted this latitude to the parties. 

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II. STANDARD OF PROOF 

 Plaintiffs must meet the burden of proving their case by a 

preponderance of the evidence. “That means Plaintiffs have to 

prove that their claims are more likely than not . . . . To say 

it differently, if one puts the evidence favorable to Plaintiffs 

and the evidence favorable to Defendants on opposite sides of 

the scales, Plaintiffs would have to make the scales tip 

somewhat to their side. If Plaintiffs fail to meet this burden, 

the verdict must be for Defendants.” See Model Jury Charge 

1.10, “Preponderance of the Evidence,” available at 

http://www.ca3.uscourts.gov/model-civil-jury-table-contents-andinstructions (July 2015); see also Sivolella, 2016 WL 4487857, 

at *4-5. 

III. FACTUAL FINDINGS5

A. Background Facts 

 Plaintiffs are shareholders in six mutual funds.6 Joint 

Stip. of Facts (“JSOF”) ¶ 1. Each of the Funds is a series of 

 

5 The Court’s recitation of these facts constitutes its findings 

of fact for this trial. 

6 The Funds are: (1) the Hartford Balanced Fund; (2) The Hartford 

Capital Appreciation Fund; (3) The Hartford Floating Rate Fund; 

(4) The Hartford Growth Opportunities Fund; (5) The Hartford 

Healthcare Fund; and (6) The Hartford Inflation Plus Fund. JSOF 

¶ 1. Plaintiffs are: (1) Jennifer Kasilag, who has been a 

shareholder in the Hartford Healthcare Fund since at least 

January 1, 2010; (2) Louis Mellinger, who has been a 

shareholder in the Hartford Growth Opportunities Fund and the 

Hartford Inflation Plus Fund since at least January 1, 2010; (3) 

Judith Menendez, who has been a shareholder in the Hartford 

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Hartford Growth 

Opportunities Fund $1,942,767,000 $1,935,198,000 $1,896,773,000 $2,387,115,000

Hartford 

Healthcare Fund $377,848,000 $374,193,000 $413,853,000 $578,202,000

Hartford Inflation 

Plus Fund $2,080,195,000 $2,180,448,000 $2,396,917,000 $1,814,042,000

Id.

 Pursuant to Investment Management Agreements (the “IMAs”) 

with the Funds, Defendants serve or served as investment 

managers for the Funds. See, e.g., JX-93; JX-144. Specifically, 

Defendant Hartford Investment Financial Services, LLC (“HIFSCO”) 

served as investment manager until December 31, 2012. JSOF ¶ 

26. Defendant Hartford Funds Management Company, LLC (“HFMC”) 

then has served as investment manager since January 1, 2013. 

Id. ¶ 27.

 The parties agree that under the IMAs, Defendants are 

obligated to: 

 Provide investment advice to the Funds with respect to 

each Fund’s investment policies, investments, and 

purchase and sale of securities; 

 Continuously supervise each Fund’s investment program 

and performance; 

 Provide economic and statistical data and other 

information relating to each Fund to the Funds’ Board 

of Directors; and

 “[P]erform . . . such other duties as may be necessary 

or appropriate in connection with its services as 

investment manager.”

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Defs.’ Prop. Findings of Fact [ECF No. 235] and Pls.’ Resps.

[ECF No. 241] ¶ 10 (hereinafter, “DPFOF & PR ¶ ___.”); see also 

JX-144 §§ 1, 2. The IMAs also state that the Defendants shall 

“perform, or shall cause an affiliate to perform” a series of 

administrative services: 

 Assist[ing] in the supervision of all aspects of the 

Company’s operation, including the coordination of all 

matters relating to the functions of the custodian, 

transfer agent or other shareholder servicing agents 

(if any), accountants, attorneys and other parties 

performing services or operational functions for the 

Company; 

 Provid[ing] the Company with the services of a person, 

who may be the Adviser’s officers or employees, 

competent to serve as officers of the Company and to 

perform such administrative and clerical functions as 

are necessary in order to provide effective 

administration for the Company, including the 

presentation and maintenance of required reports, 

books and records of the Company; [] 

 Provid[ing] the company with adequate office space and 

related services necessary for its operations as 

contemplated in [the IMA;] [and] 

 Provid[ing] such other services as the parties hereto 

may agree upon from time to time. 

JX-144 § 3. 

i. The Funds’ Fee System 

 Pursuant to the IMAs, Defendants received an investment 

management fee from each Fund calculated based on a percentage 

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of each Fund’s average daily AUM.7 JSOF ¶ 30. The fee schedule 

associated with calculating the fee contained various discounts 

(“breakpoints”) as the asset level under management grew. For 

instance, with regard to the Hartford Capital Appreciation Fund, 

the fee was scheduled at .8000% for the first $500 million under 

management, but for assets of $500 million to $1 billion, the 

fee decreased to .7000%. Id. ¶ 31. Based on the AUM, the gross 

investment management fees paid by the Hartford Capital 

Appreciation Fund ranged from .6520% to .6570% between 2010 and 

2013.8 Id. ¶ 33. 

 The gross management fee collected by Defendants and paid 

by the Funds are set forth on the below table: 

Pls.’ Prop. Findings of Fact [ECF No. 237] & Defs.’ Resps. [ECF 

No. 240-1] ¶ 71 (hereinafter, “PPFOF & DR ¶ ___.”).9 In total, 

 

7 A table outlining the investment management fee schedule for 

each fund can be found in the Joint Stipulation of Facts at 

Paragraph 31. 

8 The remaining gross investment management fee schedules can be 

found in the Joint Stipulation of Facts at Paragraphs 32 through 

37.

9 Although the parties generally agree that the amounts contained 

in the above table represent the gross management fees collected 

by Defendants during the years 2010 to 2013, they disagree 

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Defendants were paid $670,253,000 in gross management fees 

across the six at-issue funds in the above-listed four years. 

Id.

ii. Use of Sub-Advisory Services 

 Much of the core of the case comes down to Defendants’ use 

of sub-advisers to meet a portion of their obligations under the 

IMAs. The parties agree, however, that the use of sub-advisers 

is not unusual. DPFOF & PR ¶ 24. Indeed, the IMAs specifically 

contemplated that Defendants might seek to make use of subadvisers to meet their obligations under the agreements:

The Adviser, upon approval of the Board of Directors, 

may engage one or more investment advisers that are 

registered as such under the Investment Advisers Act of 

1940, as amended, to act as sub-adviser with respect to 

existing and future Portfolios of the Company. Such 

sub-adviser or sub-advisers shall assume such 

responsibilities and obligations of the Adviser pursuant 

to this Investment Management Agreement as shall be 

delegated to the sub-adviser or sub-advisers, and the 

Adviser will supervise and oversee the activities of any 

such sub-adviser or sub-advisers. In addition, the 

Adviser may subcontract for any of the administrative 

services set forth in Section 3 above. 

 

whether the sub-advisory fee was paid out of the Funds’ assets. 

PPFOF & DR ¶ 71. As this is a relatively meaningful 

distinction, insofar as it colors the Courts’ treatment of subadvisory expenses, the Court notes here that it finds that the 

sub-advisory fee was not paid out of the Funds’ assets, but 

rather out of the Defendants’ assets pursuant to the subadvisory agreements. See, e.g., JX-703 § 7(c) (“The Sub-Adviser 

will not be entitled to receive any payment for the performance 

of its services hereunder from the Portfolios.”).

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JX-144 § 4. Consistent with this section of the IMAs, for all 

years at issue, Defendants made use of Wellington Management 

Company, LLP (“Wellington”) to act as a sub-adviser for some of 

the Funds. JSOF ¶ 38. Further, during a limited period of 

time, Defendants also made use of HIMCO to act as a sub-adviser 

for some of the Funds, although Wellington ultimately took over 

for HIMCO.10 With the exception of fee schedules, the terms of 

the sub-advisory agreements are substantively identical. Id. ¶

42. Additionally, the parties agree that “Wellington is a 

highly respected sub[-]adviser that Hartford has had a 

relationship with for over 30 years.” DPFOF & PR ¶ 19; see also 

Trial Tr. 785:13-17 (Meyer Testimony). 

 Wellington, like Defendants, was compensated with a 

sliding-scale fee schedule that made use of breakpoints for all 

but two Funds, which were sub-advised on a flat rate (Hartford 

Capital Appreciation Fund and Hartford Growth Opportunities 

Fund).11 For example, while the fee rate for the first $50 

million in assets under management was .220% for the Hartford 

 

10 The precise breakdown of the years during which HIMCO operated 

as a sub-adviser can be found in the Joint Statement of Facts at 

Paragraphs 38 through 44. Ultimately, Wellington took over for 

HIMCO on all of HIMCO’s funds in 2012. JSOF ¶¶ 40-41.

11 By contrast, HIMCO’s sub-advisory expenses were paid in an 

agreement whereby Defendants were obligated to pay HIMCO “the 

amount of all direct and indirect expenses incurred in 

connection with the performance of [HIMCO’s] duties under [the 

sub-advisory agreement].” JSOF ¶ 45.

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Balanced Fund, which made use of breakpoints, the gross 

management fee rate paid in 2010 was .1510%. JSOF ¶ 48. 

Defendants are contractually responsible for the payment of 

these fees, not the Funds. JX-703 (“As compensation for the 

performance of the services by the Sub-Adviser hereunder, the 

Adviser shall pay to the Sub-Adviser, as promptly as possible 

after the last day of each calendar year quarter, a fee accrued 

daily and paid quarterly . . . .”); see also id. § 7(c) (“The 

Sub-Adviser will not be entitled to receive any payment for the 

performance of its services hereunder from the Portfolios.”).

 The below table sets forth the fees that were paid to the 

sub-advisers by Defendants: 

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PPFOF & DR ¶ 76.12 In the aggregate, Defendants incurred 

$223,560,000 in sub-advisory expenses across the six at-issue 

funds during the above-listed four-year period.13

B. Services Provided by the Defendants 

i. Testimony of Vernon Meyer 

To this day, Defendants provide a series of services to the 

Funds. Vernon Meyer was called during Defendants’ portion of 

the case to testify to the specific services the Defendants 

provide.14 Mr. Meyer works with the Hartford Funds as the Chief 

Investment Officer and Head of Product. Trial Tr. 708:24-25. 

As Chief Investment Officer, he and his team are responsible for 

 

12 Defendants dispute whether the above table shows the portion 

of the gross management fee was paid to the sub-advisers. To 

the extent this is a distinction with a difference, the Court 

agrees that the above table sets forth Defendants’ sub-advisory 

expenses for the relevant funds in the associated time period, 

not the portion of the gross management fee that was paid to the 

sub-advisers. JX-703 § 7)a_ (“As compensation for the 

performance of the services by the Sub-Adviser hereunder, the 

Adviser shall pay to the Sub-Adviser, as promptly as possible 

after the last day of each calendar year quarter, a fee accrued 

daily and paid quarterly . . . .”); see also id. § 7(c) (“The 

Sub-Adviser will not be entitled to receive any payment for the 

performance of its services hereunder from the Portfolios.”). 

The fees in this table were paid pursuant to the sub-advisory 

agreements, not the IMAs. As such, the Court does not divide 

the unitary fees pursuant to the IMAs into components earmarked 

for Defendants or the sub-advisers. 

13 It is generally undisputed that Wellington’s profit margin was 

lower than Defendants’, PPFOF & DR ¶ 110; Trial Tr. 464:9-14, a 

fact that is not that significant or surprising given the 

businesses are different. 

14 The Court, having viewed the testimony of Mr. Meyer, finds his 

testimony credible and persuasive. 

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managing the full line of mutual funds that are offered to the 

marketplace. As he testified, “we are responsible for product 

management, product development, product integrity. We are 

responsible for managing the portfolio managers, evaluating the 

performance, reporting to the board . . . .” Id. 710:19-25. 

 Mr. Meyer testified that Defendants help in the 

establishment of the fund strategy, and re-evaluate that 

strategy as necessary.15 Specifically, Mr. Meyer was asked to 

broadly describe “the portfolio [of] management services that 

the investment manager provides to the at-issue funds[.]” He 

explained: 

So, it would include things, some of which I referenced 

earlier, the establishment of the fund strategy, 

inclusive of constantly re-evaluating that fund 

strategy, is it working, and whether or not changes need 

to be made to a fund strategy. So, it’s a continuous 

process evaluating that fund strategy. 

Trial Tr. 725:11-19. As Mr. Meyer explained, “that constant 

evaluation entails things like should the fund strategy, if it’s 

an equity fund and it’s a strategy that invests in large cap or 

large U.S. companies, should the strategy also allow for 

 

15 Plaintiffs argue that Defendants do not ever re-evaluate the 

strategy, but other than pointing to the fact that in the 2010-

2014 period the strategies generally were unchanged, Plaintiffs 

do not provide any evidence that this was abnormal or that 

Defendants were not undertaking their obligation to change fund 

strategy as needed. PR ¶ 29. 

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investment in smaller companies or mid cap companies.” Id.

726:14-23. 

 Defendants are also directly responsible for “selecting and 

monitoring the sub-advis[e]rs or portfolio managers.” Id. 

725:20-21. This process included several components, generally 

revolving around “making constant decisions around keeping them 

or maintaining that portfolio manager, [or] changing the 

portfolio manager.” Id. 725:20-25. Underneath the broad 

umbrella of assessing and selecting a sub-adviser is the task of 

“selecting and monitor[ing] the portfolio manager or portfolio 

management team within a sub-advis[e]r[.]” Id. 727:11-13. This 

selection and monitoring of the portfolio manager or team is 

“done at multiple levels.” Id. 728:5. These include 

quantitatively measuring the performance of an individual 

portfolio manager and qualitatively evaluating the portfolio 

manager through conversations with him. Id. 728:5-20. This 

task also includes meeting with every portfolio manager at least 

twice a year, and Mr. Meyer testified that “we also have the 

ability to pick up the phone and talk to someone on the 

portfolio management team or the portfolio manager if there’s a 

particular question or issue as well.” Id. 728:21-729:3.16 

 

16 The Court does note that for four of the Funds, the subadviser did not change during the relevant time period. JSOF ¶ 

39. 

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 The Defendants also serve in monitoring and reporting 

functions, as Mr. Meyer explained. This includes a “constant 

evaluation of the performance of the portfolios or how the funds 

are doing” and reporting that information to the Board on a 

quarterly basis as well as in compliance “with the annual 15(c) 

contract renewal.” Id. 726:1-7. As Mr. Meyer testified: 

So, as we perform this role and this assessment of 

performance or how the portfolio manager is doing, we 

have a series of reporting mechanisms that we look at[,] 

as well as the board has asked us to produce reports on 

a quarterly basis for the investment committee[,] and to 

share with the full board about how the funds are 

performing, what’s going into the funds, what’s our 

assessment. 

It could be things like a general market review of what’s 

worked in the marketplace this given quarter and how our 

individual funds have performed, to the other extreme 

where for each fund we produce what’s known as a fund 

fact sheet or a fully comprehensive review of the fund, 

its performance, its characteristics, what are the top 

10 holdings, what has it done during different market 

environments, again, things of that nature. And we share 

that and report that to the mutual fund board. 

Id. 732:11-733:1.17

 Furthermore, as Mr. Meyer described, Defendants also

perform legal services for the Funds, including generating the 

annual prospectus, the statement of additional information, the 

preparation of and negotiation of contracts with service 

providers, and the arrangement of any Board or shareholder 

 

17 Mr. Meyer additionally testified about Wellington’s lack of a 

chief investment officer, and how his team filled that role. 

Trial Tr. 734:1-17.

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meetings. Additionally, the Defendants perform compliance 

services, which include “assess[ing] the effectiveness of 

compliance programs and [the] oversee[ing of] the compliance 

programs, and the compliance programs of the sub-adviser as 

well.” Id. 735:23-736:1.

 Finally, Mr. Meyer also testified about administrative 

services that were provided to the at issue funds, including the 

provision of personnel and office space and assistance with 

meetings. Id. 736:5-8.

C. Risks Borne by the Defendants 

 In addition to performing the work described above, Mr. 

Meyer testified about the risks Defendants face in their

provision of services under the IMAs. Specifically, he 

testified concerning entrepreneurial risk, reputational risk,

and legal/regulatory risk. Entrepreneurial risk, Mr. Meyer 

explained, was viewed by Defendants as the risk that one of the 

Funds might be offered but then the “market changes,” such that 

a feature of the fund that was deemed beneficial in the market 

no longer is considered to be a plus. Id. 741:4-16. Mr. Meyer 

also discussed reputational risks that are borne by the 

Defendants. He testified that if the funds fail to deliver what 

the shareholders are expecting, their name is at risk because it 

is associated with the Funds. Id. 741:23-742:4. Finally, with 

regard to legal and regulatory risk, Mr. Meyer testified that as 

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regulations change, or interpretations of regulations change, 

there is a risk borne by Defendants that “what we have built or 

the way we manage our fund is – in the future changes either 

with new regulation or with a different interpretation of the 

regulation.” Id. 742:8-15.

Plaintiffs’ expert witness, Dr. Kopcke, see infra, also 

testified concerning risks. He assessed the risks faced by 

Defendants as “relatively low.” Id. 475:6-7. He explained that 

the liability-related clauses contained in the IMAs protect 

against any outsized risk: 

[B]ecause of the clauses we discussed earlier in the 

management agreement, that basically says as long as 

they behave themselves and don’t steal and act very 

grossly negligent, they’re held harmless. And the way 

a – financially firms usually work is that we have a 

variety of laws and regulations that apply to them. And, 

in general, if you behave yourself and follow the 

compliance implied by the laws and regulations, nobody’s 

going to hold you at fault if things go wrong. They’re 

kind of a safe harbor that defines activities that spare 

you this problem. 

Id. 475:9-18. Certainly, the contractual provisions limiting 

liability reduce risk, as Dr. Kopcke testified. Defendants do 

not appear to contest this fact. The testimony from Dr. Kopcke, 

however, did not address the types of risk, such as 

entrepreneurial risk or reputational risk, which Defendants view 

to be important. 

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D. Performance 

 Several metrics for assessing the performance of the Funds 

were presented by the parties throughout the trial. Both 

parties had their preferred methodologies for assessing 

performance. Defendants argued that the Court should consider 

two metrics: a Lipper peer group analysis and an analysis of 

performance by their expert witness, Dr. Glenn Hubbard.18 

Plaintiffs argued that neither of these performance analyses is 

useful, and instead urged the Court to rely upon a comparison of 

the Funds’ performance to the Funds’ own benchmarks.

i. Lipper Peer Group Analysis19

The Funds’ performance as shown in the Lipper Performance 

Universe during the 2010-2014 time period is set forth below: 

 

18 Dr. Hubbard is a professor of finance and economics and the 

Dean of Columbia Business School. Id. 950:3-7, 1004:6-1005:2. 

He has been a professor at Columbia since 1988. Id. 950:8-9. 

He has been the Dean of the Business School since 2004. Id. 

950:13-14. 

19 The Lipper peer group chart and Lipper analyses have been 

challenged as hearsay in a motion in limine by Plaintiffs. 

Pls.’ Br. in Supp. Mot. In Limine 19-22. The Court believes the 

Lipper performance reports to be admissible under Federal Rule 

of Evidence 803(17), which permits market reports and similar 

commercial publications. See id. (permitting “market 

quotations, lists, directories, or other compilations that are 

generally relied on by the public or by persons in particular 

occupations”). Moreover, there is sufficient evidence before 

this Court to determine Lipper performance reports are relied 

upon in the mutual fund industry and Plaintiffs’ attempts to 

discredit Lipper performance data is unpersuasive to this Court. 

As such, Plaintiffs’ motion in limine on this ground is denied. 

Moreover, even if the Lipper performance reports were not 

admissible, the result of this Court’s ultimate analysis in the 

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DX-507.20

The Court also received testimony and evidence from both 

parties concerning the use of Lipper performance data. Dr. 

Hubbard testified that Lipper has “got to be close to 

universally used among advisors.” Trial Tr. 968:19-20. He 

added “I can think of none who don’t use it . . . .” Id.

968:20-22. Mr. Meyer likewise testified that his understanding 

was that Lipper is used in the industry and is “highly regarded 

 

case would not change, given that Dr. Hubbard’s analysis is 

similar in outcome on the issue of performance. While his 

analysis is based on Lipper data, it is based on basic raw data 

from Lipper, which certainly falls under the purview of Federal 

Rule of Evidence 803(17) and all selections and calculations 

were made by Dr. Hubbard himself. Trial Tr. 964:2-5 (“I used 

the underlying raw data. So, Lipper is doing no calculations 

for me. I’m simply taking the data and imposing my own judgment 

on how to construct a peer group.”); see also id. (“I did my own 

analysis. So, Hartford didn’t talk to me, Lipper didn’t talk to 

me. The only input to my analysis other than my own economics 

is the raw data from Lipper, no calculations.”).

20 A fund that contains an entry of “n/a” indicates that the fund 

did not have data applicable for the ten-year period due to the 

fund’s inception date. Trial Tr. 748:17-22. 

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for providing this type of competitive information.” Id.

745:12-15.

On the other hand, Plaintiffs offered evidence seeking to 

undermine the viability of Lipper performance data. Plaintiffs 

note that Lipper boasts in the “Introduction” section of its 

reports that its data has “been introduced by fund companies as 

evidence in litigation and a consistent record of defendant 

victories has been established.” JX-542B at 12248; JX-549B at 

20887; JX-557B at 30392; JX-563 at 116879; JX-571B at 2467824. 

Additionally, Lipper reports contain a disclaimer that “there 

are no guarantees as to the accuracy, completeness or 

reliability of the information included in its reports.” See, 

e.g., JX-557B at 30389.

Finally, and most germane to this case, Plaintiffs 

presented evidence that suggested that Defendants interacted 

with Lipper in the process of selecting peer groups prior to 

that performance data being reported to the Board. 

Specifically, Mr. Meyer testified that Defendants reviewed 

drafts of the Lipper reports before they were provided to the 

Board. Periodically he “requested” changes to improve HFMC’s 

peer group ranking, and Lipper would acquiesce. Id. 919:16-

920:15; PX-828 (email exchange indicating that Lipper revisions, 

made at the request of Defendants, had yielded an improved peer 

ranking). 

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Looking directly to his testimony, Mr. Meyer sufficiently 

explained the neutral reasons for Defendants’ involvement in the 

Lipper’s peer group ranking analysis. That is, as Mr. Meyer 

explained, the reason Defendants would interact with Lipper was 

to understand the peer group selection and to make comments or 

ask questions when they did not understand or agree with a peer 

grouping. For instance, they might point out that “based on 

[Lipper’s] methodology – our understanding of their methodology, 

that other funds could have been chosen, why were they not?” 

Id. 920:13-15. Mr. Meyer also testified that it is “common 

practice for the management company and Lipper to engage in 

providing the information, the drafts, reviewing the drafts and 

asking questions.” He testified to at least one instance in 

which Lipper has refused to change a peer grouping based on 

commentary from his group. Id. 927:4-8 (“We said to Lipper we 

don’t agree with that assessment. The manager hasn’t changed. 

And they stood firm and said, you know, this is our methodology, 

this is what we’re reporting to the board. They reported [it] 

to the board.”).

In its final analysis, the Court finds that the data from 

Lipper is reliable. The Court makes this factual finding for 

several reasons. First, the Court finds that Mr. Meyer’s 

explanation of the reason behind Defendants’ interaction with 

Lipper is credible. Defendants seek to understand Lipper’s peer 

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grouping and – to the extent they see it as problematic based on 

their understanding of where they should be grouped – they may 

voice that disagreement with Lipper. If evidence had been 

presented that Lipper universally accepted such requests without 

question or hesitation, that might impugn the reliability of 

Lipper. The evidence, however, was exactly the opposite. 

Second, the Court is simply not persuaded that a 

generalized disclaimer that there may be inaccuracies in data 

meaningfully undermines the validity of Lipper. Likewise, the 

fact that Lipper in its reports’ introductions, which are 

addressed to “boards of directors/trustees,” might boast that 

its data has led to defense victories strikes this Court as 

marketing puffery, certainly, but not a meaningful indication 

that the data itself is wrong or unreliable. The same 

introduction also contains a section discussing its experience 

in the industry, a section discussing its objectivity, and a 

remark that “The Wall Street Journal, Barron’s and the 

Associated Press, among others, rely on Lipper for accurate, upto-date investment company data.” JX-542B at 4.21

 

21 The Court is additionally unpersuaded by Dr. Kopcke’s 

testimony that Lipper should not be used. Dr. Kopcke described 

Lipper as “not very valuable information” because it is 

backwards-looking and hard to reproduce. However, apart from 

those general complaints, Dr. Kopcke was unsure how Lipper 

actually arrives at its methodology. This does not sufficiently 

explain why Lipper should not be used.

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As such, the Court does not discount Lipper’s data based on 

Plaintiffs’ factual arguments, and it finds the data to be 

reliable.22 That said, the Court certainly views Lipper as only 

one of several metrics by which performance might be assessed. 

See infra. 

ii. Hubbard Performance Analysis 

 As mentioned, Defendants’ expert witness, Dr. Hubbard,23

also prepared his own peer group analysis of the Funds. The 

Funds’ performance under that analysis is set forth below:

 

22 Although not necessary to this Court’s determination of the 

reliability of Lipper data, the Court does note that many courts 

addressing claims such as this one have also looked to Lipper 

data and determined it to be reliable. See, e.g., In re Am. 

Mut. Funds Fee Litig., No. Civ. 04-5593 GAF (RBNx), 2009 WL 

5215755, at *25 (C.D. Cal. Dec. 28, 2009) (“Lipper . . . is a 

recognized industry-leading third-party source for mutual fund 

industry data”); Sivolella, 2016 WL 4487857, at *64-65 (refusing 

to accept the plaintiffs’ argument that Lipper data is 

unreliable). 

23 The Court had the opportunity to receive the testimony of Dr. 

Hubbard. Because of the observed demeanor of Dr. Hubbard, as 

well as the consistency of his testimony, the Court found the 

entirety of his testimony to be credible. The Court is not 

swayed by Plaintiffs’ argument that Dr. Hubbard’s work with the 

ICI or prior work in 36(b) cases damages his credibility in this 

case. 

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DX-509.24

 Dr. Hubbard testified concerning his methodology for 

selecting these peer groups.25 Although Dr. Hubbard relied upon 

underlying Lipper data, the “rules and the categorizations and 

 

24 Funds with no data for a given year are the result of years in 

which Dr. Hubbard could not identify five peers for the fund. 

Trial Tr. 1006:19-22.

25 The creation of peer groups and Dr. Hubbard’s comparative fee 

analysis are subject to a motion in limine by Plaintiffs. Pls.’ 

Br. in Supp. Mot. In Limine 17-19. As set forth infra, the 

Court does not read Jones to require that Defendants demonstrate 

comparative fees were negotiated at arm’s-length. Jones simply 

cautions against overreliance on comparative fee analyses 

because of the possibility that they will make use of corrupt 

comparators. Jones, 559 U.S. at 349-50 (“[C]ourts may give such 

comparisons the weight that they merit in light of the 

similarities and differences between the services that the 

clients in question require, but courts must be wary of inapt 

comparisons.”). The Court has heeded this instruction in Jones. 

With regard to Plaintiffs’ second ground for exclusion – that 

Dr. Hubbard’s selected peers were not actually comparable – the 

Court finds that Dr. Hubbard gave sufficient foundation to his 

comparisons to render them admissible in the form of his 

testimony that he selected similar funds. Trial Tr. 963:13-

967:16. Any other criticisms of them would go to the weight 

assigned by the Court. 

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the calculations were my own.” Id. 1004:19-22. This included 

selecting his own peer groups against which to compare the 

Funds’ performance. Id. 1004:23-24. Like Lipper, Dr. Hubbard 

analyzed a ten-year time horizon in viewing performance in order 

to smooth out the effects of business cycles. Id. 1007:13. As 

he remarked, actively managed funds can make use of a mix of 

style and industry bets, and “[s]ome of that can look very good 

in business cycle peaks, or sometimes strategies can look better 

in business cycle downturns. So to smooth it out, you’d want a 

period that goes longer than a business cycle.” Id. 1007:15-18. 

 Dr. Hubbard testified that, analyzing performance from his 

perspective, “for most funds and most, if not all, years, these 

are well within the range of peers.” Id. 1010:2-7. He also 

focused his testimony on the worst performing Fund that he 

analyzed, the Hartford Balanced Fund. He explained that the 

Hartford Balanced Fund “went through a number of management 

changes.” He remarked favorably that the most recent period of 

performance for that Fund, the ten-year period running from 

2004-2014 showed above average performance for the Fund—46th

percentile. Id. 1010:8-12.

iii. Benchmarks 

 Plaintiffs presented their own analysis of the Funds’ 

performance by comparing the Funds’ benchmarks as defined in the 

offering documents for the Fund. For instance, with regard to 

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would argue it’s less apt . . . It’s one data point.” Id.

1011:17-24. Additionally, Dr. Hubbard testified that “[t]he 

benchmark, you’re assuming there is no cost of operating the 

benchmark. So you’re kind of putting yourself behind from the 

get-go.” Id. 1011:11-15.

 As Dr. Hubbard testified, one cannot invest in a benchmark. 

Id. 011:16-17. This notion is corroborated by each of the 

prospectuses from which Plaintiffs pull their benchmark 

comparisons, where each benchmark performance listing notes that 

the performance of the benchmark “reflects no deduction for 

fees, expenses or taxes.” See, e.g. JX-50A at 6. As Mr. Meyer 

testified with regard to the Capital Appreciation fund as 

compared to the benchmark, “[Y]ou’re not taking any fees out of 

the Russell 3000 Index, so someone’s got to pay the financial 

adviser, and in this example the SEC requires you to assume it’s 

the maximum sales load, which has been taken out of the returns 

of the Capital Appreciation fund. And if I heard you correctly, 

you’re comparing it to the 12.56 of the Russell 3000 Index, 

which doesn’t equally take that cost out of the calculation. So 

it’s not apples to apples.” Trial Tr. 905:5-13.27 As such, 

while the Court does find comparison to benchmarks to be a valid 

method by which to evaluate performance, the Court does agree 

 

27 No witness for Plaintiffs testified concerning performance 

issues. DPFOF & PR ¶ 49. 

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with Defendants that there are certain problems associated with 

consideration of solely benchmark performance. 

E. Comparative Fee Structures 

 Defendants, but not Plaintiffs, presented evidence of fee 

structures of other funds. Defendants presented two 

methodologies by which to analyze comparative fee structures: 

consultation of the fee structures of peer groups as selected by 

Lipper, and consultation of peer groups as selected by Dr. 

Hubbard. Additionally, within those two methodologies, 

Defendants presented evidence of the comparative fee structure 

looking through two different lenses: (1) the total expense 

ratio, and (2) simply the management fee.28 Because the Court 

finds consideration of simply comparative fee structures on the 

management fee sufficient to make its determination, it does not 

consider the evidence related to “total expense ratio.”

 

28 The comparison of total expense ratio or the consideration of 

other fees or agreements than the investment management fee has 

been challenged by Plaintiffs on several grounds in one of their 

motions in limine. Pls.’ Br. in Supp. Mot. In Limine 1-12. 

They make this argument even against the backdrop of a 

Gartenberg analysis, which considers “all relevant 

circumstances.” While the Court is inclined to disagree with 

Plaintiffs because a board negotiating a fee with an eye toward 

arm’s-length bargaining might well consider the overall fee 

backdrop against which they are negotiating, the Court 

nevertheless declines to reach the issue of Plaintiffs’ first 

motion in limine, as it is unnecessary to the ultimate 

disposition of the case, which is based solely on the investment 

management fee.

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Defendants presented evidence of the management fee of the 

Funds ranked against the management fees of its Lipper Expense 

Universe. The results of that analysis are summarized in the 

below table: 

DX-522. 

Defendants’ expert, Dr. Hubbard, also conducted an analysis 

using his own peer groups to analyze the Funds’ management fees. 

That chart is presented below:

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DX-518. 

 As noted above, no witnesses for Plaintiffs testified 

regarding comparative fees of other mutual funds. As such, 

Defendants’ comparative fee analysis is the only one this Court 

considers. 

F. Plaintiffs’ “Retained Fee” Theory

 The crux of Plaintiffs’ case largely turns upon the 

argument that one should consider the services performed 

specifically by Defendants as separate and apart from those 

performed by the sub-adviser. In support of this theory, 

Plaintiffs presented the expert testimony of Mr. Kent Barrett.29

 

29 Mr. Barrett’s testimony that dealt with the salient issue of 

the sub-adviser fee was mostly unpersuasive, as such testimony 

illustrated several shortcomings. First, Mr. Barrett admitted 

that he had testified previously numerous times, under oath, 

that he had never served as a trustee or a director to a mutual 

fund. Trial Tr. 296:16-25. This was not true, as Mr. Barret 

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 Mr. Barrett is a practicing accountant who has been 

licensed since 1983. He has practiced as an accountant for a 

large accounting firm and has carried out consulting work. 

Trial Tr. 78:17-18, 79:4-5. In his current capacity, Mr. 

Barrett leads major litigation engagements, typically in 

situations involving allegations of auditor misconduct or 

financial statement improprieties. Id. 80:3-12. Mr. Barrett 

has also conducted a host of other engagements and has been 

awarded other prestigious awards and designations that underlie 

his status as an expert. Id. 81:4-92:11. Additionally, Mr. 

Barrett has serviced as an Executive Vice-President and Chief 

Financial Officer for American General’s retirement services 

division, which brought him into contact with the mutual fund 

industry. Id. 90:6-92:19.30 Mr. Barrett was qualified as an 

expert in the areas of “accounting, financial reporting, and 

 

had, in fact, served as a management representative on a board. 

Second, on the same subject, the board upon which Mr. Barrett 

served as a trustee involved a “retained fee” of 40 basis 

points, id. 303:14-18, which is near identical to the retained 

fee on the Capital Appreciation Fund that Mr. Barrett pointedly 

criticizes. Id. 304:21-23; PX-593 at 3. Mr. Barrett testified 

that he has no recollection of asking for numbers to be 

presented to him at that time in any format that conveyed true 

“economic reality,” which he faults the Defendants’ 

profitability numbers for concealing. Id. 306:18-25.

30 Mr. Barrett clarified that he was not involved in the actual 

administration of mutual funds, but his responsibilities did 

encompass financial reporting as to mutual funds. Id. 92:12-

93:3. 

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financial analysis, with a specialization [in] insurance and 

other financial services.” Id. 99:12-100:15. 

 Mr. Barrett testified concerning the distribution of labor 

between the sub-adviser and the Defendants. Id. 106:21-107:3. 

Mr. Barrett testified that it was his understanding that: 

Wellington performs virtually all of the actual 

investment management services and activities, the 

actual investment of the assets, determining which 

assets to purchase or sell, arranging for the purchase 

and sale of those assets, ensuring that the investments 

comply with both any and all regulatory requirements as 

well as just the established investment policies for 

each fund. Really, I mean, you said it, the day-to-day 

operations, the actual investment activity I believe is 

all done by Wellington. 

Id. 127:3-11.

 With regard to the services performed directly by

Defendants, Mr. Barrett testified that his understanding was: 

[T]hey are responsible for selecting the sub-advisors 

with board approval. They are responsible for reviewing 

everything that the sub-advisors do, supervising the 

activity of the sub-advisors, and then in addition, as 

we mentioned before under the IMA agreement, those 

administrative functions of coordinating with other 

parties that are providing services to the funds, 

providing space for the funds, providing the officers 

and directors of the funds. 

Id. 127:14-22. 

 Mr. Barrett also testified on the proper way to allocate 

the costs of the Defendants to the specific funds using a costallocation methodology. Id. 137:13-25. Using this methodology, 

he was able to perform an analysis of the amount of full-time 

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38

equivalent employees Defendants had working to provide services 

to the Funds. Id. 148:7-11. This calculation was done based on 

instructions provided by defense counsel. Id. 148:12-16. In so 

doing, Mr. Barrett calculated that Defendants had the equivalent 

of between 20.6 and 21.5 full-time employees, on average,

performing services pursuant to the IMAs in 2010 through 2013 

for all 50 plus retail funds in the group to which the Funds 

belonged. As Plaintiffs are quick to point out, a simple 

division of the full-time employees working on the group of

funds by the total number of funds indicates that less than one 

full-time employee was devoted to working on each fund. This 

analysis, of course, does not include services performed by subadvisers, including how many employees they used to meet their 

obligations under the sub-advisory agreements. 

 Consistent with his identification of the disparity between 

costs incurred directly by Defendants and incurred through a 

sub-adviser, Mr. Barrett also testified concerning Defendants’ 

“retained fee” in this case. This is Mr. Barrett’s methodology 

for conveying the disparity between Defendants’ profit and 

comparatively small in-house expenses. As Mr. Barrett 

testified, a “retained fee is, in this case, where we understand 

that HFMC charges a gross fee to the fund, and then it passes 

along a portion of that fee to Wellington as the sub-advisor, 

the retained fee is simply the portion that HFMC retains. So it 

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39

would be the total gross fees collected from the funds minus the 

amount passed along to Wellington, giving the amount that HFMC 

retains or keeps.” Id. 178:7-13. To reach the retained 

advisory fee for Defendants, Mr. Barrett testified that one 

should take the Gross Advisory Fee, subtract the advisory fee 

waiver, sub-advisory fees, and the reimbursement of the advisory 

fee. Id. 181:13-182:21; PX-767. He provided this overlay to 

clarify the calculation: 

PX-767. 

Calculating the “retained fee” using this methodology, the 

following values were obtained by Mr. Barrett for each Fund 

during the years 2010 to 2013:

PX-772. 

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 Mr. Barrett defends his methodology for adopting the 

“retained fee” theory on the “economic reality” of the 

situation. Specifically, Mr. Barrett testified that the proper 

way to view the costs of a sub-adviser is through the lens that 

Defendants’ payment to the sub-adviser passes right through the 

Defendants. Trial Tr. 199:15-24. For instance, with regard to 

the Capital Appreciation Fund in 2011, 

[Defendants] spent $900,000 and they get $70 million in 

exchange. That’s where they end up. Now, they get[$]113 

million and they pass [$]43 million along, so there’s 

some different steps in the process, but at the end of 

the day, they end up with $70 million more than they had 

when they started. 

Id. 216:15-21. In effect, Mr. Barrett’s methodology compares 

the work that Defendants did in-house with the profit that they 

ultimately kept themselves. See id. 200:6-8. Mr. Barrett 

highlighted the fact that for running the day-to-day operations 

of the Funds, Wellington received far less in fees than did 

Defendants, and the Wellington contract was indisputably

negotiated at arm’s-length. Id. 202:20-203:4. 

 On cross-examination, Defendants established several facts 

which are important to this Court’s holdings. First, Mr. 

Barrett’s testimony that the payments to sub-advisers shouldn’t 

be considered as expenses of Defendants was undermined by his 

own concession that he had no supporting accounting authority 

for his novel position. Id. 227:8-17. In fact, Mr. Barrett 

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readily conceded that under the Generally Accepted Accounting 

Principles (“GAAP”), sub-advisory fees are treated as an expense 

of the adviser, just as Defendants have asked the Court to treat 

them. Id. 232:4-7. Likewise, Mr. Barrett testified that he 

would not be surprised to learn that the international financial 

reporting standards also indicate that sub-advisory fees should 

be treated as an expense of the adviser. Id. 237:4-7.

 The fact that GAAP and other accounting authorities treat 

sub-adviser fees as an expense of the adviser was further 

corroborated by Mr. Barrett’s own experience on a mutual fund 

board. Mr. Barrett testified that he would not be surprised to 

learn sub-adviser expenses were treated by his board as an 

expense of the adviser, contrary to how his “economic reality” 

model of the “retained fee” would treat them. Id. 305:23-306:1. 

Indeed, he testified that he has been involved in a number of 

similar cases, and “in all of these cases that I’ve seen, that’s

the way they’re presented to the board.” Id. 306:1-4. Despite 

his experience on a board and his opinion regarding the economic 

reality of these transactions, Mr. Barrett had no recollection 

of ever suggesting that the board he served on be shown 

profitability calculations that treated sub-advisory fees as 

contra-revenue rather than expenses of the adviser. Id. 306:18-

25. Further, the board upon which Mr. Barrett served as a 

management representative involved a “retained fee” of 40 basis 

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points with regard to the sub-adviser’s, which is nearly

identical to the retained fee on the Capital Appreciation Fund 

in certain years. Id. 304:21-23. Finally, Mr. Barrett conceded 

on cross-examination that his opinion concerning the treatment 

of sub-advisory expenses came about during the recent Sivolella 

case. Before that case, he testified, he hadn’t “ever thought 

about [these] issues.” Id. 309:5-6.31

Additionally, Defendants’ accounting expert, Dr. Robin 

Cooper,32 gave credible testimony in the area he was qualified 

in, accounting.33 Id. 620:1-6. Dr. Cooper testified about the 

 

31 The Court also notes that on re-direct it was established that 

in at least some documents prepared by Defendants, sub-advisory 

costs were treated as contra-revenue. Trial Tr. 323:1-8. This 

was not particularly persuasive as evidence that the Court 

should view them that way too, as Defendants’ expert, Dr. 

Cooper, persuasively testified that “what I observed about the 

two examples that Mr. Barrett used is one he acknowledged for 

the sale of the business and the other is one for the creation 

or potential creation of a joint venture between the Hartford 

Manager and Wellington, and both of those reports are prepared 

for outside the normal course of managing the business.” Id. 

645:2-10. 

32 Dr. Cooper is a 1975 Harvard Business School graduate, with 

experience in accounting for a large accounting firm. Trial Tr. 

607:14-25. He additionally taught at Harvard Business School as 

an assistant and associate professor for ten years. Id. 608:18-

21, 25. He was also on the faculty at Emory University for 

fourteen years. Id. 609:7-11. At these institutions he has 

taught a variety of accounting courses. Id. 609:16-610:2.

33 Plaintiffs have brought a motion in limine to exclude portions 

of Dr. Cooper’s testimony. First, Plaintiffs argue that Dr. 

Cooper’s statement that he reached his opinion by letting his 

brain “munge” all of his research into the treatment of subadvisory fees impugns his ability to testify as an expert. 

Trial Tr. 626:7-11. Plaintiffs argue that munging is not a 

reliable process for purpose of Federal Rule of Evidence 702. 

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difference between management accounting, which is not based on 

an overall set of rules and is designed to represent financial 

information in any way that is “useful for the decision-maker,” 

id. 625:1, and financial accounting, which is “the accounting 

where the recipient of the accounting information is an external 

stakeholder” and is a more rules based approach that “hands over 

a standard pack [of information on economic substance] to the 

external user.” Id. 622:11-17. 

 Dr. Cooper then testified about how Defendants accounted 

for sub-advisory expenses in this case. He testified that in 

this case, sub-advisory fees were classified as an expense by 

Defendants, Id. 625:16-17, contrary to the methodology 

Plaintiffs urge should be used to assess the fees, contrarevenue, which would treat sub-advisory fees as neither revenue 

nor an expenses of Defendants. PPFOF ¶ 98 (“[T]he sub-advisory 

 

The Court disagrees and notes that Dr. Cooper appears to have 

used the phrase as a synonym for “reasoning through data.” The 

Court disagrees with Plaintiffs’ assessment of his methodology 

and does not exclude testimony on that ground. Second, the 

Court finds that Plaintiffs’ criticism of Dr. Cooper’s 

methodology for arriving at a determination of principal/agency 

relationship goes more to weight. Whether his assessment of 

control was fulsome enough is a subject ripe for crossexamination, not one of admissibility. Third, with regard to 

Plaintiffs’ argument that Dr. Cooper’s testimony is inadmissible 

because it was received from others, the Court disagrees and 

believes the record supports a finding that Dr. Cooper’s 

testimony was arrived at independently without undue assistance 

of counsel. The Court, likewise, does not find the assistance 

of Analysis Group to be improper, either. 

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fees should be treated by the Court as contra-revenue. 

Treatment of the sub-advisory fees as contra-revenue means that 

they would not be treated as revenue to HFMC or an expense.”); 

see also Trial Tr. 222:24-223:3 (“Q: So I think you testified to 

this, Mr. Barret, but the only difference between how you would 

calculate the profit margin and how Hartford calculated it is 

how we treat sub-advisory expenses. Correct? A: Yes, that’s 

correct”). Dr. Cooper then testified that the accounting 

treatment by Defendants was “not only correct; it’s the only way 

that they can treat it.” 34 Trial Tr. 626:12-16; see also id. 

633:16-21 (“[Mr. Barrett’s] approach would delete the subadvisory fees completely from the books of account of the 

Hartford Manager.”).35

G. Plaintiffs’ “Rent-Seeking” Theory

 Plaintiffs additionally called Dr. Richard Kopcke to 

provide expert testimony in this case. Dr. Kopcke is an 

 

34 Dr. Cooper also persuasively testified about the perils of 

viewing profit margin similar to Mr. Barrett’s approach. By 

permitting a party to exclude sub-advisory expenses from its 

balance sheet, it would permit an investment manager to 

selectively move costs in-house to minimize profit margin. 

Trial Tr. 655:4-15.

35 On cross-examination, Plaintiffs sought to demonstrate that 

Dr. Cooper’s use of Analysis Group undermined his testimony, 

which this Court did not find persuasive. The Court 

additionally did not find persuasive the fact that Dr. Cooper 

had minimal experience working for a mutual fund because of his 

broad-based experience teaching accounting and his general 

qualification as an accounting expert. 

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economist and a financial analyst currently employed by the U.S. 

Treasury as an adviser to foreign governments. Id. 347:21-25. 

Dr. Kopcke was qualified to testify as an expert witness in the 

areas of economics, econometrics, financial markets and 

financial institutions, including investment management and 

financial analysis and services. Id. 379:7-10.

 Dr. Kopcke first testified on issues related to competitive 

markets and specifically, flawed markets that do not show 

competitive market traits.36 Id. 381:2-20. He also testified 

more generally on the benefits of competitive markets, such as 

the ability of parties to seek alternatives and the price 

benefits that come from self-interested parties. Id. 382:9-13.

 This background testimony on economic and market theory 

served as a prelude to one particular issue that arises in the 

context of competitive (or non-competitive markets): rentseeking behavior. Id. 386:17. As Dr. Kopcke described it, 

rent-seeking is the behavior of pursuing more compensation for 

one’s effort than a competitive market would allow. Id. 386:18-

24. Rent-seeking behavior ultimately results in a degradation of 

the foundations of a competitive market. Id. 388:25-389:5.

 

36 Dr. Hubbard also testified briefly concerning investment 

management fees and competition. See, e.g., Trial Tr. 953:7-

954:20. This testimony is subject to a motion in limine to be 

excluded by Plaintiffs. The Court determines the motion is moot, 

as it does not consider this testimony in reaching its decision. 

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 On the other end of the spectrum, Dr. Kopcke testified as 

to what an arm’s-length deal truly signifies. He testified, “it 

means to me that each party must see a reasonable amount of 

value in the deal, and if it’s reached at arm’s-length, when 

both knew that they could seek other – other ways of doing their 

business, I would say it comes close to approximating what we 

would call a competitive market price.” Id. 389:17-22. One 

requirement of an arm’s-length bargain is that the parties 

cannot be related to each other, even indirectly. Id. 389:23-

390:2. 

 Against this background, Dr. Kopcke testified about 

competitive issues that can arise in the context of mutual 

funds. Id. 396:20-1 (“[T]he main problem is it’s not the 

practice in the mutual fund industry for the board to put the 

advisory function, the manager’s function, out to bid every 

year. They will continually return to the advis[e]r established 

by the sponsor of the fund and rely on that advisor’s financial 

statements and assertions about how the fund is performing in 

making its decisions.”). This raises several issues: 

Well, we have conflict of interest problems at every 

level in the negotiations, but, in particular, the 

advis[e]r or administrator’s negotiations with the 

board. We also have a principal agent problem there as 

well. And so, therefore, the information and the access 

of all parties and the bargaining power of all parties 

are not equal. It would be more equal, for example, if 

there were competitive bidding, but that’s just not the 

way it’s done, so that check on ensuring the conditions 

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for competitive arm’s length bargaining or competitive 

markets is missing. 

Id. 398:4-13.

 Dr. Kopcke then engaged in a lengthy analysis and 

description of the IMAs and the sub-adviser agreements. He 

ultimately determined that the configuration of the IMAs and 

sub-advisory agreements made sense: 

This is a pretty standard and reasonable setup. It makes 

a lot of sense that the advis[e]r would engage a 

specialized expert such as Wellington to conduct many of 

the day-to-day operations of the funds, while the 

advis[e]r retains the responsibility of communicating to 

the board, the responsibility of overseeing the subadvis[e]r and directing the sub-advisor, as necessary. 

So it’s supervisor, administrative, and takes the 

responsibility of reviewing the daily pricing and 

compliance from the data supplied by the – in part, the 

sub-advisor.

Id. 416:12-21. 

 Dr. Kopcke also testified that the sub-advisory agreements

represented arm’s-length bargains. Id. 420:1-6. On the other 

hand, Dr. Kopcke’s analysis of the profitability of Defendants 

led him to believe that the IMAs did not represent an arm’slength bargain. Dr. Kopcke used the same process as Mr. Barrett 

to arrive at a retained fee. Id. 423:15-22. He then compared 

the profit that Defendants earned based on that retained fee and 

the expenses Defendants directly incurred. Id. 426:6-8. He 

testified that, in the context of an arm’s length fee, he would 

expect to see “some reasonable correspondence between the two 

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numbers.” Id. 526:10-11. Instead, he determined that 

Defendants’ profit is “extraordinarily disproportionate.” Id.

426:20-22. He testified, “we just don’t see profit margins of 

98 percent in competitive market transactions, because nobody 

expects to pay a profit 70 times the provider’s cost.” Id.

427:14-16. Ultimately, he testified that the profit margin of 

all of the funds indicated that the agreements could not have 

been negotiated at arm’s-length. Id. 430:2-9.

Dr. Kopcke’s rationale for considering profit independent 

of sub-advisory fees was that one should generate a profit on 

the resources he personally commits and the work he does for a 

service or for a product. “You’re not entitled to earn a profit 

on work others do. That’s just basic economic principles. In 

other words, we call it in economics value added. You add 

value, you get paid for it.” Id. 430:12-17. Ultimately, he 

testified, the behavior of Defendants in this case amounts to 

the capture of economic rent. Id. 434:9-12. 

 Dr. Kopcke then engaged in an analysis of the proper means 

and amount of profit for Defendants to earn in this case. Upon 

a question from the Court, he testified that the proper profit 

margin he would expect to see would usually top out around 60 

percent. Id. 436:11-19. He testified that breakpoints as 

included in the fee schedules did not change his analysis. Id.

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455:6-8. He also testified that a profit margin around 30 

percent was usual in the industry. Id. 459:4-7.

 Problematically, on direct, the witness was asked to look 

at the gross management fee paid on the Capital Appreciation 

Fund in 2011 ($113,528,000). The sub-advisory expense for that 

period was $43,470,000. PX-767. The direct operating expenses 

for Defendants during that period were $918,000. Trial Tr. 

453:22-23.

Q: Okay. Now, concerning the total [investment 

management] fee paid, do you have an opinion as to 

whether or not that is excessive as [it] relates to the 

expenses, including both HFMC and the sub-advisory fee? 

. . . 

A: It’s a little high, but it could have resulted from 

an arm’s length bargain.

Id. 454:5-20.

 Additionally, on cross-examination, Dr. Kopcke admitted 

that his method of reaching a proper profit for Defendants 

involved using an “expense-plus approach.” Id. 509:9-11. The 

exchange proceeded: 

Q: Okay. And then – so here, you’re taking an expenseplus approach, right? 

A: Correct. 

Q: Okay. And the concept, if I understand correctly, 

is that the total fee charged to the funds would be the 

sum of, 1 HFMC’s operating expense; plus, 2, 43 percent 

of HFMC’s operating expense; plus, 3, the fee paid to 

the sub-advisory. Is that right? 

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A: Correct. 

Id. 509:9-16.

 Further, it was shown on cross-examination that Dr. 

Kopcke’s proffered reasonable fee for the Floating Rate Fund in 

2013 (15.19 basis points, of which 14 basis points would 

compensate Wellington and 1.19 would compensate Defendants) 

yielded an ultimate management fee of one-one-hundredth of one 

percent of AUM. Id. 510:23-511:1. By way of comparison, the 

actual management fee charged by the Floating Rate Fund during 

2013 was rated near 60 basis points, which placed it at 15th out 

of 29 in its Lipper peer group for management fees. See supra. 

Dr. Kopcke’s suggested fee of 15.19 basis points would have been 

11.11 basis points lower than the lowest fund in the Lipper peer 

group. Dr. Kopcke’s response to this fact was that the 

comparison funds seemed to be “quite expensive.” Id. 515:23. 

IV. ANALYSIS

 Having framed the factual evidence as it was presented, the 

Court now sets forth its analysis of the Gartenberg factors, 

including all relevant surrounding information. As set forth 

above, those non-exhaustive factors are: “(1) the nature and 

quality of the services provided by the adviser to the 

shareholders; (2) the profitability of the mutual fund to the 

advisers; (3) “fall-out” benefits; (4) the economies of scale 

realized by the adviser; (5) comparative fee structures with 

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similar funds; and (6) the independence and conscientiousness of 

the independent trustees.” Gallus, 497 F. Supp. 2d at 979. 

This Court has already determined that the final listed factor, 

the independence and conscientiousness of the independent 

trustees, cuts in favor of Defendants’ position.

i. Nature and Quality of Services Provided 

1. Nature of the Services 

 A crucial metric in this case is a determination of the 

nature of the services provided by the Defendants. Under 

Plaintiffs’ principal theory of the case, the services provided 

by Defendants are woefully minimal compared to the excessive 

profit they reaped, amounting to less than one full-time 

employee per fund. This is a tangential result of Plaintiffs’ 

“retained fee” theory of the case, as primarily outlined by 

Plaintiffs’ expert Mr. Barrett, whereby the services of subadvisers are not considered as an expense of the Defendants. 

 At summary judgment, the Court expressed its preliminary 

thoughts on the issue of Plaintiffs’ theory of excluding the 

services of sub-advisers from consideration under Section 36(b):

It would be a strange holding to rule that the nature or 

quality of the services provided by the [] Defendants 

were inferior solely because they were contracted out to 

Wellington, when the parties acknowledged this as a 

possibility in their initial contract. Put differently, 

what’s the difference to the Funds if the [] Defendants 

perform the services directly or by way of a sub-adviser? 

The sub-adviser clause in the contract seems to indicate 

that (barring rejection of the sub-adviser by the Board) 

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there is no difference. The plain fact is, as part of 

the Board’s bargain with the [] Defendants, the 

performance of the duties ultimately tasked to 

Wellington was secured. Disregarding those services 

solely because the [] Defendants made the permissible 

business decision that they were better or more 

efficiently (or even more inexpensively) performed by 

Wellington is non-sensical. 

Op. 44. Despite this Court’s earlier reservation, Plaintiffs 

labored during trial to present much evidence explaining why 

this Court should not consider the services of Wellington. 

Nevertheless, the Court finds that consideration of services 

performed by Wellington is proper. As an initial matter, the 

Court is reminded of a central tenet of Section 36(b), that 

courts must consider “all services rendered to the fund or its 

shareholders and all compensation and payments received, in 

order to reach a decision as to whether the adviser has properly 

acted as a fiduciary in relation to such compensation.” S. Rep. 

No. 91-184, at 13 (1969), reprinted in 1970 U.S.C.C.A.N. 4897, 

4910 (1970); see also Gartenberg v. Merrill Lynch Asset Mgmt., 

Inc., 528 F. Supp. 1038, 1052 (S.D.N.Y. 1981) (it is “entirely 

proper for the fiduciary to consider the totality of the values 

placed at the disposal of the shareholders in appraising the 

fairness of the compensation, or else form would be substituted 

for substance”); Benak v. Alliance Cap. Mgmt. L.P., No. 01-5734, 

2004 WL 1459249, at *8 (D.N.J. Feb. 9, 2004) (“[U]nder § 36(B) 

it is the overall nature and quality of the services provided by 

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the investment adviser that is at issue – not merely some small 

percentage of those services”.). This is a challenge of the 

investment management fee that Defendants collected; that fee 

was paid pursuant to the IMAs. As such, the Court will consider 

all services provided under the IMAs for that fee, whether 

Defendants performed them or hired others to fulfill their 

obligations. 

 As to the SEC consent judgments cited by Plaintiffs, which 

are held out to stand for the notion that a sub-advisory type 

relationship is suspect when the adviser makes a significant 

profit, the Court is unpersuaded that these consent judgments 

carry the weight Plaintiffs urge. To the extent stipulated 

consent judgments before the SEC are persuasive authority, the 

Court is nevertheless convinced that each case cited by 

Plaintiffs involved facts far different from those at play here. 

 In SEC v. Am. Birthright Tr. Mgmt. Co. Litig., 1980 WL 1479 

(D.D.C. Dec. 30, 1980), the complaint alleged that the offering 

documents associated with the mutual funds “failed to disclose 

or misrepresented material facts and circumstances relating to, 

among other matters, . . . the advisory services performed by 

the ‘sub-adviser’ to the funds and the compensation paid to it . 

. . .” Id. (emphasis added). In this case, any allegations 

that information was misrepresented by Defendants did not 

proceed to trial. Indeed, there has never been any allegation 

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that Defendants failed to disclose or misrepresent that 

Wellington was performing sub-advisory services and what the 

compensation for those services was. As such, the Court finds 

American Birthright to be distinguishable. 

 Likewise, In re Smith Barney Fund Mgmt. is also 

distinguishable. That case, and ultimately the consent 

judgment, involved allegations of misleading the Board as to the 

economic substance of a relationship with a transfer agent: 

[T]he Adviser, which serves as an investment adviser to 

the Smith Barney Family of Funds . . . , recommended the 

Funds contract with an affiliate of the Adviser, which 

would perform limited transfer agent services and subcontract with the Funds’ existing transfer agent. The 

existing transfer agent would perform almost all of the 

same services it had performed previously, but at deeply 

discounted rates, permitting the affiliate of the 

Adviser to keep most of the discount for itself and make 

a high profit for performing limited work. In making 

this recommendation, the Adviser misled the board by 

omitting material facts, which led the boards to believe 

that the Adviser’s recommendation was made in the Funds’ 

best interests, which was not true.

Id. at ¶ 1 (emphasis added). At trial, there was no allegation 

that the Board was materially misled by information provided by 

Defendants. 

 Next, the Court is unpersuaded that R.W. Grand Lodge of F & 

A.M. of Pa. v. Salomon Bros. All Cap Value Fund, 425 F. App’x 

25, 30-31 (2d Cir. 2011) or Operating Local 469 Annuity Trust 

Fund v. Smith Barney Fund Mgmt., LLC, 595 F.3d 86, 93 (2d Cir. 

2010) counsel in favor of excluding sub-advisory services from 

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consideration. That case involved allegations at the motion to 

dismiss stage of a defendant entering into a phony relationship 

for the purpose of fleecing the shareholders: 

Defendants caused the [funds] to negotiate a contract 

with an SSB affiliate to replace the Funds’ existing 

transfer agent. Once it replaced the existing agent, 

the SSB affiliate then sub-contracted with that agent to 

continue to perform virtually the same services that it 

had previously performed, but at a steep discount. 

Rather than pass the resulting savings on to investors 

in the form of lower fees, SSB’s affiliate kept the 

windfall, permitting Defendants to profit at the expense 

of the SSB Funds and their investors. 

Id. at *30; see also Operating Local 469, 595 F.3d at 93 

(“Deloitte expressed doubts to CAM as to the legality of the 

arrangement, questioning, among other things, whether the 

anticipated savings [on the new arrangement] belonged to the 

Funds as opposed to the investment adviser and whether the Fund 

Boards would ever approve such an arrangement. At that point, 

CAM changed course and created a transfer agent subsidiary[.]”). 

This case contains no allegations that Defendants negotiated a 

sham contract to provide the same services they had previously 

contracted to provide under a different contract solely for the 

purpose of an ill-gotten windfall. There was simply no evidence 

put forward by Plaintiffs that the Board was not aware of the 

services and method by which Wellington would be compensated.37

 

37 The Court is additionally unpersuaded that the Pfeiffer case 

is persuasive. In that case, “serving as a pass-through entity 

for . . . payments [did] not constitute ‘receipt’ under the 

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 The Court is also unconvinced by Plaintiffs’ resort to 

common law fiduciary principles to show that the “economic 

reality” requires the Court consider only Defendants’ retained 

fee (and associated services). The Supreme Court has declined 

to articulate the exact overlap of common law fiduciary duties 

and those under Section 36(b), and has noted at least one 

difference between the standards that raises the bar for 

Plaintiffs. Jones, 559 U.S. at 347 (“The [ICA} modifies this 

duty in a significant way: it shifts the burden of proof from 

the fiduciary to the party claiming breach . . . .”);see also 

Sivolella, 2016 WL 4487857, at *3 (“However, the fiduciary duty 

imposed by § 36(b) is significantly more circumscribed than 

common law fiduciary duty doctrines.” (citation omitted)). 

Moreover, the Restatement (Third) of Trusts, which suggests that 

a rule of “reasonable compensation” should apply when a portion 

of the investment function is delegated directly contradicts 

Congress’s intent in enacting Section 36(b). Jones, 559 U.S. at 

352 (“Congress rejected a ‘reasonableness’ requirement that was 

 

ICA.” Pfeiffer v. Bjurman, Barry & Assocs., No. 03 Civ. 9741, 

2006 WL 497776, at *5 (S.D.N.Y. Mar. 2, 2006), aff’d, 215 F. 

Appx. 30, 31-32 (2d Cir. 2007). In this case, the evidence does 

not establish that Defendants served as a pass through entity 

for Wellington’s service, particularly in light of Mr. Meyer’s 

testimony concerning oversight obligations and Defendants’

retention of risk and liability.

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criticized as charging the courts with rate-setting 

responsibilities.”).38

 Although the costs that were directly incurred by 

Defendants were low in relation to the gross management fee that 

was paid, the Court finds that a consideration of all of the 

services performed, including those performed by sub-advisers, 

Plaintiffs have not carried the burden of showing that the 

nature of the services indicates the fees were so 

disproportionate that they could not have been negotiated at 

arm’s-length. This is particularly so in light of the risks 

that were also borne by Defendants, which Plaintiffs only 

tacitly disagreed with in the examination of Dr. Kopcke. See 

Sivolella, 2016 WL 4487857, at *42-44 (considering risks faced 

by the adviser). 

 Most problematically, however, Plaintiffs presented little 

or no evidence in their case on the nature of the services 

provided by Wellington,39 which the parties do not dispute 

 

38 The Court is similarly unpersuaded by reliance on the Uniform 

Trust Act, § 708 (2010 rev.), which notes that “a downward 

adjustment of fees may be appropriate if a trustee has delegated 

significant duties to agents, such as delegation of investment 

authority to outside managers.” Id. Defendants retain ultimate 

responsibility for ensuring all of the Funds’ investment 

management services are performed. 

39 The Court is also unpersuaded that the Board could have 

contracted directly with Wellington and thereby secured a 

separate analysis of Wellington’s and the Defendants’ contracts, 

consistent with what they argue is the “economic reality” of the 

case. Those are not the facts of the case, and the Court is 

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accounted for millions of dollars and the vast majority of 

services (at least monetarily) performed under the IMAs. Absent 

evidence showing the nature of these services was somehow 

suspect or inadequate, Plaintiffs have not carried their burden. 

2. Quality of the Services 

 The Court also heard evidence concerning the quality of the 

services performed by Defendants. Plaintiffs and Defendants 

presented three metrics by which one might assess the 

performance of the Funds. Each of these presents a different 

look at the overall picture, and the Court does not find that 

one method over another is better or worse. 

 Defendants’ two performance analyses, Lipper’s and Dr. 

Hubbard’s, both support a finding that the Funds performed 

roughly in a middle-of-the-road fashion or better for most of 

the Funds. For instance, looking to the Fund that Plaintiffs 

used as an exemplar throughout most of the trial, the Capital 

Appreciation Fund, the Lipper performance numbers show the fund 

performed in the 34th, 9th, 7th, 23rd and 32nd percentiles between 

2010 and 2014. The Court finds this performance is 

 

unconvinced on the evidence before it that such a hypothetical 

separate agreement, if it had been reached, would have been in 

all other ways identical to the relationships, risks and 

liabilities borne by the respective parties. Likewise, the 

Court is unconvinced that Wellington’s fiduciary duty to the 

Funds necessarily implies that the fees can be bifurcated as 

Plaintiffs treat them. 

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unquestionably strong based on an analysis of Lipper data. The 

Court likewise finds that the performance of all remaining 

funds, except the Balanced Fund was average or strong based on 

this particular metric.

 On the other hand, the Fund that appears to have performed 

the worst, the Hartford Balanced Fund, does not have similarly 

strong data. Based on the Lipper peer group, the performance 

ranged between the 77th and 71st percentile. The Court finds that 

this performance is well-labeled as below-average, although the 

Court does note that in the final 10-year reporting period 

(2014), the Balanced Fund outperformed 29% of its competitors. 

Dr. Hubbard’s unrebutted testimony that the fund was undergoing 

management changes, and the fact that the Fund performed 

strongest during the final ten-year period presented to the 

Court softens the determination that the Fund overall performed 

weakly. 

Dr. Hubbard’s analysis using his own independently selected 

peer groups is similar in outcome to Lipper’s. His analysis, 

DX-509, demonstrates that all of the funds except the Hartford 

Balanced Fund outperformed the majority of their peers in the 

vast majority of 10-year reporting periods. Id. Once again, 

the Balanced Fund was somewhat of a straggler, although it 

performed better under Dr. Hubbard’s analysis, ultimately 

outperforming more than half of its competitors in the final 10-

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year reporting period. Id. Again, the Balanced Fund’s poor 

performance is softened by the credible and unrebutted 

explanation that the managerial shakeup with the Fund and an 

associated increase in performance in the final interval. 

 Plaintiffs additionally have argued that the performance of 

the Funds was poor based on their near-universal failure to 

exceed the performance of their selected benchmarks. See supra. 

Certainly benchmarks are a way to assess the performance of a 

fund. But, Plaintiffs presented little evidence that the 

failure to hit a benchmark is a strong indication of poor 

performance. The Court has little trouble believing that mutual 

funds in general strive to do as well as possible, including 

frequently attempting to beat any and all benchmarks. However, 

the opposite notion, that failure to hit a benchmark is the sine 

qua non of poor performance is not well-established on the 

evidence before the Court. 

 On the other hand, the Court did receive persuasive and 

competent testimony from Dr. Hubbard concerning the value of 

benchmarks in assessing performance. As he set forth in his 

testimony, they are one metric for evaluating performance, but 

they are a metric that analyzes performance in a vacuum, because 

fees are not involved. For instance, although the Hartford 

Capital Appreciation Fund failed to outperform the Russell 3000 

Index over any of the 1, 5 or 10 year spans pointed to by 

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Plaintiffs, based on the testimony of Dr. Hubbard, this is not 

surprising, as the Russell 3000 is not a mutual fund, but an 

index which does not incorporate fees. As such, in going 

against a benchmark, a mutual fund begins in the hole. 

 Although the performance evidence the Court received seems 

to indicate one of the Funds, the Hartford Balanced Fund, 

performed below average during the relevant time periods, the 

remaining Funds appear to have performed – at worst – middle of 

the pack. For those Funds, the quality factor of the Gartenberg 

analysis does not point in favor of finding the fees paid 

Defendants could not have been part of an arm’s-length 

agreement. With regard to the Hartford Balanced Fund, this 

generally weak performance tips very mildly in Plaintiffs’ 

favor. 

ii. Profitability 

 With regard to the issue of profitability, the Court is 

guided by the notion that it is not a permissible approach under 

Section 36(b) to argue that the adviser “just plain made too 

much money.” Kalish v. Franklin Advs., Inc., 742 F. Supp. 1222, 

1237 (S.D.N.Y. July 24, 1990). Section 36(b) has never required 

a “cost-plus” method of setting profits. Consistent with the 

Court’s consideration of the services provided by Wellington in 

considering the “nature of services” provided, the Court 

considers profitability inclusive of Wellington’s fees. As 

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such, the Court does not give weight to Mr. Barrett’s “retained 

fee” methodology for calculating profitability, which yielded 

extremely high profit margins. Instead, the Court looks to the 

profitability as reported based on Lipper’s and Dr. Hubbard’s 

analyses. 

 Excluding consideration of distribution fees, the profit 

margins for the Defendants were as follows: 

JX-3E; JX-5E; JX-7E; JX-9E; JX-11D; see also PX-593 (“Reported 

Profitability Ratio (Gross)”).

 The Court has little evidence before it with which to 

determine whether these profit margins are so great that they 

could not have been achieved at arm’s-length.40 See generally In 

re Am. Mut. Funds Fee Litig., 2009 WL 5215755, at *50 (“Section 

 

40 The Court is unpersuaded that the proper course is to compare 

the profit margins of Defendants to Wellington, as Plaintiffs 

urge. PPFOF ¶¶ 110. Although Wellington’s profit margin is 

lower than Defendants’, PPFOF & DR ¶ 110, as Defendants point 

out, the Court is in receipt of little evidence that the 

profitability of a sub-adviser with a different role and 

different risks, among other differences, can be compared. 

Trial Tr. 468:6-14.

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36(b) does not prohibit an investment adviser from making a 

profit, nor does it regulate the level of profit.”). Looking to 

the case law, pre-tax margins (like these) as high as 77.3% have 

been affirmed. Schuyt v. Rowe Price Prime Reserve Fund, Inc., 

663 F. Supp. 962, 972 (S.D.N.Y. 1987), aff’d, 835 F.2d 45 (2d 

Cir. 1987). 

Moreover, the Court is also not persuaded by Dr. Kopcke’s 

opinion on profitability because his model essentially seeks to 

adopt a cost-plus approach. Trial Tr. 436:7-9, 508:25-509:11 

(“Q. . . . [S]o here, you’re taking an expense[-]plus approach, 

right? A. Correct.”). It is well-established that Section 36(b) 

does not require cost-plus profit for advisers. Schuyt, 663 F. 

Supp. at 972 (Senate Report “indicates that the investment 

adviser is entitled to make a profit and that the bill neither 

requires a ‘cost-plus’ advisory agreement nor general concepts 

of rate regulations, such as those applicable to public 

utilities”) (citing S. Rep. No. 91-184).

 In this light, Plaintiffs have failed to meet their burden 

of establishing that the Funds were so profitable that their fee 

could not have been negotiated at arm’s-length. This was 

perhaps best demonstrated by Dr. Kopcke’s own direct examination 

where, when presented with the exact figures of a particular 

year for a particular fund, he testified that the profits were 

“a little high, but could have resulted from an arm’s length 

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bargain.” Simply put, if a fee could have resulted from an 

arm’s-length bargain, then Plaintiffs have failed to meet their 

burden. 

iii. Fall-Out Benefits

 Plaintiffs, despite the Court’s holding that the issue of 

fall-out benefits was a disputed one at summary judgment, do not 

make any argument with regard to fall-out benefits after trial. 

Pls.’ Br. 25 (“Plaintiffs did not address economies of scale or 

fall out benefits”). Fall-out benefits are those which accrue 

to the mutual funds adviser as a result of its work on behalf of 

the mutual fund. Hoffman v. UBS-AG, 591 F. Supp. 2d 522, 539 

(S.D.N.Y. 2008). Accordingly, for purposes of meeting their 

burden of proof, the Court finds that the absence of evidence 

with regard to fall out benefits that were realized by 

Defendants in its relationship with the Funds militates against 

a finding that the fee was so disproportionate that it could not 

have been negotiated at arm’s-length. Plaintiffs have not 

carried their burden with regard to this factor, either. 

iv. Economies of Scale 

 Likewise, Plaintiffs also concede that they did not address 

economies of scale at trial. Pls.’ Br. 25. The reason behind 

the omission of this evidence is that “Defendants’ costs are so 

low that even were they to have experienced economies of scale, 

those economies would have no meaningful impact on their costs.” 

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Id. For purposes of meeting their burden of proof, the Court 

finds that the absence of evidence with regard to economies of 

scale that were realized by Defendants in their relationship 

with the Funds against a finding that the fee was so 

disproportionate that it could not have been negotiated at 

arm’s-length.

v. Comparative Fee Structures 

 Plaintiffs additionally made no effort to present evidence 

of comparative fee structures at trial. Indeed, their posttrial brief emphasizes the unimportance of comparative fee 

structures. Pls.’ Rep. Br. 9 (“[C]omparative fees are 

relatively unimportant[.]”). Plaintiffs are certainly correct 

that courts should be wary of giving undue weight to fees 

charged by other mutual funds. As the Supreme Court in Jones 

noted, “[t]hese comparisons are problematic because these fees, 

like those challenged, may not be the product of negotiations 

conducted at arm’s length.” 559 U.S. at 350-51. Contrary to 

Plaintiffs’ position, however, “not relying too heavily” on 

comparisons does not mean “not relying at all.” Id. Indeed, a 

fulsome reading of the section of the Jones opinion explicitly 

reveals that comparative fee structures, when the circumstances 

are appropriate, should be considered: “courts may give such 

comparisons the weight that they merit in light of the 

similarities and differences between the services that the 

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clients in question require, but courts must be wary of inapt 

comparisons.” Id. at 350-51. Wariness of inapt comparisons and 

an instruction not to rely too heavily upon fee comparisons does 

not equal an outright bar to the consideration of comparative 

fee analyses under Jones. See DPFOF & PR ¶ 55 (“Defendants 

proffered no evidence that the fees in their suggested fee 

comparisons were negotiated at arm’s length. Thus, Defendants’ 

comparative fee “evidence” is tainted and irrelevant under 

Jones.”).

 Considering the evidence before the Court on the issue of 

comparative fees, the Court finds that this factor weighs 

against a determination that the fees charged to the Funds by 

Defendants were excessive. As set forth, supra, no Fund under 

either the Lipper analysis or Dr. Hubbard’s analysis ever fell 

into even the bottom tenth percentile. While it is inescapably 

true that some of these peers may not operate under an arm’slength fee agreement, either, nothing Plaintiffs have put 

forward has undermined the generally median fee levels of the 

Funds as opposed to their competitors. Under this evidentiary 

showing, the Court rules that this factor weighs in favor of 

finding against Plaintiff. 

B. Weighing Under Gartenberg 

 Plaintiffs are correct that the Gartenberg analysis is not 

a checklist. A plaintiff need not triumph with regard to each 

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factor – or any particular factor – to demonstrate that a fee is 

improper under Section 36(b). As such, that Plaintiffs did not 

present evidence with regard to certain of the factors does not 

doom Plaintiffs’ claims, although it certainly moves them no 

closer to meeting their burden of proof.

 In addition to the above, this Court had already determined 

that the independence and conscientiousness of the Board cut in 

favor of Defendants. Further, Plaintiffs have elected to 

present minimal evidence with regard to comparative fee 

structures, fall out benefits, or economies of scale. This 

leaves a determination by the Court whether Plaintiffs have

demonstrated that the fee is so disproportionate that it could 

not be one that was negotiated at arms’ length based upon a 

select few of the Gartenberg considerations. Plaintiffs have 

not done so.41

 

41 The Court also notes that Plaintiffs have advanced an 

alternate theory that, even if the Court considers the services 

performed by Wellington in evaluating the fee, the Defendants 

have still violated the ICA because of the disparity between 

Defendants’ and Wellington’s profit margins, the Funds’ 

performance against the benchmarks, and the generally high 

profits. The Court disagrees. It remains unexplored in the 

record why Wellington’s profit margin can (or should) be 

compared to Defendants. Benchmarks still remain one of several 

methods by which performance is analyzed. The generally high 

profit numbers are insufficient. Kalish, 742 F. Supp. at 1237 

(noting it is insufficient to argue a defendant “just plain made 

too much money.”). 

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 As noted above, the Court has determined that the nature of 

the services provided by Defendants, the quality of those 

services, and Defendants’ profitability do not suggest that the 

fee is so disproportionate that it could not have been 

negotiated at arm’s-length.42 Accordingly, Plaintiffs have not 

carried their burden of proof. Judgment in favor of Defendants 

is therefore proper. An appropriate Order will follow. 

DATED: February 28, 2017 

 s/Renée Marie Bumb 

 RENÉE MARIE BUMB 

 UNITED STATES DISTRICT JUDGE 

 

42 The singular poor performance of the Hartford Balanced Fund 

does not outweigh the remaining factors, which weigh in favor of 

Defendants. 

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