UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

___________________________________

JENNIFER L. KASILAG, LOUIS )

MELLINGER, JUDITH )

M. MENENDEZ, JACQUELINE M. )

ROBINSON, and ) Civil Action No. 11-cv-1083 (RMB) (AMD)

LINDA A. RUSSELL, et al., )

) Motion Date: May 7, 2012

Plaintiffs, ) Oral Argument Requested

) Document Filed Electronically

v. )

)

HARTFORD INVESTMENT )

FINANCIAL SERVICES, LLC, )

)

Defendant. )

___________________________________ )

REPLY MEMORANDUM IN FURTHER SUPPORT OF 

DEFENDANT’S MOTION TO DISMISS

RIKER DANZIG SCHERER HYLAND 

PERETTI LLP

By: Anthony J. Sylvester

Headquarters Plaza

One Speedwell Avenue

Morristown, NJ 07962-1981

(973) 538-0800 (tel)

(973) 538-1984 (fax)

asylvester@RIKER.com

ROPES & GRAY LLP

By: Harvey J. Wolkoff

Robert A. Skinner

Allison M. Boscarine

Prudential Tower

800 Boylston Street

Boston, MA 02199-3600

(617) 951-7000

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-iTABLE OF CONTENTS

Page

1. Plaintiffs’ New Factual Allegations Should Be Disregarded as an Improper 

Attempt to Further Amend the SAC....................................................................................1

2. The SAC’s Comparison to Sub-Advisory Fees Does Not Make Out a Plausible 

Claim that the Investment Management Fees are “So Disproportionately Large” 

that They “Bear No Reasonable Relationship to the Services Rendered”...........................3

3. The SAC’s Allegations that HIFSCO Charges Higher Fees than Vanguard Does 

Not Plausibly Support a Claim that HIFSCO’s Fees Were “So Disproportionately 

Large” ..................................................................................................................................4

4. Plaintiffs’ Theory of Liability Based on Comparison to Institutional Fees Should 

Be Limited to the Single Fund as to which the SAC Alleges Facts ....................................5

5. Plaintiffs’ Remaining “Gartenberg Factor” Allegations Do Not Form a Plausible 

Allegation that HIFSCO’s Fees Were “So Disproportionately Large” ...............................6

6. Plaintiffs’ Modified “Disclosure” Theory Still Fails to Allege a Plausible Claim 

for Excessive 12b-1 Fees on Class A Shares.......................................................................7

7. Plaintiffs Do Not Have Article III Standing to Pursue 12b-1 Fee Claims on Behalf 

of Class B Shareholders, and Even If They Did, Plaintiffs Have Alleged Conduct 

Entirely Consistent with Legal Activities............................................................................9

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-iiTABLE OF AUTHORITIES

Page(s)

CASES

Daily Income Fund, Inc. v. Fox,

464 U.S. 523 (1984).................................................................................................................10

DeMarco v. DepoTech Corp.,

149 F. Supp. 2d 1212 (S.D. Cal. 2001)......................................................................................4

Frederico v. Home Depot,

No. Civ.A. 05-5579(JAP), 2006 WL 624901 (D.N.J. Mar. 10, 2006) aff’d, 507 F.3d 

188 (3d Cir. 2007)......................................................................................................................2

Gallus v. Ameriprise,

--- F.3d ----, 2012 WL 1058976 (8th Cir. Mar. 30, 2012) ...................................................6, 12

Hoffman v. UBS-AG,

591 F. Supp. 2d 522 (S.D.N.Y 2008).........................................................................................7

In re Franklin Mut. Funds Fee Litig.,

478 F. Supp. 2d 677 (D.N.J. 2007)............................................................................................7

In re Goldman Sachs Mut. Funds Fee Litig.,

No. 04-2567, 2006 WL 126772 (S.D.N.Y. Jan. 17, 2006) ........................................................7

In re Mut. Funds Inv. Litig.,

767 F. Supp. 2d 531 (D. Md. 2010)...........................................................................................3

In re Mutual Funds Investment Litigation,

519 F. Supp. 2d 580 (D. Md. 2007).........................................................................................10

In re Resource Am. Sec. Litig.,

CA. No. 5446, 2000 WL 1053861 (E.D. Pa. Jul. 26, 2000) ......................................................4

Jones v. Bureau of Prisons,

Civ. No. 10-0297 (NLH), 2012 WL 40160 (D.N.J. Jan. 9, 2012).............................6, 7, 11, 12

Operating Local 649 Annuity Trust Fund v. Smith Barney Mgmt., LLC,

595 F.3d 86 (2d Cir. 2010).......................................................................................................10

Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp.,

632 F.3d 762 (1st Cir. 2011)....................................................................................................10

Reso v. Artisan Partners Ltd. Partnership,

No. 11-cv-873, 2011 WL 5826034 (E.D. Wis. Nov. 18, 2011).................................................5

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-iiiSantiago v. Warminster Township,

629 F.3d 121 (3d Cir. 2010).....................................................................................................11

Santomenno v. John Hancock Life Ins. Co. (U.S.A.),

No. 11-2520 (3d Cir. Apr. 16, 2012) .......................................................................................10

Schirmer v. Penkethman,

Civ. No. 10-1444, 2011 WL 1211324 .......................................................................................1

SEC v. Pentagon Capital Mgmt. PLC,

No. 08 Civ. 3324, 2012 WL 479576 (S.D.N.Y. Feb. 14, 2012)................................................3

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Nowhere in their Opposition do Plaintiffs explain how the Second Amended Complaint 

(“SAC”) corrects the failings the Court identified in the Amended Complaint (“AC”). Instead, 

Plaintiffs seek to prop up their allegations with entirely new allegations asserted for the first time 

in their opposition. In addition to being wholly improper as a procedural matter, these new 

“facts” do nothing to cure the defects in Plaintiffs’ allegations under § 36(b). Like the AC before 

it, the SAC relies largely on inapt industry-wide allegations and/or conclusory assertions 

regarding HIFSCO’s services that are belied by the very documents on which Plaintiffs rely –

leaving the pleading as a whole void of any plausible basis to show that the fees were “so 

disproportionately large” that they “could not have been the product of arm’s length bargaining.”

1. Plaintiffs’ New Factual Allegations Should Be Disregarded as an Improper Attempt 

to Further Amend the SAC

The SAC is Plaintiffs’ third bite at the apple, following extensive briefing and argument 

of the shortcomings in plaintiffs’ prior allegations. Nevertheless, Plaintiffs are still not content to 

rest on their pleading, but now attempt to bolster their claims further with the insertion of many 

entirely new “facts” in their opposition briefing – allegations that appear nowhere in the SAC.1

 1 The newly asserted facts relate to disparate topics such as the number of employees at 

HIFSCO, the size of the Funds’ front-ends sales loads, HIFSCO’s maintenance of shareholder 

records, and the state of mind of the Funds’ independent directors. 

 

However, “[i]t is axiomatic that the complaint may not be amended by the briefs in opposition to 

a motion to dismiss.” Schirmer v. Penkethman, Civ. No. 10-1444 RMB/JS, 2011 WL 1211324, 

at *7 (D.N.J. Mar. 28, 2011) (Bumb, J.) (internal quotation marks omitted). In support, Plaintiffs 

have submitted thirty new exhibits, as compared to the three exhibits attached to the SAC. This 

maneuver is entirely improper, and these new allegations should be disregarded. Particularly 

after more than a year of briefing and argument over Plaintiffs’ claims, HIFSCO should not be 

required to track a moving target while Plaintiffs continue to search for plausible claims. See 

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Frederico v. Home Depot, No. Civ.A. 05-5579(JAP), 2006 WL 624901, at *2 (D.N.J. Mar. 10, 

2006) aff’d, 507 F.3d 188, 201-02 (3d Cir. 2007) (“Not only has Plaintiff’s maneuvering in this 

regard prejudiced Defendant by requiring Defendant to alter its arguments in response to 

Plaintiff’s moving target of factual allegations, but it highlights the issue that the Court must 

address in the instant motion – the sufficiency (or insufficiency) of Plaintiff’s allegations in her 

complaint . . . .”).

It is telling that Plaintiffs apparently did not feel sufficiently confident about these new 

allegations to include them in their pleading. For example, the opposition brief’s repeated 

assertions regarding the number of HIFSCO employees are based upon carefully selected 

excerpts of a “Form ADV” that HIFSCO is required to file with the SEC, which were attached 

by Plaintiffs as Exhibit B to the Lakind Declaration. See Opp. at 5, 7, 8, 11, 12, 14, 17, 22. The 

date on this exhibit demonstrates that it was printed by Plaintiffs from the SEC website on 

November 14, 2011 – the very day the SAC was filed – and yet Plaintiffs elected to hold it in 

reserve for Motion to Dismiss briefing. See Lakind Decl. ExApril 20, 2012. B. Such tactics are 

contrary to the letter and spirit of the Federal Rules.2

In another attempt at belated misdirection, Plaintiffs now claim that “HIFSCO does not 

itself maintain [shareholder] records . . . as HIFSCO was required to rely on Plaintiffs to identify 

 2

 As for its substance, Plaintiffs’ new assertion that the Funds were being managed with only a 

handful of employees is a preposterous red herring. Indeed, given the breadth of HIFSCO’s 

responsibilities under the IMA, as discussed in the Motion, it should come as no surprise that 

literally hundreds of Hartford personnel are in fact engaged in providing those services to the 

Funds – all of whom are formally employed by other Hartford affiliates for administrative 

purposes, with their time allocated internally to HIFSCO’s business. Accordingly, only officers 

of HIFSCO are included on its Form ADV. Plaintiffs’ opposition offers absolutely no factual 

basis – because it cannot – to support the suggestion that the HIFSCO employees counted under 

the “investment advisory function” as that term is used in the SEC’s Form ADV are the only 

employees engaged in providing the array of investment management and administrative 

services set forth in the IMA. 

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the share class of their respective investments.” Opp. at 10. But Plaintiffs are undoubtedly well 

aware that most mutual fund shares are not purchased by individual investors directly from the 

funds themselves, but are instead purchased through third-party intermediaries (e.g., Schwab or 

Fidelity) – and those intermediaries bundle the share purchases and sales of their individual 

investor clients into what are known as “omnibus accounts” in transacting with the funds. See 

SEC v. Pentagon Capital Mgmt. PLC, No. 08 Civ. 3324, 2012 WL 479576, at *25 (S.D.N.Y. 

Feb. 14, 2012) (“An omnibus account is a pooled account, meaning that multiple trades are 

bundled and submitted together under a single account number.”); In re Mut. Funds Inv. Litig., 

767 F. Supp. 2d 531, 540 (D. Md. 2010) (explaining that “in an omnibus account, [the Fund] 

sees nothing but one big shareholder account”). To assert that HIFSCO does not maintain 

required shareholder records – simply because it cannot “look through” such omnibus accounts 

to determine what share classes the individual named Plaintiffs own – is implausible at best, and 

disingenuous at worst. 

Accordingly, while it is always improper to introduce new allegations through an 

opposition to a motion to dismiss, Plaintiffs’ attempts to do so here are particularly dubious –

and these assertions should be disregarded entirely.

2. The SAC’s Comparison to Sub-Advisory Fees Does Not Make Out a Plausible 

Claim that the Investment Management Fees are “So Disproportionately Large” 

that They “Bear No Reasonable Relationship to the Services Rendered”

Regardless of whether the new factual assertions in the opposition are taken into account, 

nowhere in their brief do Plaintiffs explain how the SAC corrects the failings the Court identified 

in the AC regarding the sub-advisory fee comparison. Plaintiffs still assert conclusorily that 

“substantially all” of the investment management and administrative services required of 

HIFSCO are delegated to the sub-adviser – when the very documents relied upon by Plaintiffs 

show the opposite to be true. Def. Mem. at 11-12. 

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Plaintiffs’ attempted reliance on a putative expert to resurrect its conclusory allegations is 

unavailing. Plaintiffs concede the established principle in the Third Circuit that expert 

declarations may not be considered on a motion to dismiss. See Opp. at 12 (“As HIFSCO 

argues, Rose v. Bartle holds that declarations may not be considered on a motion to dismiss.”).3 

Nonetheless, Plaintiffs now argue that the allegations in the SAC that are derived from their 

putative expert’s declaration may be considered by the Court. While otherwise-proper 

allegations supported by an expert may be included in a pleading under certain circumstances,4

 

Plaintiffs here do not even attempt to refute that the Pomerantz declaration – and the 

corresponding SAC paragraphs – are the very same conclusory allegations (with little or no 

content specific to the Hartford Funds) that the Court rejected in considering Plaintiffs’ AC. See 

Def. Mem. at 15. Indeed, the allegations about what “should be” the most important and 

expensive services and how HIFSCO “should have” charged less for its services are virtually 

unchanged from the AC.5

3. The SAC’s Allegations that HIFSCO Charges Higher Fees than Vanguard Does Not 

Plausibly Support a Claim that HIFSCO’s Fees Were “So Disproportionately 

Large” 

 See id. at 15 & n.9. Because conclusory allegations carry no 

additional weight merely because a putative expert echoes them, the Pomerantz declaration does 

nothing to elevate these allegations from the conceivable to the plausible. 

In the Opposition, Plaintiffs do nothing to distinguish the repeated holdings of courts in 

 3

 To the extent Plaintiffs’ citation to In re Resource Am. Sec. Litig., CA. No. 5446, 2000 WL 

1053861 (E.D. Pa. Jul. 26, 2000), is intended to contravene the Third Circuit’s clear holding in 

Rose v. Bartle, this unpublished decision is plainly not controlling authority. See Opp. at 12. 

4

 See, e.g., DeMarco v. DepoTech Corp., 149 F. Supp. 2d 1212, 1222 (S.D. Cal. 2001) (“A 

better approach might be to include the expert’s nonconclusory assertions within specific 

paragraphs in the complaint.” (emphasis added))

5

 See, e.g., SAC ¶ 52 (“The evaluation and implementation of a fund’s investment program is 

generally the most expensive, and important, investment management activity, with respect to a 

fund.”); id. ¶ 78 (“[A]s set forth in the Declaration of Steven Pomerantz Ph.D., HIFSCO’s total 

investment management fee for each Hartford Fund bore no reasonable relationship to the 

services it rendered.”); see also Def. Mem. at 15 n.9.

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§ 36(b) cases refusing to credit a comparison to Vanguard as relevant. See Def. Mem. at 16-17. 

Nor do Plaintiffs undertake to compare HIFSCO’s fees to any other mutual fund adviser 

(including for-profit entities), comparators that are every bit as publicly available to Plaintiffs as 

are HIFSCO’s and Vanguard’s fees. In one decision heavily relied on by Plaintiffs, Reso v. 

Artisan Partners Ltd. Partnership, No. 11-cv-873, 2011 WL 5826034 (E.D. Wis. Nov. 18, 

2011), the court denied the motion to dismiss but nevertheless agreed with the defendant that 

“extremely limited comparisons” to Vanguard funds “are of little value.” Id. at *8.6

Thus, Plaintiffs are forced merely to reiterate their allegations that Vanguard’s advisory 

fees are lower than HIFSCO’s. It cannot plausibly be alleged that HIFSCO’s fees are outside the 

range of what could have been negotiated at arm’s length by simply pointing to just one data 

point at the very lowest end of the range. Indeed, by contending that Vanguard’s fees of zero to 

one basis point are appropriate comparators, see SAC ¶ 171, Plaintiffs essentially allege that 

HIFSCO breached its fiduciary duties by not offering its services for free. There is no legal 

support for such a proposition, or for treating Vanguard as a relevant comparison. 

 

4. Plaintiffs’ Theory of Liability Based on Comparison to Institutional Fees Should Be 

Limited to the Single Fund as to which the SAC Alleges Facts

Plaintiffs offer no reason why the litigation should proceed on the basis of an institutional 

fee comparison as to all six Funds owned by Plaintiffs when only one of the Funds even 

allegedly has an institutional fee counterpart for purposes of this comparison. The SAC 

compares the fees paid by the Hartford Inflation Plus Fund (a fixed-income (i.e., bond) Fund 

sub-advised by HIMCO, which is an affiliate of HIFSCO) to the fees allegedly paid to HIMCO 

for managing fixed-income separate accounts for other clients. See SAC ¶¶ 180-81. But this 

 6

 Although the Reso court found the complaint to allege plausible claims under § 36(b), that 

complaint asserted facts specific to the funds at issue that are not present here, including that 

industry analyst Morningstar had allegedly given the adviser an “F” grade for fees.

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single comparison between one Fund and two HIMCO-run separate accounts cannot justify full 

discovery and litigation as to all the Funds, particularly where most of the others are sub-advised 

by Wellington and thus can offer no analogous comparison. For example, the Hartford Capital 

Appreciation Fund – far and away the largest of the Funds at issue in this case – is an equity fund 

pursuing a “large-cap growth” strategy, sub-advised by Wellington. Plaintiffs nowhere allege 

that comparable services are being provided by HIFSCO or any of its affiliates to other clients 

for less – nor could they, as no HIFSCO affiliate offers such a strategy to any client. 

Instead, Plaintiffs set up a straw man argument. Plaintiffs misconstrue HIFSCO as 

asserting that discovery should be limited to the single Fund referenced in this sub-allegation 

“because the other accounts HIMCO manages do not have similar investment strategies to those 

of the Hartford Funds.” See Opp. at 17. This is flatly incorrect. HIFSCO maintains that 

discovery should be limited to the alleged Inflation Plus Fund “analogues” for the 

straightforward reason that this is the only comparison alleged in the SAC. 

5. Plaintiffs’ Remaining “Gartenberg Factor” Allegations Do Not Form a Plausible 

Allegation that HIFSCO’s Fees Were “So Disproportionately Large”

Plaintiffs argue that the litigation should proceed on the basis of its allegations about the 

remaining so-called “Gartenberg factors”: economies of scale, conscientiousness of the Board, 

and profitability. Opp. at 19. Critically, however, these factors are not themselves the test of 

liability – the test remains the “so disproportionately large” standard that the Supreme Court 

embraced in Jones. 130 S. Ct. at 1426; Gallus v. Ameriprise, --- F.3d ----, 2012 WL 1058976, at 

*2 (8th Cir. Mar. 30, 2012) (citing Jones, 130 S. Ct. at 1426). The so-called “Gartenberg

factors” are not the equivalent of elements of a § 36(b) claim, but are simply a “non-exhaustive” 

list of considerations that courts may wish to take into account when applying the ultimate 

standard. Plaintiffs thus cannot satisfy the Twombly/Iqbal pleading requirements merely by 

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asserting plausibly that HIFSCO enjoys economies of scale or profitable operations, but must 

show plausibly that the fees were so large as to be outside the bounds of what could be 

negotiated at arm’s length.

The SAC’s invocation of boilerplate “information and belief” assertions regarding the 

Gartenberg factors do nothing to meet this standard. For example, just as the AC before it, the 

current complaint does not identify any relevant information that the Board of Directors should 

have considered in approving the fees, but did not. The SAC also asserts that since HIFSCO 

and its sub-adviser, Wellington, have different breakpoints in their fee agreements, economies of 

scale are not “meaningfully” shared with the fund shareholders. See SAC ¶¶ 116, 126. Such 

conclusory allegations are insufficient because they say nothing about the costs per investor.7

6. Plaintiffs’ Modified “Disclosure” Theory Still Fails to Allege a Plausible Claim for 

Excessive 12b-1 Fees on Class A Shares

 

Finally, the SAC’s allegations with respect to HIFSCO’s profitability in managing the Funds rely 

primarily on “information and belief” and industry-wide generalizations. The SAC again 

focuses on the dollar amounts of the investment management fees but alleges nothing of 

substance on HIFSCO’s costs, which essentially equates revenue with profits. Such bare-bones 

allegations do not come close to meeting the plausibility standards of Iqbal/Twombly and the “so 

disproportionately large” standard of Jones. 

Plaintiffs’ opposition argument regarding Class A share 12b-1 fees reflects an abrupt 

about-face from their position at oral argument that the Funds’ disclosures about these fees were 

misleading. Plaintiffs now do not dispute that the Funds’ disclosure documents (cited by 

 7 See, e.g., Hoffman v. UBS-AG, 591 F. Supp. 2d 522, 540 (S.D.N.Y 2008). Courts in this 

Circuit and others have dismissed cases relying on general allegations that defendant investment 

managers refused to pass along economies of scale. See, e.g., In re Franklin Mut. Funds Fee 

Litig., 478 F. Supp. 2d 677, 687 (D.N.J. 2007); Amron, 464 F.3d at 345; In re Goldman Sachs 

Mut. Funds Fee Litig., No. 04-2567, 2006 WL 126772, *9 (S.D.N.Y. Jan. 17, 2006).

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Plaintiffs in the SAC at the Court’s request) clearly spell out that Class A shareholders pay both 

an up-front sales load at the time of purchase and a 12b-1 distribution and service fee 

thereafter. Acknowledging that HIFSCO’s disclosure is fulsome, Plaintiffs now argue for the 

first time in their Opposition that “[a]n ICA § 36(b) claim does not focus on the accuracy of the 

disclosure, rather, it focuses on whether the fees were disproportionate to the services rendered.” 

Opp. at 25. This stands in stark contrast to what Plaintiffs argued at oral argument: 

MR. LAKIND: – we allege that Hartford took the position before the SEC 

that 12b-1 fees essentially are a replacement for front end and back end 

loads. Insofar as they charge both, we’re alleging with regard to those two 

share classes that the services provided are already compensated for by the 

front end and the back end loads, so therefore the 12b-1 fees of necessity 

must be excessive. 

THE COURT: Because of the position they took before the SEC?

MR. LAKIND: Yes. 

* * *

THE COURT: That seems to be a plausible claim, that if it was 

represented to – if the allegation is that it was represented to the SEC that 

the distribution fees will be taken care of or addressed in the front end and 

back end loads and then that the distribution fees have actually turned out 

to be much more . . . .

Tr. 97:18-99:4.8

 Indeed, the Court stated that “I don’t want to allow a claim that I think is 

plausible to go forward if this is really – the claim as drafted is really being misconstrued.” Tr. 

104:11-14; id. at 105:6-8 (“. . . I am going to direct that you turn over the entire – the filing, 

because if it is taken out of context, then I think it’s ripe for me to look at.”).9

 8 See also Tr. 95:22-25 (“And when [HIFSCO] tells the SEC that you get one or the other [sales 

load or 12b-1 fee], that is not a fair charge to the plaintiffs – or it’s a disproportionate charge to 

the plaintiff because we’re paying both.”); id. at 96:5-6 (“[T]he fact remains that they charge 

both when they told the SEC they would charge one or the other.”).

 

9 Plaintiffs suggest that the Court should not consider this claim in the SAC because of the 

Court’s prior ruling on the AC. At oral argument, however, the Court ruled that if “the 

complaint as amended varies the analysis” of the allegations, that the Court would allow 

reargument of the point. Tr. 82:7-10; id. at 84:1-3. HIFSCO respectfully submits that the 

inclusion in the SAC of the complete SEC filing relating to HIFSCO’s purported 

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Backing away from their disclosure misrepresentation theory – the very theory that was 

the centerpiece of Plaintiffs’ oral argument and which the Court relied upon in allowing the 

claim to go forward – Plaintiffs introduce yet another allegation not included in the SAC in order 

to bolster its claims. Now, Plaintiffs assert that the Funds’ Board must have been confused about 

the fact that Class A shareholders pay both a sales load and a 12b-1 fee because one sentence of 

a Fund disclosure describes 12b-1 fees as a possible “alternative” to sales loads – which of 

course is true with respect to Class B and C shares. See Opp. at 25 (“The Board of Directors, in 

approving the Hartford Funds’ 12b-1 fees, specifically identified them as ‘an alternative to 

paying front end sales charges.’”). Raising this for the first time in Opposition to HIFSCO’s 

motion, Plaintiffs then criticize HIFSCO for “fail[ing] to explain how it can reconcile charging 

both fees when the Directors considered them to be alternatives.” Id. Aside from improperly 

introducing new facts in their Opposition, Plaintiffs’ ipse dixit about what the Board considered 

or thought – without any factual support whatsoever – cannot save any of the versions of 

Plaintiffs’ allegations regarding Class A 12b-1 fees.

7. Plaintiffs Do Not Have Article III Standing to Pursue 12b-1 Fee Claims on Behalf of 

Class B Shareholders, and Even If They Did, Plaintiffs Have Alleged Conduct 

Entirely Consistent with Legal Activities 

The opposition does not and cannot explain how Plaintiffs – who own no Class B shares 

and thus do not pay the 100 basis point 12b-1 fees on these shares – have the required “personal 

stake” in those fees to give them Article III standing to challenge them as excessive. Plaintiffs 

cite case law suggesting that mutual fund investors in a given share class might have statutory 

standing to pursue claims for other classes, but nowhere address the Supreme Court’s holding in 

Gollust v. Mendell that, notwithstanding statutory standing, “the plaintiff must still allege a 

 

misrepresentation of the 12b-1 fees paid by the Funds, SAC ¶ 92 n. 9, entitle HIFSCO to address 

these newly-pled allegations.

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distinct and palpable injury to himself.” 501 U.S. 115, 126 (1991) (emphasis added). See also 

Santomenno v. John Hancock Life Ins. Co. (U.S.A.), No. 11-2520 (3d Cir. Apr. 16, 2012) (slip. 

op.) (affirming dismissal where plaintiffs did not have a “personal stake in the outcome of the 

controversy” because “only those parties who would actually benefit from a suit may continue to 

prosecute the action”); Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset 

Acceptance Corp., 632 F.3d 762, 770 (1st Cir. 2011). Instead, Plaintiffs rely on Daily Income 

Fund, Inc. v. Fox, 464 U.S. 523 (1984),10

Plaintiffs also cite In re Mutual Funds Investment Litigation, 519 F. Supp. 2d 580 (D. 

Md. 2007), which held that shareholders in one mutual fund could have Article III standing to 

assert claims regarding market timing activities as to other funds whose shares they did not own. 

But the court’s reasoning is inapplicable here: “[t]he named plaintiffs have made plausible 

allegations that investment advisers, traders, and brokers who engaged in market timing and late 

trading activities caused the same type of harm by the same type of misconduct to shareholders in 

various mutual funds within the same family of funds.” Id. at 587 (emphases added); see id. at 

548-86 (canvassing Supreme Court precedent holding generally that “a plaintiff who had been 

and Operating Local 649 Annuity Trust Fund v. Smith 

Barney Management, LLC, 595 F.3d 86 (2d Cir. 2010). See Opp. at 25-26. Those cases, 

however, dealt only with statutory standing under § 36(b), not whether the plaintiff had a 

personal stake in the litigation sufficient to satisfy the requirements of Article III. Id. Plaintiffs’ 

suggestion in the next sentence of their Opposition that the named plaintiffs “therefore” have 

“Article III standing and statutory standing” is a non-sequitur.

 10 Plaintiffs cite Daily Income Fund for the proposition that “[a]ny recovery belongs to the fund, 

not the shareholder or the specific share class of the fund.” Opp. at 25. Daily Income Fund 

nowhere addressed share classes, and only concluded that any recovery would not go to an 

individual shareholder prosecuting the suit. Contrary to Plaintiffs’ suggestion, any recovery of 

Class B 12b-1 fees would be returned to that particular class of the Funds.

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subject to injurious conduct of one kind [does not] possess by virtue of that injury the necessary 

stake in litigating conduct of another kind, although similar, to which he has not been subject” 

(emphasis added)). Here, it cannot be said that the “same type of misconduct” cause the “same 

type of harm.” Plaintiffs here claim that Class A 12b-1 fees of 25 basis points are excessive 

because those shareholders pay front-end sales loads in addition to ongoing 12b-1 fees, and that 

the Directors purportedly considered them to be alternatives, but in reality they were not. 

Regarding the Class B 12b-1 fees of 100 basis points (which no named Plaintiff pays), on the 

other hand, Plaintiffs claim that those fees are excessive because the share class is closed, not 

because of some improper combination of different fee types. It cannot be said that this action 

alleges the “same type of harm by the same type of misconduct.”

With respect to Class B being closed to new investors, Plaintiffs nowhere distinguish the 

reasoning of the SEC and various courts that have concluded that charging 12b-1 fees for a 

closed share class is not improper. Indeed, Plaintiffs have acknowledged in the SAC that 12b-1 

fees may be used to finance initial and ongoing commissions and payments to broker-dealers, 

see SAC ¶ 87 – making continued payment of 12b-1 fees following closure of the class to new 

investors perfectly logical. See Jones v. Bureau of Prisons, Civ. No. 10-0297 (NLH), 2012 WL 

40160, at *3 (D.N.J. Jan. 9, 2012) (“If the allegations give rise to an ‘obvious alternative 

explanation,’ then the complaint ‘stop[s] short of the line between possibility and 

plausibility . . . .’” (internal quotation marks omitted)). Instead, Plaintiffs rely wholly on preTwombly case law for support that their claims can survive – under the prior Conley v. Gibson

“no set of facts” pleading standard. See Opp. at 24. But now it is no longer sufficient to allege 

activities that could conceivably be unlawful – they must be plausibly unlawful. See Santiago v. 

Warminster Township, 629 F.3d 121, 133 (3d Cir. 2010) (“‘[M]ere possibility’ of misconduct [is] 

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not enough.”). While compliance with SEC guidance and industry norms does not necessarily 

make such fee structures per se lawful under § 36(b), these facts vividly demonstrate the 

implausibility of Plaintiffs’ assertion that closure of Class B establishes these fees as “so 

disproportionately large” under Jones.

11

Finally, Plaintiffs’ Opposition offers no further support for its assertion that 12b-1 fees 

are excessive because they “are substantially a waste of fund assets” – without reference to how 

those fees compare to the value of the services rendered in exchange. SAC ¶ 98. Recently, the 

Eighth Circuit rejected such a theory of liability for 12b-1 fees that does not take into account 

whether the fee is “so disproportionately large” under the Jones/Gartenberg standard. See 

Gallus, 2012 WL 1058976, at *5. Plaintiffs’ claims here must fail for the same reason. 

Dated: April 20, 2012 Respectfully submitted,

RIKER DANZIG SCHERER HYLAND PERETTI LLP

/s/ Anthony J. Sylvester

Anthony J. Sylvester

Headquarters Plaza

One Speedwell Avenue

Morristown, NJ 07962-1981

(973) 538-0800 (tel)

(973) 538-1984 (fax)

asylvester@RIKER.com

 11 Plaintiffs suggest that the Court should not consider this claim in the SAC because of the 

Court’s prior ruling on the AC. Here again, HIFSCO submits that the inclusion in the SAC of (a) 

pleading of the classes of shares owned by the named plaintiffs, SAC ¶¶ 17-22; and (b) the fact 

that 12b-1 fees may be used to finance initial and ongoing commissions and payments to brokerdealers, SAC ¶ 87, entitle HIFSCO to address these newly-pled allegations.

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Of Counsel:

ROPES & GRAY LLP

Harvey J. Wolkoff

Robert A. Skinner

Allison M. Boscarine

Prudential Tower

800 Boylston Street

Boston, MA 02199

harvey.wolkoff@ropesgray.com

robert.skinner@ropesgray.com

allison.boscarine@ropesgray.com

Attorneys for Defendant Hartford

Investment Financial Services, LLC

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