18‐733

Pirundini v. J.P. Morgan Investment Management Inc.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

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

SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED

BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1.  

WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY

MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE

NOTATION ASUMMARY ORDER@).  A PARTY CITING A SUMMARY ORDER MUST SERVE A

COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second

Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley

Square, in the City of New York, on the 18th day of March, two thousand

nineteen.

PRESENT: DENNIS JACOBS,

RICHARD J. SULLIVAN,

    Circuit Judges,

    EDWARD R. KORMAN,*

    District Judge.

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JOAN PIRUNDINI,

Plaintiff‐Appellant,

  ‐v.‐                  18‐733

 

* Judge Edward R. Korman, United States District Court for the Eastern District of New York, sitting by

designation.
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J.P. MORGAN INVESTMENT

MANAGEMENT INC.,

Defendant‐Appellee,

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FOR PLAINTIFF‐APPELLANT: ANDREW M. MCNEELA (Ira M.

Press, on the brief), Kirby McInerney

LLP, New York, NY.

FOR DEFENDANT‐APPELLEE: MICHAEL K. ISENMAN, Goodwin

Proctor LLP, Washington, D.C.

(Mark Holland, Valerie A. Haggans,

Charles A. Brown, and Elizabeth S.

David, Goodwin Proctor LLP, New

York, NY, on the brief).

Appeal from a judgment of the United States District Court for the

Southern District of New York (Daniels, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the judgment of the district court is

AFFIRMED.

Plaintiff Joan Pirundini, on behalf and for the benefit of the J.P. Morgan

U.S. Large Cap Core Plus Fund (the “Fund”), sued Defendant J.P. Morgan

Investment Management Inc. (“J.P. Morgan”), the Fund’s investment advisor,

claiming that J.P. Morgan’s excessive fees breached its fiduciary duty to the Fund

in violation of Section 36(b) of the Investment Company Act of 1940, 15 U.S.C. §

80a‐35 (“ICA”).  Pirundini appeals the district court’s decision dismissing the

complaint for failure to state a claim, arguing that the court erred by misapplying

the standard and factors set forth in Gartenberg v. Merrill Lynch Asset Mgmt.,

Inc., 694 F.2d 923 (2d Cir. 1982).  We assume the parties’ familiarity with the facts

alleged, the procedural history of the case, and the issues on appeal.  We accept

the facts as pleaded.
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The Fund is one of several mutual funds housed in the JPMorgan Trust I

and overseen by the same Board of Trustees.  At the time the complaint was

filed, each of the 12 Trustees qualified as “non‐interested,” that is, independent,

under the ICA.  J.P. Morgan serves as the Fund’s investment advisor and

assesses an annual investment advisory fee of 0.80 percent of the Fund assets

pursuant to an Investment Advisory Agreement.  Until 2015, the annual fee was

1 percent.  The fee does not include any break points at which progressively

lower asset‐based fees are assessed, but J.P. Morgan did agree to waive fees that

exceed specified caps on the Fund’s total expense ratio, which is the sum of all

Fund fees and operating expenses divided by the Fund’s net assets.  Thus, J.P.

Morgan waived $4.54 million of the $39.74 million in advisory fees owed for the

second half of 2016, resulting in a net advisory fee of 0.72 percent.  J.P. Morgan

also provides administrative services to the Fund for which it is compensated

separately.   

As the Fund’s investment advisor, J.P. Morgan is responsible for selecting

and managing the Fund’s investment portfolio.  From 2005 to 2015, the Fund was

managed by two of J.P. Morgan’s portfolio managers, during which time the

Fund’s assets increased from less than $1 billion to more than $10 billion.  A third

portfolio manager was added in 2015.  J.P. Morgan’s investment strategies for the

Fund include the “less common” strategy of taking short positions.  Joint App’x

42.   

On appeal, Pirundini argues that the district court misapplied the

Gartenberg factors by considering them individually rather than collectively.  

More fundamentally, she argues that the complaint satisfies the Gartenberg

standard and should not have been dismissed.

We review de novo a grant of a motion to dismiss pursuant to Federal

Rule of Civil Procedure 12(b)(6).  Fink v. Time Warner Cable, 714 F.3d 739, 740

(2d Cir. 2013).  “To survive a motion to dismiss, a complaint must contain

sufficient factual matter, accepted as true, to ‘state a claim to relief that is

plausible on its face.’”  Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell

Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).  
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To determine whether an investment advisor has breached its fiduciary

duty in violation of Section 36(b), “the test is essentially whether the fee schedule

represents a charge within the range of what would have been negotiated at

arm’s‐length in the light of all of the surrounding circumstances.”  Jones v.

Harris Assocs. L.P., 559 U.S. 335, 344 (2010) (quoting Gartenberg, 694 F.2d at 928).  

Courts in this circuit focus on the six Gartenberg factors to aid the inquiry: “(1)

the nature and quality of services provided to fund shareholders; (2) the

profitability of the fund to the adviser‐manager; (3) fall‐out benefits; (4)

economies of scale; (5) comparative fee structures; and (6) the independence and

conscientiousness of the trustees.”  Amron v. Morgan Stanley Inv. Advisors Inc.,

464 F.3d 338, 340 (2d Cir. 2006).

1. As Pirundini contends, the district court never explicitly weighed the

Gartenberg factors collectively to determine whether the complaint’s allegations,

taken as a whole, plausibly alleged that Defendant’s fees were outside the range

of what would have been negotiated at arm’s‐length.  Moreover, the district

court’s language, at times, suggests that it considered whether each factor in

isolation satisfied this pleading burden, in particular, factors 1 and 5.  See, e.g.,

Special App’x 16 (“These allegations [as to factor 1] are insufficient to raise an

inference that the fees were so excessive as to violate Section 36(b).”); id. at 20

(“Plaintiff’s allegations as to comparative fee structures fail to plausibly allege

that the fees [J.P. Morgan] charges the Fund . . . [are] impermissibly excessive.”).  

On the other hand, the court properly evaluated facts alleged relating to factors

2, 3, 4, and 6 to determine whether each factor weighed in Plaintiff’s favor.  See,

e.g., id. at 15 (“These allegations are insufficient to show that the Fund achieved

economies of scale . . . .”); id. at 18 (“Plaintiff’s allegations can support an

inference . . . that [J.P. Morgan] enjoys a fall‐out benefit.”); id. at 17 (“[N]one of

these ‘facts’ . . . plausibly suggest that the Fund has been particularly

profitable . . . .”); id. at 20 (“[T]hese allegations . . . do not suggest a basis for this

Court to reject the Board’s considered findings as to [J.P. Morgan’s] fees.”).    

Because our standard of review requires us to assess the Gartenberg

factors de novo, any error in the district court’s method of analysis is rendered

moot by our independent evaluation, so we see no reason to vacate the court’s

decision on these grounds.
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2. The parties have focused on the fifth Gartenberg factor relating to

comparative fee structures.  Plaintiff proffers several comparators.  We are not

persuaded that Bloomberg Finance L.P.’s category of U.S. equity large‐cap blend

funds is an apt comparator, particularly given its inclusion of index funds.  See

Jones, 559 U.S. at 350 (noting that courts “must be wary of inapt comparisons”).  

The other proffered comparators, though apt, result in a wash.  While the

JPMorgan U.S. Equity Fund pays only half the gross fee charged to Plaintiff, it

holds substantially fewer positions than does the Fund and does not take short

positions—a “major” difference according to the complaint.  Joint App’x 52.  J.P.

Morgan provides sub‐advisory services (as opposed to advisory services) to the

PSF Long/Short Large‐Cap Portfolio.  The Supreme Court has warned that we

should be wary of comparisons “between the fees that an adviser charges a

captive mutual fund,” like the Fund, “and the fees that it charges its independent

clients,” like the PSF Fund, Jones, 559 U.S. at 349, and that we “should be

mindful that the Act does not necessarily ensure fee parity between mutual

funds and institutional clients,” id. at 350.  Given this warning and the relatively

marginal difference in net fees (0.12 percent), we are not inclined to lend this

comparison much weight either.  Accordingly, we conclude that the complaint’s

allegations as to the fifth Gartenberg factor are weak.

Plaintiff’s allegations regarding the first and second Gartenberg factors are

also wanting.  As to the first factor, which relates to the nature and quality of the

Fund’s services, the complaint focuses on the Fund’s “essentially middling”

performance which placed it in the third, third, and fourth quintiles for 1‐, 3‐ and

5‐year periods, respectively, for Class A shares and in the third, second, and

third quintiles for Select Class shares.  Joint App’x 78.  These numbers are

unremarkable, and Plaintiff’s observation that middle‐of‐the‐pack returns mean

that the Fund has underperformed half of its peers is neither here nor there.  And

the complaint acknowledges that the Fund is within the 20 percent “lowest/best”

of its category—measuring performance against fees—according to

Broadridge/Lipper.  Joint App’x 64–65.  As to the second factor—the profitability

of the fund to the adviser‐manager—a plaintiff at the pleading stage is at a

disadvantage, being limited to publicly available information and largely

circumstantial evidence.  But the complaint’s allegations as to this factor

significantly duplicate facts adduced as to other Gartenberg factors.  And while

the complaint alleges revenues totaling approximately $100 million, see id. at 81,
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193, it does not reference profit margins, relative profitability of funds, or

subsidization of other funds through the Fund’s profits sufficient to draw any

meaningful inference as to actual profitability.  See, e.g., Chill v. Calamos

Advisors LLC, 175 F. Supp. 3d 126, 143 (S.D.N.Y. 2016) (denying motion to

dismiss when complaint alleged that parent company had 39.6 percent operating

margins and the fund contributed 20 percent to 40 percent of the defendant’s

advisory‐fee income).   

The allegations relating to the third and fourth Gartenberg factors are

more useful to Plaintiff.  As the district court found, the Fund’s ability to operate

a “clone” fund (the PSF Fund) at reduced cost supports at least a “weak”

inference of a fall‐out benefit.  Special App’x 18.  Moreover, the services

performed by Defendant as administrator of the Fund, along with services

performed by its affiliates, similarly support an inference of fall‐out benefits.  

And the explosive growth of the Fund’s assets under management from $69.2

million in 2006 to $9.86 billion in 2016 supports an inference that the Fund enjoys

economies of scale that it has not fully shared with investors.  On the other hand,

that inference is tempered; in the same period of time, the Fund has (1) added a

third portfolio manager, (2) decreased its fee from 1 percent to 0.8 percent, and

(3) waived certain fees resulting in a net fee of 0.72 percent for the second half of

2016.   

Pirundini has also provided some support for an inference in her favor

under the sixth Gartenberg factor, which relates to the independence and

conscientiousness of the Board.  On the one hand, the complaint concedes that

each trustee “qualifies under the ICA as a ‘non‐interested’ or independent

trustee,” Joint App’x 85, and Pirundini’s allegations relating to the trustees’

compensation, on their own, are insufficient as a matter of law, see Amron, 464

F.3d at 345.  On the other hand, the complaint alleges that the information the

Board considered regarding profitability—J.P. Morgan’s unaudited determination

of its revenues—was inadequate to determine whether the Fund’s profits were

reasonable.  Joint App’x 106.  That allegation provides some support for an

inference that the Board was not “fully informed about all facts bearing on the

adviser‐manager’s service and fee,” Gartenberg, 694 F.2d at 930, or as

conscientious as it could have been.
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Although, in the end, the complaint makes a showing under the third,

fourth, and sixth Gartenberg factors, Plaintiff has not stated a plausible claim for

relief.  “[I]n the light of all of the surrounding circumstances,” Jones, 559 U.S. at

344 (quoting Gartenberg, 694 F.2d at 928), the existence of fall‐out benefits, some

unshared economies of scale, and an ill‐informed Board do not support an

inference that Defendant’s 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,” id. (quoting Gartenberg, 694 F.2d at 928).   

We have considered Plaintiff’s remaining arguments and find them to be

without merit.  The judgment of the district court is AFFIRMED.

EDWARD R. KORMAN, District Judge, concurring:

I concur solely on the authority of Amron v. Morgan Stanley Investment

Advisors Inc., 464 F.3d 338 (2d Cir. 2006).  That decision imposed an impossible

pleading burden on Section 36(b) plaintiffs by wrongly applying, on a motion to

dismiss, the Gartenberg factors, which had previously only been applied after

discovery closed.  See, e.g., Gartenberg v. Merill Lynch Asset Mgmt., Inc., 694

F.2d 923, 925 (2d Cir. 1982) (judgment entered after trial); Jones v. Harris Assocs.

L.P., 559 U.S. 335, 341, 345–46 (2010) (adopting Gartenberg test for summary

judgment); Krinsk v. Fund Asset Mgmt., Inc., 875 F.2d 404, 408‐09 (2d Cir. 1989)

(applying Gartenberg after trial).  Amron requires plaintiffs to plead information

solely within the knowledge of the defendant and cannot be reconciled with

Gomez v. Toledo, 446 U.S. 635, 641 (1980) (Marshall, J.), which held that it would

“be contrary to the established practice in analogous areas of the law” to impose

the pleading burden on the plaintiff where she “cannot reasonably be expected to

know” the relevant facts.  Indeed, “the ordinary rule . . . does not place the

burden upon a litigant of establishing facts peculiarly within the knowledge of

his adversary.”  Campbell v. United States, 365 U.S. 85, 96 (1961) (Brennan, J.);

see also ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 101–02 (2d Cir.

2007) (holding that “at the early stages of litigation, the plaintiff need not plead

manipulation to the same degree of specificity as a plain misrepresentation

claim” because it “involve[s] facts solely within the defendant’s knowledge”).
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The effects of Amron may be seen throughout the majority’s analysis.  Here,

plaintiff pleaded revenues of at least $100 million, in addition to numerous fall‐

out benefits, including Rule 12b‐1 fees acknowledged in the Fund’s Semi‐Annual

Report, from which J.P. Morgan likely derived a profit.  Indeed, she pleaded facts

similar to those deemed sufficient in Chill v. Calamos Advisors LLC, 175 F. Supp.

3d 126, 143‐44 (S.D.N.Y. 2016), such as alleging that the Fund is among the most

profitable funds operated by J.P. Morgan.  And yet, her inability to plead more

specific information such as profit margins—which were not publicly available

but are presumably significant—dooms her claim.

Similarly, as the majority explains, “the complaint alleges that the

information the Board considered regarding profitability . . . was inadequate to

determine whether the Fund’s profits were reasonable.”  Op. 6.  While Pirundini

was able to make a showing as to the Board’s lack of conscientiousness, her

allegations apparently only provide “some support for an inference that the Board

was not . . . as conscientious as it could have been.”   Op. 6 (emphasis added).  

Generally, precisely what information a board reviews in assessing a captive

entity’s investment adviser agreement is peculiarly within the knowledge of the

defendant.  Accordingly, plaintiffs will struggle to make a strong showing on this

factor.    This is especially troubling because a “robust” review process earns a

board “commensurate deference.”  Jones, 559 U.S. at 351.  If defendants decline to

release information, they make it impossible for plaintiffs to demonstrate that a

board’s review process is deficient.   Ultimately, this may lead courts to award

undue deference to underinformed and careless trustees and directors.

In sum, Amron effected a judicial repeal of Section 36(b) by imposing a

pleading standard that cannot be satisfied without discovery.    Moreover, it

encourages investment advisers, such as J.P. Morgan, to conceal information that

supports a claim of breach of fiduciary duty.    These consequences effectively

insulate investment advisers from the Investment Company Act’s reach.  The ICA

was designed to mitigate the problem of captive mutual funds—situations like this

one where J.P. Morgan is both the adviser and “the creator, sponsor, and promoter

of the mutual fund,” Northstar Fin. Advisors Inc. v. Schwab Invs., 779 F.3d 1036,

1040–41 (9th Cir. 2015) (quotation marks and citation omitted), so the fund

“cannot[] as a practical matter sever its relationship with the adviser,” Burks v.

Lasker, 441 U.S. 471, 481 (1979)).   Recognizing the need to balance the conflict
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inherent in such captive relationships, Congress created a cause of action for

plaintiffs while simultaneously including numerous protections for defendants,

such as placing the ultimate burden of proof on plaintiffs, limiting recovery to

actual damages incurred in the preceding one‐year period, and guaranteeing

access to bench, rather than jury, trials.  Amron upsets this legislatively crafted

balance and makes the ICA’s ends impossible to achieve.  It binds this panel in this

case, but it should not be the law.

FOR THE COURT:

CATHERINE O’HAGAN WOLFE, CLERK