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North Valley GI Medical Group v. Prudential Investments LLC

United States District Court, D. Maryland

August 23, 2016



          James K. Bredar United States District Judge

         Pending before the Court are Defendant's motion to dismiss for failure to state a claim (ECF No. 26) and Defendant's motion to strike jury demand (ECF No. 27). The latter motion has not been opposed by Plaintiffs (ECF No. 36) and will be granted. The motion to dismiss has been briefed (ECF Nos. 35, 39), and no hearing is required, Local Rule 105.6 (D. Md. 2016). It will be denied. The Court also will deny Plaintiffs' motion for leave to file a surreply (ECF No. 40) as untimely inasmuch as it was filed seven weeks after Defendant's reply.

         Before addressing the merits of Defendant's motion to dismiss, the Court cautions both parties to observe certain rules as to the format of motion papers. First, the parties' motion papers employed a method of citation of authorities that is not only incompatible with the rules but also a hindrance to the Court's consideration of the parties' respective arguments. For documents filed in this Court, the Local Rules neither permit nor require the citation of authorities in footnotes, as opposed to incorporating them into the text of documents. See The Bluebook: A Uniform System of Citation R. B1.1, at 3 (Columbia Law Review Ass'n et al. eds., 20th ed. 2015) (“In non-academic legal documents, such as briefs and opinions, citations generally appear within the text of the document immediately following the propositions they support. Footnotes should only be used in non-academic legal documents when permitted or required by local court rules.”). Second, the former rule requiring attachment to motion papers of unpublished case opinions has been omitted from recent iterations of the Local Rules. A citation to either Westlaw or LEXIS suffices for unpublished opinions. Counsel should familiarize themselves with these rules. Future noncompliant filings will be stricken without prior notice.

         The Court turns now to the substance of Defendant's motion to dismiss.

         I. Standard of Dismissal for Failure to State a Claim

         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 Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Facial plausibility exists “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. An inference of a mere possibility of misconduct is not sufficient to support a plausible claim. Id. at 679. As the Twombly opinion stated, “Factual allegations must be enough to raise a right to relief above the speculative level.” 550 U.S. at 555. “A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.' . . . Nor does a complaint suffice if it tenders ‘naked assertion[s]' devoid of ‘further factual enhancement.'” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555, 557). Although when considering a motion to dismiss a court must accept as true all factual allegations in the complaint, this principle does not apply to legal conclusions couched as factual allegations. Twombly, 550 U.S. at 555.

         II. Allegations of the Complaint

         Plaintiffs in this case are North Valley GI Medical Group, Christopher Evans, John Kernan, James and Karen Grugan, and Joseph Lipovich. Plaintiffs are investors in certain named mutual funds and are suing on behalf of those funds. (Compl. ¶¶ 1, 10-14, ECF No. 1.) The funds in question are the following:

• Prudential Jennison Growth Fund (“Growth Fund”)
• Prudential Jennison Mid-Cap Growth Fund, Inc. (“Mid-Cap Fund”)
• Prudential Global Real Estate Fund (“Real Estate Fund”)
• Prudential Jennison Equity Income Fund (“Income Fund”)
• Prudential Short-Term Corporate Bond Fund, Inc. (“Short-Term Fund”) and
• Prudential Jennison Natural Resources Fund, Inc. (“Resources Fund”). Collectively, these are referred to as the “Funds.” (Id. ¶ 1.)

         Defendant Prudential Investments LLC launches and manages equity, fixed income, and balanced mutual funds. (Id. ¶ 21.) Defendant is the investment advisor to the Funds and receives an annual fee from each of the Funds for providing investment advisory services to each one. (Id. ¶ 2.) Plaintiffs allege the Defendant violated its statutory fiduciary duty with respect to these investment advisory fees paid by the Funds to Defendant. (Id. ¶ 2.) In particular, Plaintiffs allege that the investment advisory fees received by Defendant from each of the Funds are so disproportionately large that they bear no reasonable relationship to the value of the services provided by Defendant and could not have been the product of arm's-length bargaining. (Id.) The complaint explains that Defendant delegates to investment subadvisors substantially all of Defendant's responsibilities for providing investment advisory services to the Funds while, at the same time, retaining over half of the advisory fees Defendant receives from the Funds. (Id. ¶ 3.) The rest of the fees not retained by Defendant are paid to the subadvisors, who, Plaintiffs allege, are performing the vast majority of investment advisory services to the Funds. (Id. ¶ 4.) Other than for minimal oversight services actually performed by Defendant, Plaintiffs allege that most of the many millions of dollars Defendant receives in investment advisory service fees represent pure profits and not compensation for services rendered. (Id. ¶¶ 3, 4.) Additionally, Plaintiffs allege that Defendant further breached its fiduciary duty by failing to share with the Funds savings from economies of scale realized due to the considerable growth of the Funds since their inception. (Id. ¶ 5.) Rather, the significant increase in fees paid by each of the Funds as the Funds have grown larger has not been matched by a proportionate increase either in the services performed by Defendant or in the cost or quality of investment advisory services provided to the Funds. (Id.)

         The six Funds that are the subject of the complaint are in addition to fifty-two other mutual funds for which Defendant serves as the investment advisor. Collectively, these fifty-eight mutual funds are referred to as the “Prudential Funds.” (Id. ¶ 24.) In a September 2014 filing with the Securities and Exchange Commission (“SEC”), Defendant indicated it employs sixty-nine individuals to perform investment advisory services for all of the Prudential Funds, including the Funds at issue in this case. (Id.)

         Plaintiffs make specific allegations as to each of the Funds' growth in assets under management (“AUM”) and fees charged. They also compare Defendant's responsibilities, as set forth in the management agreements between the Funds and Defendant, with the subadvisors' responsibilities, as set forth in the management agreements between Defendant and the subadvisors.

         The detailed allegations regarding the Growth Fund are illustrative of the detailed allegations regarding the other Funds. Under Defendant's management agreement for the Growth Fund, Defendant's responsibilities include the following:

         ... [T]he Manager shall manage the investment operations of the [Fund] and the composition of the [Fund's] portfolio, including the purchase, retention and disposition thereof, in accordance with the [Fund's] investment objectives, policies and restrictions ... subject to the following understandings:

(a) The Manager ... shall provide supervision of the [Fund's] investments and determine from time to time what investments or securities will be purchased, retained, sold or loaned by the [Fund], and what portion of the assets will be invested or held uninvested as cash.
* * *
(c) The Manager ... shall determine the securities and futures contracts to be purchased or sold by the [Fund] and will place orders pursuant to its determinations with or through such persons, broker dealers or futures commission merchants (including but not limited to Prudential Securities Incorporated) in conformity with the policy with respect to brokerage as set forth in the ...

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