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PFEIFFER v. INTEGRATED FUND SERVICES

May 18, 2005.

MILTON PFEIFFER, Plaintiff,
v.
INTEGRATED FUND SERVICES, INC., SCOTT A. ENGLEHART, and TINA H. BLOOM, Defendants.



The opinion of the court was delivered by: DENISE COTE, District Judge

OPINION AND ORDER

On October 6, 2004, plaintiff Milton Pfeiffer ("Pfeiffer"), a shareholder of the Bjurman, Barry Micro Cap Growth Fund (the "Fund"), filed the instant action, alleging that defendants Integrated Fund Services, Inc. ("Integrated"), Scott A. Englehart ("Englehart"), and Tina H. Bloom ("Bloom") (collectively the "Integrated Defendants") violated Section 36 of the Investment Company Act of 1940 ("ICA"), 15 U.S.C. § 80a-35(b), by receiving, or by approving the receipt of, "grossly inflated" administrative and transfer agent fees from the Fund. Pursuant to Rule 12(c), Fed.R.Civ.P., the Integrated Defendants have moved for judgment on the pleadings. For the reasons stated herein, the defendants' motion is granted. Background

  The following facts are taken from the plaintiff's complaint and the documents upon which it relies. Pfeiffer owns shares in the Fund, a mutual fund that closed to new investors on May 30, 2003. The Fund's investment adviser is Bjurman, Barry & Associates ("BBA"),*fn1 and its principal underwriter is IFS Fund Distributors, Inc. ("IFS"), an "affiliated broker/dealer" of Integrated.*fn2 Integrated's business is to provide mutual fund companies, including the Fund, with "fund administration, fund accounting, transfer agency, financial reporting, and shareholder servicing and distribution services." Two officers of Integrated, Englehart and Bloom, also serve as officers of the Fund. Englehart, Integrated's president, has served as treasurer of the Fund since 2002. Bloom, who is executive vice president of Integrated and its managing attorney, has served as the Fund's secretary since 1999.

  Pursuant to a December 18, 1998 Administrative Agreement (the "Administrative Agreement") between the Fund and Integrated's predecessor, Countrywide Fund Services, Inc., Integrated performs a range of administrative and other services on behalf of the Fund, including the preparation of tax returns, reports to shareholders, SEC filings and similar filings with state securities authorities, and materials for Board of Trustees' meetings. Under the Administrative Agreement, Integrated receives .150% of the Fund's average daily net assets up to $25 million; .0125% of such assets between $25 and $50 million; and .100% of such assets in excess of $50 million. At a minimum, the Agreement provides that Integrated will receive $2,000 per month. As the Fund's asset base has ballooned from $7 million to over $800 million, Integrated's compensation under this "antiquated fee structure" has increased substantially as well. Between April 1, 2002 and March 31, 2003, for instance, Integrated charged the Fund administrative fees of $353,487. More significantly, despite the fact that the Fund closed to new investors in May 2003, which Pfeiffer believes should have diminished the need for administrative services, for the year ending March 31, 2004, Integrated received $811,738 in administrative fees from the Fund.

  Aside from the administrative fees, Integrated also receives transfer agent fees pursuant to a December 18, 1998 Transfer, Dividend Disbursing, Shareholder Service and Plan Agency Agreement ("Transfer Agent Agreement"), which provides that Integrated will also perform services related to issuing share certificates, executing purchase orders, maintaining shareholder records, mailing proxies, and other administrative functions. The Transfer Agent Agreement provides that Integrated will receive $20 per account per year and that its monthly fee will be no less than $2,000. For the year ending March 31, 2003, the Fund paid Integrated $96,500 in transfer agent fees. The next year, Integrated received $162,197 in transfer agent fees, even though the Fund was closed to new investors for ten of those twelve months.

  According to Pfeiffer, the Fund's administrative and transfer agent payments to Integrated are funded through an ongoing "asset-based charge on fund shareholders to pay for administrative and other back-office services." Like the payments to Integrated that the charge facilitates, Pfeiffer alleges that the charge itself "bear[s] no reasonable relation to the actual services provided to the Fund," but instead merely reflects "the significant appreciation of the Fund's asset base."

  Pfeiffer filed the instant action on October 6, 2004, in which he charges that Integrated received excessive administrative and transfer agent fees and that there is "no rational justification" for the dramatic increase in such fees over time. Pfeiffer further alleges that by allowing the Fund to pay "grossly inflated" fees to Integrated, Englehart and Bloom have violated their "fiduciary duty to the Fund and its shareholders to ensure that the fees and expenses paid by the Fund to Integrated for administrative and other services have a reasonable relationship to the actual services provided by the Fund to Integrated." As such, Pfeiffer charges, they have violated Section 36(b) of the ICA, 15 U.S.C. § 80a-35(b). Englehart and Bloom's dereliction of duty is particularly egregious, according to Pfeiffer, due to their dual roles as officers with Integrated as well as with the Fund. Through his suit, he seeks to "recover the improper administrative fees, transfer agent fees and any other expenses paid by the Fund to Integrated," as well as "to enjoin defendants from overcharging the Fund in the future."

  Through a January 19, 2005 Order, the defendants were granted permission to file a third-party complaint in this action against The Bjurman, Barry Funds; G. Andrew Bjurman, O. Thomas Barry III; Mark K. Mason; William L. Wallace; and Joseph E. Maiolo (collectively "the Bjurman Parties") by February 4. This third-party complaint was filed on January 26.

  On February 17, 2005, a pretrial conference relating to both the instant action and Pfeiffer's related action against BBA and the Fund was held. At that conference, the Integrated defendants expressed their desire to bring the instant motion, explaining their view that Section 36 of the ICA solely addresses fees for advisory services, which they had not rendered, and arguing that none of the Integrated defendants fell into any of the statutory definitions of those who could be liable under that section. A scheduling order relating to the motion was issued on the same day, and the motion was fully submitted on April 1.*fn3 Discussion

  "[T]he legal standards for review of motions pursuant to Rule 12(b)(6) and Rule 12(c) are indistinguishable." DeMuria v. Hawkes, 328 F.3d 704, 706 n. 1 (2d Cir. 2003). When considering a motion to dismiss, a court must "accept? as true the factual allegations in the complaint as true and draw? all inferences in the plaintiff's favor." Scutti Enters., LLC v. Park Place Entm't Corp., 322 F.3d 211, 214 (2d Cir. 2003) (citation omitted). "Dismissal is inappropriate unless it appears beyond doubt that the plaintiff can prove no set of facts which would entitle him to relief." Raila v. United States, 355 F.3d 118, 119 (2d Cir. 2004).

  Pfeiffer's claims are governed by Rule 8, which requires that a plaintiff provide a "short and plain statement of the claim showing that the pleader is entitled to relief." Rule 8(a), Fed.R.Civ.P. Pleadings are to give "fair notice" of a claim and "the grounds upon which it rests" in order to enable the opposing party to answer and prepare for trial, and to identify the nature of the case. Dura Pharm., Inc. v. Broudo, 125 S. Ct. 1627, 1634 (2005) (citation omitted); see also Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 512 (2002). Rule 8 is "not meant to impose a great burden upon a plaintiff." Broudo, 125 S. Ct. at 1634. Rather, "[t]he federal rules allow simple pleadings and rely on liberal discovery rules and summary judgment motions to define disputed facts and issues and to dispose of unmeritorious claims." Phillip v. Univ. of Rochester, 316 F.3d 291, 293 (2d Cir. 2003) (citation omitted). Because Rule 8 is fashioned in the interest of fair and reasonable notice, not technicality, "extensive pleading of facts is not required." Wynder v. McMahon, 360 F.3d 73, 77 (2d Cir. 2004) (citation omitted). If it is clear, however, that "no relief could be granted under any set of facts that could be proved consistent with the allegations," the complaint should be dismissed. Swierkiewicz, 534 U.S. at 514.

  Section 36 of the ICA contains two subsections of importance to this motion. Subsection (a) authorizes the SEC to bring an action to enjoin a breach of fiduciary duty by an "officer, director, member of any advisory board, investment adviser, or depositor" of a registered investment company or certain underwriters of a registered investment company.*fn4 15 U.S.C. § 80a-35(a). The SEC may bring the action against the persons described above for any breach of fiduciary duty "involving personal misconduct." Id. Subsection (b) sets forth a more specific fiduciary duty owed by the investment adviser of a registered investment company. In relevant part, it provides:
the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser.
15 U.S.C. § 80a-35(b) (emphasis supplied). Subsection (b) further enables either the SEC or a person holding securities in a registered investment company to bring an action against three categories of persons, specifically, to bring an action
 
on behalf of such company, against such investment adviser, or any affiliated person of such investment adviser, or any other person enumerated in subsection (a) of this section who has a fiduciary duty concerning such compensation or payments, for breach of fiduciary duty in respect of such compensation or payments paid by such registered investment company or by the security holders thereof to such investment adviser or person.
15 U.S.C. § 80a-35(b) (emphasis supplied).*fn5 The ICA defines an "affiliated person" of another person as
 
(A) any person directly or indirectly owning, controlling, or holding with power to vote, 5 per centum of the outstanding voting securities of such other person; (B) any person 5 per centum or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other person; (C) any person directly or indirectly controlling, controlled by, or under common control with, such other person; (D) any officer, director, partner, copartner, or employee of such other person; (E) if such other person is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (F) if such other person is an unincorporated investment company not having a board of directors, the depositor thereof.
15 U.S.C. § 80a-2(a)(3). The class of actions that may be brought under Section 36(b) is further limited by Subsection (b)(3), which mandates that "[n]o such action shall be brought ...

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