United States District Court, S.D. New York
OPINION & ORDER
L. STANTON U.S.D.J.
Susan Paskowitz seeks pursuant to Section 36(b) of the
Investment Company Act of 1940 ("ICA"), 15 U.S.C.
§ 80a-35(b), to recover what she claims are excessive
fees paid by Prospect Capital Corporation
("Prospect") to defendants Prospect Capital
Management L.P. ("PCM") and Prospect Administration
LLC ("PA") for investment advisory and
administrative services. Defendants move to dismiss the
complaint for failure to state a claim upon which relief can
reasons that follow, defendants' motion is granted.
a Maryland corporation, is a registered investment company
that trades on the NASDAQ stock market and operates as a
business development company ("BDC") under Section
54 of the ICA, see 15 U.S.C. § 80a-53. Compl.
(Dkt. No. 1) ¶¶ 14, 27. Prospect has a board of
directors, but has no employees. Id. ¶ 4.
Instead, Prospect contracts with PCM to provide it with
investment advisory services, and with PA to provide it with
administrative services and facilities. Id. ¶
is and has been a shareholder of Prospect since October 2013,
and brings this action on Prospect's behalf and for its
benefit. Id. ¶¶ 13-14.
a registered investment adviser. Id. ¶ 15. PCM
created Prospect, and Prospect is PCM's only client.
Id. ¶ 16. Under its agreement with Prospect,
PCM (1) manages the investment and reinvestment of
Prospect's assets in accordance with Prospect's
investment objective, policies, and restrictions, and
implements its investment decisions for Prospect; (2)
arranges for Prospect's debt financing; and (3) maintains
books and records concerning transactions in Prospect's
portfolio, and periodically reports to Prospect's board
of directors. Id. ¶ 56.
exchange for the services it provides to Prospect, each year
PCM receives a base management fee equal to 2.00% of
Prospect's gross assets, paid quarterly. Id.
¶ 63. Additionally, PCM is paid an incentive
fee which is
calculated as follows: for quarters in which Prospect's
net investment income amounts to 2.1875% (i.e., 8.75%
annually) or less of its net assets, PCM is paid 20.00% of
the net investment income that exceeds 1.75% of net assets;
for quarters in which Prospect's net investment income
exceeds 2.1875% (i.e., 8.75% annually) of its net assets, PCM
is paid 20.00% on all of Prospect's net investment
income. Id. ¶ 65. During the fiscal year that
ended on June 30, 2015, Prospect paid PCM a total of $225,
277, 000. Id. ¶ 78, Table 1. During the first
two quarters of the fiscal year ending on June 30, 2016 it
paid PCM a total of $112, 796, 000, which is roughly in line
with what PCM earned the prior year. Id., ¶ 79,
Table 2. Unlike PCM which provides investment advisory
services, PA provides Prospect with administrative services,
personnel, and facilities. Id. ¶ 71. PA is an
LLC whose sole member is PCM, and its only client is
Prospect. Id. 19. PA provides Prospect with office
space and equipment, maintains Prospect's books and
records, fulfils Prospect's reporting obligations to its
shareholders and regulatory agencies, interacts with
Prospect's third-party service providers (e.g., brokers,
accountants, attorneys, banks, insurers, etc.), and provides
Prospect with managerial assistance. Id.,
¶¶ 72-73. Prospect reimburses PA for the costs and
expenses it incurs in providing these services. Id.
¶¶ 75-76. During the fiscal year that ended on June
30, 2015, Prospect reimbursed PA $21, 906, 000. Id.
¶ 78, Table 1. During the first two quarters of the
fiscal year ending on June 30, 2016 it reimbursed PA $6, 178,
000, which is a substantial decline from what PA was
reimbursed the prior year. Id. ¶79, Table 2.
36(b) of the ICA imposes upon the investment adviser of a
registered investment company "a fiduciary duty with
respect to the receipt of compensation for services, or of
payments of a material nature, paid by such registered
investment company ... to such investment adviser or any
affiliated person of such investment adviser." 15 U.S.C.
§ 80a-35(b). It also authorizes a shareholder of a
registered investment company to bring an action "on
behalf of such company, against such investment adviser, or
any affiliated person of such investment adviser . . . 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." Id. The statute limits recovery to
damages incurred up to one year before the action was
instituted. Id. § 80a-35 (b) (3) .
alleges that defendants breached their fiduciary duty by
charging excessive fees, and seeks to recover damages that
resulted from the breach on behalf of Prospect shareholders.
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. A claim has facial
plausibility when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged. This
plausibility standard asks for more than a sheer possibility
that a defendant has acted unlawfully." Wilson v.
Merrill Lynch & Co., 671 F.3d 120, 128 (2d Cir.
2011) (citation and alteration omitted). While "all
factual allegations in the complaint are accepted as true and
all inferences are drawn in the plaintiff's favor, "
Littlejohn v. City of New York, 795 F.3d 297, 306
(2d Cir. 2015), "bald assertions and conclusions of law
will not suffice, " Amron v. Morgan Stanley Inv.
Advisors, Inc., 464 F.3d 338, 344 (2d Cir. 2006).
Adjourned (Matter Not Available).
complaint is predicated on the claim that the fees paid to
defendants substantially exceed the average fee rate paid by
comparable BDCs to their investment advisers and
administrators for comparable services. Compl. ¶ 131.
However, "to face liability under § 36(b), an
investment adviser must charge a fee that 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
v. Harris Assocs. L.P., 559 U.S. 335, 346, 130 S.Ct.
1418, 1426 (2010). "[T]he 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." R.W. Grand
Lodge of F. & A.M. of Pa. v. Salomon Bros. All Cap Value
Fund, 425 F.App'x 25, 30 (2d Cir. 2011) (summary
order), quoting Gartenberg v. Merrill Lynch Asset
Mqmt., 694 F.2d 923, 928 (2d Cir. 1982). "[T]he
Supreme Court's approach does not allow a court to assess
the fairness or reasonableness of advisers' fees; the
goal is to identify the outer bounds of arm's length
bargaining and not engage in rate regulation." Jones
v. Harris Assocs. L.P. (Jones II), 611
F.App'x 359, 360 (7th Cir. 2015). As stated in the
Supreme Court's unanimous opinion, Jones, 559
U.S. at 352-53, 130 S.Ct. at 1430:
Congress rejected a "reasonableness" requirement
that was criticized as charging the courts with rate-setting
responsibilities. See Daily Income Fund[ v. Fox, 464
U.S. 523], at 538-540[, 104 S.Ct. 831 (1984)]. Congress'
approach recognizes that courts are not well suited to make
such precise calculations. Cf. General Motors Corp. v.
Tracy, 519 U.S. 278, 308[, 117 S.Ct. 811] (1997)
("[T]he Court is institutionally unsuited to gather the
facts upon which economic predictions can be made, and
professionally untrained to make them") [citing cases].
Gartenberg's "so disproportionately
large" standard, 694 F.2d, at 928, reflects this
congressional choice to "rely largely upon [independent
director] 'watchdogs' to protect shareholders
interests." Burks[ v. Lasker, 441 U.S. 471], at
485[, 99 S.Ct. 1831 (1979)].
Justice Thomas, concurring, stated, id. at 354-55,
130 S.Ct. at 1431:
most courts . . . have followed an approach (principally in
deciding which cases may proceed past summary judgment) that
defers to the informed conclusions of disinterested boards
and holds plaintiffs to their heavy burden of proof in the
manner the Act, and now the Court's opinion, requires. *
* * *
. . . Whatever else might be said about today's decision,
it does not countenance the free-ranging judicial
"fairness" review of fees that Gartenberg
could be read to authorize, see 694 F.2d, at
929-930, and that virtually all courts deciding § 36(b)
cases since Gartenberg (including the Court of
Appeals in this case) have wisely eschewed in the
post-Gartenberg precedents we approve.
Act does not require courts to engage in a precise
calculation of fees representative of arm's-length
bargaining, " id. at 352, 130 S.Ct. at 1430,
and it "does not necessarily ensure fee parity between
mutual funds and institutional clients, " id.
at 350, 130 S.Ct. at 1429. Plaintiff's burden is "to
show that the fee is outside the range that arm's-length
bargaining would produce." Id. at 347, 130
S.Ct. at 1427.
this test, plaintiff has failed to plead facts creating a
plausible inference that defendants are liable. The complaint
conclusorily alleges that
As set forth in Sections VI-VIII [of the complaint],
Defendants breached their fiduciary duties in violation of
ICA Section 36(b) by extracting investment advisory and other
fees from Prospect so disproportionately large that they bear
no reasonable relationship to the value of the services
provided by Defendants, and could not have been the product
of arm's-length bargaining (hereinafter,
"excessive" fees) ....
Compl. ¶ 7. But a careful review of the allegations made
in Sections VI-VIII of the complaint reveals that from the
facts pleaded one cannot plausibly infer that defendants'
fees do not bear a reasonable relationship to the services
rendered, or fall outside the range that arm's-length
bargaining could produce.
allegations address six factors that under
Gartenberg, courts are to consider in deciding
Section 36(b) claims. These are: “(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." Mron, 464
F.3d at 344.
consideration of these factors, the complaint fails to state
a claim upon which relief can be granted.
Comparative Fee Structures
complaint first addresses comparative fee structures. The
complaint purports to show that $102.6 million of the fees
paid to defendants for fiscal year 2015 are excessive and
"At a minimum ... at least $54.4 million of the fees
Prospect paid to Defendants are excessive." Compl.
¶ 7. It does so by comparing the fee rate paid to
defendants with the average fee rate paid by other BDCs
included in the Wells Fargo Business Development Company
Index ("BDC Index") (of which Prospect is one) going back
to 2013. It divides those BDCs into two groups and looks at:
(1) fees paid by internally-managed BDCs to their advisers-employees, and
(2) fees paid by other externally-managed BDCs to their
investment advisers. Id. ¶¶ 115-35.
Prospect paid an effective fee rate of 6.68% of net assets to
defendants. Id. ¶ 129, Table 7. The effective
fee rate paid by seven of the nine internally-managed BDCs included in
the BDC Index ranged from 1.58% of net assets to 7.36% of net
assets, and averaged 3.90% of net assets. Id. ¶
116, Table 5.The effective fee rate paid by
thirty-four of the thirty fiveexternally-managed BDCs included in the
BDC Index (of which Prospect ...