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Court OKs Discovery Request in Excessive Fee Case

In an excessive fee suit brought by participants, a money manager is going to have to turn over reports about the performance, expense and profitability of the mutual funds in the company’s 401(k) plan.

The plaintiffs in the case against American Century Services (ACS) (Wildman v. Am. Century Servs., LLC, W.D. Mo., No. 4:16-cv-00737, order granting motion to compel 7/27/17) had requested that American Century provide “for each year of the Subject Period [2010 — to the present], all reports (including but not limited to the Profitability, Expense, and Performance Reports) prepared as part of the 15(c) process for each investment adviser subsidiary or affiliate of the American Century Entities, so long as the entity managed one or more Designated Investment Alternatives within the Plan during the year in question.”

The Case

The suit has alleged that the plan fiduciaries improperly managed plan assets for their own benefit, specifically by:

  • using a disloyal and imprudent process to manage the plan;

  • retaining high-cost proprietary funds in their own self-interest and to the detriment to plan participants;

  • failing to procure the least expensive available share class for numerous funds;

  • causing the plan to pay excessive recordkeeping costs; and

  • failing to adequately monitor investments and remove poor performing investments.

Moreover, plaintiffs have alleged that ACS failed to monitor the performance of the Committee and American Century Investment Management, Inc. (ACIM), including monitoring the process used to select, evaluate and retain the plan’s investment lineup, and that the plan fiduciaries caused the plan to engage in prohibited transactions with ACS and ACIM through a revenue sharing agreement between ACS, ACIM and the plan, that the revenue sharing agreement allowed ACIM to deduct fees from plan assets for services it provided and paid a portion of those fees to ACS in what amounted to “…more than reasonable compensation” that “resulted in significant losses to the Plan participants.”

Discovery Debate

In support of their request, the plaintiffs argued that the 15(c) reports were relevant to showing the defendants’ motivation to breach their fiduciary duties of loyalty and prudence, and that the expense data in those reports were relevant to calculating damages from their breach of fiduciary duty claims and their claim for equitable disgorgement of profits.

In making their discovery request, plaintiffs assert producing these reports would not be unduly burdensome because federal law requires the defendants maintain and preserve the documents in an easily accessible location, and claimed that defendants are the only parties that have access to the information in the reports, and there is no publicly available information regarding the profitability of each mutual fund.

For their part, the American Century defendants countered that the reports weren’t relevant (in that the Committee did not rely on them in making their decisions, that the plaintiffs’ expert has already calculated damages without these reports, and that producing the reports would be unduly burdensome because it would require a manual review of approximately 72,600 pages (and several hundred hours to complete). By the plaintiff’s estimate, there are 2,000 class members and $10-20 million in plan losses in the case that has (already) involved tens of thousands of pages of electronic discovery.

The Decision

Having previously rejected American Century’s request for a dismissal of the suit, Chief Judge Greg Kays supported the plaintiff’s discovery motion, concluding that they had “met their burden by making a threshold showing that the 15(c) reports are relevant to their claims and to the calculation of damages in this case,” and that they had “…described with a reasonable degree of specificity the information they hope to obtain from the 15(c) reports and their importance in supporting their claims of breach of fiduciary duty and calculation of damages.” Moreover, he concluded that American Century had not established to his satisfaction that producing the 15(c) reports would be “unduly burdensome or disproportional to the needs of the case.”