Boeckman v. A.G. Edwards, Inc.

461 F.Supp.2d 801

Gerard BOECKMAN, Plaintiff, v. A.G. EDWARDS, INC., Defendant.

No. CIV. 05-658-GPM.

United States District Court, S.D. Illinois.

September 26, 2006.

COPYRIGHT MATERIAL OMITTED

Diane M. Heitman, Douglas R. Sprong, Korein Tillery, Swansea, IL, Steven A. Katz, Korein Tillery, LLC, St. Louis, MO, for Plaintiff.

Bernard J. Ysursa, Sr., Cook, Ysursa et al., Belleville, IL, Sari M. Alamuddin, Shannon M. Callahan, Morgan, Lewis et al., Chicago, IL, for Defendant.

MEMORANDUM AND ORDER

MURPHY, Chief Judge.

This matter is before the Court on the motion for judgment on the pleadings brought by Defendant A.G. Edwards, Inc. (Doc. 12). For the following reasons, the motion is DENIED.

BACKGROUND

Plaintiff Gerard Boeckman brings this action on behalf of himself and a proposed class of participants in the A.G. Edwards, Inc., Retirement and Profit Sharing Plan ("the Plan") pursuant to the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001-1461 ("ERISA"). Boeckman, a former employee of Defendant A.G. Edwards, Inc. ("A.G. Edwards"), became a participant in the Plan in 1997. The Plan allows participants to contribute a percentage of their pre-tax earnings to the Plan and permits participants to invest their contributions in one or more of a list of thirty-eight mutual funds available in the Plan.¹

This case concerns a variety of fees paid by A.G. Edwards to the mutual funds in the Plan, so that some discussion of the structure and operations of mutual funds is necessary in order properly to set out Boeckman's claims and to provide background for the Court's discussion of the issues presented by the instant request for judgment on the pleadings. "A mutual fund is a pool of assets, consisting primarily of portfolio securities, and belonging to the individual investors holding shares in the fund." Burks v. Lasker, 441 U.S. 471, 480, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979). "Generally, `mutual funds' are open-end management companies engaged in the business of continuously issuing and offering for sale redeemable securities which represent an undivided interest in the fund's assets." Investment Co. Inst. v. Camp, 274 F.Supp. 624, 628 (D.D.C.1967).² The appeal of a mutual fund as an investment vehicle is the diversification of risks, professional management, and the opportunity it affords small investors to invest their savings in a professionally-managed portfolio of equity securities. See Noboru Tanabe, Japan's Investment Trust: a Vehicle of Savings for Tomorrow, 2 Ind. Int'l & Comp. L.Rev. 385, 387 (1992).

Mutual funds are extensively regulated under the Investment Company Act of 1940, 15 U.S.C. §§ 80a-1-80a-64 ("ICA"). A fund is required to register under the ICA if it "holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities." 15 U.S.C. § 80a-3(a)(1)(A). See also 15 U.S.C. § 80a-8; SEC v. Midland Basic, Inc., 283 F.Supp. 609, 614 (D.S.D.1968). The statute further defines an investment company as "any issuer which is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding [40%] of the value of such issuer's total assets[.]" 15 U.S.C. § 80a-3(a)(1)(C). Also, mutual fund shares must be registered under the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa. See 15 U.S.C. §§ 77c-77f; 15 U.S.C. § 80a-24. Mutual funds must use a prospectus in connection with the sale of their shares, see 15 U.S.C. § 80a-22(d), and are regulated with respect to the amount of their sales load, see 15 U.S.C. § 80a-22(b), (c), determination of offering price, see 15 U.S.C. § 80a-22(a), the extent to which time-payment plans may be front-loaded, see 15 U.S.C. § 80a-27(a), (d), composition of their board of directors, see 15 U.S.C. § 80a-10, capital structure, see 15 U.S.C. §§ 80a-18, 80a-23, transactions with affiliates, see 15 U.S.C. § 80a-17(a), reporting, see 15 U.S.C. § 80a-30, proxy solicitations, see 15 U.S.C. § 80a-20(a), and in numerous other respects.³ In 1980, the Securities and Exchange Commission adopted Rule 12b-1, which permits mutual funds to use fund assets to finance distribution and marketing of fund shares to the public. See 17 C.F.R. § 270.12b-1.

It is common for mutual funds to offer multiple classes of shares in the same fund or series of funds, with identical investment objectives but varying loads, Rule 12b-1 fees, administrative expenses, transfer agency fees,⁴ voting rights, or dividend payments. See, e.g., PaineWebber America Fund, Investment Company Act Release No. 18,084, 56 Fed.Reg. 14,962 (Apr. 12, 1991) (authorizing issuance of three different classes of shares with different loads, distribution fees, and other different characteristics); Freedom Investment Trust, Investment Company Act Release No. 18,377, 56 Fed.Reg. 56,260 (Nov. 1, 1991) (authorizing a multi-class distribution system involving three classes of shares subject to different loads, as well as different distribution fees and other differences); CoreFunds, Inc., Investment Company Act Release No. 18,259, 56 Fed.Reg. 37,743 (Aug. 8, 1991) (authorizing issuance of four or more different classes subject to different service or distribution fees and other differences); Flex-Funds, Investment Company Act Release No. 18,110, 56 Fed.Reg. 19,888 (Apr. 30, 1991) (authorizing issuance of unlimited different classes subject to different expenses for services and other differences). Multiple share classes, with their range of load options and Rule 12b-1 fees, are intended, in theory anyway, to provide an array of choices for investors with differing needs. See Benzon v. Morgan Stanley Distribs., Inc., 420 F.3d 598, 606-07 (6th Cir.2005).

Turning then to the claims asserted in this case, Boeckman alleges that the Plan has assets in excess of $2 billion and that A.G. Edwards could have used the Plan's stature as a large investor to secure more favorable terms regarding fees paid to mutual funds on behalf of Plan participants. Specifically, Boeckman alleges that A.G. Edwards could have privately retained the same professional money managers used by the mutual funds in the Plan, thereby avoiding a host of fees associated with mutual fund transactions, including shareholder service fees, transfer agent fees, Rule 12b-1 fees, administrative fees, registration and reporting fees, expenses for reports to shareholders, postage and stationery fees, audit and legal fees, custodian fees,⁵ and state and local taxes. Also, Boeckman alleges that A.G. Edwards could have purchased less expensive "institutional shares" in the funds, which are typically available only to large or institutional shareholders such as endowments and private retirement plans, instead of the more expensive "retail shares" commonly sold to individual or small investors, which entail higher fees than institutional shares do. Boeckman alleges that the fees paid by the Plan were passed on to Plan participants.

Boeckman's complaint contains four counts. Count I and Count II allege, respectively, that A.G. Edwards breached its fiduciary duty under ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B), by failing to negotiate fees for investment services directly with the money managers used by the mutual funds in the Plan, thus minimizing the fees paid by Plan participants, and by purchasing higher-priced retail shares in the funds instead of lower-priced institutional shares. Count III and Count IV allege that A.G. Edwards, as the Plan fiduciary, violated ERISA § 406(a)(1)(D), 29 U.S.C. § 1106(a)(1)(D), by engaging in prohibited transactions with a party in interest. Specifically, Count III of Boeckman's complaint alleges that A.G. Edwards improperly transferred Plan assets to parties in interest — the mutual funds in the Plan — in the amount of the difference between the fees assessed by the funds to the retail shares in the Plan and the fees that would have been assessed had A.G. Edwards privately negotiated a contract with the money managers used by the funds. Count IV alleges that A.G. Edwards improperly transferred Plan assets to parties in interest — the mutual funds — in the amount of the difference between the fees assessed by the funds to the retail shares in the Plan and the fees that would have been assessed had the Plan invested in institutional shares in the funds.

A.G. Edwards in turn has moved for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure. The motion presents two issues for resolution. First, A.G. Edwards contends that a release of claims executed by Boeckman as a condition of receiving a severance package when he left his employment with A.G. Edwards in 2002 bars the instant suit. Second, A.G. Edwards contends that as a matter of law the mutual funds in the Plan cannot be "parties in interest" within the meaning of ERISA § 406(a), 29 U.S.C. § 1106(a). Having reviewed the submissions of the parties, together with all exhibits thereto, and having conducted a hearing, on the motion, the Court now is prepared to rule.

DISCUSSION

A. Legal Standard

Rule 12 of the Federal Rules of Civil Procedure provides, in pertinent part, "[a]fter the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings." FED. R. CIV. P. 12(c). The pleadings for purposes of a Rule 12(c) motion include the complaint, the answer, and any written instruments attached to the pleadings as exhibits. See Northern Ind. Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 452-53 (7th Cir.1998). The main difference between a Rule 12(c) motion and a motion to dismiss for failure to state a claim upon which relief can be granted under Rule 12(b)(6) of the Federal Rules of Civil Procedure is that the latter may be filed before an answer to a complaint is filed, whereas a ...