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12-24-2013, 11:34 AM
The Dissent in Jones v

The renowned legal minds of 7th Circuit judges Frank Easterbrook and Richard Posner have clashed again, this point within the validity and applicability of your Gartenberg strategy to claims of excessive mutual fund management fees. Judge Easterbrook, currently chief judge on the 7th Circuit, served over the panel that issued a per curiam opinion in Jones v. Harris Associates, 527 F.3d 627 (7th Cir. 2008) in May 19, 2008. In this case, the judicial panel dismissed the Gartenberg standard which has been relied upon by courts, practitioners and fund managers more than 25 years.

On August 8, 2008, Judge Posner, former chief judge of one's 7th Circuit, writing component a small group of 7th Circuit judges, issued a highly critical dissent of your Jones opinion as well as the panel's subsequent refusal enabling an en banc rehearing. Jones v. Harris Associates, ___ F.3d ___, 2008 WL 3177282 (7th Cir. 2008). In her dissent, Posner explains needing en banc can it the key case, highlighting the circuit split caused by Jones,one particular will find its approach to Supreme Court review.

Gartenberg and the rejection with the Jones panel

Much more Two-and-a-half decades until the 7th Circuit's opinion in Jones v. Harris Associates, federal courts had relied upon the conventional articulated through the 2nd Circuit in Gartenberg v. Merrill Lynch Asset Management Inc., 694 F.2d 923 (2nd Cir. 1982) to figure out whether a fund manager breached its fiduciary duty by charging excessive management/ advisory fees in violation of section 36(b) on the Investment Company Act of 1940.

Gartenberg articulated two similar versions of your test to work out a violation of section 36(b): 1) "whether the charge schedule represents a cost throughout the array of what may happen to have been negotiated at arm'slength in the light out of all the surrounding circumstances;" and/or 2) perhaps the advisormanager charges "a fee that could be so disproportionately large that this bears no reasonable relationship to the services rendered and would donrrrt you have been the information of arm'slength bargaining." 694 F.2d at 928.

Yet the Jones panel rejected Gartenberg actually, the Jones court rejected the premise that this courts, rather than market, should appraise the reasonableness of advisor fees with the exception of extraordinary circumstances. The Jones panel stated: "A fiduciary is different from rate regulation. A fiduciary must make full disclosure and play no tricks, however it is not be subject to a cap on compensation. The trustees (and in the end investors, who vote with the feet and dollars), instead of a judge or jury, figure out how much advisory services can be worth." Jones v. Harris Associates, 527 F.3d 627, 632 (7th Cir. 2008). Added the judge: "Judicial pricesetting is not going to accompany fiduciary duties. Section 36(b) is not going to require a departure out of this norm." Id. at 633.

Judge Posner's dissent to Jones together with his defense of Gartenberg

On August 8, 2008 nearly 90 days after publication from the Jones panel's opinion Judge Posner, accompanied by Circuit Judges Rovner, Wood, Williams and Tinder, published a critical dissent in Jones; not one of the dissenting judges had served relating to the original Jones panel. Following publication from the Jones opinion, a "judge in service essential a vote in the suggestion for rehearing en banc. Many did not favor rehearing en banc and the petition therefore is denied." (2008 WL 3177282, p1).

Judge Posner began by citing the overwhelming, longstanding support for Gartenberg by courts and practitioners countrywide. The Jones panel had cited two cases for that proposition of the fact that court had previously questioned the Gartenberg approach Posner stated that neither of individuals cited cases stood for that proposition in anyway. Indeed, noted Posner, "there is mostly a slew of positive citations" and only Gartenberg, as well as proceeded to give out merely a lot of the slew. Id. Moreover, Posner noted that Gartenberg has ugg クラシックショート (http://www.valuebasedmanagement.net/ug6.html) not been overtime on fund advisors the fact that the standard really should be changed; he cited legal treatises showing that postGartenberg cases have the majority of resulted in judgments on your fund manager defendants. Id.

But the heart of Posner's dissent preoccupied with the economic climate while in the financial services market, using one of fund managers in particular. Id. at 2 3. Rampant abuse inside the financial services industry as a rule merged with inherent conflicts useful and significant, essentially incestuous, favoritism among fund directors and advisory firms make a dangerous anticonsumer brew, depending on Posner. Id. at 3. Posner called the panel opinion's rationale dismissing these concerns as "pure speculation." Id. at 3.

Harris Associates, notes Posner, may be a prime illustration showing this environment of intertwined relationships: Harris founded the Oakmark funds in question; the Oakmark Board of Trustees reselects Harris because the fund advisor every single year, and Harris manages the full Oakmark portfolio. Id. Whenever the directors plus the managers are closely connected like Harris and Oakmark, the boards are probably not going to check and question the fund advisor than if ever the board was more independent. It feels right circumstances where consumers haven't much choice or control there is no "arm's length" bargaining power in play. Id.

Posner noted whenever all of the industry took benefit to the wide discretion afforded it by Jones, and all of fund advisors charged similar exorbitant fees, consumers can have no alternatives even tough they did look to "vote in relation to their feet." Id. This deficiency of consumer choice which may result of Jones directly contradicts the "let the market decide" premise in the Jones holding if http://www.valuebasedmanagement.net/aj5.html the total marketplace is uniformly exorbitant, consumers haven't any reasonable alternative decision to generate. Id.

Finally, Posner notes your Jones panel created split among circuits, with all the 7th Circuit's Jones opinion now contradicting your second Circuit's Gartenberg holding. Id. at 4. Whenever a panel's decision will almost certainly create a very split, claims Posner, court procedure is to try to circulate luring full http://www.valuebasedmanagement.net/nb7.html court just before publication, which your Jones panel did not do. Id. Posner concluded by stating: "[T]he development of a circuit split, the value of the matter for the mutual fund industry, along with the onesided character of your panel's analysis warrant our hearing the scenario en banc." Id.

A difficulty ripe for Supreme court Review

Posner's dissent indicates a split not simply among circuits, but some of the 7th Circuit judges themselves. The controversy comes from that old question of precisely how much protection government and the judiciary specifically should provide consumers who might well be prone to market controllers. Posner argues the fact that Jones opinion isn't able to provide adequate consumer protection; the panel believes businesses over these circumstances might take proper care themselves as well as the judiciary should step out of the way.

Future federal courts do not provide the ease relying on the triedandtrue Gartenberg standard; they'll need to make a choice of calling side with Posner or Easterbrook. Posner's dissent might be more favorable to Section 36(b) plaintiffs; the Jones panel opinion provides more leeway for fund managers and advisors. Mainly because of the current economic and political climate throughout this country, with rising accusations of unanswered abuse in corporate and real estate markets, this debate is ripe for resolution through Supreme Court.

However the Jones panel rejected Gartenberg, still upheld the district court's determination (which has been depending on the Gartenberg analysis) that the advisory fees at trouble in the case were "ordinary" without having to unreasonable. 527 F.3d at 631 and 635.