First Eagle Advisers Can't Duck Claims Over Fees

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By Phyllis Diamond

Oct. 8 — Investment adviser First Eagle Investment Management LLC, which recently settled SEC claims it misused nearly $25 million in fund assets, should have to face shareholder claims its advisory fees were excessive relative to the services provided, a U.S. magistrate judge recommended Oct. 8 (Lynn M. Kennis Trust v. First Eagle Inv. Mgmt. LLC, D. Del., Civil Action No. 14-585-SLR-SRF, 10/8/15).

As a whole, the complaint “pleads sufficient facts regarding the fees paid to FEIM and their relationship to the services rendered to present a plausible claim that the fees are disproportionately large,” she said in a report and recommendation.

In late September, FEIM agreed to pay $40 million to settle Securities and Exchange Commission allegations it used fund assets to pay for marketing and distributing fund shares. The settlement was the first under the agency's crackdown on mutual funds using client funds instead of their own assets to pay for marketing and distribution—the commission's “Distribution-in-Guise Initiative.”

Same Services

The plaintiffs, shareholders in First Eagle Global Fund and First Eagle Overseas Fund, alleged that during fiscal 2013 FEIM their funds $306 million and $97 million respectively. They claimed FEIM provided “substantially the same investment advisory services to other clients,” including a sub-advised fund sponsored by Mercet Investment Management Inc.

According to the plaintiffs, publicly available information indicates that the fees paid by the sub-advised fund are “significantly lower” than the fees their funds paid for essentially the same services.

In a dismissal motion, FEIM argued that the plaintiffs didn't plead any facts showing that their funds' fees were disproportionately large, but the Magistrate Judge Sherry R. Fallon didn't agree. She said that “[c]ontrary to FEIM's contentions,” the complaint “contains more than conclusory allegations regarding the allegedly excessive nature of the advisory fees.”

The plaintiffs also adequately alleged that the FEIM board's process for approving the advisory contract was deficient because it wasn't competitive or conducted at arm's length.

Saying the complaint “contains sufficiently specific factual allegations to meet [Fed.R.Civ.P.] 8's liberal pleading standard at this stage of the proceedings,” Fallon recommended that the court deny FEIM's dismissal motion.

To contact the reporter on this story: Phyllis Diamond in Washington at pdiamond@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com