BlackRock faces lawsuits over “disproportionately large” fees

Powerball-winning Florida adviser with stake in fund accuses firm of breaching fiduciary obligations

May 8, 2014 @ 12:38 pm

By Trevor Hunnicutt

BlackRock Inc. is facing a potential class-action lawsuit by investors — and a lottery-winning Florida adviser — who assert the firm has breached its fiduciary obligations by charging exorbitant fees.

In the fourth legal complaint this year asserting similar claims, Florida investment adviser Timothy C. Davidson claims the world's largest money manager keeps too much of the value generated by one of its funds even as it gets larger and cheaper to maintain.

“Defendants have breached their fiduciary duty … by charging and receiving investment advisory fees from the fund that are so disproportionately large that they bear no reasonable relationship to the services rendered,” the complaint read. “The fund's investment advisory fee arrangement has enabled [BlackRock Advisors] to retain for itself the vast majority of the benefits of economies of scale resulting from increases in the fund's assets under management during recent years, without appropriately sharing those benefits with the fund and its shareholders. In this regard, it is generally accepted in the mutual fund industry that it is not harder to manage a fund simply because it is bigger.”

The complaint also accuses the fund's board of directors of “not acting conscientiously” in approving fees and “markups,” a breach of the obligations required by the Investment Company Act of 1940, which governs funds.

"The fund and its shareholders have sustained hundreds of millions of dollars in damages," according to the complaint.

In the latest lawsuit, the fund in question is the BlackRock Global Allocation Fund. Mr. Davidson said a trust he helped form after buying a winning lottery ticket owned shares worth $1 million in the fund's institutional share class (MALOX), according to the complaint filed Tuesday in the U.S. District Court for the District of New Jersey in Trenton, N.J.

Altogether the fund manages about $60 billion.

(See also: From Pimco to BlackRock, financial giants protest expansion of too-big-to-fail rules)


In 2011, Mr. Davidson bought a winning ticket in a Powerball lottery at a BP gas station, entitling his trust to a $254.2 million jackpot, according to an article that appeared in the Hartford Courant, a Connecticut newspaper, in December 2011.

The winnings were to be rolled into a subsequent trust formed by Mr. Davidson and two colleagues at a registered investment adviser with offices in Florida, Connecticut and Arizona, the newspaper reported, citing a copy of the trust agreement.

That trust was invested in BlackRock's fund, according to the complaint.

A profile of the adviser that appears on his firms' website says that he manages proprietary portfolios and provides financial planning services. Mr. Davidson did not respond to a request for comment left with an assistant at his Delray Beach, Fla., office. His attorney, Richard B. Brualdi, also did not respond to a request for comment left with an assistant at his New York office.

BlackRock is facing three other similar claims. On Monday, U.S. District Judge Joel A. Pisano agreed to consolidate those claims into one legal proceeding.

"The issue we're focused on is the difference between what BlackRock charges the funds and the fees BlackRock negotiates with other firms at arms' length," said Andrew Robertson, senior counsel at Zwerling, Schachter & Zwerling, the New York firm representing individuals who brought the other lawsuits against BlackRock.

Katherine Ewert, a spokeswoman for BlackRock, read a statement in which the firm described the suits as being without merit and said it planned to defend against the action. She declined to make anyone available to discuss the lawsuits' specific claims.

Other fund companies have been challenged on advisory fees deemed excessive in recent years. Those companies include Principal Management Corp., Ameriprise Financial, Oakmark Funds, American Funds, Hartford Investment Financial Services, Axa Equitable Life Insurance Co. and ING Investments, according to records collected by The Coalition of Mutual Fund Investors, a shareholder advocacy group.


“A couple of these cases have gone beyond the 'motion-to-dismiss' phase, which has encouraged the Plaintiffs' Bar and so we're seeing a plethora of cases right now … I'm struggling to post them all,” said Niels Holch, the coalition's executive director. “The question is should investors be paying twice the fee for the same services, and is that a breach of fiduciary duty for the board to agree to a fee structure that's double what it should be in a competitive marketplace.”

In a recent analysis of the BlackRock Global Allocation Fund, Morningstar Inc. analyst Kevin McDevitt gave the fund positive marks on fees.

“The 1.05% expense ratio on the fund's A shares and 0.78% levy on the institutional shares are low relative to similarly distributed world-allocation funds and below the median for similarly distributed aggressive-, moderate-, and conservative-allocation funds,” Mr. McDevitt wrote.

But he said the management fee structure for the fund prevented those fees from dropping further.

“The shares' expense ratios are unlikely to drop much further given the management-fee breakpoints currently in place for the fund,” Mr. McDevitt wrote. He did not respond to a request for comment left at his office.


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