BlackRock fights lawsuit claiming 'excessive fees'

Judge poised to rule on whether a trial can proceed on claims the company violated its fiduciary obligations

Aug 14, 2014 @ 1:21 pm

By Trevor Hunnicutt

A federal judge is poised to decide whether to dismiss a lawsuit contending BlackRock Inc. violated its fiduciary obligations by charging exorbitant fees.

Lawyers representing the firm, the largest money manager by assets globally, argued this week the U.S. District Court in Trenton, N.J., should dismiss those claims before the case proceeds to a trial.

The investors — which include a lottery-winning Florida investment adviser whose winnings were apparently invested with BlackRock — said the fund manager's subsidiaries collect excessive fees for services provided to their nearly $59 billion Global Allocation Fund (MDLOX) and the almost $30 billion Equity Dividend Fund (MDDVX).

But BlackRock is fighting the claims. Its lawyer, Andrew Muscato, said in a filing Monday the claims are without merit and should be dismissed by a judge.

“Tellingly, the complaint does not fully acknowledge the scope and size of the [fund], nor does it allege any facts sufficient to plausibly show that [BlackRock Advisors'] fee bears no reasonable relationship to the services it performs in discharging its responsibility of continuously supervising the investments of a $58 billion global investment fund,” wrote Mr. Muscato, of the law firm Skadden, Arps, Slate, Meagher & Flom.

A judge is scheduled to review arguments from both sides on Monday.

The lawsuit is among a set of cases closely watched by lawyers that are challenging sub-advisor fees and so far have not been dismissed by courts. Similar lawsuits have also been filed against SEI Investments Management, J.P. Morgan Investment Management Inc. and AXA Equitable Life Insurance Co., according to records maintained by Fundfox Inc., a legal research firm.

The lawsuits assert that subsidiaries controlled by the fund companies retain too much of the revenue generated by their funds as they get larger and cheaper to maintain, even when sub-advisers do much of the work.

The lawsuit against BlackRock also faults the funds' board of directors for “not acting conscientiously” in approving fees and “markups,” a breach of the obligations required by the U.S. Investment Company Act of 1940, which governs mutual funds.

But Mr. Muscato said there is no evidence board members exercised insufficient oversight or that the fund manager “does nothing to earn its share” of fees.

Andrew Robertson, a lawyer with Zwerling, Schachter & Zwerling, which represents the investors, did not respond to a request for comment. Nor did Jessica Greaney, a spokeswoman for BlackRock.

The investors claim the funds lost millions in excessive fees. They've asked the court to demand those losses be paid out as restitution.

The investors include Timothy C. Davidson, who bought a winning, $254.2 million Powerball lottery ticket in 2011. The winnings were to be rolled into a trust formed by Mr. Davidson and two colleagues at a registered investment adviser with offices in Florida, Connecticut and Arizona, according to a contemporaneous news account. The trust was invested in one of the BlackRock funds, according to the complaint.

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