In the fortnight
since the Supreme Court announced its decision
in Jones v. Harris on March 30, 2010, the
parties and the media have loudly declared victory for both sides in the dispute.
In this lawsuit alleging that an investment advisor charged excessive
fees for managing investors’ mutual funds, the advisory industry has claimed
victory because the Supreme Court generally endorsed a legal test – the Gartenberg standard – that led to almost
total success for defendants over the past twenty-five years. Investors, on the other hand, have
pointed out that the Court tweaked the Gartenberg
standard to give it a far more plaintiff-friendly twist. So, how do we tell who actually won?
approach would be to wait for the case to be remanded, most likely all the way back
to the Northern District of Illinois, and then await a subsequent
verdict. Deploying the Supreme
Court’s new formula, the lower court will eventually compute a new (or old) winner. Of course, we can reasonably predict
that whichever side loses at trial might argue that a single verdict does not
encompass the entirety of a new doctrine – other trials could yield other
verdicts. In this area, as it
happens, the Supreme Court also just granted, vacated, and remanded a case with
very similar facts to Jones – Gallus v. Ameriprise – which emerged
from the Eighth Circuit. So we
have at least a very modest experimental population of two cases to watch on
remand. (And while the Seventh
Circuit has been somewhat unsympathetic to plaintiffs in these and related
ERISA cases involving mutual funds, the Eighth Circuit has been notably hospitable
monitoring subsequent litigation is time-consuming and of little reliability
until a decent population of verdicts accumulates over several years. So how else might we evaluate the
impact of the recent Supreme Court ruling in the meantime? Here are a few suggestions:
1. Measure any
variation in the number of lawsuits filed.
the extent that plaintiffs – and their attorneys – feel emboldened by the
Court’s ruling, we should expect to see an uptick in filings of lawsuits
alleging excessive fees in mutual funds.
Of course, attorneys might attempt to manipulate this datum solely in an
effort to create the appearance of an investor-friendly interpretation of Jones v. Harris and thereby to increase
pressure upon the advisory industry.
2. Measure any
variation in the number of lawsuits settled.
more reliable measure of relative success would involve actual settlements
negotiated between plaintiffs and defendants since the new ruling. These data, unfortunately, are very
hard to find because of standard confidentiality agreements.
3. Conduct an event study.
a more illuminating measurement might come from monitoring the spread between
retail and institutional fees in mutual funds. The Supreme Court’s new modification of the Gartenberg standard highlighted the discrepancy between fees that
advisors charge their retail investors (to whom they owe a fiduciary duty) and
their institutional clients (to whom they may not) – heretofore, the industry
on average has charged retail investors fees twice as high as those they charge
institutions. If the Court’s
ruling was a victory for the industry, we should expect to see the spread stay
constant or to increase; if, on the other hand, the ruling was a victory for
plaintiffs, we should expect to see the spread in fees narrow.
One might conduct an event study focusing on important moments in
the course of this litigation to see whether and when any variation in those
fees occurred, including the dates of the Easterbrook opinion for the Seventh
Circuit, the Posner dissent from the denial of rehearing en banc, the grant of
certiorari, the briefing deadlines at the Supreme Court, the oral argument, and
the eventual decision. Advisors
might reasonably have assessed their prospects of victory on any or all of
those dates and reacted by adjusting their fees accordingly, though the process
of changing compensation might well lag somewhat.
the extent advisors are uncomfortable with monitors evaluating the spread in
their fees, they might very well attempt to confound comparisons by making
their retail and institutional investments less comparable. Of course, that behavior would in
itself be a very reliable indication of whether the Supreme Court gave them a
victory or a loss.