Kennis v. Metropolitan West Asset Management LLC


Following trial in the U.S. District Court for the Central District of California, the judge ruled in favor of the defense, discarding claims of excessive fees.

Retained by Ropes & Gray

The plaintiff alleged that Metropolitan West Asset Management LLC (MetWest) charged excessive fees, and that those fees did not meet the “arm’s-length bargaining” standard under Section 36(b) of the Investment Company Act. Defense counsel retained John Coates of Harvard Law School and Cornerstone Research to evaluate MetWest’s role as advisor to the Metropolitan West Total Return Bond Fund (the Fund) and to rebut the plaintiff’s experts’ arguments on all fronts.

The judge cited Professor Coates extensively, stating that the plaintiff’s expert’s testimony was “outweighed by Defendant’s contradictory evidence (especially Coates’ testimony).”

The plaintiff’s experts opined that, due to the purported lack of competition in the mutual fund industry, peer mutual funds were an inappropriate yardstick to evaluate the Fund’s fees. They argued that, instead, the fees MetWest charged other funds for sub-advisory services should be used as a benchmark, given the purportedly similar services performed by MetWest as an advisor to the Fund and as a sub-advisor to the externally sponsored sub-advised funds. According to the plaintiff’s experts, if MetWest had charged the Fund the same advisory fee it charged other funds for sub-advisory services, MetWest would still have been sufficiently profitable while appropriately sharing economies of scale with the Fund’s shareholders.

Based on his analyses of the mutual fund market, Professor Coates opined that there was ample competition for comparable mutual funds with fees he evaluated to be in line with peers. He also analyzed the Fund’s performance and testified on MetWest’s profitability from the Fund, the ways mutual funds may or may not experience and share economies of scale, and the differing services offered and risks borne by advisors and sub-advisors. He opined that MetWest provides different services when playing its different roles, operates a different set of businesses, and incurs different risks as an advisor than it does as a sub-advisor, and thus sub-advisory fees on their own could not be used to determine if the Fund’s fees were reasonable.

Following a bench trial, a federal judge found in favor of MetWest and called Professor Coates’ testimony convincing across a wide range of topics. In his decision, the judge stated “the Court agrees with Coates’ criticism” of the plaintiff’s expert’s estimation of economies of scale and opined that “Coates proffered convincing testimony as to why economies of scale as to a non-index mutual bond fund would dissipate at well below $10 billion AUM.” He also cited Professor Coates’ assessments regarding competition in the mutual fund industry as persuasive.

For more information on this case, contact David Marcus or Gary Schmirer.

John C. Coates

John F. Cogan Jr. Professor of Law and Economics,
Research Director, Center on the Legal Profession,
Harvard Law School;
Former General Counsel and Acting Director,
Division of Corporation Finance,
Securities and Exchange Commission;
Senior Advisor, Cornerstone Research