Thursday, November 5, 2009

Henderson on the role of Twombly and Iqbal in mutual fund compensation actions

Continuing the trend of scholars from inside and outside of the civil procedure realm to study the possible ramifications of Twombly and Iqbal, M. Todd Henderson (University of Chicago) has posted an essay entitled Justifying Jones to SSRN.

This essay considers Judge Easterbrook's opinion in Jones v. Harris Associates in celebration of his 25th anniversary on the bench. The case, currently pending at the Supreme Court, is being billed as the most important mutual fund case in decades, if not ever. This is part because it addresses the question of whether investors are overpaying for the services of their investment advisors, and the current political climate is quite hostile to highly compensated managers and sympathetic to investors. Judge Easterbrook's opinion makes the case even more interesting because it was not expected or wanted by any of the parties, and everyone involved wants the Supreme Court to reject its reasoning. Easterbrook believes that litigation against advisors claiming excessive compensation is socially wasteful, and his opinion tries to do away with these cases in all but the most extreme cases. This Essay uses theory and some ballpark estimates of the costs and benefits of this type of litigation to justify what Judge Easterbrook did. It shows how despite being billed as a case about executive compensation, the relevant precedents are not the Supreme Court's cases on pay (e.g., Rogers v. Hill) but rather its recent civil procedure cases (e.g., Bell Atlantic Corp. v. Twombly). It also exposes the reasons why none of the parties nor the mutual fund industry agree with Judge Easterbrook. Obviously the lawyers on both sides benefit from litigation, which he is trying to end, but more interestingly the mutual fund industry rationally prefers the small tax on its profits that the current regime generates over the risk that the Supreme Court or, worse, the Congress might make matters much worse. This case is therefore a classic example where the narrow interests of the parties are not informative of the right result. This Essay shows why the Supreme Court should consider the interests of investors over the lawyers and the funds before reinstating a legal regime under which the plaintiffs have never won and that serves no deterrent function.


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