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Shareholders say T. Rowe charged excessive mutual fund fees

Baltimore-based company sharply disputes claims

T. Rowe Price's sign outside of their Owings Mills Campus. (File)

T. Rowe Price’s sign outside of their Owings Mills Campus. (File)

A group of shareholders has filed suit alleging T. Rowe Price charged as much as $388 million in excessive mutual fund fees for its own benefit and to inflate its assets under management.

The suit alleged that T. Rowe collected management fees that are “so disproportionately large” that they are not an accurate representation of the services the company provided and “could not have been” the agreed upon fees through arms-length bargaining.

The Baltimore-based money manager disputed the claims laid out in the lawsuit, which was filed the U.S. District Court in Oakland, California on April 27.

“We believe the claims are without merit, and will aggressively defend against the suit,” said T. Rowe Price spokesman Brian Lewbart.

The lawsuit contends that T. Rowe’s fee rates were as much as 73 percent higher than the rates negotiated at arm’s length with other clients for the same services, the complaint said.

“The Funds’ investment management fee rates have enabled (T. Rowe) to retain for itself the benefits of economies of scale resulting from increases in each of the Funds’ assets under management during recent years, without appropriately sharing those benefits with the Funds,” the complaint said.

T. Rowe reported 10.7 percent compounded annual growth rate from 2000 to 2015, with $785 billion assets under management in the first quarter of 2016.

The plaintiff’s case focuses on T. Rowe’s handling of eight funds, including the Blue Chip Growth Fund, Capital Appreciation Fund, Equity Income Fund, Growth Stock Fund, High Yield Fund, New Income Fund, Small Cap Stock Fund and the International Stock Fund.

The plaintiffs argued that the funds identified in the complaint commanded higher fees than the subadvised funds, which are open-end management investment companies and are sponsored by independent financial institutions.

For example, the complaint alleged that the Blue Chip Growth Fund’s 57 basis point investment management fee is nearly 60 percent higher than the free rate paid for the subadvised version of that fund. The plaintiff argued that the fees should be comparable as T. Rowe offers about the same level of service for both funds. If the Blue Chip Growth Fund’s fees were calculated at the same rate as its subadvised counterpart, the plaintiff argues the fund would pay up to $67.4 million less in fees annually at its current asset levels.

In the case of the Blue Chip Growth Fund, the plaintiffs argued that T. Rowe upped its fees when it saw the benefits of economies of scale. From December 31, 2008 to December 31, 2015, the fund’s assets under management grew from $7.5 billion to $31.3 billion. In that time period, management fees paid by the fund went from $64.7 million to $165.9 million, the complaint said, pointing to similar increases in the other funds.

The suit has been brought by six individual shareholders and the Virginia A. Durand Revocable Living Trust based in Michigan. Three of the shareholders are also from Michigan and the other three are from New York.

The plaintiffs filed the case in California with the argument that T. Rowe Price has an office in the judicial district in San Francisco. The complaint also said “certain of the acts and transactions giving rise to Plaintiff’s claims occurred in this district,” but it is unknown what those transactions were. Courts have a discretionary power that lets them dismiss cases when another court is in a better position to hear the matter. If that happens, the plaintiff can refile the case in another court.

Lewbart would not comment on the plaintiff’s decision to file the case in California.

The plaintiffs are represented by McKool Smith Hennigan, a California-based business litigation firm with offices in Los Angeles and Silicon Valley. The firm is part of a larger firm, McKool Smith, based in Dallas, Texas. The plaintiffs’ attorney, J. Michael Hennigan, did not respond to requests for comment.