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In re American Mutual Funds Fee Litigation

December 28, 2009

IN RE AMERICAN MUTUAL FUNDS FEE LITIGATION


The opinion of the court was delivered by: Gary Feess, United States District Court Judge

FINDINGS OF FACT AND CONCLUSIONS OF LAW

This Document Relates to:

ALL ACTIONS

PRELIMINARY STATEMENT

The Court has now read and considered: (1) Defendants' Revised Proposed Findings of Fact and Conclusions of Law; (2) Plaintiffs' Objections to Defendants' Proposed Findings of Fact and Conclusions of Law (which includes 85 additional proposed findings); (3) Defendants' Ex Parte Application For Leave to File A Reply in Support of Their [Proposed] Findings of Fact and Conclusions of Law; and (4) unrequested materials including Defendants Memorandum of Points and Authorities Regarding the Court's Statement of Intended Decision and related responses and replies. Before the Court presents its detailed findings of fact and conclusions of law, it will address certain issues that the parties have raised in these documents and that seem best addressed separately from the remainder of the document.

(1) Plaintiff's Objections: Though Defendants quarrel with the specifics of a number of the objections, the Court will not address those disputes in any detail. The Court's response to the objections is incorporated in the findings and conclusions set forth below. However, the Court feels that a recurring objection requires a comment.

Plaintiffs have, on many occasions, objected to the content of findings because the subject was not included in the Court's Statement of Intended Decision ("Statement").

That objection may have merit where the material included in the findings is inconsistent with the Court's Statement, but not otherwise. The Court expressly advised that it expected the proposed findings and conclusions would be substantially more detailed than the Statement and would cover matters not addressed in the Statement. While the Court agrees that there are items in Defendants' proposed findings that are not consistent with the Court's views of this case, those items have been deleted. However, the document contains much material that the Court anticipated would and should be included, and that material has been retained.

(2) Defendant's Objections: In a memorandum not requested by the Court Defendants take issue with the Court's comments regarding the collaboration of the directors with management in connection with the litigation of this dispute. Defendants argue that, in assessing the independence of the directors, the Court should focus solely on the conduct that occurred during their deliberations and not on their conduct at trial because there are reasons why they would be aligned with management in the defense of the case. The argument tends to prove the Court's point. A witness's association with a particular position may be considered in assessing the weight to be given the witness's testimony. Model jury instructions direct a trier of fact to consider demeanor, manner, apparent bias, and a witness's interest in the outcome of the litigation in evaluating the credibility of, and weight to be given to, a witness's testimony. The Court's comments go principally to those issues, which are a proper consideration.

But the memorandum also implicitly complains that the Court has not commended the directors for the job they did on behalf of the investors. For example, Defendants claim that the record "supports a finding that . . . the independent directors were well-informed on all material issues, and exercised their business judgment in a manner that they reasonably determined was in the best interests of fund shareholders."

(Mem., at 5-6 n.3.) Such a statement does not reflect the Court's view, and the Court will not adopt those portions of the findings and conclusions that laud the work of the directors precisely because the Court does not believe that praise is warranted. The tenor of such proposed findings suggests that the directors achieved the best possible result for fund shareholders -- a conclusion not warranted by the record but not required by controlling case law.

To be clear, the Court understands that a violation of section 36(b) under the Gartenberg standard requires proof that "the adviser-manager [has charged] a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining."

Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923, 928 (2nd Cir. 1982). But in the Court's view, this standard establishes a very low threshold for the mutual fund companies and a very high hurdle for a plaintiff.*fn1 Because there is no real arm's- length bargaining between funds and their management,*fn2 and because true arm's length bargains are treated by some Courts as an irrelevant consideration, Jones v. Harris Assocs. L.P., 527 F.3d 627, 634-35 (7th Cir. 2008), reh. and reh.en banc denied, 537 F.3d 928 (7th Cir. 2008), cert. granted, 129 S. Ct. 1579 (2009), there is little useful data from which to assess whether a management fee is consistent with arm's-length bargaining. Even if such data existed, it would be of limited significance under Gartenberg because that case teaches that evidence that a better deal could have been struck would not establish a violation of Section 36(b). Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 528 F. Supp. 1038, 1047 (S.D.N.Y. 1981) ("It bears repeating that in order to provide relief under Section 36(b), it is not enough for this Court to find that a better bargain was possible."), aff'd, 694 F.2d 923 (2d Cir. 1982). For these reasons, a defendant's success in litigation, where the availability of a better bargain is considered insufficient to prove a breach of fiduciary duty, proves little about the conduct of the unaffiliated directors.

Judge Posner addressed this issue in his Jones dissent. Criticizing the rationale of the panel decision, he wrote:

The panel bases its rejection of Gartenberg mainly on an economic analysis that is ripe for reexamination on the basis of growing indications that executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation. See, e.g., Lucian Bebchuk & Jesse Fried, Pay without Performance: The Unfilfilled Promise of Executive Compensation 23-44 (2004); Charles A. O'Reilly III & Brian G.M. Main, "It's More Than Simple Economics," 36 Organizational Dynamics 1 (2007); Ivan E. Brick, Oded Palmon & John K. Wald, "CEO Compensation, Director Compensation, and Firm Performance: Evidence of Cronyism?," 12 J. Corp. Finance 403 (2006); Arthur Levitt, Jr., "Corporate Culture and the Problem of Executive Compensation," 30 J. Corp. Law 749, 750 (2005); [numerous additional citations.] 537 F.3d, at 730. Further, he noted, "Competition in product and capital markets can't be counted on to solve the problem because the same structure of incentives operates on all large corporations and similar entities, including mutual funds." Id. Judge Posner's observation regarding incentives is particularly apt. The Court finds little in the record to establish a potent incentive on the part of the directors, regardless of their education, background and experience, to police the compensation paid to CRMC to manage the Funds.

One example, in particular, is noteworthy: the directors were never provided with data showing, either in the aggregate or in specific instances, the compensation paid to employees of the defendants. There is no evidence that any director ever asked for such information, and when management advised that its compensation levels (which were undisclosed) were necessary to meet competition in the marketplace, the directors simply accepted that claim as gospel. There is not a shred of evidence that any director asked management to identify who CRMC perceived as its competition, to provide information regarding compensation levels at those competing firms, to compare those compensation levels to compensation paid to CRMC and AFD employees, or to explain why those compensation levels were necessary to attract and retain personnel or to provide services at a specified level of quality. Given that, after CRMC paid all of its expenses, including salary and bonuses, it contributed 35% of the net revenues to its Special Compensation Plan, one would have expected some level of interest on the part of the directors. But no such interest was shown. The existing incentives were simply insufficient to move even the most aggressive director to raise questions on this subject. Thus, although the directors were represented by counsel and were provided with detailed materials to which they and Defendants can point to and say, "see how thorough and careful we were," the entire process seems less a true negotiation and more an elaborate exercise in checking off boxes and papering the file. Nonetheless, this is what controlling case law and SEC regulations demand, and is sufficient to immunize Defendants against section 36(b) liability so long as the fees charged are not grossly out of line with the range of fees charged in the industry.

The Court will not belabor the point further. In the end, the Gartenberg standard establishes a very high hurdle to overcome, and Plaintiffs failed in that effort.

But, in the Court's view, that conclusion should not be mistaken for a determination that the directors obtained the best possible deal for investors as suggested in some of Defendants' proposed findings and conclusions of law. For that reason, the Court has omitted a number of the findings and conclusions directed to what the Defendants describe as the independence and diligence of the Unaffiliated Directors. In sum, although Defendants proposed certain findings that included what amounted to a commendation for the work of the directors, they will have to be satisfied with merely winning the lawsuit.

FINDINGS OF FACT

I. OVERVIEW

A. The Plaintiffs

1. Plaintiffs bring this lawsuit on behalf of investors in the following eight American Funds: AMCAP Fund, Inc. ("AMCAP"), American Balanced Fund, Inc. ("AMBAL"), The Bond Fund of America, Inc. ("BFA"), Capital Income Builder, Inc. ("CIB"), The Investment Company of America ("ICA"), The Income Fund of America, Inc. ("IFA"), The Growth Fund of America, Inc. ("GFA"), and Capital World Growth and Income Fund, Inc. ("WGI") (collectively, the "Funds"). [SF-8]*fn3

2. Plaintiff Rodney T. Jelinek held as of July 15, 2004, and continued to hold Class A shares of ICA as of June 24, 2009. [SF-17]

3. Plaintiff David L. Caplan & Robert M. Macko, as Trustees of the David L. Caplan Revocable Trust, held as of July 15, 2004, and continued to hold Class C shares of CIB and IFA as of June 24, 2009. [SF-18]

4. Plaintiff Gregory J. Baurnes held as of July 15, 2004, and continued to hold Class A shares of AMBAL, BFA, GFA, CIB, and WGI as of June 24, 2009. [SF-19]

5. Plaintiff Ernest Visalli held as of July 15, 2004, and continued to hold Class A shares of BFA as of June 24, 2009. [SF-20]

6. Plaintiff Paul D. Angotta held, as of July 15, 2004, Class A shares of AMCAP, GFA and ICA. On or about June 3, 2009, Mr. Angotta sold all of his shares of these funds. On June 15, 2009, Mr. Angotta purchased 20.733, 14.303, and 15.165 Class A shares of AMCAP, GFA and ICA, respectively, and continued to hold those shares as of June 24, 2009. [SF-21]

7. None of the Plaintiffs owns Class B, F, R, or 529 shares of the Funds. [SF-22]

8. No Plaintiff owns Class C shares in AMCAP, AMBAL, BFA, ICA, GFA, and WGI. [SF-23]

B. Defendants and Related Entities

1. CRMC

9. Defendant Capital Research and Management Company ("CRMC") is a wholly-owned subsidiary of The Capital Group Companies, Inc. ("Capital Group"), a privately owned company. [SF-1,3]

10. CRMC is a registered investment adviser under the Investment Advisers Act of 1940. [SF-4]

11. CRMC has served as the investment adviser to the American Funds since 1931. [SF-5]

12. CRMC's business is devoted exclusively to managing mutual funds and providing related services. [SF-6]

13. CRMC maintains a long-term perspective in managing the American Funds. Ex. 648 at 27, 39; Tr. 259:3-13.

14. Capital Group is a global firm with twenty-three offices throughout the world. Tr. 107:4-11.

15. CRMC manages fixed income assets through its Fixed Income Division. [SF-11]

16. CRMC currently manages equity assets through two investment divisions: Capital World Investors ("CWI") and Capital Research Global Investors ("CRGI"). [SF-9]

17. From fiscal years 2002 to 2006, CRMC and its subsidiaries collectively employed several thousand associates to carry out CRMC's consolidated operations, with 2,777 associates employed in fiscal year 2002 and 4,060 associates employed in fiscal year 2006. [SF-76]

2. AFD

18. Defendant American Funds Distributors, Inc. ("AFD") is a registered broker-dealer and wholly owned subsidiary of CRMC. [SF-12]

19. AFD is the principal underwriter and distributor of the American Funds. [SF-13]; see also Tr. 352:24-353:1.

20. AFD distributes and markets the Funds almost exclusively through broker-dealers and other financial intermediaries. Ex. 335 at CORBI_0209265; Ex. 648 at 52 n.34; Tr. 354:11-14.

21. AFD has formed a selling group comprised of broker-dealers and other financial intermediaries who offer the Funds to the public and provide services to American Funds shareholders. [SF-14]

22. AFD enters into a Selling Group Agreement with each broker-dealer firm selling the Funds, pursuant to which AFD grants the broker-dealer firm the authority to sell the Funds. [SF-72]

23. Under the Selling Group Agreement, the broker-dealer firm agrees to abide by certain policies set forth in the Agreement regarding order processing, redemptions, use of sales literature, and maintaining securities law qualifications and registrations. In addition, the broker-dealer firm must represent that it complies with all applicable federal and state laws and will continue to do so. Ex. 333 at CORBI_0208988-90; see also Tr. at 788:21-790:4.

3. AFS

24. American Funds Service Company ("AFS"), a wholly owned subsidiary of CRMC, provides services to Fund shareholders as a transfer agent, dividend disbursing agent, and directed redemption agent for the American Funds. [SF-15]

25. The transfer agency services provided by AFS include recordkeeping, account maintenance, transaction and distribution processing, tax reporting, responding to account related calls from shareholders and advisers, shareholder and fund communications, and website-based services. See, e.g., Ex. 688 at CORBI_0204157; Tr. 444:5-18, 496:9-497:3.

26. AFS is not a Defendant in this action. [SF-16]

C. The American Funds

27. The American Funds mutual fund complex consists of thirty (30) mutual funds of varying size, asset mix, and investment strategy. Ex. 649 at ¶¶ 16, 20; Ex. 1134 at CORBI_0075721.

28. The investment objectives of the eight Funds at issue are as follows: [SF-25]

* AMBAL: The fund's investment objectives are: (1) conservation of capital, (2) current income and (3) long-term growth of capital and income.

* AMCAP: The fund's investment objective is to provide long-term growth of capital.

* BFA: The fund's investment objective is to provide as high a level of current income as is consistent with the preservation of capital.

* CIB: The fund has two primary investment objectives. It seeks (1) to provide a level of current income that exceeds the average yield on U.S. stocks generally and (2) to provide a growing stream of income over the years.

* ICA: The fund's investment objectives are to achieve long-term growth of capital and income.

* IFA: The fund's investment objectives are to provide current income while secondarily striving for capital growth.

* GFA: The fund's investment objective is to provide growth of capital.

* WGI: The fund's investment objective is to provide long-term growth of capital while providing current income.

29. Net assets under management for the American Funds mutual fund complex increased from $422 billion in fiscal year 2003 to approximately $1.2 trillion in fiscal year 2008, with a high of $1.225 trillion in fiscal year 2007. Net assets under management for the Funds at issue increased from $243.6 billion in fiscal year 2003 to $548.6 billion in fiscal year 2008, with a high of $710.5 billion in fiscal year 2007. [SF-73]

30. From fiscal year 2003 to fiscal year 2008, the number of average active full-service accounts, excluding street-name and omnibus accounts, increased from 11.3 million to nearly 23 million. See Ex. 2224; Ex. 621 at CORBI_0362734 (showing that the total number of average active accounts, including street name and omnibus accounts, was approximately 35 million in 2004 and 71 million in 2008); Tr. 501:6-502:13.

D. Fees Charged to American Funds Investors

31. Every fund at issue in this litigation offers multiple share classes to investors (e.g., Class A, B, C, F, R and 529 shares). [SF 17-23]. Each share class possesses a specific fee structure that differentiates it from other share classes. Ex. 3 at CORBI_0231606-CORBI_0231612; Tr. 354:6-355:10, 481:4-11, 635:23-636:16.

32. While each share class has a different fee structure, as a result of different arrangements for shareholder services or for distribution related services, the different share classes invest in the same portfolio of assets and receive the same investment management services. Ex. 1208 at 16; Tr. 361:22-362:6.

33. CRMC and its subsidiaries charge the Funds various fees in exchange for providing services to the Funds, including portfolio management, fund accounting, transfer agency, distribution, and shareholder services. [SF-26]

34. The Funds are sold to investors as an integrated product. An investor cannot purchase these services separately. Ex. 651 at ¶ 24; Tr. 1525:14-1526:3. Nonetheless, the payment of certain of these fees, notably the 12b-1 fees provide greater benefit to the defendants than to investors in the American Funds.

35. CRMC discloses each Fund's fees and total expenses in the Fund's prospectus, annual report, semi-annual report, and statement of additional information. [SF-27]

1. Investment Advisory Fees

36. Pursuant to Investment Advisory and Service Agreements (the "Advisory Agreements"), CRMC acts as the investment adviser to each of the Funds and provides investment management services such as investment research, investment selection, and portfolio trading, as well as related executive, administrative, clerical, compliance and bookkeeping services. E.g., [SF-28-30]; Ex. 690; Tr. 108:8-14.

37. In exchange for providing these services, CRMC charges each fund an advisory fee (sometimes called a management or investment advisory fee). [SF-31]

38. The advisory fee is calculated either as a percentage of the particular fund's assets under management, or in the case of IFA, BFA, and CIB, as a percentage of assets under management plus a percentage of the fund's gross income earned by the fund. [SF-32-33]

39. The advisory fee schedules for the eight Funds include various breakpoints, which are scheduled reductions in the rate of the advisory fee as net assets under management increase. [SF-34-36]

40. Since 2002, there have been at least twenty-six (26) new breakpoints added to the fee schedules of the eight Funds at issue in this action. [SF-38]

41. Seventeen (17) breakpoints were added to six of the eight Funds at issue during fiscal year 2004 alone. [SF-38]

42. The advisory fee schedule for each Fund for the period relevant to this litigation (July 2003 to present) is set out below. [SF-38]

a. AMCAP 7/1/93 to 11/30/03 .485% on first $1 billion of assets .385% from $1 to $2 billion .355% from $2 to $3 billion .335% from $3 to $5 billion .32% from $5 to $8 billion .31% on assets over $8 billion 12/1/03 to 3/31/06 4/1/06 to date .485% on first $1 billion of assets .485% on first $1 billion of assets .385% from $1 to $2 billion .385% from #1 to $2 billion .355% from $2 to $3 billion .355% from $2 to $3 billion .335% from $3 to $5 billion .335% from $3 to $5 billion .32% from $5 to $8 billion .32% from $5 to $8 billion .31% from $8 to $13 billion .31% from $8 to $13 billion .30% from $13 to $21 billion .30% from $13 to $21 billion .295% on assets over $21 billion .295% from $21 to $27 billion .29% on assets over $27 billion

b. AMBAL 1/1/03 to 4/4/04 .42% on first $500 million of assets .324% from $500 million to $1 billion .30% from $1 to $1.5 billion .282% from $1.5 to $2.5 billion .27% from $2.5 to $4 billion .262% from $4 to $6.5 billion .255% from $6.5 to $10.5 billion .25% from $10.5 to $13 billion .245% from $13 to $17 billion .24% from $17 to $21 billion .236% from $21 to $27 billion .232% on assets over $27 billion 4/5/04 to 12/31/04 .42% on first $500 million of assets .324% from $500 million to $1 billion .30% from $1 to $1.5 billion .282% from $1.5 to $2.5 billion .27% from $2.5 to $4 billion .262% from $4 to $6.5 billion .255% from $6.5 to $10.5 billion .25% from $10.5 to $13 billion .245% from $13 to $17 billion .24% from $17 to $21 billion .235% from $21 to $27 billion .230% from $27 to $34 billion .225% from $34 to $44 billion .220% on assets over $44 billion 1/1/05 to 12/31/05 .42% on first $500 million of assets .324% from $500 million to $1 billion .30% from $1 to $1.5 billion .282% from $1.5 to $2.5 billion .27% from $2.5 to $4 billion .262% from $4 to $6.5 billion .255% from $6.5 to $10.5 billion .25% from $10.5 to $13 billion .245% from $13 to $17 billion .24% from $17 to $21 billion .235% from $21 to $27 billion .230% from $27 to $34 billion .225% from $34 to $44 billion .220% from $44 to $55 billion .215% on assets over $55 billion 1/1/06 to Present .42% on first $500 million of assets .324% from $500 million to $1 billion .30% from $1 to $1.5 billion .282% from $1.5 to $2.5 billion .27% from $2.5 to $4 billion .262% from $4 to $6.5 billion .255% from $6.5 to $10.5 billion .25% from $10.5 to $13 billion .245% from $13 to $17 billion .24% from $17 to $21 billion .235% from $21 to $27 billion .230% from $27 to $34 billion .225% from $34 to $44 billion .220% from $44 to $55 billion .215% from $55 to $71 billion .210% on assets over $71 billion

c. BFA 11/1/98 to 10/31/03 .30% on first $60 million of assets .21% from $60 million to $1 billion .18% from $1 to $3 billion .16% from $3 to $6 billion .15% from $6 to $10 billion .14% on assets over $10 billion; PLUS 2.25% of first $8.333.333 of monthly gross income 2% of monthly gross income over $8,000,000 11/1/03 to 3/31/04 .30% on first $60 million of assets .21% from $60 million to $1 billion .18% from $1 to $3 billion .16% from $3 to $6 billion .15% from $6 to $10 billion .14% from $10 to $16 billion .13% on assets over $16 billion; PLUS 2.25% of first $8,333,333 of monthly gross income 2% of monthly gross income from $8,333,333 to $41,666,667 1.75% of monthly gross income in excess of $41,666,667 4/1/04 to 10/31/07 .30% on first $60 million of assets .21% from $60 million to $1 billion .18% from $1 to $3 billion .16% from $3 to $6 billion .15% from $6 to $10 billion .14% from $10 to $16 billion .13% from $16 to $20 billion .12% on assets over $20 billion; PLUS 2.25% of first $8,333,333 of monthly gross income 2% of monthly gross income from $8,333,333 to $41,666,667 1.75% of monthly gross income in excess of $41,666,667 11/1/07 to present .30% on first $60 million of assets .21% from $60 million to $1 billion .18% from $1 to $3 billion .16% from $3 to $6 billion .15% from $6 to $10 billion .14% from $10 to $16 billion .13% from $16 to $20 billion .12% from $20 to $28 billion .115% from $28 to $36 billion .11% on assets over $36 billion; PLUS 2.25% of first $8,333,333 of monthly gross income 2% of monthly gross income from $8,333,333 to $41,666,667 1.75% of monthly gross income over $41,666,667

d. CIB 3/1/95 to 10/31/03 .24% on first $1 billion of assets .20% from $1 to $2 billion .18% from $2 to $3 billion .165% from $3 to $5 billion .155% from $5 to $8 billion .15% on assets over $8 billion; PLUS 3% of annual gross income 11/1/03 to 5/31/04 .24% on first $1 billion of assets .20% from $1 to $2 billion .18% from $2 to $3 billion .165% from $3 to $5 billion .155% from $5 to $8 billion .150% from $8 to $13 billion .145% from $13 to $17 billion .140% from $17 to $21 billion .135% from $21 to $27 billion .130% on assets over $27 billion; PLUS 3% of annual gross income 6/1/04 to 10/31/05 .24% on first $1 billion of assets .20% from $1 to $2 billion 18% from $2 to $3 billion .165% from $3 to $5 billion .155% from $5 to $8 billion .150% from $8 to $13 billion .145% from $13 to $17 billion .140% from $17 to $21 billion .135% from $21 to $27 billion .130% from $27 to $34 billion .125% from $34 to $44 billion .120% on assets over $44 billion; PLUS 3% of first $1.2 billion of annual gross income 2.5% of annual gross income over $1.2 billion 11/1/05 to 10/31/06 .24% on first $1 billion of assets .20% from $1 to $2 billion .18% from $2 to $3 billion .165% from $3 to $5 billion .155% from $5 to $8 billion .150% from $8 to $13 billion .145% from $13 to $17 billion .140% from $17 to $21 billion .135% from $21 to $27 billion .130% from $27 to $34 billion .125% from $34 to $44 billion .120% from $44 to $55 billion .117% on assets over $55 billion; PLUS 3% of first $1.2 billion of annual gross income 2.5% of annual gross income over $1.2 billion 11/1/06 to 10/31/07 .24% on first $1 billion of assets .20% from $1 to $2 billion .18% from $2 to $3 billion .165% from $3 to $5 billion .155% from $5 to $8 billion .150% from $8 to $13 billion .145% from $13 to $17 billion .140% from $17 to $21 billion .135% from $21 to $27 billion .130% from $27 to $34 billion .125% from $34 to $44 billion .120% from $44 to $55 billion .117% from $55 to $71 billion .114% from $71 to $89 billion .112% on assets over $89 billion; PLUS 3% of first $1.2 billion of annual gross income 2.5% of annual gross income over $1.2 billion 11/1/07 to present .24% on first $1 billion of assets .20% from $1 to $2 billion .18% from $2 to $3 billion .165% from $3 to $5 billion .155% from $5 to $8 billion .150% from $8 to $13 billion .145% from $13 to $17 billion .140% from $17 to $21 billion .135% from $21 to $27 billion .130% from $27 to $34 billion .125% from $34 to $44 billion .120% from $44 to $55 billion .117% from $55 to $71 billion .114% from $71 to $89 billion .112% from $89 to 115 billion .110% on assets over $115 billion; PLUS 3% of first $1.2 billion of annual gross income 2.5% of annual gross income over $1.2 billion

e. ICA 1/1/00 to 2/15/05 .39% on first $1 billion of assets .336% from $1 to $2 billion .30% from $2 to $3 billion .276% from $3 to $5 billion .258% from $5 to $8 billion .246% from $8 to $13 billion .24% from $13 to $21 billion .234% from $21 to $34 billion .231% from $34 to $44 billion .228% from $44 to $55 billion .225% from $55 to $71 billion .222% on assets over $71 billion 2/16/05 to present .39% on first $1 billion of assets .336% from $1 to $2 billion .30% from $2 to $3 billion .276% from $3 to $5 billion .258% from $5 to $8 billion .246% from $8 to $13 billion .24% from $13 to $21 billion .234% from $21 to $34 billion .231% from $34 to $44 billion .228% from $44 to $55 billion .225% from $55 to $71 billion .222% from $71 to $89 billion .219% on assets over $89 billion

f. IFA 1/1/00 to 12/31/04 .25% on first $500 million of assets .23% from $500 million to $1 billion .21% from $1 to $1.5 billion .19% from $1.5 to $2.5 billion .17% from $2.5 to $4 billion .16% from $4 to $6.5 billion .15% from $6.5 to $10.5 billion .144% from $10.5 to $13 billion .141% from $13 to $17 billion .138% from $17 to $21 billion .135% from $21 to $27 billion .133% from $27 to $34 billion .131% from $34 to $44 billion .129% on assets over $44 billion; PLUS 2.25% of annual gross income 1/1/05 to 12/31/05 .25% on first $500 million of assets .23% from $500 million to $1 billion .21% from $1 to $1.5 billion .19% from $1.5 to $2.5 billion .17% from $2.5 to $4 billion .16% from $4 to $6.5 billion .15% from $6.5 to $10.5 billion .144% from $10.5 to $13 billion .141% from $13 to $17 billion .138% from $17 to $21 billion .135% from $21 to $27 billion .133% from $27 to $34 billion .131% from $34 to $44 billion .129% from $44 to $55 billion .127% on assets over $55 billion; PLUS 2.25% of annual gross income 1/1/06 to 12/31/07 .25% on first $500 million of assets .23% from $500 million to $1 billion .21% from $1 to $1.5 billion .19% from $1.5 to $2.5 billion .17% from $2.5 to $4 billion .16% from $4 to $6.5 billion .15% from $6.5 to $10.5 billion .144% from $10.5 to $13 billion .141% from $13 to $17 billion .138% from $17 to $21 billion .135% from $21 to $27 billion .133% from $27 to $34 billion .131% from $34 to $44 billion .129% from $44 to $55 billion .127% from $55 to $71 billion .125% on assets over $71 billion; PLUS 2.25% of annual gross income 1/1/08 to present .25% on first $500 million of assets .23% from $500 million to $1 billion .21% from $1 to $1.5 billion .19% from $1.5 to $2.5 billion .17% from $2.5 to $4 billion .16% from $4 to $6.5 billion .15% from $6.5 to $10.5 billion .144% from $10.5 to $13 billion .141% from $13 to $17 billion .138% from $17 to $21 billion .135% from $21 to $27 billion .133% from $27 to $34 billion .131% from $34 to $44 billion .129% from $44 to $55 billion .127% from $55 to $71 billion .125% from $71 to $89 billion .123% on assets over $89 billion; PLUS 2.25% of annual gross income

g. GFA 9/1/00 to 2/29/04 .50% on first $1 billion of assets .40% from $1 to $2 billion .37% from $2 to $3 billion .35% from $3 to $5 billion .33% from $5 to $8 billion .315% from $8 to $13 billion .30% from $13 to $21 billion .29% from $21 to $27 billion .285% from $27 to $34 billion .281% from $34 to $44 billion .278% from $44 to $55 billion .276% on assets over $55 billion 3/1/04 to 8/31/05 .50% on first $1 billion of assets .40% from $1 to $2 billion .37% from $2 to $3 billion .35% from $3 to $5 billion .33% from $5 to $8 billion .315% from $8 to $13 billion .30% from $13 to $21 billion .29% from $21 to $27 billion .285% from $27 to $34 billion .280% from $34 to $44 billion .275% from $44 to $55 billion .270% from $55 to $71 billion .265% from $71 to $89 billion .260% on assets over $89 billion 9/1/05 to 8/31/06 .50% on first $1 billion of assets .40% from $1 to $2 billion .37% from $2 to $3 billion .35% from $3 to $5 billion .33% from $5 to $8 billion .315% from $8 to $13 billion .30% from $13 to $21 billion .29% from $21 to $27 billion .285% from $27 to $34 billion .280% from $34 to $44 billion .275% from $44 to $55 billion .270% from $55 to $71 billion .265% from $71 to $89 billion .260% from $89 to $102.5 billion .255% from $102.5 to $116 billion .25% from $116 to $130 billion .245% on assets over $130 billion 9/1/06 to 8/31/07 .50% on first $1 billion of assets .40% from $1 to $2 billion .37% from $2 to $3 billion .35% from $3 to $5 billion .33% from $5 to $8 billion .315% from $8 to $13 billion .30% from $13 to $21 billion .29% from $21 to $27 billion .285% from $27 to $34 billion .280% from $34 to $44 billion .275% from $44 to $55 billion .270% from $55 to $71 billion .265% from $71 to $89 billion .260% from $89 to $102.5 billion .255% from $102.5 to $116 billion .25% from $116 to $130 billion .245% from $130 to $144 billion .242% from $144 to $166 billion .239% on assets over $166 billion 9/1/07 to Present .50% on first $1 billion of assets .40% from $1 to $2 billion .37% from $2 to $3 billion .35% from $3 to $5 billion .33% from $5 to $8 billion .315% from $8 to $13 billion .30% from $13 to $21 billion .29% from $21 to $27 billion .285% from $27 to $34 billion .280% from $34 to $44 billion .275% from $44 to $55 billion .270% from $55 to $71 billion .265% from $71 to $89 billion .260% from $89 to $102.5 billion .255% from $102.5 to $116 billion .25% from $116 to $130 billion .245% from $130 to $144 billion .242% from $144 to $166 billion .239% from $166 billion to $188 billion .236% from $188 billion to 210 billion .233% on assets over $210 billion

h. WGI 11/1/00 to 5/31/04 .60% on first $500 million of assets .50% from $500 million to $1 billion .46% from $1 to $1.5 billion .43% from $1.5 to $2.5 billion .41% from $2.5 to $4 billion .40% from $4 to $6.5 billion .395% from $6.5 to $10.5 billion .39% from $10.5 to $17 billion .385% on assets over $17 billion 6/1/04 to 10/31/05 .60% on first $500 million of assets .50% from $500 million to $1 billion .46% from $1 to $1.5 billion .43% from $1.5 to $2.5 billion .41% from $2.5 to $4 billion .40% from $4 to $6.5 billion .395% from $6.5 to $10.5 billion .39% from $10.5 to $17 billion .385% from $17 to $21 billion .38% from $21 to $27 billion .375% from $27 to $34 billion .37% from $34 to $44 billion .365% on assets over $44 billion 11/1/06 to 10/31/07 .60% on first $500 million of assets .50% from $500 million to $1 billion .46% from $1 to $1.5 billion .43% from $1.5 to $2.5 billion .41% from $2.5 to $4 billion .40% from $4 to $6.5 billion .395% from $6.5 to $10.5 billion .39% from $10.5 to $17 billion .385% from $17 to $21 billion .38% from $21 to $27 billion .375% from $27 to $34 billion .370% from $34 to $44 billion .365% from $44 to $55 billion .36% from $55 to $71 billion .356% from $71 to $89 billion .352% on assets over $89 billion 11/1/05 to 10/31/06 .60% on first $500 million of assets .50% from $500 million to $1 billion .46% from $1 to $1.5 billion .43% from $1.5 to $2.5 billion .41% from $2.5 to $4 billion .40% from $4 to $6.5 billion .395% from $6.5 to $10.5 billion .39% from $10.5 to $17 billion .385% from $17 to $21 billion .38% from $21 to $27 billion .375% from $27 to $34 billion .370% from $34 to $44 billion .365% from $44 to $55 billion .360% on assets over $55 billion 11/1/07 to present .60% on first $500 million of assets .50% from $500 million to $1 billion .46% from $1 to $1.5 billion .43% from $1.5 to $2.5 billion .41% from $2.5 to $4 billion .40% from $4 to $6.5 billion .395% from $6.5 to $10.5 billion .39% from $10.5 to $17 billion .385% from $17 to $21 billion .38% from $21 to $27 billion .375% from $27 to $34 billion .370% from $34 to $44 billion .365% from $44 to $55 billion .36% from $55 to $71 billion .356% from $71 to $89 billion .352% from $89 to $115 billion .350% on assets over $115 billion

43. In addition to breakpoints, CRMC has also waived portions of the Funds' advisory fees. [SF-39].

44. As of September 1, 2004, CRMC implemented a voluntary fee waiver that reduced the advisory fees charged to the American Funds, including the Funds, by five percent. [SF-39]; Ex. 858.

45. As of April 1, 2005, CRMC increased the fee waiver to ten percent. [SF-40]

46. Before implementing each of the fee waivers, CRMC presented its proposal for the waiver to the Boards of Directors. Ex. 858; Ex. 859; Tr. 555:1-14, 977:23-978:3, 985:13-986:8.

47. In both instances, the Directors approved the proposed fee waivers. See, e.g., Ex. 107 at CORBI_0342547-CORBI_0342549; Tr. 871:19-872:14, 942:4-9.

48. The fee waivers resulted in a decrease in advisory fees paid by all American Funds of approximately $1.2 billion during the period September 1, 2004, through December 31, 2008. [SF-42]

49. For the eight Funds at issue, the fee waivers reduced advisory fees by approximately $540 million from September 1, 2004, to June 30, 2008, in addition to the reductions realized from breakpoints. [SF-43]

50. With respect to the Funds at issue, CRMC waived the following amounts of investment advisory fees pursuant to the fee waivers during the relevant CRMC fiscal years: [SF-44]

 FY Ending 6/30/05FY Ending 6/30/06FY Ending 6/30/07FY Ending 6/30/08Total AMCAP$3,234,413$7,200,051$8,045,471$8,380,721$26,860,656 AMBAL$5,972,095$12,438,836$13,341,630$14,098,440$45,851,001 BFA$2,698,491$5,740,673$6,976,466$8,749,260$24,164,890 CIB$6,352,371$15,331,278$20,277,550$26,679,269$68,640,468 WGI$7,412,427$20,981,724$30,962,043$40,265,537$99,621,731 GFA$14,718,887$35,613,175$43,810,311$50,245,458$144,387,831 ICA$9,589,049$19,001,778$20,934,842$20,445,781$69,971,450 IFA$7,241,848$15,496,105$19,164,751$21,006,109$62,908,813 Total$57,219,581$131,803,620$163,513,064$189,870,575$542,406,840

51. After suffering a substantial decline in assets under management during the recent economic crisis, CRMC determined that the reasons the fee waivers were originally implemented no longer existed and it would be appropriate to discontinue the fee waivers. Tr. 664:8-21, 873:7-21.

52. CRMC discontinued the fee waiver as of January 1, 2009. [SF-41] The Directors of the Funds supported this decision. Tr. 873:2-21, 987:21-23. This occurred during a period when the funds' investors were suffering catastrophic losses.

53. During the relevant period through December 31, 2008, CRMC saved the Funds the following amounts of advisory fees pursuant to fee waivers and breakpoints: Ex. 2218B; Tr. 663:17-664:7.

 Savings from Fee Waivers Through December 31, 2008Savings from Breakpoints Through December 31, 2008Total AMCAP$29,993,999$28,606,814$58,600,813 AMBAL$51,768,881$51,618,653$103,387,534 BFA$28,631,741$18,941,510$47,573,251 CIB$79,896,649$98,585,178$178,481,827 WGI$115,468,608$132,949,258$248,417,866 GFA$164,711,062$221,988,959$386,700,021 ICA$77,612,580$23,532,396$101,144,976 IFA$72,169,023$40,463,471$112,632,494 Total$620,252,543$616,686,239$1,236,938,782

54. Overall, the investment advisory fees paid by the Funds at issue during the relevant period ranged from 21 basis points to 42 basis points, as follows: [SF-46]

Fund200320042005200620072008 AMBAL.26%.24%.22%.22%.22%.22% (7/31/08) AMCAP.36%.34%.32%.29%.29%.29% (11/19/08) BFA.27%.25%.22%.22%.23%.22% (9/4/2008) CIB.30%.27%.24%.23%.22%.22% (6/11/2008) WGI.42%.40%.36%.34%.33%.33% (6/11/2008) GFA.31%.29%.27%.25%.25%.24% (5/6/2008) IFA.28%.25%.24%.22%.22%.22% (7/31/08) ICA.25%.24%.22%.21%.22%.22% (11/26/2008)

55. In dollars, the advisory fees increased from over $508 million in fiscal year 2003 to over $1.708 billion in fiscal year 2008. [SF-45]

2. Rule 12b-1 Fees

56. Rule 12b-1 fees are widely used in the mutual fund industry as a method of compensating broker-dealers for distributing fund shares as well as providing information, advice, and ongoing support services to mutual fund investors. Tr. 333:12-334:8, 796:2-7, 797:1-11, 933:3-12, 1396:19-1397:18, 1459:7-11. Because 12b-1 fees allow the mutual fund manager to pay the costs of distribution out of revenues belonging to its customers, and because the mutual fund manager is compensated through advisory fees based on the total assets under managements, the interests of fund investors and the fund manager are potentially in conflict over the imposition of this fee.

57. The American Funds paid Rule 12b-1 fees pursuant to Plans of Distribution that were reviewed and approved annually by each Fund's Board of Directors, including the Unaffiliated Directors. [SF-47; SF-126; SF-132]; Tr. 356:21-24, 358:13-15.

58. The Plans of Distribution permitted the Funds to pay Rule 12b-l fees to finance distribution and marketing activities that were primarily intended to result in sales of shares and to reimburse AFD for commissions paid to broker-dealers for sales of no-load Class A shares and Class B and C shares. Ex. 3216; Ex. 335 at CORBI_0209268-69.

59. The amount of the Rule 12b-l expenses each share class incurs is based on the average daily net assets attributable to each share class. Tr. 356:5-15, 359:22-360:1, see, e.g., Ex. 696 at CORBI_0205616.

a. Class A Shares

60. Class A shares require payment of an up-front sales charge of up to 5.75% for purchases below $1 million. The broker-dealer receives a maximum of five percent and AFD receives the remaining 75 basis points. Ex. 335 at CORBI_0209268; Tr. 360:2-5, 364:19-365:3.

61. An annual Rule 12b-l fee of 25 basis points of average net assets under management is paid to dealers beginning in the second year after purchase. Ex. 3 at CORBI_0231607; Tr. 360:2-10.

62. To facilitate the payment of this fee to brokers, the Fund initially pays this fee to AFD, which passes the fees through to the broker-dealers who, in AFD's discretion, are entitled to payment of these fees. Tr. 481:17-482:2.

63. On Class A share purchases in amounts exceeding $1 million, the shareholder does not pay a sales charge. AFD pays commissions to broker-dealers and its wholesalers, and AFD may be reimbursed for these payments through Rule 12b-1 fees. Ex. 335 at CORBI_0209268; Tr. 365:4-17.

b. Class B Shares

64. Class B shares do not carry a front-end sales charge, thereby permitting shareholders to invest the entire amount of their investment right away. Ex. 335 at CORBI_0209268; Tr. 360:11-13, 360:18-361:10, 366:8-11.

65. The Funds, in connection with Class B shares, paid a Rule 12b-1 fee in an amount up to 1.00% of the assets in the Fund. Pursuant to FINRA rules, 75 basis points of this is characterized as "distribution," and 25 basis points is characterized as "service." Ex. 603 at CORBI_0208433; Tr. 360:14-361:10, 366:8-11, 366:15-22, 487:14-488:4.

66. AFD sold its right to receive the distribution component of the Rule 12b-1 fees in connection with Class B shares to Citibank. Ex. 335 at CORBI_0209269. From 2000 to 2003, Citibank paid AFD 4.55% of the purchase price for each Class B share for which it received the right to collect fees. Ex. 3192. The payment was reduced to 4.45% in February 2002 (Ex. 3196), reduced further to 4.27% in February 2005 (Ex. 3201), increased to 4.35% in May 2006 (Ex. 3208), and subsequently changed to 4.10% or 4.35%, depending upon the aggregate purchase price, in May 2008. Ex. 3213. For Class 529-B shares, Citibank paid 4.45% from February 2002 until February 2005, 4.27% from February 2005 to May 2008, and 4.22% or 4.27%, depending on the aggregate purchase price, as of May 2008. Ex. 3212. Of the amounts paid to AFD, AFD paid 4.00% to the broker-dealer, which includes the 0.25% service fee for the first year. Ex. 335 at CORBI_0209269; Tr. 366:12-22, 482:7-25.

67. During the first year following a shareholder's purchase of a Class B share, AFD retains the 0.25% service component of the Rule 12b-1 fee, which reimbursed AFD for the 0.25% shareholder servicing payment that AFD had advanced to the dealer at the time of purchase. Ex. 335 at CORBI_0209269; Ex. 603 at CORBI_0208433; Tr. 384:20-385:9.

68. After the first year, broker-dealers received the 0.25% service fee paid by the Funds on Class B shares. Ex. 335 at CORBI_0209269; Tr. 483:1-7.

69. Other than receipt of the 0.25% service fee during the first year, AFD received no other Rule 12b-1 fees from the Funds on Class B shares, although it did receive the above-referenced payment from Citibank for its sale of the .75% distribution component of the 12b-1 fees. Ex. 335 at CORBI_0209269; Tr. 483:1-11.

70. Shareholders who redeemed Class B shares within one year of purchase paid a contingent deferred (back-end) sales charge of 5%, which declined to zero percent six years after purchase. Ex. 603 at CORBI_0208423; Tr. 366:23-367:2.

71. Class B shares automatically convert to Class A shares eight years after purchase. Ex. 335 at CORBI_0209269; Tr. 355:17-21.

72. American Funds stopped selling Class B shares in April 2009. Ex. 1221 at 15.

c. Class C Shares

73. Like Class B shares, Class C shares do not carry a front-end sales charge, thereby permitting investors to invest all of their money right away. Ex. 1208 at 17; Tr. 361:15-17, 391:6-10.

74. In connection with Class C shares, the Funds pay Rule 12b-1 fees in an amount up to 1.00% each year. Ex. 335 at CORBI_0209269; Tr. 361:18-21; 391:6-10.

75. Class C shareholders pay a contingent deferred sales charge of one percent if they redeem within the first year after purchase. Ex. 603 at CORBI_0208411; Tr. 391:15-19.

76. AFD retains any contingent deferred sales charges it assesses on Class C shares. Ex. 335 at CORBI_0209269; Tr. 391:15-19.

77. Class C shares automatically convert to F shares after ten years. Ex. 335 at CORBI_0209269; Tr. 355:25-356:4.

d. Amount of Rule 12b-1 Fees Paid

78. In fiscal year 2004, the Funds paid Rule 12b-l fees totaling over $883 million; by fiscal year 2007, this figure exceeded $2 billion. Ex. 793; Ex. 3158A-I; Tr. 389:19-390:20. From fiscal years 2004 to 2007, the Funds paid Rule 12b-l fees totaling approximately $5.5 billion. Ex. 793.

79. AFD retained approximately $500 million of those fees during the period 2004-2007, although a substantial percentage of the retained amount constituted reimbursement for monies advanced to broker-dealers by AFD on Class B and C shares. The remaining Rule 12b-1 fees were paid to broker-dealers. Ex. 793; Tr. 485:15-21.

80. Beginning in 2005, CRMC agreed to waive any Rule 12b-1 fees it received in connection with shareholder accounts for which there was no broker of record (i.e., "orphan" accounts). Ex. 814 at CORBI_0219945.

3. Additional Compensation

81. In addition to Rule 12b-1 fees, AFD pays its top 75 borker-dealers additional commissions, known as "additional compensation." Ex. 335 at CORBI_0209277.

82. Payments of additional compensation are paid by AFD, although the Court notes that AFD is not profitable and frequently required "support payments" from CRMC. Ex. 335 at CORBI_0209277; Tr. 404:25-405:5, 494:24-25. For that reason, it is not possible to identify in all cases with great specificity the source of funds used to pay additional compensation.

83. AFD's stated purpose for paying additional compensation is to defray the costs of training and educating broker-dealers and to ensure that investors' assets are placed in funds that are consistent with the investors' investment objectives. Ex. 335; Tr. 399:4-400:8, 402:10-18, 492:19-494:2; 835:5-9.

84. To be eligible to receive these additional funds, a broker-dealer must represent that it will classify the American Funds as "approved" or "preferred" (or an equivalent). Ex. 335 at CORBI_0209312; Tr. 401:4-16, 494:3-23.

85. In determining whether to pay additional compensation to a particular broker-dealer, AFD considers, among other things, sales volume, redemption rates, and the quality of AFD's relationship with the broker-dealer. Ex. 335 at CORBI_0209277; Tr. 403:25-404:11.

86. Payments of additional compensation may not exceed the sum of ten basis points of the prior year's fund sales by the broker-dealer and 2 basis points of the total assets attributable thereto. Ex. 335 at CORBI_0209277.

87. From fiscal year 2003 through fiscal year 2008, AFD paid broker-dealers more than $600 million in additional compensation. Ex. 10 at CORBI_0343236.

4. Transfer Agent Fees

88. The Funds pay transfer agent fees to AFS pursuant to the fee schedule in the Shareholder Services Agreement. [SF-54]; Tr. 448:8-12.

89. The transfer agency expense ratio incurred by the Funds' Class A and B shareholders generally remained flat or decreased slightly from fiscal year 2003 to fiscal year 2008. Ex. 621 at CORBI_0362738, CORBI_0362739, CORBI_0362744-CORBI_0362745, CORBI_0362747, CORBI_0362751-CORBI_0362752, CORBI_0362754; Exhs. 2215A-2215H.

90. The table below shows the Funds' transfer agency expense for each year during the relevant period:*fn4

Fund200320042005200620072008 AMBAL0.13%0.10%0.09%0.08%0.08%0.08% AMCAP0.12%0.09%0.09%0.09%0.09%0.09% BFA0.11%0.11%0.11%0.11%0.10%0.10% CIB0.08%0.07%0.06%0.06%0.06%0.06% WGI0.10%0.08%0.08%0.08%0.07%0.08% GFA0.16%0.10%0.09%0.07%0.07%0.07% IFA0.07%0.06%0.06%0.06%0.05%0.06% ICA0.10%0.08%0.08%0.07%0.07%0.08%

91. Any payments made to third parties by AFS in connection with the servicing of shareholder accounts (e.g., where AFS subcontracts out to a third party the provision of transfer agency and shareholder services for omnibus accounts) are limited to AFS's cost to provide that same service. See, e.g., Ex. 688 at CORBI_0204158.

92. In fiscal year 2004, AFS collected more than $234 million in transfer agent fees, which grew to over $400 million by fiscal year 2007. Ex. 793 at 1.

93. However, AFS provides transfer agency services to the Funds effectively "at cost." [SF-56]; Tr. 448:13-449:8, 495:25-496:2; 868:4-5.

94. If AFS makes a profit in a given fiscal year, it retains those profits. Ex. 688 at CORBI_0204158; Tr. 448:13-449:3. AFS is contractually prohibited from distributing any net income to CRMC, and any retained earnings would be returned to the Funds if AFS wound down its operations. Ex. 621 at CORBI_0362707; Tr. 448:13-449:8.

95. During the period fiscal year 2003 to fiscal year 2008, AFS had a net operating loss of $21 million. [SF-105]

5. Administrative Services Fees

96. Pursuant to an Administrative Services Agreement entered into between CRMC and each Fund, CRMC provides and/or contracts and arranges to have provided transfer agency, recordkeeping, and related shareholder services for the Funds' Class C, F, R, and 529 shares. [SF-57]; Tr. 416:23-417:2, 453:10-14.

a. The Services

97. The transfer agency/shareholder services under the Administrative Services Agreement include the same types of recordkeeping, account maintenance, transaction processing, tax reporting, and shareholder and fund communications services that are provided to Class A and B shareholders under the Shareholder Services Agreement. See Ex. 3 at CORBI_0231610; Tr. 453:6-454:14, 497:12-23, 499:21-500:12.

98. In addition, the Agreement requires CRMC to coordinate, monitor, oversee, and assist with the provision of shareholder services. Ex. 43 at CORBI_0468568; Ex. 648 at 29.

b. The Fee Level

99. The Administrative Services Agreement is reviewed and approved on an annual basis by the Boards of each of the Funds. [SF-58]; Tr. 417:10-12.

100. During CRMC's fiscal years 2003 to 2005, the Funds paid a 0.15% administrative services fee on Class C, F, 529, and R-shares except Class R-5. [SF-62]; Tr. 418:5-11. During the same period, the Funds paid up to 10 basis points on Class R-5 shares. [SF-59]; Tr. 418:5-11. CRMC passed through varying amounts of the fee to third parties with whom it arranged to provide the transfer agency services, as contemplated by the agreement. Until July 1, 2005, any amounts not paid to third parties were retained by CRMC. Tr. 418:21-25; 420:21-23.

101. Beginning July 1, 2005, CRMC agreed to cap the amount it retained for monitoring, coordinating, overseeing and assisting with the provision of shareholder services at 0.05%. Ex. 814 at CORBI_0219945-CORBI_0219946; Tr. 419:9-22, 471:20-472:23. CRMC's intent in imposing the cap was to reduce the total amount of administrative services fees paid by the Funds. Those fees did in fact decline after the cap was imposed. Exhs. 2216A-H; Tr. 421:8-12, 473:3-24.

102. Under the current structure, CRMC can lose money under the Administrative Services Agreement to the extent the payments it makes to third parties exceeds the 0.15% administrative services fee it receives from the Funds. Ex. 814 at CORBI_0219945. For certain share classes and funds, CRMC payments to third parties have exceeded the 0.15% it received from the funds. Tr. 436:16-437:12, 472:11-473:2, 507:23-509:5.

103. For fiscal years 2006 to 2008, while the 0.05% cap was in effect, the Funds paid the following administrative services fees (in basis points) in each of those years with respect to Class C and Class F Shares as follows: [SF-65]

Class C Shares200620072008 AMBAL13 bps13 bps13 bps AMCAP15 bps14 bps14 bps BFA14 bps14 bps13 bps CIB12 bps11 bps11 bps GFA15 bps15 bps13 bps IFA10 bps10 bps10 bps ICA13 bps12 bps12 bps WGI14 bps14 bps13 bps Class F Shares200620072008 AMBAL8 bps8 bps9 bps AMCAP9 bps9 bps10 bps BFA8 bps9 bps10 bps CIB9 bps8 bps8 bps GFA10 bps9 bps10 bps IFA8 bps8 bps9 bps ICA9 bps9 bps11 bps WGI10 bps8 bps9 bps

104. In 2004, before the institution of the five basis point cap, the eight funds at issue paid administrative fees totaling over $51 million, over $29 million of which was retained by CRMC. [SF-66]; Ex. 793 at 1.

105. In 2007, the amount of administrative services fees paid by the Funds totaled over $175 million, of which CRMC retained nearly $76 million. [SF-66]

106. CRMC retained over $154 million in 2008 to cover its oversight of third parties, which includes monitoring, coordinating and assisting third party service providers. CRMC paid out $213 million to those same third parties to carry out their administrative responsibilities. Ex. 18 at CORBI_0389686.

E.Issues Related To Fund Size

1. Benefits of Growth and Size

107. The growth in assets benefited the Funds in a number of ways. Tr. 153:18-154:24, 895:2-17.*fn5

108. For a part of the relevant time period, the fees paid by the Funds declined (in percentage terms) as a result of growth, via breakpoints, waivers, and reductions in the other fees charged to the Funds. See Findings of Fact ("FOF") ¶¶ 36-57, 92-107, 239-46.

109. Growth allowed CRMC to continually invest in research. Tr. 273:24-274:3, 138:13-141:12. Because of its large asset base, CRMC has extensive research capabilities. Tr. 266:18-268:1. Size also means better access to the companies the Funds invest in, enhancing investment results. Tr. 274:16-275:11, 1140:1-3.

110. Defendants claim that size has facilitated significant investments in shareholder services. Tr. 273:24-274:8, 689:23-690:10, 139:11-141:5, 895:2-13, 992:17-993:1, 1139:18-22, 1439:6-16. However, the record does not disclose any particular service or level of service that is notably better than services provided by Defendants' competitors.

111. Defendants claims that the size of the organization and the volume of assets under management allowed CRMC to attract and retain talented personnel. Tr. 274:20-24, 895:5-9, 993:1-7, 1139:18-24, 1439:6-16, 153:18-154:18, 188:4-7. That contention has not been borne out because the evidence needed to test the assertion has never been disclosed to the Court, to the Plaintiffs, or, indeed, to the unaffiliated directors. The record contains enough evidence to suggest that the profit sharing pool is enormous and that at least some employees are compensated at levels that might be viewed as excessive. Without knowing more details about these payments, and without information identifying the competitors for their employee's services or the compensation levels of those competitors, the Court cannot say that the size of the organization and the volume of assets (and the fees it receives as a result) have benefitted investors by supporting the hiring and retention of highly skilled employees.

112. The size of the Funds has led to lower brokerage commissions, enhanced CRMC's competitive advantage in trading, and led to better service from trading partners. Tr. 274:9-15, 1139:10-1141:8.

113. Steady inflows lead to greater liquidity and stability of assets, making the Funds easier to manage. Tr. 119:21-120:5, 274:9-15. Having regular net inflows into the funds provides management advantages because it provides a means of funding new ideas without being forced to sell investments already in the portfolio. Tr. 334:17-335:5.

2. CRMC Effectively Managed Fund Growth

114. Throughout the relevant time period, CRMC's investment process for managing the funds helped effectively manage growth in assets under management, and CRMC also took additional steps to handle the influx of assets. Tr. 124:11-21.

115. CRMC utilized a multiple portfolio counselor system (the "MPCS") to manage its assets. Tr. 131:21-132:8, 259:14-23; see also Ex. 2209B; 2115 at 6-7. The MPCS differentiates CRMC from most investment advisory firms, which often employ a single portfolio manager for each fund. Tr. 131:23-132:8, 259:14-260:9, 260:23-261:23.

116. Under the MPCS, CRMC divides each Fund's assets into smaller portions and allocates them to individual portfolio counselors and a research portfolio. Ex. 2209B; Ex. 2115 at 6; Tr. 131:21-132:8, 259:14-260:9.

117. One segment, the research portfolio, is further divided and allocated among research analysts. The research analysts invest in the sectors and industries they follow for the research portfolio. Ex. 2115 at 6; Tr. 134:23-135:7, 259:14-260:9.

118. In addition to individual portfolio counselors and research analysts, each Fund has a coordinating committee that: (1) ensures the fund is managed according to its goals and objectives; (2) monitors gains, losses and dividend income for the entire fund; and (3) monitors the allocation of new assets to portfolio counselors. Ex. 2115 at 6; Tr. 131:21-132:8.

119. Individual portfolio counselors typically manage no more than 20% of a Fund's assets. Tr. 134:8-14.

120. Further, as assets grow, new portfolio counselors may be added to provide additional resources to assist in managing the fund and to help ensure a balance among portfolio counselors in the fund. Ex. 2115 at 7; Tr. 133:3-23, 259:14-260:9, 292:2-9.

121. CRMC maintains a long-term focus on the management of its business, focuses on long-term fund investment results, and discourages high-volume and short-term trading. Ex. 2115 at 4; Tr. 112:6-21, 259:3-13, 344:5-8.

122. To deal with problems associated with extraordinary growth, CRMC also split the management of the Funds' equity assets among two investment divisions: Capital World Investors ("CWI") and Capital Research Global Investors ("CRGI"). [SF-9]

123. Following the split, portfolio counselors in CRGI and CWI began making independent investment decisions, enabling them to better manage money with a long-term view, the least amount of limitation, and greater flexibility. Ex. 630 at 1; Tr. 130:18-25; 283:22-284:3, 346:15-347:22, 1123:1-3.

124. The process for splitting the CRMC equity investment group into these two divisions began in 2003. Ex. 641 at CORBI_0291816-17; Tr. 124:22-126:22.

125. This process evolved over time and by February 2006 the two divisions stopped sharing research, resulting in a divergence in investments and increasing investment diversity. Ex. 641 at CORBI_0291818; Tr. 63:9-12, 130:18-25, 277:9-278:7, 1123:4-12.

126. As of December 31, 2007, CWI and CRGI began to report their securities holdings to the U.S. Securities and Exchange Commission ("SEC") separately on Schedule 13G. [SF-10]

127. The diversity in investment strategies began to emerge before filing for formal disaggregation with the SEC in January 2008. Exhs. 630 at 1-2, 632 at 2, 641 at ...


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