According to Judge John F. Murphy of the US District Court for the Eastern District of Pennsylvania, investors can proceed with their lawsuit against Vanguard for breaching its fiduciary duty of care by allowing smaller shareholders access to some of its institutional target date retirement funds. This decision allegedly led to unexpected capital gains tax bills for the investors.
Judge Murphy determined that the investors have standing to bring the lawsuit and have stated a plausible claim for breach of care against Vanguard’s officers and independent trustees. However, some other claims, including claims of gross negligence, unjust enrichment, and violation of California’s Unfair Competition Law were dismissed by Vanguard.
The lawsuit challenges Vanguard Chester Funds’ decision in 2020 to lower the eligibility threshold to access its institutional funds from $100 million to $5 million. This change resulted in a significant movement of assets out of Vanguard’s retail funds towards more favorable investment options, resulting in substantial capital gains distribution to remaining shareholders.
According to Murphy’s opinion, some shareholders faced large capital gains liabilities as a result of this decision, leading to unexpected tax bills and potential penalties from the IRS and state authorities.
Murphy also rejected Vanguard’s argument that the investors didn’t have standing because the company may have “done the aggrieved investors a favor” by accelerating their timeline for paying taxes on their gains.
The plaintiffs in the case are represented by The Rosen Law Firm PA and Dovel & Luner LLP, while Debevoise & Plimpton LLP is among the firms representing the defendants.
You can find more information about the case here.