Vanguard investors seeks approval for $40M settlement

Update: 

• Vanguard investors asked a Pennsylvania federal judge to preliminarily approve a $40 million settlement to end claims its actions caused tax account holders to suffer massive tax burdens. 
• The investors told the judge the deal is a fair, reasonable and adequate result for the settlement class and would protect them from risks associated with continued litigation. 
• The Vanguard class action lawsuit claimed the company breached its fiduciary duty to its account holders by triggering a sell-off of target retirement fund assets that caused them to have massive tax bills. 

Vanguard Taxable Accounts Class Action Lawsuit Overview: 

• Who: Valerie M. Verduce, Catherine Day and Anthony Pollack filed a class action lawsuit against Vanguard Chester Funds. 
• Why: Investors claim Vanguard caused its taxable account holders to suffer massive tax burdens after it triggered a sell-off of target retirement fund assets. 
• Where: The class action lawsuit was filed in Pennsylvania federal court. 

(March 28, 2022)

Vanguard caused some of its investors to suffer tax burdens after it triggered a “massive” sell-off of target retirement fund assets, a new class action lawsuit alleges. 

Plaintiffs Valerie M. Verduce, Catherine Day and Anthony Pollack claim Vanguard initiated the sell-off as an attempt to be able to lower its fees. They allege Vanguard required individuals who invested in its “set-it-and-forget-it” target retirement date funds to sell off up to 15% of their assets to the detriment of investors with taxable accounts.

“When these assets were sold, the retail funds recognized capital gains on the assets. The resulting capital gains distributions to investors were unprecedented (40 ‘mes previous levels’),” the class action lawsuit states. “While this didn’t hurt retirement plans, it left taxable investors holding the tax bag.”

Vanguard Could Have Lowered Fees Without ‘Harming’ Investors, Plaintiffs Argue

Verduce, Day and Pollack argue there were ways Vanguard could have accomplished its goal of lowering the cost of retirement plans without harming investors who held taxable accounts. 

“But it either did not even consider these options or did not care about hurting its smaller, taxable investors,” the investors said. “This was a gross violation of Vanguard’s fiduciary duties (among other legal duties).”

Investors who had $100 million or less in retail and retirement funds were adversely affected by the sell-off, while those with more than $100 million in institutional funds benefited, according to the class action. 

Vanguard would ultimately merge the two fund types, according to the class action lawsuit, however, Verduce, Day and Pollack argue “the harm was done.” 

“Taxable investors had already incurred unnecessary capital gains distributions — and corresponding taxes — that could not be erased,” the class action lawsuit states. 

Verduce, Day and Pollack claim Vanguard is guilty of breach of fiduciary duty, gross negligence and unjust enrichment, among other things, and in violation of California’s Unfair Competition Law. 

Verduce, Day and Pollack want to represent a nationwide class and California subclass of individuals who invested in and held Vanguard’s Retail Funds in taxable accounts and who received capital gains distributions. 

Plaintiffs are demanding a jury trial and requesting injunctive relief along with statutory, enhanced or punitive damages for themselves and all class members.

A separate class action lawsuit was filed earlier this month by investors arguing that the popular cryptocurrency trading platform Coinbase is operating as an unauthorized securities exchange.  

Have you invested in Vanguard Chester Funds? Let us know in the comments! 

The plaintiffs are represented by Peter H. LeVan of LeVan Stapleton Segal Cochran LLC and Jonas B. Jacobson and Simon Franzini of Dovel & Luner LLP.

The Vanguard Taxable Accounts Class Action Lawsuit Class Action Lawsuit is Verduce, et al. v. Vanguard Chester Funds, et al., Case No. 2:22-cv-00955, in the U.S. District Court for the Eastern District of Pennsylvania.

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