A federal judge in Philadelphia has rejected Vanguard Group’s proposed $40 million class-action settlement, stating it offers no added value to investors already eligible for relief from a separate agreement.

Analysis of the Rejection

U.S. District Judge John Murphy determined that the proposed settlement duplicated benefits provided under a prior $135 million agreement with the U.S. Securities and Exchange Commission (SEC) enacted this year. The SEC settlement, net of the proposed $40 million and certain individual claims, resulted in approximately $106.4 million in actual investor compensation, which included a $13.5 million civil penalty.

Judge Murphy criticized class-action attorneys for designing a deal that would deduct over $13 million in legal fees, effectively reducing investors’ compensation below what they were owed under the SEC agreement.

“The named plaintiffs, their counsel, and Vanguard cannot deny the math,” Murphy stated.
“The SEC settlement ensures class members receive the exact benefits as this proposed settlement—without imposing deductions for attorney fees or requiring claims to be extinguished.”

The Context

This dispute arose from Vanguard’s decision in December 2020 to lower the investment threshold for institutional share classes of its target-date funds from $100 million to $5 million. This action prompted a mass shift of investments from retail funds to lower-cost institutional classes.

Such movement forced the retail funds to liquidate assets, resulting in unforeseen capital gains taxes for lingering investors, even though target-date funds were advertised as tax-efficient retirement solutions.

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Looking Ahead for Vanguard

This decision represents a significant setback for Vanguard’s legal strategy, particularly in terms of resolving civil and regulatory concerns simultaneously. Vanguard has indicated that the refusal to approve the $40 million settlement could complicate future settlement negotiations in similar circumstances.

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Judge Murphy’s ruling sends a firm message: duplicate settlements designed to benefit attorneys at the expense of investors will not be accepted by the courts. Given the substantial restitution already provided through regulatory actions, any future civil settlement must demonstrate clear, additional benefits to investors to be deemed fair.