A U.S. judge has blocked Vanguard’s $40 million settlement with investors over a mutual fund tax mess. The court said the deal did not actually help the investors and made more sense for the lawyers than the people who were harmed.
The issue started when Vanguard made a big change back in December 2020. They lowered the entry price for a special kind of fund called a target-date fund. Before, only big institutional investors with at least $100 million could access these low-cost funds. But Vanguard dropped that amount to just $5 million.
That sounds like a good deal, but it caused problems. Big investors quickly switched to the cheaper funds. This forced the older, more expensive retail funds to sell assets rapidly, leading to large capital gains. Those gains were passed along as surprise tax bills to regular investors who stayed in the retail funds.
Naturally, those investors were upset. So a lawsuit followed, where Vanguard offered a $40 million settlement to make it right. But the judge blatantly said no.
Judge Says Math Ain’t Mathing
The judge, John Murphy, said that this deal gave investors less money than they were already getting from another settlement. Earlier this year, Vanguard settled a similar case with the Securities and Exchange Commission. That deal was worth $135 million.
After some adjustments, the SEC deal provided over $106 million in real payouts to investors. And it did not include big lawyer fees. But this new $40 million deal did. Over $13 million of it would have gone to lawyers, not investors.
The judge said approving this smaller deal would actually hurt investors because they would walk away with less. He also said that the first settlement already gave them the same benefits as this one. In short, there was no reason to approve a second deal that only added more legal fees.
Investors Get Paid More
Investors are still getting paid through the SEC settlement. But this extra $40 million deal will not go forward. Vanguard and the lawyers involved have not said anything publicly since the ruling.
The takeaway is simple. Settlements need to actually help the people who were harmed. And in this case, the court said the math just did not make sense.
