Federal Judge Rejects Vanguard’s $40 Million Class Settlement, Citing Better Outcome Under SEC Deal
From the Desk of Jim Eccleston at ÍøÆسԹÏ
A federal judge has rejected a proposed $40 million class-action settlement with Vanguard, finding that the deal offered little to no real value to harmed investors compared to a separate settlement the firm reached with the Securities and Exchange Commission ("SEC"), according to Barron’s.
The dispute originated after corporate retirement plans moved out of Vanguard’s target-date funds in favor of lower-cost institutional options. This shift left retail investors with unexpected capital gains tax liabilities. Vanguard initially agreed to settle the resulting class action for $40 million, allocating over $13 million for plaintiffs’ attorneys’ fees. The U.S. District Court had granted preliminary approval of the settlement before new facts emerged.
Around the same time, Vanguard entered into a $135 million remediation agreement with the SEC and several state regulators for the same conduct. Notably, that agreement allowed Vanguard to reduce its SEC payment by $40 million if the court approved the class settlement. In effect, Vanguard’s total payout remained $135 million, but approval of the class settlement would divert a significant portion of the sum to attorneys’ fees, reducing the investors’ recovery.
As reported by Barron's, the court called this a “strange situation” and highlighted that rejecting the class settlement would result in a greater recovery for the investors through the SEC fund-- without deductions for legal fees and without requiring class members to waive any claims.
Following additional argument and briefing, Judge Murphy concluded that the proposed class settlement was neither fair, reasonable, nor adequate. He noted that approval would have primarily benefitted Vanguard and class counsel at the expense of the investors. By rejecting the deal, the court preserved investors' rights and guaranteed them at least the same financial recovery through the SEC agreement. 
The court has ordered the parties to file a status report by May 30.
ÍøÆØ³Ô¹Ï LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
