A federal judge has rejected a plan for Vanguard to pay $40 million to resolve a class-action dispute arising from its target-date funds, citing a “strange situation” in which the plaintiffs are guaranteed to get more money if the court rejects the settlement.
Vanguard last year agreed to settle the lawsuit, which stems from corporate retirement plans’ fleeing target-date funds for institutional equivalents, leaving retail investors with a big capital gains tax bill. The U.S. District Court in Philadelphia had preliminarily approved the $40 million settlement, with over $13 million designated for attorneys’ fees.
Vanguard then settled a Securities and Exchange Commission probe into regulatory charges with the SEC and various states for the same conduct addressed in the lawsuit. Under the SEC settlement, Vanguard must pay $135 million in remediation to harmed investors, a court memorandum filed Monday states.
“But there’s a catch in the SEC settlement. Vanguard negotiated a deal that it can reduce its payment into that fund by $40 million if the proposed settlement in this case is approved. But if settlement in this case doesn’t happen for whatever reason, then Vanguard must pay that same $40 million into the SEC’s fund instead,” the judge wrote.
“So Vanguard is on the hook for $135 million regardless of whether we approve or reject the settlement in this case. But it matters to the class — and plaintiffs’ counsel. If we approve, the harmed investors lose $13 million to attorneys’ fees,” he said.
“If we reject, the harmed investors get that $13 million themselves, through the SEC settlement” and could potentially recover even more because the litigation will continue, he added, noting that plaintiffs’ interests have diverged from their lawyers’ interests.
A class member, John Hughes, a lawyer himself, brought the SEC settlement to the court's attention "in a remarkable objection," U.S. District Judge John Murphy wrote, saying neither Vanguard nor plaintiffs' representatives had done so.
"He asks us to reject the proposed class settlement because how can any settlement stand when it is guaranteed to net the class less money? A simple and compelling point. The named plaintiffs, their counsel, and Vanguard cannot deny the math. But they adamantly, and creatively, dispute Mr. Hughes’s objection. After oral argument and additional rounds of briefing, we can safely conclude that the proposed settlement provides no value to the class and therefore reject it," Murphy wrote.
The court found the previously agreed-on court settlement is not fair, reasonable or adequate for the class because the SEC settlement “guarantees class members the exact benefit that would have been provided by this proposed settlement — but without deduction for attorneys’ fees” or requiring plaintiffs to give up their ability to pursue their own claims.
The judge noted that a claims administrator had sent over 300,000 notices to potential class members in the proposed court settlement after the preliminary approval in November.
The parties must provide the court with a status report by May 30.
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