A federal judge who previously rejected a plan for Vanguard to pay $40 million to resolve a class-action dispute arising from its target-date funds preliminarily approved a $25 million settlement this week that ultimately would guarantee more money for the plaintiffs.
The approval is subject to further consideration at a Jan. 6 hearing in U.S. District Court for the Eastern District of Pennsylvania in Philadelphia.
Vanguard last year agreed to settle the lawsuit, which stems from corporate retirement plans’ fleeing target-date funds for lower-fee institutional equivalents when the asset manager in December 2020 lowered minimum investments and left retail investors with a big capital gains tax bill.
A judge had approved the $40 million settlement, with over $13 million designated for attorneys’ fees.
Vanguard, however, 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 regulatory settlement, Vanguard must pay $135 million in remediation to harmed investors, according to court filings.
Under the SEC settlement, Vanguard could have reduced by $40 million its payment into a “fair fund” meant to compensate affected investors if the court approved the proposed $40 million legal settlement.
As the judge said in May, Vanguard is on the hook for $135 million regardless of the court action, but the harmed investors would lose $13 million in attorneys' fees if the court approved that $40 million settlement.
The plaintiffs, in an unopposed motion filed last week, asked the court to preliminarily approve a $25 million settlement, saying the judge’s reasons for denying the previous settlement don’t apply to the new agreement, which the parties negotiated in a mediation.
The SEC settlement will provide $133 million to class members, given a roughly $2 million offset for individual arbitration settlements, and the newly negotiated court settlement would provide an additional $25 million in cash, which plaintiffs’ attorneys said in the motion is “an excellent result” for class members.
“The terms of the SEC Settlement will not impact approval of this Settlement, unlike the Prior Settlement. Settlement Class Members who receive payments from the SEC Fair Fund will still be eligible for disbursement in this Settlement … such that this Settlement provides $25 million for the Settlement Class in addition to the $133 million Fair Fund,” the motion says.
Plaintiffs’ attorneys, citing risks to affected investors from continued litigation, suggested that the new agreement is fair, reasonable and adequate for final approval.
Class attorneys intend to seek an attorneys’ fees award of no more than one-third of the settlement amount, or about $8.3 million, and to recover litigation expenses up to $985,000, the motion states.
After the court's preliminary approval of the initial $40 million settlement, a class member brought the SEC settlement to the court's attention "in a remarkable objection," U.S. District Judge John Murphy wrote in rejecting that agreement, saying that 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," Murphy wrote at the time. "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."
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.