As previously covered here, in 2025 two similar class action lawsuits were filed in New York and Delaware state courts by the same law firm, on behalf of plaintiff shareholders, against two mutual fund complexes. The lawsuits alleged false and misleading statements and material omissions in the funds’ registration statements related to the funds’ accounting practices. In decisions issued by the Delaware court on July 9, 2026 and the New York court on August 3, 2026, the claims were dismissed with prejudice at the motion to dismiss stage. Appeals have been filed in both cases.
In the lawsuits filed in 2025, the plaintiffs challenged the defendant equity mutual funds’ disclosures regarding their accounting practices, which treat dividend income and capital gains as assets until the funds distribute (i.e., pay out) their net investment income and net capital gains to their shareholders, suggesting that these undistributed amounts are effectively fund liabilities and should instead be accounted for as liabilities. The disclosure claims are based on plaintiffs’ theory that the funds’ treatment of undistributed income as an asset artificially inflates a fund’s net asset value (NAV) per share and results in investors overpaying for fund shares, paying management fees on what are effectively liabilities, and paying taxes on a portion of the distribution that is effectively a return of the investor’s principal. The plaintiffs argued that the defendant equity mutual funds should instead remove realized income from their NAVs on a daily basis, as money market funds do. The plaintiffs named various equity mutual funds and the funds’ trustees, officers, investment adviser, and distributor as defendants in the lawsuits, alleging the defendants are liable for false and misleading statements and material omissions in the funds’ registration statements under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933.
On July 9, 2026, the Delaware court dismissed plaintiffs’ claims with prejudice, finding that plaintiffs failed to state a claim under Sections 11 and 12(a)(2) and that their Section 15 claim, which is derivative of the former claims, fails as a matter of law. The court found that the funds appropriately disclosed how fund NAVs were calculated, that income and capital gains are recorded as assets and that income and capital gains may be part of the purchase price. The court rejected plaintiffs’ theory that the funds’ accounting practices “artificially inflated” the funds’ NAVs, observing that the alleged inflation resulted from a “well-recognized” accounting method in the mutual fund industry and that labeling it “artificial” does not make the funds’ disclosures misleading. The court stated that plaintiffs’ preference for an alternative accounting method does not make the funds’ disclosures misleading and that plaintiffs provided no basis to support that proposition. The court highlighted that plaintiffs had failed to identify any law requiring income and capital gains to be classified as liabilities and indeed conceded that the funds’ accounting practices do not violate any SEC regulation or GAAP.
On August 3, 2026, the New York court also dismissed plaintiffs’ claims with prejudice. Similar to the Delaware court decision, the court rejected plaintiffs’ “artificial inflation” theory, noting that the plaintiffs failed to allege that the funds’ accounting practices were improper.
