Vanguard to Settle Investors’ ‘Elephant Stampede’ Sell-Off Suit

Vanguard Group Inc. has reached a settlement with a group of investors who accused the firm of breaching its fiduciary duty by causing them “massive” capital gains tax bills, prompting a federal court to pause their litigation Monday.

The two sides plan to continue to hammer out the details of the settlement, but they have reached an agreement in principle to resolve all claims, they said in a joint stipulation filed Sept. 20 at the US District Court for the Eastern District of Pennsylvania.

Vanguard was sued in late 2022 by a group of investors who’d said they were hit with high capital gains taxes after Vanguard Chester Funds lowered the eligibility minimum for some of its low-fee institutional accounts from $100 million to $5 million. The complaint said this led to an “elephant stampede” of an estimated 8,500 401(k) investors out of retail funds into the institutional funds.

Vanguard’s retail funds then had to sell off assets and distribute the capital gains to those who remained. The plaintiffs alleged those who’d stayed in the retail funds each faced an extra tax bill of $9,000 to $36,000 as a result.

The settlement comes after private mediation before retired judge Layn Phillips Step. 19, and ahead of scheduled oral arguments at the court next month.

The parties told Judge John F. Murphy they need more time to negotiate and memorialize the details of the settlement, and intend to move for preliminary approval of the proposed class settlement by Nov. 4.

Vanguard was previously able to fend off some of the claims related to gross negligence and unjust enrichment, but the court gave investors a green light to proceed on other claims last year.

The Rosen Law Firm PA represents the class. Debevoise & Plimpton LLP and Welsh & Recker PC represent Vanguard.

The case is In Re Vanguard Chester Funds Litig., E.D. Pa., No. 22-cv-00955, joint order and stipulation 9/23/24.