Delaware and New York State Courts Reject Unusual Theory Under the Securities Act

In a pair of recent decisions, the Delaware Superior Court and the New York State Supreme Court each dismissed with prejudice nearly identical cases brought against the First Eagle and JPMorgan mutual fund complexes, respectively, relating to their application of industry standard accounting practices. Putting forth an unusual theory under the Securities Act of 1933 (the “Securities Act”), the lawsuits alleged that certain mutual funds’ registration statements were misleading because they failed to disclose that, under the funds’ accounting practices, the funds’ realized income and capital gains were temporarily treated as assets (rather than liabilities) prior to those earnings being distributed to fund shareholders (typically on a quarterly or annual basis). Plaintiffs argued that this allegedly undisclosed practice artificially inflated the funds’ NAV, which caused investors to suffer various forms of harm, including higher asset-based fees and increased tax liabilities. However, plaintiffs’ theories were not grounded in the relevant accounting guidance (ASC 946-320-25-4¹), which does not (i) require that earnings be immediately classified as liabilities, or (ii) prescribe how frequently a fund should declare distributions.

Though framed as a challenge to disclosures, plaintiffs’ legal theory is a challenge to longstanding and widely adopted mutual fund accounting practice, and it represents a thinly veiled attempt to force funds to declare dividends more frequently. In support of their theory, plaintiffs cited the fact that certain funds declare dividends on a daily basis, thus effectively removing that income from a fund’s NAV each day. Plaintiffs argued in effect that all mutual funds should follow this approach, ignoring critical distinctions as to why certain funds, such as money market funds, may elect to declare dividends more frequently consistent with their investment objectives.

Ultimately, the courts in both cases rejected this theory at the motion to dismiss stage in large part on the basis that the mutual funds’ accounting practices were GAAP-compliant and properly disclosed.

Overview of the Decisions

Dandini v. First Eagle Funds²: On July 9, 2026, the Delaware Superior Court held that plaintiffs failed to state claims under Sections 11³ and 12(a)(2)⁴ of the Securities Act because the challenged disclosures were not materially misleading and because plaintiffs did not identify any actionable omissions.⁵ The court did so without reaching the issue of damages. The court also dismissed plaintiffs’ Section 15 claim⁶ because it depended on the viability of the Section 11 and Section 12(a)(2) claims. In its ruling, the court focused on the following:

• Adequate Disclosures: The court found that the First Eagle funds properly disclosed that earnings may be part of the funds’ NAV at the time of a shareholder’s purchase of shares. The court also noted that Form N-1A did not create any further disclosure obligations beyond the information already provided in the funds’ registration statements.
• Industry-Standard Approach: The court rejected plaintiffs’ theory that the funds’ NAVs were “artificially inflated,” reasoning that (i) the alleged inflation resulted from a well-recognized accounting method in the mutual fund industry, and (ii) merely labeling the accounting impact “artificial” did not make the disclosures misleading.
• Preferences Are Irrelevant: The court confirmed that plaintiffs’ preference for earnings to be recorded as liabilities on an earlier basis does not make First Eagle’s disclosures misleading. The court noted that plaintiffs conceded the funds did not violate any SEC regulation or GAAP and, accordingly, had no basis to demand the funds account differently for earnings.

Morad v. JPMorgan Trust I⁷: On July 31, 2026, the New York State Supreme Court dismissed plaintiffs’ claims with prejudice during oral argument. The court embraced similar rationale to Dandini, noting that (i) plaintiffs could not point to any law, rule, regulation, or accounting guidance that required the funds to account for earnings differently; (ii) the mutual funds properly disclosed their treatment of earnings; and (iii) plaintiffs’ claims accordingly failed under both a misstatement and omissions theory. Like the Delaware Superior Court, the New York State Supreme Court did not reach the issue of damages.

Key Takeaways

These decisions provide a clear roadmap for defeating omission theories that attempt to convert disagreement with a fund’s chosen business practices into Securities Act claims. Specific to fund accounting practices, the decisions underscore that funds are free to select their accounting method of choice, so long as the selection is lawful and GAAP-compliant, and that the frequency of dividends is a matter reserved to a fund’s judgment and may differ depending on each fund’s investment objectives.

A team of Ropes & Gray litigators represented the JPMorgan funds in the Morad case. If you would like to discuss these matters, please contact any of the attorneys listed below or your regular Ropes & Gray service provider.

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