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 946-320-25-4[1]), which does not (i) require that earnings be immediately classified as liabilities, or (ii) prescribe how frequently a fund should declare distributions.

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