BlackRock Sued Over Alleged NAV Inflation That Investors Say Led To Higher Fees And Tax Bills

BlackRock, the world’s largest asset manager, has been sued by investors who allege the firm used improper accounting practices that artificially inflated the net asset values (NAVs) of more than 70 equity mutual funds, causing shareholders to pay excessive management fees and incur larger tax liabilities.

The proposed class action, filed on Monday in New York state court in Manhattan, claims BlackRock improperly treated accrued dividend income and realized capital gains as fund assets even though those amounts were legally required to be distributed to shareholders within the same tax year.

According to the complaint, the accounting treatment overstated the value of the funds, reducing the number of mutual fund shares investors received when purchasing units while simultaneously increasing the asset base on which BlackRock collected management fees.

The lawsuit seeks unspecified damages on behalf of investors who held BlackRock’s actively managed and index equity mutual funds during the past three years.

At the center of the lawsuit is the calculation of a mutual fund’s net asset value, or NAV, which determines the price investors pay to buy or sell fund shares. The plaintiffs argue that BlackRock included dividend income and realized capital gains in the NAV even after those amounts had effectively become liabilities because they were required to be distributed to shareholders before the end of the tax year.

According to the investors, this accounting approach produced several financial consequences.

First, an inflated NAV meant investors received fewer mutual fund shares for every dollar invested than they otherwise would have.

Second, because management fees are calculated as a percentage of assets under management, the allegedly overstated NAV resulted in investors paying higher fees than they should have.

Third, shareholders allegedly incurred higher tax liabilities because they effectively purchased fund shares that already contained undistributed taxable gains and dividends, a phenomenon commonly referred to as “buying a dividend.”

The complaint argues that while mutual fund companies routinely warn investors about purchasing shares shortly before dividend distributions, BlackRock failed to disclose what the plaintiffs describe as a more fundamental issue.

“The ‘Buying a Dividend’ disclosure conceals the far broader and more damaging reality: that the NAV of the respective BlackRock Funds are artificially inflated by accrued income and gains every day,” the lawsuit states.

The investors accuse BlackRock of violating the Securities Act of 1933, arguing that the company’s registration statements and disclosures failed to accurately describe how the funds’ net asset values were calculated.

The lawsuit targets one of the largest players in the global asset management industry. BlackRock managed $13.89 trillion in assets at the end of March, including approximately $7.66 trillion in equity investments, making it the world’s largest asset manager.

The company has previously noted that more than half of its assets are held in retirement accounts, where tax treatment differs from that of taxable investment accounts. The lawsuit, however, primarily concerns investors exposed to tax consequences arising from mutual fund distributions.

The case could attract attention across the asset management industry because mutual fund pricing and tax treatment are governed by long-established accounting and regulatory standards.

Mutual funds are generally required under U.S. tax rules to distribute substantially all of their taxable income and realized capital gains annually to avoid being taxed at the fund level. Investors who purchase shares before those distributions can receive taxable payouts that partly represent gains earned before they became shareholders.

While this “buying a dividend” effect is widely disclosed throughout the industry, the plaintiffs argue that BlackRock’s alleged practice went beyond normal fund accounting by embedding liabilities into daily NAV calculations.

If the claims succeed, the litigation could prompt greater scrutiny of how mutual fund companies account for accrued income, calculate net asset values, and disclose the tax implications of purchasing fund shares before distributions. The lawsuit also comes at a time of heightened legal and regulatory scrutiny of major asset managers as investors increasingly challenge fee structures, disclosures and fund valuation practices across the investment industry.