July 22, 2025  ·  United States District Court for the Southern District of New York, No. 1:25-cv-06028

By David Brunk, civil litigation attorney

Read the complaint

In re Easterly ROCMuni Asks Whether a Collapsed Bond Fund's Marks Were Opinions or Misstatements

A high-yield municipal bond fund that lost nearly a third of its value in a single day is now the setting for one of the sharpest pleading-stage fights in the current wave of fund valuation litigation. In In re Easterly ROCMuni High Income Municipal Bond Fund, No. 1:25-cv-06028 (S.D.N.Y.), a fully briefed motion to dismiss sits before Judge Denise Cote, and the ruling, whenever it comes, is likely to be the first district court decision testing whether investors can plead their way past the argument that a fund's asset valuations are protected statements of opinion.

A 30 Percent One-Day Collapse

The Easterly ROCMuni High Income Municipal Bond Fund was an open-end mutual fund marketed to retail investors, the successor by a September 2024 reorganization to the Principal Street High Income Municipal Fund. On June 13, 2025, the fund's net asset value fell more than 30 percent in a single day and continued to decline afterward, and the fund ultimately liquidated. According to the operative complaint, the fund sold more than $58 million in securities for approximately $10 million, a markdown of over 82 percent against the values the fund had been reporting. The fund attributed the decline to what it called "liquidity-driven dispersion." The complaint alleges that at the time of the collapse at least 45 percent of the fund's assets were illiquid, three times the 15 percent limit on illiquid investments represented in the fund's offering documents.

Two class actions filed within days of each other in July 2025 were consolidated on October 9, 2025, before Judge Cote, who appointed Richard Fulford lead plaintiff and Kaplan Fox & Kilsheimer LLP lead counsel. The defendants, represented by Sullivan & Cromwell LLP, include the fund registrants, trustees, officers, investment advisers, and distributors.

Strict Liability Claims, Not Fraud

The lead plaintiff's claims are brought under Sections 11, 12, and 15 of the Securities Act of 1933, which impose strict liability and negligence standards for material misstatements in registration statements and prospectuses, together with a proxy disclosure claim under Section 14(a) of the Exchange Act and control person claims under Section 20(a). There is no fraud count and no requirement to plead intent. The class period runs from July 29, 2022 through June 12, 2025.

The second amended complaint organizes the alleged misstatements into four categories. First, the offering documents allegedly represented that the fund "will not hold more than 15%" of its assets in illiquid investments, while illiquid holdings exceeded that level throughout the class period. Second, the fund allegedly represented that its assets were valued at "market price" using "market-based" inputs from nationally recognized pricing services, while the pricing service systematically ignored actual contemporaneous market trades, including odd-lot transactions, producing stale and inflated marks. Third, the fund allegedly stated that purchasing defaulted securities would not be a "significant investment strategy" when defaulted paper was in fact a principal strategy. Fourth, sector concentration risk was allegedly presented as hypothetical after it had already materialized.

The Position That Anchors the Complaint

The complaint's showcase allegation involves a Level 3 holding of preferred stock in Next Renewable Fuels. According to the complaint, the value of the position was tied to a proposed SPAC merger, and when that merger was terminated in November 2023 the investment became worthless. The fund nonetheless continued to carry the position at more than $5 million, among its top ten holdings, for roughly eighteen months. After the collapse, under a new auditor, the fund conceded the position was worthless. The complaint offers this as an objective, dateable demonstration that the fund's reported values did not reflect economic reality, alongside bond-by-bond examples of marks exceeding the prices at which the same securities were actually trading.

The Motion to Dismiss

Defendants moved to dismiss a first amended complaint on January 30, 2026. The lead plaintiff responded by filing a second amended complaint on his existing amendment deadline, and Judge Cote dismissed the first motion as moot while warning that further amendment was unlikely to be permitted. Defendants filed their renewed Rule 12(b)(6) motion on March 23, 2026, accompanied by a declaration attaching 41 exhibits.

The defense brief opens with the Supreme Court's admonition in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), that the securities laws do not provide investors with broad insurance against market losses. It emphasizes that the plaintiff held senior roles in the investment industry, that the fund paid nearly double typical municipal bond yields, and that the offering documents warned the fund held "junk bonds," "highly speculative" instruments, and defaulted securities, and might need to sell assets "at significantly reduced prices."

On the merits, the motion advances four independent grounds. On the 15 percent illiquidity representation, defendants argue the statement merely tracks SEC Rule 22e-4, which they read as requiring only a plan to return below the threshold within a reasonable period rather than an absolute cap. On valuation, they invoke the Second Circuit's opinion doctrine: under Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016), liquidity classifications and asset marks are statements of opinion that are not actionable unless the speaker did not honestly believe them, and the marks here came from nationally recognized pricing services that the complaint does not allege the defendants disbelieved. Descriptions of valuation procedures, they argue, are not guarantees of compliance under Singh v. Cigna Corp., 918 F.3d 57 (2d Cir. 2019), and the remainder of the complaint amounts to garden-variety mismanagement claims that the securities laws do not reach. The phrase "significant investment strategy," they contend, is too vague to be actionable as a matter of law.

Defendants separately argue that the Securities Act claims are time-barred. The one-year limitations period runs from inquiry notice, and the motion points to a December 2023 Morningstar article that flagged the predecessor fund's peer-highest yield, its holdings of defaulted and nonrated bonds, and the potential for serious outflows and "pain." The proxy claim fails, in their view, because statements about investment strategies were not an essential link in the shareholder vote approving a reorganization that left both funds' strategies unchanged. The motion asks for dismissal with prejudice.

The Opposition and the Fight Over 41 Exhibits

The lead plaintiff's opposition, filed April 23, 2026, answers the hindsight argument with contemporaneity: the complaint alleges illiquid holdings exceeded 15 percent during the class period, not merely at the end, and the 82 percent markdown realized in liquidation corroborates that the marks were inflated all along. Against the argument that information about the underlying bonds was publicly available, the opposition alleges that performance information for a material number of the fund's holdings was confined to confidential data rooms inaccessible to ordinary investors. And against the opinion doctrine, the opposition points to objective facts: actual arm's-length trades the pricing service allegedly ignored, and the Next Renewable Fuels position carried at more than $5 million long after the event that gave it value had disappeared.

The opposition came paired with a motion to strike the 41 exhibits attached to the defense motion, or in the alternative to convert the motion to dismiss into one for summary judgment with an opportunity for discovery. The plaintiff argues the Morningstar article cannot be judicially noticed for the truth of its contents, accused no defendant of wrongdoing, and simply repeated the same risk disclosures the complaint challenges as misleading, which cannot establish inquiry notice of misstatements. The exhibit fight matters more than most procedural skirmishes: the limitations defense rests almost entirely on the Morningstar article, so if the exhibits are excluded, the time bar largely falls out of the motion.

Briefing on both motions concluded on May 14, 2026, and both sides have requested oral argument. As of early July 2026 no decision has issued.

Why This Case Is Being Watched

The Easterly case is procedurally the furthest along in a cluster of 2025 and 2026 lawsuits alleging that funds and their advisers controlled the valuation of their own illiquid assets and reported numbers that diverged from economic reality. Related theories are pending against business development company advisers in the Southern District of New York and the District of Maryland, including the consolidated fee litigation against Blue Owl advisory subsidiaries, and against BlackRock TCP Capital in the Central District of California and FS KKR in the Eastern District of Pennsylvania. Because those cases are months behind this one, Judge Cote's ruling will likely provide the first judicial signal on the question that runs through all of them: when do specific, position-level allegations that reported values contradicted observable market evidence transform a protected valuation opinion into an actionable misstatement?

The pleading-stage pattern emerging from this cluster is already instructive. Complaints built on characterizations of judgment and above-average fees have been dismissed, while complaints that plead named positions, dated events, and dollar-for-dollar gaps between marks and market evidence have drawn serious defensive resources. The Easterly opposition's reliance on a single worthless position carried at more than $5 million for eighteen months is a case study in the kind of objective allegation this defense is hardest pressed to answer.

Key Filings

• Class action complaint (ECF 1, July 22, 2025)
• Defendants' memorandum in support of the motion to dismiss (ECF 112, March 23, 2026)
• Lead plaintiff's opposition (ECF 115, April 23, 2026)
• Motion to strike the exhibits (ECF 116, April 23, 2026)
• Lead plaintiff's reply on the motion to strike (ECF 126, May 14, 2026)
• Full docket on CourtListener

David Brunk is a civil litigation attorney. He can be reached at david@newmanbrunk.com.