Vanguard Made a Single Acquisition. Now, It’s Getting Sued

Vanguard made its first acquisition in 2021, but by the looks of it, it may just be the last. 

The Malvern, Pennsylvania-based firm is now facing a lawsuit stemming from the purchase of JustInvest, one of a handful of direct indexing platforms that were all the rage back in the early 2020s. The complaint alleges the world’s second-largest money manager acted in bad faith post-sale by thwarting certain business deals that would have led to payouts for JustInvest founders and shareholders. Even today, Vanguard investors aren’t able to use the service, which was rebranded Vanguard Personalized Indexing Management, nor can the firm’s in-house advisors, according to Jeff DeMaso, editor of the newsletter the Independent Vanguard Advisor. So, why the acquisition in the first place?

“Perhaps it was a move to defend the firm against the risk that direct indexing would replace index mutual funds and ETFs,” DeMaso said. “If that was the goal, sure, mission accomplished. But that’s a low hurdle.”

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The suit alleges that Vanguard blocked deals that would have led to performance payments, which represented a “large share” of compensation to JustInvest’s founders. In one instance, JustInvest was close to landing $900 million in assets but Vanguard management allegedly put the kibosh on the deal without an explanation. Before the acquisition, however, Vanguard insisted there would be “lines out the door” for their direct indexing service and that it could help bring in $1 billion in assets to JustInvest on Day 1 alone, according to the complaint filed in Delaware Chancery Court. “Indeed, before the merger closed, Vanguard expressed concerns that the security-holders would earn the full performance payments under the agreement too quickly,” the suit said.

The complaint also alleges the three founders — Jonathan Hudacko, Vijay Rao, and Alan Cummings — were terminated last year without cause in retaliation for raising concerns. Vanguard declined to comment.

Direct Hit. Who can forget when direct indexers were hot commodities in the early 2020s as experts predicted the platforms, which help clients build their own, personalized indexes that come with significant tax advantages, could even take over the ETF industry itself? The laundry list of proud new index shop owners included BlackRock, Charles Schwab, Morgan Stanley and JPMorgan, to name just a few. 

“[Acquisitions] are not easy, no matter which seat you are in,” DeMaso said. “But this has not been a win-win coming together. Said differently, Vanguard is 0 for 1 on acquisitions … at least from the viewpoint of the acquired.”