Lost Money in a BDC or Income Fund? Inflated Valuations, Fees on Phantom Income, and Fiduciary Breach May Give You a Claim

A wave of investors are discovering that their losses in income funds, BDCs, non-traded REITs, and private credit vehicles did not come from bad markets alone. They came from internal accounting mismanagement and fiduciary duty violations: managers who marked the value of their own illiquid assets, recognized income that was never collected in cash, kept distributions flowing to disguise the problem, and paid themselves management and incentive fees on numbers they controlled. When the marks finally corrected, the losses landed on investors; the fees, already collected, stayed with the manager.

The law requires more of anyone who manages your money. Brokers, registered investment advisers, and fund managers owe fiduciary and best-interest duties: to act in your interest, disclose conflicts and fee structures that matter, and not profit at your expense. When those duties are breached, whether through the fee mechanics above or through unsuitable recommendations, hidden compensation, unauthorized trading, or outright fraud, you may be able to recover through FINRA arbitration or civil litigation.

David Brunk is an Oregon civil litigation attorney who evaluates these claims. He can advise you on whether you have a viable case, what forum applies, and what recovery may be possible.

Note on timing: FINRA arbitration claims must generally be filed within six years of the events giving rise to the claim, and Oregon securities claims carry shorter periods (generally three years from the sale, or two years from discovery, whichever is later). If your fund cut its distribution, froze redemptions, or wrote down its net asset value, the clock may already be running. Early evaluation matters.

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BDC Investors: Fees on Income That Never Arrived

Federal lawsuits filed in 2025 and 2026 allege a recurring structure at some of the country's largest business development companies (BDCs) and private credit funds. The fund's external adviser serves as its own valuation designee, marking the illiquid loans it manages. Interest on struggling borrowers accrues "payment in kind," or PIK: instead of paying cash, the borrower's unpaid interest is added to the loan balance, yet the fund books it as income. The adviser then collects a management fee on the marked-up assets and an incentive fee on the paper income, in real cash, every quarter, with no obligation to return those fees if the income is never collected. One fund's own annual report states that its adviser "is not obligated to return the Incentive Fee it receives on PIK interest that is later determined to be uncollectible in cash."

The companion problem is non-accrual accounting. When a loan sours, the fund is supposed to place it on "non-accrual" and stop counting its income. The pending complaints allege that struggling loans were instead restructured, often by converting cash interest to PIK, so they stayed technically "performing," the published non-accrual numbers stayed low, and the income and the fees kept accruing, right up until dividend cuts and net asset value writedowns revealed the problem. Complaints raising versions of these allegations are pending against advisers and funds in the Blue Owl, Ares, FS KKR, and BlackRock TCP fund families; related suits involve non-traded REITs and interval funds whose sponsors set the net asset values their own fees were calculated on.

The warning signs investors describe are consistent: a distribution that was quietly cut or that exceeded the fund's actual cash earnings; a non-traded fund that froze or limited redemptions; a net asset value written down sharply after years of smooth, steady marks; and account statements that showed gains right up until the moment they did not.

For individual investors, the critical point is what the fund-level cases cannot do: fee recoveries in those suits are paid to the fund itself, not to the people who bought shares. An investor's own claim, that the adviser or broker who recommended the product never explained how the manager was paid or what the risks of the structure were, is separate, individual, and unaffected by the outcome of the fund-level litigation. Ongoing coverage of these cases is at Newman News.

What Constitutes a Breach of Fiduciary Duty

A fiduciary relationship arises when one party is entrusted with authority over another’s assets and is legally obligated to put that person’s interests first. Brokers, investment advisers, fund managers, and general partners all owe some form of this duty, though the precise standard varies by role and regulatory framework.

Breach takes many forms: recommending investments that serve the adviser’s financial interest rather than the client’s, failing to disclose compensation arrangements that create conflicts, trading excessively to generate commissions, placing client funds in products the manager had an undisclosed stake in, or simply lying about what an investment was and what it would do.

FINRA Arbitration

Disputes with FINRA-registered brokers and broker-dealers are resolved through FINRA’s arbitration system, not in court; this is required by the arbitration clause in nearly every brokerage agreement. FINRA arbitration is faster than litigation and specifically designed for investment disputes.

Common claims include unsuitable investment recommendations (Regulation Best Interest and the prior suitability standard), churning (excessive trading to generate commissions at the client’s expense), unauthorized trading, and failure by the brokerage firm to supervise its registered representatives.

Claims must generally be filed within six years of the event. If you believe misconduct occurred, time is a relevant factor in whether your claim remains viable.

Registered Investment Advisers

Registered investment advisers (RIAs) are subject to a statutory fiduciary standard under the Investment Advisers Act of 1940. They must act in clients’ best interests, disclose all material conflicts of interest, and refrain from self-dealing.

Common violations include steering clients into funds in which the adviser has an undisclosed financial interest, misrepresenting historical performance, and charging fees that were never adequately disclosed. These claims can be brought in state or federal court and may overlap with securities fraud claims.

Real Estate and Cryptocurrency Fund Managers

Real estate funds and cryptocurrency funds, often structured as limited partnerships or LLCs with a general partner or managing member, involve a manager who owes fiduciary duties to investors.

In real estate funds, disputes frequently arise from undisclosed related-party transactions, misrepresentation of projected returns, and diversion of investor capital. In cryptocurrency funds, additional risks arise from inadequate custody arrangements, commingling of client and house assets, undisclosed leverage, and misrepresentation of investment strategy.

Where interests in these funds constitute securities, as they frequently do under federal law and Oregon’s ORS Chapter 59, claims may include securities fraud in addition to breach of fiduciary duty.

Partnership and Business Disputes

General partners, managing members, and majority shareholders owe fiduciary duties to their co-investors. Self-dealing transactions, where a managing partner causes the entity to enter into contracts that benefit the manager at the partnership’s expense, breach the duty of loyalty.

Diversion of business opportunities, exclusion of partners from management in violation of the governing agreement, and misappropriation of entity assets are also actionable. These claims proceed in Oregon state court and are often combined with breach of contract and conversion claims.

What Happens When You Reach Out

  1. You describe the situation: who managed the funds, what you were told, what happened, and approximately what you lost.
  2. David reviews the facts and advises whether a viable claim exists, what forum applies (FINRA arbitration, state court, or federal court), and what recovery may be available.
  3. If the case warrants proceeding, he will explain the next steps, timeline, and fee structure before you commit to anything.

The initial consultation is free and confidential. You are under no obligation after speaking.

David Brunk is an Oregon civil litigation attorney who can handle breach of fiduciary duty claims, FINRA arbitration, registered investment adviser disputes, and partnership disputes involving the management of funds and assets. He can be reached at david@newmanbrunk.com or through the form above.