A class action lawsuit filed in the U.S. District Court for the Eastern District of Pennsylvania accuses FS KKR Capital Corp. (NYSE: FSK) of misleading investors about the health of its private credit portfolio and the sustainability of its dividend. The complaint, brought by lead plaintiff Calvin Stuart, seeks to represent shareholders who purchased FSK shares between May 8, 2024, and February 25, 2026, citing violations of Sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5.
The suit names CEO and Chairman Michael C. Forman and CFO Steven Lilly as defendants, alleging that the publicly traded business development company (BDC) consistently portrayed its credit profile as improving. According to the filing, FSK's press releases and SEC filings for five consecutive quarters through Q1 2025 emphasized “portfolio stability” and “attractive distributions,” while claiming that legacy non-accrual issues were being resolved through restructurings.
The narrative began to unravel on August 6, 2025, when FSK reported a 6.2% drop in net asset value per share to $21.93 for the second quarter. The fair value of investments fell by $474 million, and non-accruals rose to 3.0% at fair value and 5.3% at amortized cost. Management attributed the decline to “company specific issues” at four portfolio companies: Production Resource Group, 48forty, Kellermeyer Bergensons Services, and Worldwise. FSK shares fell 8.20% the following day.
A more severe correction came on February 25, 2026, when fourth-quarter and full-year results revealed NAV had fallen further to $20.89, with an additional $406 million decline in fair value. Non-accruals climbed to 3.4% at fair value and 5.5% at amortized cost. The board slashed the quarterly dividend from $0.70 to $0.48 per share. On the earnings call, Chief Investment Officer Daniel Pietrzak disclosed that the four previously flagged companies accounted for only about 50% of net realized and unrealized losses, and that FSK's non-accrual rate exceeded the long-term BDC industry average cost basis rate of roughly 3.8%. The stock plummeted 15.24% the next day, closing at $11.29.
The lawsuit alleges that FSK overstated the effectiveness of its restructurings, inflated the value of its portfolio, and misrepresented the durability of its dividend. The case highlights the risks inherent in private credit valuations, which rely on fair value marks for illiquid assets. For financial advisors using BDCs as income generators for high-net-worth clients, the suit serves as a cautionary tale about the potential volatility of non-accrual disclosures and dividend guidance.
This legal action comes amid heightened regulatory scrutiny of private credit disclosures. The SEC has been conducting a sweep targeting private credit disclosures at 14 funds, and the case underscores the importance of rigorous valuation governance under Rule 2a-5. Advisors should be aware that even well-known BDCs can face sudden shifts in portfolio quality and dividend policy.
The complaint also raises questions about the reliability of forward-looking statements in the private credit space. As the industry continues to grow, with assets under management in private credit exceeding $1.5 trillion, the need for transparent and accurate reporting becomes increasingly critical. The outcome of this case could have implications for how BDCs communicate with investors and manage their portfolios.
