A shareholder derivative lawsuit filed in federal court accuses the board of FS KKR Capital Corp. (NYSE: FSK) of concealing deteriorating portfolio conditions and an unsustainable dividend payout over a nearly two-year period. The complaint, filed May 12 in the U.S. District Court for the Eastern District of Pennsylvania, targets CEO and Chairman Michael C. Forman, CFO Steven Lilly, President and Chief Investment Officer Daniel Pietrzak, and nine other current and former directors.
The suit, Goodman v. Forman et al., No. 2:26-cv-03240, alleges that between May 8, 2024, and February 25, 2026, leadership issued reassuring statements about the portfolio's cleanup, valuation accuracy, and dividend strength. According to the filing, Forman highlighted "significant progress restructuring certain non-accruing investments" and cited the company's "strategy of building spillover income during prior periods of elevated interest rates" as supporting the "continued stability of our $0.64 base and $0.06 supplemental quarterly distributions."
The first cracks appeared on August 6, 2025, when FS KKR Capital reported net asset value per share had fallen 6.2% to $21.93. Total fair value of investments dropped $474 million, and non-accruals rose to 3.0% at fair value and 5.3% at amortized cost. The filing attributes the decline to four troubled portfolio companies, including Production Resource Group and 48forty. The stock slid roughly 8.2% the next day, from $20.24 to $18.58.
The fuller picture emerged on February 25, 2026. NAV slipped further to $20.89, another $406 million in investment value was written off, and non-accruals climbed to 3.4% at fair value and 5.5% at amortized cost. During the earnings call, Pietrzak told analysts that the 2026 dividend, previously expected to yield about 10% of NAV, "may now be more in the range of 9% of net asset value." The quarterly payout was slashed from $0.70 to $0.48 per share. Shares plunged 15.2% the following day, closing at $11.29.
The complaint also flags a November 25, 2024, trade by director Osagie Imasogie, who allegedly sold 40,885 shares for approximately $900,034 while in possession of material non-public information. The claims include breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and violations of Section 14(a) of the Securities Exchange Act of 1934. Forman and Lilly also face contribution claims tied to a parallel securities class action pending in the same court.
For advisors allocating client capital to business development companies for yield, the case underscores the critical role of board oversight in portfolio valuation. Under Rule 2a-5 of the Investment Company Act, directors may delegate day-to-day fair-value determinations to an adviser, but the board retains ultimate responsibility. When non-accruals spike and NAV declines, those judgments face heightened scrutiny in hindsight.
The lawsuit comes amid broader regulatory attention on private credit disclosures. The SEC has been conducting a sweep targeting private credit disclosures at 14 funds, and FS KKR Capital is already facing a class action over allegedly misleading private credit disclosures. Another investor suit specifically challenges the dividend disclosures.
