Investors are taking a major private credit firm to court, claiming FS KKR Capital downplayed bad loans while promising stability and rich dividends.
The proposed class action, filed in the U.S. District Court for the Eastern District of Pennsylvania, targets FS KKR Capital Corp. (NYSE: FSK), a publicly traded business development company, along with chief executive and chairman Michael C. Forman and chief financial officer Steven Lilly. Lead plaintiff Calvin Stuart is suing on behalf of investors who bought FSK shares between May 8, 2024 and February 25, 2026, citing Sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5 (Stuart v. FS KKR Capital Corp., No. 2:26-cv-02969).
The story FSK told shareholders, the filing says, was a reassuring one. For five straight quarters through the first quarter of 2025, the company allegedly described a steadily improving portfolio credit profile, said legacy non-accrual issues were being cleaned up through restructuring, and pointed to durable quarterly distributions. Press releases and SEC filings repeatedly emphasized "portfolio stability" and "attractive distributions," according to the filing.
That story, the suit says, started to fall apart on August 6, 2025. FS KKR reported that net asset value per share had dropped 6.2% to $21.93 in the second quarter, fair value of investments fell by $474 million, and non-accruals climbed to 3.0% at fair value and 5.3% at amortized cost. Management blamed "company specific issues" at four portfolio companies — Production Resource Group, 48forty, Kellermeyer Bergensons Services and Worldwise — some of which, the filing notes, had already been through restructuring. FSK shares slid 8.20% the next day.
The steeper drop, the suit alleges, came on February 25, 2026. Fourth-quarter and full-year results showed NAV down again to $20.89, another $406 million drop in fair value, and non-accruals rising to 3.4% at fair value and 5.5% at amortized cost. The board cut the quarterly payout from $0.70 to $0.48 per share. On the earnings call, chief investment officer Daniel Pietrzak said recent underperformance reflected problems in additional names, including Medallia and Cubic Corp, that the four previously flagged companies accounted for only about 50% of net realized and unrealized losses, and that FSK's non-accrual rate was running above the long-term BDC industry average cost basis rate of approximately 3.8%. The stock dropped 15.24% the following day to close at $11.29.
According to the filing, the company overstated how well its restructurings were working, overstated the value of its portfolio and the rigor of its valuation process, and overstated how durable that headline dividend really was.
For advisors using BDCs as income engines for high-net-worth clients, the case is a sharp reminder that fair value marks on illiquid private credit, non-accrual disclosures and forward dividend guidance can shift quickly, and that Rule 2a-5 valuation governance is on plaintiffs' radar.
The allegations have not been tested in court. The defendants have not yet filed a response, and no court has ruled on the claims.
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