As detailed in prior posts on this site (here and here), turbulence in the private credit markets have roiled the financial marketplace. Collapses (and related scandals) involving high profile private credit borrowers – including Tricolor and First Brands– have led to bankruptcies, civil lawsuits, and criminal indictments. The disruption in the private credit markets has also recently led to securities class action lawsuits involving private credit lenders. In the most recent example of this phenomenon, late last week a plaintiff shareholder filed a securities class action lawsuit against private credit lender Hercules Capital, after a short seller published a report suggesting that the company had misrepresented its borrower due diligence processes. A copy of the March 20, 2026, lawsuit can be found here.

Background

Private credit refers to non-bank lending, in which investors fund loans made directly to businesses or investors. Estimate vary, but some observers estimate that the private credit market had assets under management as of year end 2025 of as much as $3.5 trillion.

Hercules Capital is a private credit firm, operating as a Business Development Company (BDC) that specializes in making private loans to companies. The company describes itself as “the largest non-bank source of venture funding in the market.” As of year-end 2025, the company manages more than $5.7 billion in assets. Among other things, the company claims to maintain a “disciplined and robust deal origination process, including vigorous sourcing, due diligence, and valuation in order to maintain the value and stability of its portfolio.”

On February 27, 2026, Hunterbrook Media, which operates as the journalism arm of Hunterbrook Capital, a hedge fund that shorts the stock of companies being investigated, issued a report stating that a former Hercules employee had said that the company’s deal sourcing essentially consisted of simply copying the investments from the Google Ventures website, relying on other investors to have done the due diligence, instead of doing their own. The report also cited another former employee as saying that the company’s finance team was “a small, overstretched team with few checks in place.” The report also claimed that Hercules understated its significant exposure to the debt of software companies and that the company valued the software debt at 100 cents on the dollar even though the debt across the software industry was “falling into distressed territory.”

According to the complaint, the company’s share price declined nearly 8% on this news.

The Lawsuit

On March 20, 2026. A plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Hercules and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased the securities of Hercules during the period May 1, 2025 through February 27, 2026.

The complaint alleges that during the class period, the defendants failed to disclose that: “(1) the Company overstated the due diligence with which it conducted its deal sourcing and/or loan origination process; (2) the Company overstated the due diligence with which it conducted its portfolio valuation process; (3) the Company reported misclassified portfolio investments; (4) as a result of the foregoing, the Company overstated and/or misrepresented its portfolio valuations; and (5) that as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.

Discussion

As I noted at the outset, beginning late last year, a host of questions began to surround the private credit markets. According to a March 18, 2026, memo from the K&L Gates law firm (here), the financial press recently has reported on “a wave of investor withdrawals hitting major funds simultaneously, firms publicly announcing mark downs in the valuation of certain loans,” and that “various firms are capping redemptions to maintain adherence to pre-established limits.” Securities analysts have warned that the private credit sector “may be entering a ‘reckoning’ following years of ostensible aggressive lending and weaker underwriting standards.”

The short seller whose report at issue here delivered its report into this already febrile atmosphere, fraught as the industry already was with concerns that the industry growth may have been due to lax standards. The short seller’s report, attributing statements to anonymous ex-employees raising questions about the company’s lending processes and practices, was sure to hit the company’s share price (which of course is the objective of a short seller putting out an attack report like the one involved here). Reasonable minds could differ about whether a manufactured share price drop of less than eight percent reflects a perception that confidence in the company has been entirely undercut, but it was at least a large enough drop to attract the attention of at least one plaintiffs’ law firm.

As I have detailed in previous posts on this site (most recently here), there are reasons why courts should be skeptical of securities class action lawsuits based solely on allegations from financially motivated short seller reports, particularly where the short seller report are based solely on alleged statements of anonymous former employees. Indeed, some court have recognized these concerns; for example, the Ninth Circuit said in one recent case that “we should not credit anonymous posts on a website notorious for self-interested short-sellers trafficking in rumor for their own pecuniary gain.” All of these reasons for caution are present here, and undoubtedly will become relevant in this case at the motion to dismiss phase.

In any event, this case does represent the latest in a series of securities class action lawsuits filed against private credit lenders.

For example, and as discussed here, in December 2025, Blue Owl Capital, one of the largest private credit lenders, was sued in a securities class action lawsuit, in a case alleging that Blue Owl and the other defendants misrepresented the firm’s liquidity, redemption conditions, and the merger risks involving its private credit vehicles. A different investor filed a separate lawsuit against Blue Owl in January 2026, as discussed here, alleging that the company had misrepresented the level of investor redemptions the company was facing.

In addition, as discussed in detail here, in early February 2026, a plaintiff shareholder filed a securities class action lawsuit against BlackRock TCP Capital Corp., the private credit arm of finance giant BlackRock, alleging that the company’s investments were not being appropriately valued and that the company’s unrealized losses were understated. Interestingly, the corporate defendant in that case, like the corporate defendant in the Hercules case, operated as a Business Development Company (as indeed to many of the private credit lending firms).

In addition, prior high profile corporate failures involving private credit borrowers — including for example, Tricolor and First Brands – have resulted in D&O claims against the firms and their executives, as discussed here and here.

Signs are that problems in the private credit market are likely to continue in the months ahead, with the potential for further securities litigation and other D&O claims against both private credit borrowers and private credit lenders.

There is also the possibility that the problems (and potential D&O claims) could spread beyond just the immediate private credit borrowers and lenders. As a recent Wall Street Journal article noted (here), the stock prices of traditional banks are also getting beat up over the problems in the private credit sector. The problem is that the private credit lenders are themselves borrowers, often from traditional banks. In light of the distress in the private credit markets, banks are reexamining their lending commitments to the private credit funds.

The Journal article attributed a recent drop in banks’ share prices to concerns that banks could be “left holding the bag” as the private credit market becomes increasingly disrupted. These concerns are heightened by revelations that some of the private credit loans (for example, with respect to Tricolor and First Brands), which were used to collateralize bank loans, were fraudulent. All of these questions arise at a time when some private credit funds, facing unexpectedly high redemption requests, are drawing further on their bank lines of credit.

In light of all of these factors, at least some observers have raised the question whether the problems in the private credit sector could become a banking industry contagion event, the possibility of which is even further heightened by the ever-lengthening list of adverse macroeconomic factors (such as inflation, the war in Iran, disruption to global trade due to U.S. tariffs, and so on).

The bottom line is that there is much more of this story to be told, and there appear to be reasons to be concerned that the story in the months ahead could involve further D&O claims related to the private credit sector.