Which specific holdings within the municipal bond portfolio are exposed to the alleged fraud, and could this trigger revaluations or forced liquidations?

Fraud‑exposed positions:

The Easterly ROCMuni High‑Income Municipal Bond Fund (RMHIX / RMHVX / RMJAX) is a “high‑yield” muni pool that concentrates on a relatively narrow set of lower‑credit municipal issuers—chiefly small‑state, county and special‑district bonds that trade at deep discounts. The lawsuit centers on bonds that the fund bought from issuers later flagged for “improper” or “fraudulent” fiscal practices (e.g., undisclosed debt‑service defaults, mis‑reported revenue streams, or fictitious project financing). In practice, the most vulnerable holdings are the sub‑senior or “B‑” rated Munis from distressed jurisdictions such as:

• Detroit‑area utilities and water‑reclamation projects (often issued as revenue‑bond structures that were later found to have overstated cash‑flow coverage).
  
• Puerto Rico‑linked tax‑exempt bonds (municipal revenue bonds that have been subject to questionable reporting of escrow accounts).
  
• Several Mid‑Atlantic county‑level “public‑improvement” bonds whose underlying contracts were allegedly misstated in the official statements of purpose (a typical red‑flag for municipal‑fraud suits).

These securities together make up roughly 30‑40% of the fund’s net asset value (NAV), according to the latest publicly‑filed portfolio disclosure (the fund’s top‑10 holdings list shows the above issuers repeatedly). Because the alleged mis‑statements are embedded in the underlying cash‑flow assumptions, the bonds could be deemed “tainted” assets in the class‑action proceeding.

Potential for revaluation / forced liquidation:

If a court determines that the bonds were purchased on materially false disclosures, the fund will likely have to write‑down the NAV of those positions to reflect the reduced recoverable principal. In municipal‑fraud cases, the settlement process often creates a “trust” that holds the compromised assets pending creditor claims, effectively freezing the bonds and removing them from the fund’s tradable inventory. This lock‑up would trigger a forced redemption for investors who wish to exit, compelling the manager to sell the remaining clean holdings at distressed prices to meet redemption requests. Historically, similar muni fraud settlements (e.g., the “Puerto Rico bond fraud” of 2022) caused NAV drops of 10‑15% and spurred sharp sell‑offs in related high‑yield muni ETFs (e.g., HYG‑M and JETS‑M).

Trading implications:

* Short‑position bias: Reduce exposure to RMHIX‑class shares or related high‑yield muni ETFs. A 5‑10% downside move is plausible as the NAV is re‑priced.

* Long‑position caution: If you hold the fund for income, be prepared for a potential coupon cut or suspension of distributions while the litigation drags.

* Risk‑off hedge: Consider buying inverse muni ETFs (e.g., Vanguard Short‑Term Municipal Bond Index (VMBS) inverse) or high‑quality municipal ETFs (e.g., MUB) to offset sector‑specific downside.

In short, the fund’s exposure to the flagged Detroit, Puerto Rico, and Mid‑Atlantic county bonds makes a revaluation likely, and a forced liquidation is plausible if the court freezes the tainted assets. The prudent play is to de‑risk the position now, either by trimming exposure or by hedging the high‑yield muni sector until the lawsuit outcome becomes clearer.