The fund - more than $17m (£13.5m ) - was set up after Yahoo provided information about political dissidents to the Chinese government.
It appointed a high-profile political activist, Harry Wu, to administer the funds.
The lawsuit alleges that Mr Wu, who died last year, used the money for other purposes.
Mr Wu ran the Washington-based human rights group Laogai Research Foundation.
The lawsuit claims that in fact the funds were used to fight other legal cases and to buy two properties in Washington for the human rights organisation.
