Editor’s note: Earlier this month, I posted an entry entitled Class Action Claims Aggregators, the Latest Innovation in Entrepreneurial Litigation, an admittedly glib post that inaccurately described the phenomenon of private companies aggregating class action settlement claims for clients as a new one. As it turns out, these services have existed for years. Adam Savett, attorney and Director of Securities Class Actions for the class action claims aggregator Claims Compensation Bureau, LLC, the first class action claims aggregator, graciously agreed to author the following guest post describing the history of the industry and the services that these companies provide to their clients. Adam’s comments and opinions are his own, but then again you probably guessed that given my documented ignorance about this subject. Many thanks to Adam for his contribution to CAB. -PK
The following is offered to expand upon a prior post discussing the existence and role of “class action settlement aggregators.”
It may surprise readers to know that this is not a new field at all, though the number of entrants has certainly accelerated in the last 5 years. The field has been around for 15 years, though there is no accepted term to describe the services offered. “Third party claims filer” and “bulk filer” are generally used in the class action arena to describe these entities.
There are a number of firms that operate in this space, and while the first firms to offer this service started with securities class actions, a number now also file claims in the antitrust field. A few have also ventured into the consumer and mass tort fields.
The value that these firms bring to clients is ensuring that they are kept apprised of all settlements that may impact them, regardless of how far flung their operations may be. In other words, if a class action notice is sent to a manufacturing plant, instead of to the corporate office, or whatever group might handle the oversight of claims filing (e.g. purchasing, legal, compliance), it may not be acted upon.
And that presumes that the notice reaches the class member at all. Every year there are between 100 and 150 securities class action settlements (or SEC “Fair Funds” actions) and a large number of antitrust settlements as well. Those settlements are administered by more than 30 different claims administrators, each using their own proprietary methodology for identifying and contacting potential claimants.
Given that the vast majority of securities are held in “street” name, there is no definitive list of the investors that bought or sold the impacted securities during the class period. While most securities class action settlement notices require those that hold securities for the benefit of another (the so called “banks, brokers, and nominees” clause), the processes used by these firms to actually cascade notice to investors vary dramatically.
There are additional hurdles to just being made aware of potential claims in settlements. Investors change custodial banks, brokerages, and investment managers frequently, and many of these service providers have no policy on reaching out to former clients to make them aware of settlements that include transactions from the time period when the investor was still a client.
In order to file and perfect a claim in most securities class action settlements, an institution will first need to determine whether they are eligible to participate in the litigation. This typically involves comparing the definition of the class (the group of investors that are to be included in a given litigation) to the current, or more commonly, the historical securities transactions of the institution. The class definition will typically spell out both which specific securities are included in the litigation as well as the period during which an investor had to purchase or sell the securities at issue, commonly called the “class period.” On the surface this sounds straightforward; the reality is far more complex.
As an initial matter, the class period for a federal securities fraud class action can span a period of five years. Layered on top of that is the length of time that most cases take to reach the settlement stage – 2-5 years – and one can immediately sense that the data needed to file claims in settled cases can, and often is, quite historical. This presents a real problem for institutional investors, as obtaining access to, searching through, and extracting 10+ year old securities transaction data is often not something that was planned for when custodial bank or prime brokerage relationships were initiated or terminated, or when internal fund management and accounting systems were built or sunset. As noted in the 2009 Global Custodian Prime Brokerage Survey, nearly half of the respondents had started a new prime brokerage relationship during the prior 12 months.
Layered on top of the turnover, is the apparent failure to look to the future, when starting these new relationships. Indeed, an analysis of more than 50 RFPs issued during the last 3 years for custodial bank or prime brokerage services revealed that less than 10% of the RFPs even mentioned securities class action claims filing, and an even smaller percentage mentioned access to historical information if and when a custodial relationship were to be terminated. We have often encountered a reluctance on the part of a former custodian to grant a client access to their historical securities transaction information.
Just as importantly, the breadth of class action settlements continues to expand. Whereas 10-15 years ago it was fairly common for a securities class action settlement to include just one security identifier (CUSIP, SEDOL, or ISIN), the cheap and ready access to the debt markets that was commonplace (at least until the credit and equities markets seized up in 2007) meant that an increasing number of companies issued debt securities or multiple tranches of preferred shares. These debt securities are increasingly being included in securities class actions and the resulting settlements. A quick analysis of settled cases finds that the percentage of settlements involving fixed income securities has dramatically increased over the years and now encompasses nearly 25% of all settlements in a given year.
The need for this data is becoming more important as regulators and beneficiaries are turning a keener eye on the size of securities litigation settlements and the failure of investors to file claims in settled cases. The costs of not filing, or not filing properly, can be high indeed. In January 2005, 40 mutual fund managers were sued by shareholders in class action lawsuits alleging that the funds had failed to collect nearly $2 billion in settlement payouts to which the funds (and the funds’ shareholders) were entitled. The lawsuits alleged that the funds’ failure to claim this money was a breach of the manager’s fiduciary duty and a violation of federal law. The lawsuits sought compensatory damages for all of the money that the funds left on the table, punitive damages and the forfeiture of all commissions and fees paid by fund shareholders. In 2007, an investment advisor took a $56 million charge as a result of having to reimburse certain clients for claims filing mistakes. More recently, several brokerage firms have been sued by clients for allegedly failing to notify them of the existence of settlements that they were eligible to participate in.
Antitrust cases can be even more difficult to track, as there are generally multiple defendants, and they rarely settle at the same time. The claims administrators often rely on the records of the defendant to perform the notice function. A particular class member may not receive notice if for example they bought products only from a non-settling defendant in a price-fixing or market allocation conspiracy, as they would not appear in the records produced or available to the settling defendant.
While I don’t dispute that this is an entrepreneurial endeavor, it is one that is unfortunately very much needed. These firms assist clients such as institutional investors or multi-national manufacturers with researching, filing, tracking, and recovering money through class action settlements in the securities and antitrust fields. They are able to verify, consolidate, format, submit, and then chase their clients’ claims with the benefit of subject matter expertise, and without forcing the client to use internal resources. Examples of where the value add is easy to see are post-merger scenarios where records are in different locations and formats, or when an institutional investor has switched custodians, often depriving them of electronic access to the trading records needed to correctly fill out a claim form.
About the Author:
Adam Savett is the Director of Securities Class Actions for Claims Compensation Bureau.
Adam is a former securities litigator who used to represent and advise institutional investors in all aspects of securities litigation. He speaks frequently on securities litigation, claims filing, and corporate actions issues, and his comments on those topics have appeared in a wide variety of publications.
Recently, Adam was named one of the 100 Lawyers You Need to Know in Securities Litigation by Lawdragon Magazine. He has published a number of articles and original research pieces on securities litigation topics and is also a member of the National Association of Public Pension Attorneys (NAPPA), the Professional Liability Underwriting Society (PLUS), SIFMA’s Corporate Actions Division, the American Bar Association (ABA), and the Hedge Fund Business Operations Association (HFBOA).
What Fraud Claims Make for a Good Class Action? Justice Breyer has an Idea.
Posted in Commentary, Securities Class Actions, Supreme Court Decisions, tagged breyer, erica p. john fund, fraud, fraud on the market, halliburton, oral argument, presumed reliance, presumption of reliance, reliance, scotus, securities fraud, Supreme Court on April 25, 2011| Leave a Comment »
The United States Supreme Court heard oral argument today in the case of Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403. A transcript of the argument is now available on the Court’s website.
Erica P. John Fund involves the appropriate standard for assessing class certification in securities fraud cases brought under the “fraud on the market theory.” Much of the argument was focused on whether the lower courts properly applied existing precedent in determining whether common issues predominated and whether the district court improperly considered the merits of the plaintiffs’ claim by requiring proof of loss causation at the class certification stage. Many of these issues are unique to the securities fraud context. The “fraud on the market” theory has been rejected in other contexts. (See, e.g. CAB entry dated April 27, 2009.) However, one seemingly off-the-wall hypothetical from Justice Breyer helps to illustrate what creates a common rather than an individualized question when evaluating either a securities fraud claim or another other fraud, misrepresentation, or nondisclosure claim:
Slip op. at 44-45.
Setting aside the possibility of an individual question relating to the agency relationship, Justice Breyer’s hypothetical gets to the heart of what could make a fraud claim susceptible to class treatment. First, although fraud requires reliance, in many contexts, it does not usually require reliance by the plaintiff. In Justice Breyer’s hypothetical, a single party meets the reliance requirement for the entire class. In other words, a false statement was made, and there was reliance because Mr. Jackson believed and acted upon it. There could also be common causation of injury if, due to his reliance on the lie, Mr. Jackson paid $1 per thousand seed when he could have paid $.99 for seed with the same attributes somewhere else.
The agency issue could very well be an individual issue, as Mr. Sterling surmised, but there really aren’t enough facts in the hypothetical to know this for sure. For example, there could be a single document that all of the farmers signed, to which there is no dispute about authenticity, and which designates Mr. Jackson as the agent for all. (Nor does Mr. Sterling’s answer probably help the defendant in a securities fraud case, since the “Mr. Jackson” in a “fraud on the market” claim is the market itself. If it is an efficient market, so the theory goes, it sets the price that everyone pays regardless of their individual assent.)
The problem with the hypothetical, therefore, is not that it fails to describe the type of fraud claim that might be appropriate for class treatment but instead that it does not describe most real-life fraud cases that are brought as class actions.
In most fraud claims, however, neither the question of reliance nor the question of loss causation is a common question. In most cases, the reliance that would have to be proved for any class member to prevail would be the class member’s own reliance. Unless the case involves a situation in which no reasonable person would take any action other than the one that the plaintiff claims could have been taken for class members to avoid injury, reliance is probably not a common question. Moreover, the existence of a common injury is not necessarily a common question in most cases because the existence of some better alternative often can only be evaluated on a case-by-case basis.
For example, take away the common agent and change the hypothetical as follows, and the common issues go away: A seed salesman sells corn seed to 1000 farmers for $1 per thousand, and falsely claims, uniformly to each of the farmers, that the seeds grow ears of white-colored corn, but truthfully claims that the corn will be drought-tolerant and delicious. In fact, they the seeds grow ears of slightly yellowish corn.
Though the fraudulent statement was uniform, the lack of a common agent to rely on it injects problems with reliance and causation that should prevent this claim from being tried (fairly anyway) on a class-wide basis. Proof of reliance will require that the color of the corn was an important attribute to each farmer, and that he would not have purchased the seeds if they had been advertised as being off-white. Many farmers may not care what color the corn is, as long as it is drought-tolerant and delicious, and the only way to resolve the reliance question for sure is to adjudicate each farmer’s claim individually. Proof of causation will require, in addition, that a given farmer had an alternative source of white corn available. If not, and the farmer would have been compelled to buy the supplier’s seeds regardless of the color, then the false statement, even it if was relied upon, caused no injury. Note that even in the hypothetical that includes a common agent, causation of injury may not be common because there may be farmers on whose behalf the agent would have been forced to buy the supplier’s seeds regardless of the false statement about color. These same issues come up any time there was not one obvious course of action and palatable alternative that all members of a would-be class would take if the true facts had been revealed.
So, Justice Bryer’s hypothetical may illustrate the type of fraud claim that would be appropriate for a class action, the unique facts in the example can also serve to illustrate why many fraud claims should not be certified as class actions.
Read Full Post »