Archive for April 28th, 2011

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).

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