Class-Action Surge Strains Processing Abilities
Amid rising litigation, financial firms bolster resources or tap third parties
March 16, 2009
As securities class-action lawsuits mount, money managers and their financial intermediaries are beefing up internal resources or turning to third-party processing agents to handle the complex operational work required to retrieve billions of dollars of settlement funds.
Of the 201 federal class actions filed last year, 103 named financial institutions as defendants, according to the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research. Ninety-seven of those cases involved the credit crisis. In total, investors claimed losses of $856 billion--the highest since 2002-and 12 complaints involved at least $5 billion each.
This year there have already been several high-profile cases. In January, Indian software giant Satyam Computer Services was accused of securities fraud and hit with two class actions, and several investment firms have been targeted in relation to the Bernard Madoff scandal. Texas financier R. Allen Stanford's alleged $8 billion fraud has also generated several suits.
In a class-action lawsuit, investors don't collect if they don't meet criteria set by claims administrators. Those who file their claims on time share the pool of available funds on a pro-rata basis, leaving those who don't out in the cold.
"Some financial firms and money managers are sticking their heads in the sand rather than filing the necessary paperwork," asserts David Monks, director of International Class Actions Management (ICAM), a London- and New York-based settlements processing service. Monks estimates that 40 percent of institutional investors or their intermediaries file claims.
"There is no regulatory requirement to file, so investment advisers, custodian banks and investors often pass the onus to each other," explains Michael Egan, managing director of Class Actions Claims Management in Charlotte, N.C. "Although there is a general consensus that there is a fiduciary duty to file these claims, there is no clearly delineated responsibility."
Legal experts, however, predict that the Securities and Exchange Commission will issue guidance on the matter within two years.
Cumbersome Process
Handling class-action settlements is cumbersome. Prior to notifying investors, intermediaries or their clients have to locate information on pending cases. Then they need to determine who is eligible to participate and file documentation with the court-appointed claims administrator. Finding the transactional data often means scouring multiple databases and working with other service providers.
"Some cases involve multiple, non-overlapping class periods," notes Adam Savett, director of RiskMetrics Group's class-actions settlements unit in New York. "In others, foreign investors can't participate," or different classes of securities are affected. Adding to the difficulty, says Savett, are inconsistencies in how claims must be submitted. "The information that must be included in column A of one claim administrator will be in column B for another," he says. As a result, it can take three to four years for an investor to receive compensation.
For assistance, many firms use data vendors that charge annual subscription fees. Others rely on full-blown processing services, which use a subscription model, charge contingency fees--where they are paid only when successful--or offer a hybrid pricing plan.
Stanford's database is free, but it covers federal class actions--cases filed in state courts are included only when there are parallel federal claims. Many plaintiffs' attorneys also offer free databases or provide information on their Web sites. Interactive Data Corp. says that its class-actions notification service, which uses International Organization for Standardization (ISO) 15022 message types, has 40 clients.
