Do Those Billions of Dollars Left on the Table Belong to You?
POMERANTZ MONITOR | MAY JUNE 2021
In 2020, as courts and law firms adapted to operating during the pandemic, the number of securities class actions filed in federal and state courts was 22% lower than in 2019, according to Cornerstone Research. Its report, Securities Class Action Filings: 2020 Year in Review, reveals that “the 2020 total [334 new cases], however, is still 49% higher than the 1997-2019 average.”
In the last decade, there has been a significant spike in securities class actions brought outside the United States, in response to the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, which barred recovery for losses in foreign-traded securities under the U.S. federal securities laws. This trend continues to expand. Canada, Australia, and the Netherlands are becoming experienced in the class action process. Other jurisdictions, such as Poland, the U.K., Japan, Israel, and Saudia Arabia are moving towards that end by enacting class action or collective action laws to protect shareholders. Germany and Brazil, as well as other juris- dictions, have become host to opt-in litigations.
According to ISS Securities Class Action Services LLC, there were 133 approved monetary securities-related settlements worldwide in 2020, with a total of $5.84 billion recovered for defrauded investors. Investors, however, do not receive any money from a settlement unless they file a claim as part of the settlement administration process. In 2005, Professors James Cox and Randall Thomas, in a seminal article in the Stanford Law Review, reported that, as evidenced by their empirical research, more than two-thirds of large institutional investors failed to file claims in securities class action settlements. Although the number of institutional investors that do file claims is likely larger today, billions of dollars continue to be left on the table.
Due to the opt-out nature of American securities class actions—in which individuals and entities that fall within the class definition are automatically class members unless they take affirmative steps to opt out—damaged investors frequently have their rights vindicated in court without even knowing they are members of the class or, indeed, anything else about the litigation. That is why it is essential that institutions have access to a robust research and monitoring system to ensure they do not miss out on opportunities to recover assets.
Once an investor is aware that a potentially recoverable claim exists, navigating the claims filing process requires knowledge, experience and patience. To successfully recover assets in securities related actions requires expertise beyond simply gathering all one’s holdings and transactions into a spreadsheet and filling out a form.
Even with a favorable settlement in hand, investors should assess the fairness of its terms, particularly where their losses are significant. In some instances, the plan of allocation may not adequately compensate certain class members whose claims may be stronger than those of other class members. A classic example would involve claims arising under both Section 10(b) of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933. Section 10(b) prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security. Section 11 imposes strict liability against newly public companies for misstatements, even unintentional, in their registration statements and permits recovery for any decline below the stock’s initial offering price. Since Section 11 claims, unlike Section 10(b) claims, do not require proof of scienter—that is, the intent or knowledge of wrongdoing—they are stronger and should be treated more favorably under a plan of allocation. However, this is not always the case, and, in such situations, a fund may be well-advised to file an objection to the plan of allocation.
Pomerantz’s keen oversight of settlements’ fairness to our clients has, over the years, led to concrete results. For example, in the St. Paul Travelers Companies securities fraud litigation, Pomerantz challenged the formulae used to calculate recognized losses in the settlement terms. Consequently, lead counsel revised the plan of allocation, resulting in a 60% increase in recognized losses for our client.
If a fund’s damages are significant, it might choose to opt out of the class to pursue its own, individual claims. To reach this decision, it must weigh the likelihood of increased recovery against giving up a guaranteed payout from successful litigation, the risk of no recovery if the case fails, and the costs of litigation.
To properly monitor portfolios and to receive maximum recovery, at least a basic understanding of the substantive laws involved in the class action is necessary. This has become increasingly complex, as nontraditional case allegations emerge: for example, antitrust class actions in which the underlying anticompetitive conduct impacted the price of publicly traded securities and complex financial products; litigation related to the trading of credit-default swaps and foreign exchange products; and claims concerning cybersecurity, cryptocurrency, special purpose acquisition companies (SPACs), and #MeToo allegations.
For many institutional investors, the task of professional, active portfolio monitoring is too complex, too time-consuming, and too expensive to do in-house. In response to their needs, Pomerantz offers our clients PomTrack®, a proprietary, complimentary global portfolio monitoring service that notifies fiduciaries when assets they oversee suffer a loss that may be attributable to financial misconduct.
Spearheaded by Partner and Head of Client Services Jennifer Pafiti, PomTrack® provides one of the largest global portfolio monitoring services in the United States—currently monitoring for over 100 of the most influential institutional investors worldwide with combined assets in excess of $6.8 trillion. The PomTrack® team comprises attorneys and forensic economists, damage analysts, claims filing specialists, and paralegals, as well as a dedicated team of senior and junior support staff.
For nearly two decades, Pomerantz has been providing this portfolio monitoring service at no cost to our clients. The service includes the preparation of customized, monthly PomTrack® Reports that advise clients of every settlement in which they might be eligible to participate, and the deadlines for objecting and filing proofs of claims.
For a modest fee—a percent of the assets a client recovers in a settlement—the PomTrack® team also offers expert claims filing services for all stages of the process: filing the claim, working with the Claims Administrator to cure any deficiencies, and ensuring that the client receives the recovery to which it is entitled. If the client does not recover from the settlement, no fee is charged.
To learn how PomTrack may assist your fund in portfolio monitoring and claims filing, please contact Jennifer Pafiti: jpafiti@pomlaw.com