When an estimated two-thirds of institutional investors aren't filing claims for their share of settlements in securities class-action cases, we have to ask whether the blame falls on the competence of the organizations, or on the complexities of the process.
We think the answer is both.
The process for filing claims in securities class-action settlements needs to be streamlined. A lot of money is at stake: The Worldcom Inc. settlement alone provided some $6.1 billion to be distributed among investors harmed by the fraudulent activity.
Despite the growth in securities litigation and settlements, the process still is cumbersome. It is challenging to even the most diligent and conscientious institutions, and leads many to fail to file claims.
The amount agreed upon in settlements or awarded in suits is much larger than it was a decade ago, meaning investors have more to gain or lose. Institutions that don't file claims lose their share of the settlement, and trustees who fail to ensure those claims are filed most likely are breaching their fiduciary duty.
Some large institutions are filing and recovering some of their losses. As Dan M. Slack, general counsel for the $13.3 billion Illinois State Universities Retirement System, Champaign, noted, the SURS received $274,819.43 in proceeds in some 50 claims in the first nine months of its fiscal year, from July 1, 2004, through March 31, 2005. It had received $292,349.50 in proceeds from 71 claims for the year ended June 30, 2004.
Mr. Slack pointed out the entire settlement is disbursed to filers of claims; thus filers, in addition to receiving their awarded part of the claim, share, pro rata, the amount of the settlement not claimed. "What we get depends on what percentage of the class files claims," Mr. Slack has said. "A certain percent doesn't file claims."
Bruce Carton, vice president and executive director of Securities Class Action Services cites several obstacles to a smoothly operating claims system, none of which is insurmountable. There is no centralized source of settlement information, no definitive rules on who is responsible for filing claims, no standardized forms and no coordination between securities class-action and SEC settlements. The process is more costly than it should be, eating away more of the restitution than it should. (SCAS, a unit of Institutional Shareholder Services Inc., maintains a database on securities class-action litigation and provides monitoring and claims filing services to investment managers whose clients have a stake in class-action suits.)
Having a central repository on settlements is a good idea. Institutional investors ought to provide the wherewithal to set it up and maintain it. Lead plaintiff attorneys would log settlements as they occur, allowing investors one place to check for new actions. Forms should be standardized to the extent possible and filings done electronically.
There is no excuse for any ambiguity on the responsibility for filing claims. Pension funds and other fund sponsors ought to provide in contracts with money mangers and custodians procedures and responsibilities for filing claims. Custodians now typically handle claims, although the process wasn't so clear a few years ago and some sponsors use other services. Sponsors ought to regularly verify that all the claims to which they are entitled are being filed and collected.
Aside from class-action settlements, the SEC in 2002 created the Fair Funds to distribute civil monetary penalties and disgorgement to investors harmed by corporate violations, a settlement process that is relatively new and should be evaluated for improvement and coordination. The Fair Funds include a recent Worldcom Inc. SEC settlement providing for distribution to investors $750 million.
Some people are taking the lead in an effort to streamline claims processing. Sarah Miller, director of the Center for Securities, Trusts and Investments of the American Bankers Association, organized a group of bankers and others, including Mr. Carton, to meet with SEC officials June 22 about streamlining the claims filing process. She says the group plans to have further conversations with SEC staff.
Certainly there is no excuse for not filing claims, however inefficient the process. After all, the incentive is to get claims to the rightful owners.