Only 28% of institutional investors with provable losses on average file claims in securities class-action settlements, according to empirical research by two academics.
These investors are letting billions of dollars "slip through their fingers" by not filing claims, James D. Cox, professor of law, Duke University School of Law, Durham, N.C., and Randall S. Thomas, professor of law and business, Vanderbilt University Law School, Nashville, Tenn., wrote in a study, which contains disturbing findings, valuable insight and useful recommendations.
"In 2004, securities fraud class action settlements produced $5.45 billion in cash to be distributed to defrauded investors" in settlements, they noted.
The "data provide an inescapable and startling conclusion: Financial institutions with significant provable losses fail at an alarming rate (approximately 70%) to submit their claims in settled securities class actions," they wrote in their study in Stanford Law Review last December. "Moreover, not only are their losses significant, but the sums of money they likely would gain by filing claims are also not trivial, both in the aggregate and on an average individual fund basis."
They also found that the largest institutions tend to be the most aggressive in the lawsuits, with "larger public pension funds filing all claims, irrespective of their value."
Their study of 118 cases found a mean 28.06% of institutional investors filed claims.
The average loss is fairly substantial: the mean is $848,376 and the median, $277,405.
"Of course, what most likely should guide the decision whether to file a claim is not the loss suffered, but the recovery expected," they wrote. The "average recovery rates are about one-third of losses," or about $280,000 of the mean loss or $90,000 of the median loss.
Either amount recovered "would seem to be a significant return on the small costs (in terms of time and money) of filing a claim in a securities fraud class-action settlement," they wrote.
In their 44-page study, they suggest a number of reasons for the low filing rate. Among them: conflicts of interest of money managers.
"Financial service providers try not to align themselves with protagonists of their clientele," they said. "This fact may explain why we find no recorded case where a bank, mutual fund, or insurance company has served as a lead plaintiff in a securities class action. Why should a firm step forward to lead the assault on executives who have issued misleading reports if such visibility could pose problems in soliciting banking, insurance, or pension services from other executives …"
Another problem is that "four years or more can elapse" between the time an investor purchased a security that subsequently would become subject of a class action and the announcement of a settlement in the case, they noted. This interval "has serious implications for whether the institution is likely to file a claim in settlement," they wrote.
Related to that issue is the degree of attention of custodians, which often handle claims filing for pension funds, and the problems tracking historical holdings that might be eligible for settlements in class-action cases that arise as pension funds change money managers and custodians.
The authors, in recommending a number of worthwhile solutions to raise the filing rate, conclude, "The claims-filing process needs to be fixed, and the institutions are in the best position to push for needed changes. If the current system and its related practices continue, we will continue to document apathy among institutional claimants and lose some of the impetus for making the provisions of the (Private Securities Litigation Reform Act of 1995) work to the benefit of all investors."
