Securities Class Action Recoveries Blog

Securities Class Actions: Billions in Unclaimed Dollars

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Class Actions Settlements:  Why are billions of dollars going unclaimed every year?

There are many parts of the securities class action claims filing process that can fail. In our experience working with institutional investors, this inevitably occurs when entities attempt to file on their own or rely on their custodian. In fact, industry statistics show that on average over 60% of available funds have gone unclaimed, which equates to billions of dollars each year. 

Why is this the case?  The short answer is that errors and omissions occur at each stage of the filing process, and in many cases firms cannot tell what is missing or incorrect. 

There are four primary stages to the class action claims filing process: identification, analysis & matching, filing, and allocation. The following illustrates some of the most common failure points:

1. Identification: the process begins with the responsible party identifying active securities class actions which may apply to positions that have been held by the firm.  This is the first point at which the process can fail:

a. notifications commonly do not get delivered to the responsible party for various reasons:

i. paper-based notifications being lost or returned to sender
ii. notifying firms lacking correct contact or custodial information
iii. intermediaries / past providers failing to forward notifications

b. notifications that are delivered are discarded because they are assumed to be:

i. irrelevant / not applicable to positions actually held
ii. likely to result in immaterial payments
iii. junk mail / email

2. Analysis & Matching: once relevant class actions are identified, the second major step is to perform the proper analyses to match past investment positions with each applicable security.  This includes validating the eligibility of each position according to the plan of allocation (which varies by settlement).  Errors and omissions that occur at this point are commonly due to:

a. failure to identify some / all applicable positions; as this step is most often a manual process, omissions occur due to a variety of issues:

i. incomplete case information received – not knowing all CUSIPs that are involved in the class action
ii. flawed searches (e.g., searches that fail to return all relevant data)
iii. inconsistencies and problems in the underlying data
iv. data spread across multiple systems and therefore not all data queried
v. a lack of expertise or diligence on the part of the person who executes the search (leading to inadvertent omission of some securities/positions)

b. incorrect interpretation of the rules of the individual class actions

c. data integrity issues (e.g., mixed transaction codes, disparate systems, missing/broken CUSIP numbers, etc.)

d. unreliable or inconsistent matching of criteria and trading data

e. inaccurate logic being applied to search results during validation

3. Filing: when all of the applicable investment positions have been identified, matched and validated, the appropriate filings must be prepared and submitted to the claims administrators in order for funds to be received.  Errors at this stage often lead to:

a. Claim disqualification due to:

i. flawed or inconsistent reporting of matches
ii. failure to submit information in the correct format
iii. insufficient back-up documentation being provided to the claims administrators (this often occurs as entities must provide individual trade confirmations for all relevant transactions, which is very time consuming and may require records being retrieved from archival storage)

b. Omissions due to portions of submissions being lost / not transmitted

4. Allocation: following claims being processed by the administrator, settlement payments are issued to the claimants, however there are still opportunities for issues to occur:

a. Errors and omissions by claims administrators go undetected; the filing entity cannot determine if the amount received is complete without first calculating the expected disbursement based on the plan of allocation. This obscures:

i. incorrect payment amounts that are issued by the claims administrator
ii. disqualified filings (due to issues in the filing stage outlined above)

b. In addition, disbursed funds may not be allocated to the correct client accounts for a number of reasons:

i. insufficient detail is provided by the claims administrator
ii. the filing entity has not calculated the amounts per the plan of allocation

Unfortunately, all too many firms incorrectly assume that securities class action settlements fail to be worth the time and efforts required to file for them, and they elect not to do so.  Other firms that do file for class action settlements often fail to collect a significant portion of the funds that they are eligible to receive due to the reasons outlined above.

As a result, out of the more than $40B made available to institutional investors since 1995, $26B was not claimed by the beneficial owners.  This represents a failure on the part of institutions to fulfill their fiduciary responsibilities, not a failure of the judicial process to recover investor’s losses.

While the process of filing for class action settlements requires specialized expertise and capabilities, it is not beyond the reach of today’s investment management firms.  Firms like Financial Recovery Technologies (www.frtservices.com) are dedicated to addressing the challenges of filing for class action settlements. By partnering with financial institutions they are able to insure that every eligible filing is accurate and comprehensive, is properly submitted and accounted for, and that all eligible investor funds are recovered and disbursed to the rightful parties.