Class action lawsuits are soaring in number in the United States and overseas. And, as you would imagine, so is their complexity.
In 2019, 428 new securities class actions were filed — a new record, and almost double the annual average over the last 20 years.[1] And the pace so far in 2020 has only picked up in the face of the down economy and global COVID-19 pandemic.
Of the approximately $63.5 Billion U.S. securities class action Rule 10b-5 exposure based on cases filed in Q1 of this year, over 4% of those potential damages relate to COVID-19. [2]
U.S. Federal filings against companies headquartered outside the United States set a new record last year- 59.[3]
New cases filed outside the US have doubled from 2014 (29) to 2018 (59).[4]
As such, portfolio monitoring and asset recovery in class action lawsuits is evolving. Historically, cases were largely related to stock of U.S. public companies that were accused of accounting fraud. Now, class actions expanding globally, with numerous jurisdictions enacting class action like laws. Further, class actions lawsuits are being filed across other types of securities and complex financial products, creating new complex legal issues, brought under different substantive laws, and thorny monitoring and recovery issues related to both data warehousing, and claim eligibility rules.
Fiduciary obligations to notify clients of their legal rights or recover assets on behalf of clients and/or investors are not going away.
As a result of this growth and these complexities, billions of dollars are being unclaimed by eligible institutions each year. This is a look into the market, reasons for the growth and new complexities, and reasons so many firms are leaving so much money behind, even if they are already “filing claims.”
The Shift … and its Compounding Effect
There are a number of reasons compounding the growth in the number of lawsuits, but a key driver is the shift in types of conduct by public companies serving as the backbone of a class action lawsuit. Traditionally, the market had cases like Enron Securities Litigation, where U.S. securities laws were invoked to deal with billions of dollars of accounting fraud.
Lately, there is a massive spike in “event driven” litigation. This is where an event or specific bad conduct by a company or an officer results in a material stock drop, which then results in a class action by investors. Examples of recent or pending event driven class actions include Volkswagen Securities Litigation stemming from the emissions scandal; securities class actions resulting from the poor management of data breaches; and those related to the “me-too” movement.
These types of cases are based on relatively new legal theories, and they are growing. Several stock-drop class actions have already been filed based on a company’s conduct related to COVID-19, for example.
Global Litigation is Finally Here
Following the Supreme Court’s decision in Morrison[5] in 2010 a significant spike occurred in securities class actions brought outside the US. This has continued over the past decade and now is compounding.
While Canada and Australia have a fairly well-developed class action process, and to a lesser extent the Netherlands, other jurisdictions are starting to dabble. Countries such as Poland, UK, Japan, Israel, and Saudi Arabia, have class action or collective action laws to protect shareholders. The use of these laws as well as the emergence of similar laws in new countries will increase rapidly over the next decade.
While there have already been a number of significant securities class action settlements under Dutch law, the passing of a new class action law became effective this past January 1 which will make the Netherlands the forum of choice for non-US issuers going forward.
On top of all of that, and to make matters more confusing for portfolio monitoring, we have seen a spike in opt-in litigations in numerous jurisdictions, with Germany and Brazil in particular providing fertile ground for shareholder litigation.
Complex Securities … and More Complex Laws
To properly monitor portfolios, and even more necessary to ensure maximum recovery, at least a basic understanding of the substantive laws involved in the class action is important.
Over the last decade, we saw the emergence of antitrust class actions where the underlying anticompetitive conduct impacted the price of publicly traded securities and complex financial products. We’ve seen billion-dollar settlements related to the trading of credit default swaps and foreign exchange products (FX).
There is also much litigation related to various financial products impacted by LIBOR, from bonds to mortgages, and many more. Other recent settlements of significant value include ISDAfix, Euro Interbank Offer Rate, and Euroyen-based Derivatives.
This year, thousands of financial institutions filed claims in the nearly half-billion antitrust lawsuit involving GSE Bonds. This case has numerous defendants, multiple settlements and claims periods, and more than 60,000 separate eligible debt instruments and corresponding CUSIPs. These mega-cases aren’t going away any time soon, and they tend to be big dollar. Currently, we are tracking six U.S. antitrust class actions involving securities and complex financial instruments, and another six in various jurisdictions around the globe.
Don’t Just Check the Box – The Massive Opportunity
There has been a significant shift in the participation by financial services companies in the class action market. 20 years ago, it was largely ignored. Now, too many institutions – or their agents – simply “check the box.”
Asset recovery in class actions has long been the topic of top legal scholars. For example, Professor James Cox of Duke University School of Law wrote the seminal article in 2005: “Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements.”[6]
Since then many more financial institutions actually do file claims, either in-house or by hiring someone. That said, billions of dollars are still left on the table by many firms.
Why is Money Being Left on the Table?
Portfolio monitoring, claim filings and recovering assets in securities related class actions is much more than preparing a spreadsheet and filling out a form.
First, you must have a robust research and monitoring system and make sure you are not missing an opportunity. Second, you need early evaluation, often even before a settlement is reached, and particularly with regard to global opt-in litigations, to ensure you maximize your future recovery. Third, significant thought and effort must be given to filing complete, substantiated, viable claims. “Checking the filing box” is not enough. One needs to understand the rules of the court, and advocate for full recovery of their assets.
There are some questions to consider. Have you provided all relevant transactions? Are they kept on multiple platforms, with multiple custodians? Will your claim die because your transactions were kept across multiple platforms or custodians and not pieced together?
And fourth, once the claim is filed, work is definitely not done. You must track your claim and ensure it was received. You must track the administration and know approximately when a distribution may occur. A deficiency notice from the administrator is largely inevitable.
Timely responses are necessary – more importantly, this is your chance to correct or challenge the administrator’s work. They are experts in claims administration – not on your securities or trading activity, or even securities and the securities markets in general.
Check their work, calculate your losses yourself, and challenge the administrator where necessary. There is almost always a mechanism to do so. Mistakes happen. Don’t let them impact your recovery. You must advocate for yourself, and your clients and investors, or risk being part of the many who still leave billions of dollars behind each year.
What’s Next?
Continued growth. More complexities. New legal theories. New jurisdictions globally. More antitrust cases. In short, more risk; but much more opportunity.
New and emerging industries are providing fertile grounds for new case types. Consider the spike in crypto-currency class action filings and those related to Initial Coin Offerings in 2018. And the number securities class actions in the cannabis industry in 2019.
The laws continue to change that will impact your rights. Consider the new Dutch Law enacted January 1, 2020 -- the Resolution of Mass Claims in Collective Action (Wet afwikkeling massaschade in collectieve actie). Or the upcoming case in front of the Supreme Court, where they will likely decide if the Securities and Exchange Commission can seek disgorgements and return them to investors in federal courts.
One final thought. Pay close attention to the global transition away from the use of LIBOR next year. How companies handle that transition is sure to be a ripe area for class actions in the years to come. Pay close attention. Plaintiff’s attorneys will.
[1] Cornerstone Research, Securities Class Action Filings – 2019 Year in Review, (29 January 2020)
[2] “SAR Securities Class Action (SCA) Rule 10b-5 Exposure Report – 1Q 2020,” April 10, 2020, SAR.
[3] Cornerstone Research, Securities Class Action Filings – 2019 Year in Review, (29 January 2020)
[4] Class Action Processing: The Lesser-Known Post-Trade Headache, The Aite Group (January 2020)
[5] Morrison v. National Australia Bank, 561 U.S. 247 (2010)
[6]Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements, Professors James Cox and Randall Thomas, Stanford Law Review, Vol. 58, p.411, 2005.
Published May 19, 2020.
