Securities class actions provide an efficient remedy when individual investors’ losses are small. When the amounts at issue are not sizable, aggregation of investors’ claims through the vehicle of a class action can provide recovery for investors where it would not have been in any individual investor’s interest to bring suit.
The problem is that securities class actions generally provide poor recovery, with pennies on the dollar often paid to the typical investor class member. A 2008 study demonstrated that “the ratio of median settlements to investor losses . . . stayed relatively steady in the 2-3 percent range over the past few years.”[1] And that’s not the worst of it. “[A]s investor losses increase, settlements increase at a much lower rate: a 1.0 percent increase in investor losses results in an approximately 0.4 percent increase in the size of the expected settlement, other factors being held constant.”[2]
Investors with significant securities losses need not accept what the class action system has to offer, however. While absent class members who do nothing will find themselves precluded from bringing suit once a class has been certified, class members can elect to opt out of a class action and bring their own opt-out suit to recover for investment losses. Opt-out actions allow investor plaintiffs to assert individualized securities claims to recover for their investment losses despite the pendency of a class action relating to the same subject matter, and with the potential for far greater recovery.
The WorldCom securities scandal and resulting class action was the first case to see investors with significant losses opt out, and the results were startling. Dozens of investors opted out of the class action settlement.[3] Five of them, pension funds, received $78.9 million in opt-out recovery on $130 million in alleged losses. This was estimated to be “three times more than they would have recovered if they had joined the class.”[4]
WorldCom was the just beginning. While the AOL Time Warner class action settled for a whopping $2.4 billion, opt-outs still fared better. The State of Alaska, for example, opted out of this settlement and recovered $50 million, which it announced was “50 times more than what we would have received if we had remained in the class.”[5] Another AOL Time Warner opt-out plaintiff, CalPERS, recovered $117.7 million on claimed losses of $129 million, a 90 percent recovery rate; its general counsel stated that the settlement represented “approximately 17 times what we would have recovered if we stayed in the class.”[6] The University of California estimated that its AOL Time Warner opt-out recovery was “16 to 24 times” what it would have enjoyed in the class.[7] Five Ohio state pension funds, in turn, received $135 million more than they would have been entitled to under the class settlement.[8]
The Qwest securities fraud settlement saw equally impressive opt-out numbers. The Alaska attorney general claimed that his state’s pension funds recovered 45 times what they would have received under the class.[9] The Teachers Retirement System of Texas claimed a 40-to-one recovery, opt-out versus class; the multiple for opt-out plaintiff CalSTRS in the Qwest action was thirty times the class recovery.[10] And there are others. In the Tyco securities class action, for instance, several New Jersey pension funds opted out to eventually recover 80 percent of their claimed losses; meanwhile, total recovery for class members, in contrast, was estimated by some to represent only 3 percent of the loss of the market capitalization due to the fraud.[11]
As one commentator aptly noted, “[t]hese are not small differences.”[12] And it is not just the odd-bird fund or eccentric investor that is taking the opt-out route. Some prominent names in the investment industry have been among those electing to opt out of class actions and pursue separate recovery in recent years. These include Vanguard, PIMCO, AIG, BlackRock, Janus, Russell Investments, Federated Investors, Fred Alger & Company, Rabobank, Nuveen Investments, Capstone Asset Management, Munder Capital, Stichting Pensioenfonds ABP, Oaktree Capital Management, Trust Company of the West and AUSA Life Insurance Company.
An additional advantage gained by the opt-out plaintiff is speed of recovery. When a securities class action settles, as they often do, getting paid can take time. First, the court must grant preliminary approval of the proposed settlement.[13] Then, notice must be sent to all class members, who are given an opportunity to object to the settlement before final court approval. After the court deems the settlement fair and signs off, class members are given a period in which to file forms with a claims administrator to claim their portion of the recovery. Those forms then have to be processed. After the claims forms are submitted and reviewed, settlement proceeds can begin to be disbursed.[14] In contrast, the typical opt-out plaintiff can get paid more quickly. There is no arduous claims administration process or need for court approval. One advantage to remaining a class member is no up-front cost. Securities class actions firms typically front the litigation costs, which can run in the millions. However, alternative fee arrangements are not uncommon in the opt-out context.
Finally, opt-out plaintiffs retain control. Most class members sit on the sidelines, with no interaction with the attorneys representing them and little or no say in directing the course of the litigation or negotiating a settlement. Opt-out litigants, in contrast, communicate directly with their attorneys, ensuring that their interests are best represented and participating in settlement negotiations and other key decisions.
The upshot of all this is clear. Institutional investors with significant losses on account of securities fraud may recover more as opt-out plaintiffs than class members in securities fraud actions. Rather than sit back, let class counsel take the lead, and share in whatever class recovery is eventually offered, institutional investors have their options and, with increasing frequency, they are choosing a different path.
[1] Stephanie Plancich & Svetlana Starykh, “2008 Trends in Securities Class Actions,” NERA Economic Consulting, at 15 (Dec. 2008).
[2] Id. at 13.
[3] John C. Coffee, Jr., “Accountability and Competition in Securities Class Actions: Why ‘Exit’ Works Better than ‘Voice,’” 30 Cardozo L. Rev. 407, 426 (2008).
[4] Id. (citing Kevin LaCroix, “Opt-Outs: A Worrisome Trend in Securities Class Action Litigation,” InSights, April 2007, at 3).
[5] Josh Gerstein, “Time Warner Case Finds a Surprise,” N.Y. Sun, Dec. 7, 2006, at 1.
[6] Gilbert Chan, CalPERS’ “Time Strategy Pays Off: The State Pension Fund Gets $117.7 Million after Opting Out of Class Action against Media Giant,” Sacramento Bee, Mar. 15, 2007.
[7] Id.
[8] “Time Warner Settles Lawsuit for $144 Million,” L.A. Times, Mar. 8, 2007, at C6.
[9] Press Release, Alaska Dep’t of Law, “Department of Law Announces $19 Million Settlement in Securities Fraud Claims against Qwest Communications International,” Nov. 21, 2007, available at http://www.law.alaska.gov/press/releases/2007/112107-QwestComm.html.
[10] Coffee, supra, at 428.
[11] See Matthew P. Siben & David A. Thorpe, Recovering Investment Losses, at 6, available at http://www.dstlegal.com/downloads/Recovering-Investment-Losses.pdf.
[12] Coffee, supra, at 427.
[13] Fed. R. Civ. P. 23(e).
[14] See generally Manual Complex Lit. § 21.6 (4th ed. 2004) (regarding settlement classes and procedures relating thereto).
Published October 18, 2012.
