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Hedge Fund Primer: Securities Class Action Settlement Recovery

By Jennifer Carberry, Battea | Tuesday, July 17th, 2012

Investor protection and fiduciary responsibility are fundamental principles to the successful operation of the US securities markets. Securities class action lawsuits are a last resort by shareholders and institutional investors to remedy breaches of these principles. For hedge funds, gaining an understanding of the legal process, trends and key concepts of these legal actions is relevant considering the size and scope of these settlements.

Securities Class Action Litigation Process

The securities class action litigation process is complex and lengthy. A multitude of stages and legal procedures can require three to seven years until a single award is distributed. Very few cases actually go to trial due to juries having a history of awarding overly generous settlements to plaintiffs. Consequently, for cases that are not dismissed, the plaintiff and defense typically negotiate a settlement which is then approved by the court. A Plan of Allocation is published which specifies how damages will be calculated and who is eligible to receive a prorated portion of the settlement. A claims administrator is hired to validate claims and disburse settlement awards to the eligible claimants.

Recognized Loss, Proration and Complex Filing Considerations

The Plan of Allocation in a settlement details what is called a Recognized Loss. This is NOT a loss in the real world; the Recognized Loss is the amount calculated by applying the rules of a settlement to determine what a claim is worth. It rarely corresponds to an out-of-pocket loss, and frequently exists despite real-world profits. The recognized loss figure is important because claimants need to be able to confirm the loss number that represents their portion of the settlement fund with the Claims Administrator prior to distribution to ensure settlement awards are accurate.  Accurately calculating recognized loss and fund proration is complex as there are many considerations that come into play including: accounts versus subaccounts, netted versus transactional summing, market loss treatment, FIFO versus LIFO, overlapping rules, derivatives, splits, options, IPOs, merger activity and commissions, among others.

Perception versus Reality: the Value of Claims

In order for an investor to recover his/her share of the settlement, a claim must be filed with the appointed claims administrator. Many investors receive class action settlement notices at home and, more likely than not, disregard them as a poor investment of their time. Admittedly, as an individual investor, it may not be worth the time, but institutional investors may be eligible for significant awards and have a fiduciary responsibility to file for their customers. Despite the potential windfall from such settlements and the fiduciary obligation to file, the process of actually recovering awards can be a complex and confounding task. Whether done in-house or by a third-party filing vendor, each institutional investor must evaluate the most efficient means by which they can address their responsibility for filing claims and maximize collection of the awards for which they are eligible.

Outsourcing Class Action Recovery

With securities class action settlements often in the news and an increased scrutiny within the hedge fund marketplace, more hedge fund firms are taking action and attempting to manage the settlement recovery process in-house. Most hedge funds operate with very lean staffing and the task of claims recovery is one of many piled on the Chief Operating Officer or General Counsel. Battea employs a team of 25 professionals to track and manage all securities class action litigation activity for over 300 financial institutions around the globe.

One Battea client was filing claims in-house and, due to resourcing, the firm chose to file claims in well publicized cases where they knew they held a position. They had received some settlement monies, but after talking to Battea, were convinced that they were missing out on settlements by not having a comprehensive securities class action recovery program with mechanisms in place to ensure that no eligible settlement funds are missed.  Battea analyzed the firm’s 10+ year trading history and discovered 60 settlements for which they were eligible.  Battea filed the claims on their behalf, working closely with claims administrators and in some cases, were even able to recover monies for settlements for which the deadline had already passed. Ultimately, Battea recovered over $6 million for the client. 

Fiduciary Responsibility

For firms not filing securities class action claims at all, there is a significant opportunity to not only achieve fiduciary compliance, but to potentially add alpha to their bottom line. One Battea client, a $500 million long short equity hedge fund who had been filing class action settlement claims on their own, had several of their claims rejected by the claims administrators. The fund engaged Battea to analyze their historical trade data and audit their existing filings. Battea identified several issues, determining that their trade data had been formatted incorrectly, rendering their claims inaccurate. After correctly processing the data, Battea identified several missed cases, and after submitting their corrected filings, recovered over $2 million in awards for the client. With a pay-for-performance model, clients only pay for Battea’s recovery services when actual settlement monies are delivered.

Technology & Data Security

Today’s investment advisors have billions of trading transactions, all of which must be processed and compared to the universe of existing securities class action settlements in order to collect all eligible settlement dollars. In addition to significant technological horsepower necessary to process and handle that data, client data is extremely sensitive and must be subject to the highest standards of security.

About Battea – Class Action Services

Battea – Class Action Services, LLC is the leading securities class action settlement recovery firm for institutional investors and counts over 300 institutions among its clients, the majority of which are hedge funds. Through its proprietary technology platform, The Claims Engine®, Battea provides a comprehensive and transparent class action settlement award recovery solution across all asset classes, from calculating recognized loss for every claim through the confirmation, receipt and delivery of settlement payouts. Battea has been recovering funds for clients since 2001.

Photo Credit: Alternative Asset Summit

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