Maximizing Recoveries from Securities Class Action Settlements. A Financial Recovery Technologies Whitepaper

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1 Maximizing Recoveries from Securities Class Action Settlements A Financial Recovery Technologies Whitepaper

2 Summary According to NERA Economic Consulting, over 2,200 federal securities class actions have been filed in the last 10 years, resulting in over $58B in settlement funds made available to investors. Recent trends indicate that the number securities class actions will continue to rise, with a steady stream of litigation increasing the pool of available recovery funds. Mega-cases like Enron, Worldcom, and Tyco have dramatically increased settlement values in the past few years, and increased accounting scrutiny and legislation due to the financial crisis is expected to fuel future class action cases. In fact, 2011 filing levels held pace with the past three years, driven by class actions related to securities fraud, M&A transactions, and litigation against Chinese issuers listed on U.S. exchanges. The finalization of the Dodd- Frank Whistleblower Program is expected to also drive filing volumes going forward. Last year also marked the third highest median settlement value on record. Despite these trends and the aggregate amount of settlement funds available, industry statistics show that a staggering 65% of settlement dollars go unclaimed, totaling billions of dollars each year. Why are investors leaving so much money on the table? Much of the issue can be traced back to the requirements for participating in the class action. Class action lawsuits filed against companies on behalf of investors require current and past shareholders to file a claim to participate in any distributions. Securities class action settlement funds are often overlooked because filing claims is a complicated, laborious and tedious process that often ties up back office resources, which these days are increasingly overburdened. In addition, firms that are attempting to scour past trading data and prepare such filings often lack the tools to do so on an accurate and comprehensive basis. Finally, many firms incorrectly assume that the funds they would receive aren t likely to amount to anything significant and not worth the time and effort required to file for them.

3 A Primer on Securities Class Actions Class action settlements are one of many possible end results from lawsuits filed on behalf of investors who claim a financial loss in a particular stock, typically as a result of a violation of securities laws, such as price manipulation, fraud, or improper trading. Members of a class action lawsuit claim to have suffered a financial loss as a result of a violation and therefore have a legal claim for damages against the company. To be eligible to join the class action case, an investor has to have held the stock during the class period - the time during which the questionable activity took place. A class action lawsuit can take years to finally be resolved, depending on a variety of factors such as the amount of evidence against the defendant, if the case settles or ends up going to trial, and whether or not the verdict is appealed. In the end, around onethird of securities class action lawsuits are dismissed and two-thirds are settled. Settlement recovery is a complex and resource-intensive process Once a case is settled, investors must file a claim to receive their share of the settlement funds. Class action settlement recovery is complex and resource-intensive, and errors and omissions frequently occur at each stage of the process, particularly when investors attempt to file on their own or rely on their custodian. There are four primary stages to the class action claims process: identification, analysis & matching, filing, and allocation. Each stage is subject to failure points, and we have listed some of the most common in the following sections.

4 Claims Process Stage 1: Identification Identification Identifying active securities class actions which may apply to positions that have been held by the firm in the past Common Issues Notifications commonly do not get delivered to the responsible party Paper notifications get lost, returned to sender, or are easily missed or mistaken for junk mail Notifying firms lacking correct contact or custodial information or send notices to incorrect address Intermediaries / past providers fail to forward all notifications Notifications may be discarded because they are assumed to be not applicable to positions actually held or not likely to result in material payments Best Practices Implement automation to proactively scour industry data sources to identify all cases and ensure that every possible filing can be made Electronically compare trading history against database to identify all eligible security positions that match against open class action cases FRT CASE STUDY: Identification Previous Provider: Third Party Competitor Issue: No recoveries for over two years FRT success: Current client spent two years contracted with an FRT competitor and did not receive a single check. The client approached FRT to do an audit to determine if there were any potential claims. FRT determined they were eligible for 12 past deadline cases. The client converted to FRT and those 12 cases resulted in $600,000 in recoveries and total recoveries for client now stands at 1.8mm in less than three years.

5 Claims Process Stage 2: Analysis & Matching Analysis & Matching Common Issues Perform the proper analyses to match all 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. Failure to identify all applicable positions incomplete case information received searches that fail to return all relevant data problems in the underlying data data spread across multiple systems omission of some securities or positions incorrect interpretation of the rules in the class action Data integrity issues can have material impact on results or cause rejection of a claim due to: mixed transaction codes, disparate systems and data types, missing or broken CUSIP numbers, etc. unreliable or inconsistent matching of criteria and trading data inaccurate logic being applied to search results during validation Best Practices Avoid data integrity issues verify, normalize, and cleanse all trading data so no transactions are missed Calculate recognized loss to confirm that claims administrator payments are correct. Recognized Loss is the value of loss that is calculated based on applying the settlement rules described in each plan of allocation. This forms the basis for a claim s distribution and is rarely equal to the actual economic loss. FRT CASE STUDY: Analysis & Matching Previous Provider: Third Party Competitor Issue: Missed filings FRT success: Current client asked FRT to perform an audit on all potential claims. FRT uncovered 15 cases that were not filed which were filings FRT made upon converting the client. These filings led to 52 incremental settlement payments totaling over $1.4mm.

6 Claims Process Stage 3: Filing 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 Common Issues Flawed or inconsistent reporting of positions, trades, or data Failure to submit information in the correct format Insufficient back-up documentation provided to the claims administrators Portions of submissions lost, not transmitted, or not received Best Practices Ensure complete and accurate claim submissions: Filings must match the specifications of each particular plan of allocation Relationships with the claims administrators provide insight into the requirements for approved filings and a basis to dispute inaccurate calculations Often filings can be approved past the official filing deadline FRT CASE STUDY: Filing #1 Previous Provider: None Issue: Administrator no longer accepting claims FRT success: FRT signed up a new client well after the deadline of a particular case, and the initial filing was rejected for being too late. After lengthy discussions with the claim administrator the claim was eventually accepted; however, once the administrator processed the claim the initial response was that it had no value. FRT challenged that assertion by detailing our recognized loss calculations, and succeeded in securing over $2,360,000 in recovered funds. FRT CASE STUDY: Filing #2 Previous Provider: Internal Process Issue: Incomplete filing FRT success: After analyzing the filing made by the client, FRT determined the client was owed additional dollars. FRT submitted a filing and was able to increase the total amount recovered for the client from $71,300 to $190,600.

7 Claims Process Stage 3: Filing Allocation & Reporting Settlement payments are issued to the claimants Common Issues Incorrect payment amounts issued by the claims administrator, and the filer is unable to determine if the amount received is accurate without first calculating the expected disbursement based on the plan of allocation Disbursed funds may not be allocated to the correct client accounts because of insufficient detail provided by the claims administrator or the filer has not calculated the amounts per the plan of allocation Lack of reporting for compliance and audit purposes Best Practices Calculate the recognized loss for each claim in order to confirm that the amounts received from the claims administrator are correct and are properly allocated to each individual account Generate detailed reports that provide a complete accounting and audit trail for future reference FRT CASE STUDY: Allocation & Reporting Issue: Administrator issued incorrect recovery amount FRT success: The claims administrator issued our client a settlement check of $ Our system immediately recognized this was incorrect and we were able to revert back to the claims administrator to substantiate our recognized loss calculation. The claims administrator agreed and a check was re- issued for $192,913.

8 Outsourcing can deliver high value Due to the complexity involved in the class action settlement recovery process, outsourcing this function has become an option for turning this administrative burden into a competitive advantage. Companies like FRT specialize in securities class action settlements and offer investors a turnkey claims management solution to help identify eligible security positions, calculate recognized loss, file claims, and handle payment disbursement auditing and client reporting without using in-house resources. By outsourcing this function, asset and investment managers can: Minimize operational and administrative overhead by automating the claims filing and recovery process Increase shareholder funds from settlements by recovering more funds than they could on their own Reduce the risk of liability due to errors and omissions by ensuring optimal accountability and reporting integrity Save time and money while meeting fiduciary duties and providing better service and support to clients Conclusion: Best in Class Recoveries While the process of filing for class action settlements requires specialized expertise and capabilities, it is not beyond the reach of today s asset and investment management firms. Firms like FRT 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. About Financial Recovery Technologies Financial Recovery Technologies is a technology-based services firm that helps institutional investors identify eligibility, file claims and collect funds made available in securities class action settlements. Offering the most comprehensive range of claim filing services available, the firm excels by providing best-in-class eligibility analysis, disbursement auditing and client reporting, and by delivering the highest level of accuracy, accountability and transparency available. To learn more about FRT s service offerings, please visit