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Still Having Trouble Getting Your Money Back?  You’re Not Alone

By:  Jonathan R. Davidson, Partner

Kessler Topaz Meltzer & Check, LLP

Over the last decade, we have checked in from time to time on the current state of claims administration for U.S. public pension funds relating to securities class action settlements and judgments.  At every turn, we have seen challenges confront the public pension community, making it harder to recover their respective share of proceeds from these cases.  From difficulty maintaining historical data necessary to perfect a claim in securities cases with particularly long duration, to custodial change and general issues with service providers, to the proliferation of cases being litigated around the globe post-Morrison v. National Australia Bank, the issue of claims administration continues to be a thorny one for public pension funds of all size.  If not serving an active role in a particular case, the most important part of the class action process is filing a claim when you are eligible in order to meet your fiduciary obligations.  This article will examine what is happening in claims administration today, dissect, in case study format, the ramifications of not getting the process right, and finally, provide suggestions for public pension funds to consider implementing in hopes of refining their procedures and ensuring all available funds are collected.

The Current State of Claims Administration

            According to NERA Economic Consulting, between 2005 and 2016, over $62 billion dollars in securities class action settlements and judgment proceeds were made available to investors.[1]  It is generally accepted that institutional investors have a fiduciary duty to take reasonable steps to recover these funds which are owed to them.  Yet despite this fiduciary duty and the amount of money at stake, claims filing participation remain strikingly low. 

Comparatively little research has been done in this area, since the seminal study conducted by Professors James D. Cox and Randall S. Thomas in 2005[2], which found that only 28% of institutional investors at that time were filing claim forms, thereby leaving billions of dollars on the table each year.  That being said, recent estimates compiled from NERA Economic Consulting and Cornerstone Research suggest that those figures haven’t improved by much, with only 35% of eligible institutional investors filing claims in U.S. settlements.[3]  The low U.S. claims filing rates, and changes in the legal and regulatory landscape (including the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, which has forced investors to pursue a recovery outside the United States for securities fraud losses stemming from shares traded on non-U.S. exchanges) which has further complicated the issue, has meant that twelve years after Professors Cox & Thomas’ study, institutional investors are still leaving billions of dollars on the table.


Recent Issues Causing Grief for Public Pension Funds

            In recent years, to add to the already challenging claims administration process, some new issues have arisen to further muddy the water.


Change of Custodian

            Since the financial crisis, we have observed public pension funds, including a number in Florida, making changes from one custodial bank to another for a variety of reasons.  When a public pension fund changes their custodial bank, this can give rise to an overlooked issue when it comes to claims administration.  For example, when a class period in a securities case spans the time of the custodial transition, the outgoing custodian and the newly hired custodian might each have insufficient data to file a complete claim on behalf of the public pension fund.  When this happens, and when two claim forms are submitted (one by each custodian for the data under their custody), the claims are frequently rejected by the claims administrator as deficient.  If these deficiencies are not remedied (which we believe is almost always the case), the result can be a significant lost opportunity for the public pension fund (see the Merck case study below for further discussion).


Former Custodians Getting Out of the Claims Filing Business

            In addition to the deficiency issue noted above with regard to custodian change, many custodians are simply getting out of the claims filing business altogether for former clients (or charging fees and/or taking a percentage of the recovery for this service).  This presents public pension funds with a difficult choice.  If the pension fund is fortunate enough to have all of their transaction history, they might be able to work with their current custodian to jointly construct claim forms which require both older and newer transaction history.  If the pension fund does not have the old transaction data in-house (which is often the case), they are at the mercy of the former custodian – either pay a fee to have them file the claim on behalf of the fund (what if the fee to file is larger than the actual recovery?) or give up a percentage of the recovery.  Many of our clients have faced this situation in the past two years.  Neither scenario is particularly attractive and gives rise to a risk that pension funds will fail to recovery proceeds owed to their members.


Current Custodians Outsourcing Claims Filing to Third-party Vendors

            Furthermore, some custodial banks are now outsourcing claims filing responsibilities to third-party filers, which present additional considerations, including the threshold question of whether the custodian has properly disclosed this to the client.  We have seen multiple instances in recent years where the public pension fund was not aware their custodian was no longer handling the claims filing process in-house.  While the end result may not prove harmful, at a minimum, the fund should know which vendor is doing work on its behalf.  Further, we have observed significant differences in the scope and accuracy of claim filing services provided by paid third-party filers, and as such, this may be more than a simple disclosure problem, and result in an actual failure to file claims. 


Case Study:  Merck Settlement ($1.062 billion)

            As discussed above, change in custodian is one of the biggest reasons why public pension funds fail to file claim forms in securities class action settlements and judgments.  Below is an example of the issue a pension fund faces when they have changed their custodial bank, and the class period in a particular securities class action case spans the time of the custody change.  This scenario presents a problem for the fund in being able to properly file a completed claim form.  The resulting financial impact that can occur to the fund is presented here.


·         Class Action Settlement:  In re Merck & Co., Inc. Securities, Derivative & “ERISA” Litigation, No. 05-1151 (D.N.J.)

·         Gross Settlement Amount: $1.062 billion

·         Class Period: May 21, 1999 – October 29, 2004

·         Custody Change from Custodian A to Custodian B occurred on August 1, 2004


In this situation, each custodian, Custodian A and Custodian B, would file a separate settlement claim for a public pension fund’s class period transactions that occurred while the investor was under its custody, resulting in the fund having two filed claims with partial class period transaction information.  Custodian A would file using the transactional data from the beginning of the Class Period to the time of the custody change, and Custodian B would file for transactions made from the time of the custody change to the end of the Class Period.  Although both claim forms are for transactions made by the same public pension fund (and may well have been made by the same money manager before and after the custody change), because the claims were filed separately, they would be processed separately by the claims administrator.

Please review the chart below.  Each claim, when processed separately, would be marked deficient because of the 4,000 shares that transferred from Custodian A to Custodian B during the Class Period.  Despite the deficiency, the claims administrator would calculate a recognized loss for each claim pursuant to the court-approved plan of allocation to the extent possible.  Since Custodian A’s claim shows that 4,000 shares were delivered out in August 2004, and not sold or held after Merck’s corrective disclosure that occurred in September 2004, the claim would calculate to no recognized loss.  Custodian B’s claim would have a $7,950 loss on the 1,600 shares that were purchased under Custodian B’s custody.  But what about the 4,000 received shares in Custodian B’s claim?


In U.S. settlement claim administration, transferred shares are considered “free deliveries” and “free receipts.”  In this example, the cost basis for the 4,000 shares that were transferred from Custodian A to Custodian B would never be accounted for.  The two separate claims distort the full picture of the public pension fund’s class period trading, and even though the 4,000 shares were (after the custody change) sold or held after the disclosure, the claims administrator cannot treat them as such on two separate claims. 

In this example, the recognized loss of one complete claim far outweighs the sum of its parts.   Had one complete claim been filed by a single filer, the cost basis for the 4,000 shares would have been accounted for and added significant monetary value to the public pension fund’s claim, resulting in a recognized loss of $37,626.10.


What Can Public Pension Funds Do To Improve in this Area?

            As discussed herein, the claims administration process continues to evolve and so must the processes that public pension funds have in place.  Here are a few suggestions:


1)      Ask questions:  Discuss how much money your fund has received in proceeds from securities class action settlements/judgments in the past few years?  What claims have been submitted and are awaiting distribution from the claims administrator?  Did you miss out on submitting a claim for a U.S. case for any reason?  Were you not able to participate in the recovery of a non-U.S. jurisdiction settlement because you never registered for the case at the outset of the action?  Only by asking these questions will you get the bottom of this area of your fund’s affairs.


2)      Audit:  Conduct both a historical (2-year) and ongoing (quarterly) audit of your custodial bank or other third-party filer to check their accuracy in the claims filing process and then, to keep them on their toes going forward, audit them every quarter thereafter.  To the extent any missed claims are identified along the way, immediately contact the claims administrator for the settlement in question to see if it is possible to submit a late claim or remedy a deficient one.  As long as settlement proceeds have not yet been distributed, often this can be done.


3)      Insert Language into ALL Custodial Agreements:  To help ensure that you are not put in a difficult situation when changing custodians, consider including a provision in all custodial agreements your fund executes going forward to ensure your transaction data is properly returned to you at the end of the contractual relationship.  Having this data in-house will help your fund avoid the Merck problem identified above. 



            Claims administration in securities class action settlements and judgments will never be Agenda Item #1 at your Board meeting.  Public pension funds simply have more important issues to deal with, chief among them, meeting investment returns in often difficult market environments, ensuring the proper administration of their investments, and generally, acting as good fiduciaries for the money entrusted to them.  That being said, with the truly global nature of securities litigation in this post-Morrison world, public pension funds should continue to be vigilant in this area.  The significant proceeds generated from securities class action settlements and judgments are an asset owed to you – do what you can to ensure you are getting it back.

[1] See Stefan Boettrich and Svetlana Starykh, Recent Trends in Securities Class Action Litigation: 2016 Full-Year Review: Record Number of Cases Filed, Led By Growth in Merger Objections Highest Number of Dismissals in the Shortest Amount of Time,, (January 2017).

[2] See James D. Cox & Randall S. Thomas, Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements, 58 Stan. L. Rev. 411 (2005).

[3] See Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, Securities Class Action Filings: 2016 Year in Review,, (January 2017).