Recovering monies from class action settlements should be a risk-free revenue generator, but that’s not the case for many money managers, broker-dealers and their custodians. Instead, the process is fraught with operational errors, which results in billions of dollars in uncollected compensation each year.
The COVID-19 pandemic has not only changed the types of securities class action lawsuits, but also raised the administrative challenges in collecting what is rightfully due. Remote work has made it more difficult to accomplish the multi-task process. The figures tell a sad tale of missed opportunities by buy-side firms and their service providers. Only thirty percent of institutional investors, by some estimates, ever file a claim and less than five percent of retail investors do so. The percentage of investors collecting any money is even lower when mistakes are added to the equation. James Tharin, chief executive of Chicago Clearing Corporation, and Brian Blockovich, president and general counsel of the US’ largest claims filer, recently spoke with Chris Kentouris, the editor of FinOps Report, about the problems faced by money managers, broker-dealers and custodians in handling claims filings and why outsourcing is a potential solution. Here is what Tharin and Blockovich had to say:
Mr. Tharin, can you please elaborate on the operational challenges faced by money managers, custodians, and even firms such as yours in collecting funds from securities class action settlements?
Tharin: Before I answer your question, Chris, let’s set the lay of the land. Securities and financial antitrust class actions are part of the financial fabric. They’re here to stay. Year in and year out more than 120 U.S. securities class action cases settle. Currently there is more than US$10 billion in escrow to be claimed in U.S. securities class action cases, and another US$5 billion in financial antitrust cases. With this much money available to those with the wherewithal to file, financial firms are increasingly taking note.
Chicago Clearing Corporation (CCC) is embedded in that financial fabric. CCC has plied the class action waters for nearly 30 years, recovering more than US$1 billion for harmed claimants. We project to recover another US $500 million in the next few years. Our securities and financial antitrust institutional clients number nearly 2,600. They manage US $5 trillion in assets and represent over 5 million accounts. CCC represents more beneficial owners than all but the biggest United States financial firms. There are ten basic steps serious claim filers must follow to eliminate risk and gather every dollar owed to them or their clients. Each step requires flawless execution repeated hundreds of times each year, year in and year out.
The first of the ten steps is finding cases. Missing claims is terrifying. It is the biggest fear of any class action purveyor. While the world explodes with fresh, ubiquitous ways to communicate, our legal system remains steadfastly arcane and unapproachable. Discovering new class actions remains problematic. Few money managers and custodians are card-carrying class action professionals. For most, case discovery is too time consuming to perform thoroughly and persistently. Yet, if the overworked fund manager or custodian misses just one case, it risks reputation and money.
The second of the ten steps is tracking cases. CCC is currently tracking over 1,000 active litigations. That’s a daunting task for a money manager or custodian, whose core business lies elsewhere. Dockets, if accessible, are on the one hand, voluminous, and on the other hand, abstruse. Litigations seemingly take forever. The courts have never made it easy to track cases. Pacer, the government’s docket tracker, is clunky and frustrating. Services, such as Lexis Nexis and Westlaw, are also cumbersome to use. Important case documents are often hidden in exhibits or affidavits, which, without a fine-toothed comb, are intractable. Unless tracking is all your operations team does all day every day, it becomes hopeless.
The third of the ten steps is retrieving data. Data is always problematic; ancient data is far worse. The data required to file class action claim forms is anywhere from three to fifteen years old. Old data is arduous to locate, resurrect and extract. It is often disorganized and unintelligible. There are gaps and inexplicable transactions. The data often resides in retired systems. Acquisitions create data retrieval nightmares. Client software conversions create unworkable data gaps. Switching custodians usually results in porting data with only position and cost-basis, which forecloses claim filing. Only professional claim filing firms, such as CCC, collect historical data from disparate sources, then organize, update, normalize and assemble that data with a keen eye toward the specific needs of claim filing. Combine all those hurdles with the voluminous amounts of data held by custodians and the constant migration of custodial accounts for almost countless clients and you’ve got an unworkable quandary for custodians.
The fourth of the ten steps is organizing the data. Assuming the custodian has a workable data set, that data set must be meticulously organized into hundreds of thousands of individual filings. Each individual client filing for each case must balance – from opening position to all transactions logged accurately for a balanced closing position, repeatedly. For years and years. If not done perfectly, the claim will generate a deficiency. If the deficiency is not fixed, a rejection will occur. If rejected, the claim is foreclosed and no payment is made. Claim filing is a tedious chore only suitable for a handful of people. Plus, what data should be pulled? Claim filing administrators rarely identify the myriad of Cusip identification codes that may qualify for any specific case. Furthermore, only approved claim filers can file electronically. Imagine filing each individual claim, perhaps thousands of claims, by hand on a piece of paper for more than 100 cases per year. That is not a pleasant thought.
The fifth of the ten steps is tracking filings. Once filed, the tracking begins. Out of sight, out of mind, right? Not so fast. Administrators often find mistakes. It is their job to do so. Once they notify you of a deficiency, you have 20 days to fix the deficiency. Ignoring deficiency requests, or being unable to fix deficiencies, creates rejections. Deficiencies can often take more time to fix than it did to file the claim. Yet, if not fixed, the claims administrator will foreclose the claim and create risk for custodians.
The sixth of the ten steps is projecting receivables. What will I get? That’s what we all want to know. To know that, the fund manager or custodian must meticulously interpret each “Plan of Allocation” and accurately calculate the convoluted math to derive what is known as recognized loss, which often has little correlation to actual loss. It’s complicated. Even more complicated is taking that recognized loss calculation and project the pro rata distribution. The pro rata distribution is the actual amount each successful filer gets. Without voluminous historical claims payout data, it is impossible to accurately project pro rata distribution. Fund managers and custodians often do not have or keep that data.
The seventh of the ten steps is distributing proceeds. Found money! I have a recent picture of a stack of bills on my desk from a claim against a securities class action settlement involving e-retailer Alibaba which CCC filed for me. I was ecstatic. For the fund manager still in business it’s also a happy day. However, for the custodian that filed its client’s claims, it’s a day of turmoil. So much has changed since the case was filed—your 10-year-old is now in college. You are on your third car lease since filing. You have moved twice. George W. Bush was president. That is the rub. The custodian’s client base has changed dramatically. Locating and paying them all can be a time-consuming mess.
The eighth of the ten steps is reporting. Clients are savvy. Costs are increasing and finding structured alpha is critical. Every bit of found money helps. Clients want to know what they’re going to receive. They want to be certain that all their claims have been filed accurately. They want to see this for themselves. Fund managers and custodians struggle to find the resources to create a robust reporting website to show all the details necessary to display because it is not their core job. Most custodians still track their claim filings with spreadsheets created years ago and many employees ago. Many custodians have a hard enough time tracking their own filings accurately, let alone displaying their clients’ filings.
The ninth of the ten steps is customer service. No one welcomes frustration. If the custodian lacks thorough reporting, its clients must rely on their customer service representatives for answers. Those customer service representatives may not have in depth knowledge of class actions and turn over frequently.
The tenth and final step is personnel. Often unconsidered, the personnel that operates the class action engine is critical to the success of any class action endeavor because longevity and expertise matter. Class action claims filing is not the easiest job in a custodial organization and turnover undermines claim filing. The average case takes more than five years from filing to first distribution and more than 18 months from claim filing deadline to payment. The continuity of the personnel is critical. Recreating the claim filing process from the previous employee is like handing a Rubric’s cube to a beginner. Moving the pieces does not help solve the puzzle. Without committed, experienced, and long-standing personnel, you have no chance to solve the puzzle and maximize your claims.
Fortunately, CCC can seamlessly solve these operational challenges for money managers of all stripes.
How Mr. Blockovich has the COVID-19 pandemic affected the types of securities class action settlements being filed and how has this impacted the operational work money managers and custodian must do to collect funds from securities class action settlements?
Blockovich: The years 2017, 2018 and 2019 were huge years in the securities class actions world. More litigations were filed in those three years – roughly 420 each year – than ever before. The year 2020 slipped to 350 filings, smaller, yet the fourth highest yearly total ever. The COVID-19 pandemic slowed the process down a bit, but not appreciably.
Accounting fraud is still the primary source for securities class actions. Clever class action attorneys made some efforts to interject COVID-19 into the mix. Some plaintiff attorneys investigated Amazon for not having high enough COVID-19 safety standards in their warehouses, which they claimed harmed employees and therefore harmed shareholders. However, COVID-19 related suits rarely settle as securities class actions.
The COVID-19 pandemic certainly interrupted the workflow of fund managers and custodian banks. Getting class action notices from the mail room to the appropriate person’s office was problematic before COVID. Imagine how improbable that is during the pandemic. If the mailed notice miraculously arrives at the employee’s home address, the remote employee must then read and analyze the notice and somehow collect all pertinent and sensitive client data remotely – things like account numbers, names, addresses and yes, social security numbers. Talk about driving the chief compliance officers crazy. You better have a big machine at home, because that can be tons of data to stuff in such a little box. Oh, and an amazing home firewall as well. Then, what happens when the administrator sends 100,000 deficiencies to your home office? Or 100,000 checks? Need I say more?
What mistakes have you seen, Mr. Tharin, money managers, broker-dealers and custodians make during the pandemic when it comes to claiming compensation from securities class action settlements?
Tharin: Claim filing is not as easy as conducting a Zoom call. Remote working shattered the claim filing process. Claim filing cannot be done successfully remotely, because it is an operational process that is something like a relay race. Done correctly, each leg is run by a unique person who must physically hand the baton to the next runner. Of course, this necessitates the next runner to be ready and available to take the baton. You can’t grab the baton remotely.
To file perfectly— and, each individual claim filing must be perfect— one must first be certain each case has been found, manipulated voluminous amounts of gnarly, ancient data, then filed each individual claim with precision. An employee would need quite an amazing home computer to pull that off and every waking hour devoted solely to claim filing. In addition, many firms have shelved planned operational efficiencies and initiatives until the COVID pandemic is over. Since money is always flowing from class action settlements, by delaying claims, significant sums are being unclaimed, harming both the firm and the firm’s clients.
Are there any challenges, Mr. Blockovich, when it comes for foreign securities class action settlements?
Blockovich: Yes, too many to list. There is no such thing as a foreign class action as we know it. No other jurisdiction has adopted anything similar to Rule 23. That is the 1938 rule that established and governs class actions. Class actions in foreign jurisdictions are more like mass actions, where individual lawsuits are bundled together to bring maximum pressure against the defendant. Each jurisdiction is unique and significantly different from the other. Its laws are different, its conventions are different, and its courts are different. There is also a cost benefit analysis to consider with foreign litigations. Unlike in the U.S. where you fill out a claim form and wait for your settlement proceeds, in many foreign jurisdictions claimants have to execute an agreement with the litigation funder and local counsel. Claimants also have to be aware of potential litigation costs and participation. In certain instances, claimants in foreign litigations may be required to give testimony or provide affidavits. Despite these hurdles, because foreign litigations are becoming more prominent, they cannot be ignored. Recognizing the terrain and hiring an astute guide is the key to success.
Why is collecting compensation from securities class action settlements, Mr. Tharin, not a priority for money managers considering they have a fiduciary obligation to investors to increase their revenues and investment performance?
Tharin: That is a good question. Only roughly 30 percent of all eligible institutions file securities class actions. As previously explained, filing class actions is challenging. Creating a thorough and flawless internal process solely to file class actions is sometimes unworkable for the staff of overstretched money managers. Moreover, many money managers understandably don’t wish to expose their data to anyone, particularly a class action administrator that may or may not have certified data audits. Many money managers can’t retrieve data that is old, and many believe that the reward is just not there. Many incorrectly believe their claim filing is being handled properly by someone else. Many have no memory of holding the security in question. Some funds are so new and close so abruptly that they die before receiving their claim. Some decide they don’t want to pay for a claims filer.
The role of the money manager as a fiduciary is an ongoing debate and something of a hodgepodge. Certainly, bank trust departments, mutual funds, pension funds and bank custodians have a fiduciary duty to file class action claims. Asset managers and hedge funds have an economic interest to file, and some would argue, a fiduciary obligation to file. Registered Investment advisors have a due care commitment to file, and some would argue, a fiduciary obligation to file. Brokers believe their only obligation is to notify their clients.
Despite the maze of different levels of fiduciary responsibility, it is not advisable to ignore filing. It’s a competitive world and improving investment performance is critical. Increasingly, clients and investors are aware of class actions and are demanding their financial advisors file and claim their awards.
How are brokers and broker custodians faring, Mr. Tharin, when it comes to helping investors reclaim funds from securities class action settlements and why?
Tharin: Not as well as they could be. Based on our proprietary research, the retail redemption rate is only three percent. Notifying clients that they may be eligible to file claims is the only fiduciary responsibility recognized by brokers. Courts direct broker custodians to notify their nominees of a settlement and that is all most do. For most brokers and broker custodians, filing is viewed only as a risk. Any misstep could be costly. Therefore, the potential reward for their clients and themselves is ignored.
However, clients love receiving found money. I know I do. I’m a single trader and CCC regularly gets me my class action checks. Recently I received a US$3,400 check in the class actions settlement involving Alibaba’s American Depositary Receipts. I cashed the check and smiled at the stack of bills on my desk. I would be loyal to any broker that did that for me. Loyalty is important. It’s easier to keep a client than find a new client.
The amount of money to be claimed is substantial. Ten billion dollars can be claimed today, yet brokers are leaving many billions of dollars of their clients’ money on the table every single year, year in and year out. If a broker would not forgo a dividend check for its clients why should it forgo a claim payment? Moreover, by not retrieving money for their clients, brokers are forsaking millions annually in profit for their own firms. A broker’s return on client assets is roughly two percent. The return from those assets becomes return on equity, which is roughly 12 percent. Over time, brokers are leaving substantial sums of their money lying alone on the table for someone else to grab. It is akin to sitting at a perpetual poker table, winning the pot time and again and letting someone else sweep all your money onto their pile and laugh all the way to the bank.
What are the similarities and differences, Mr. Blockovich, between how money managers and brokers handle securities class action settlements?
Blockovich: Clients or no clients. That is the fundamental difference between fund managers and brokers. The fund manager has a responsibility to its investors and a broker has a responsibility to its individual clients. Fund managers either do nothing, let their custodians handle claim filing, hire third party claim filers, or file on their own. Broker dealers uniformly notify their clients about class action settlements and let their clients file on their own. Both, however, are leaving substantial sums on the table.
Why Mr Blockovich should money managers, broker and custodians consider outsourcing their filings for securities class action settlements to yor ur firm and what questions should they be asking you before deciding?
Blockovich: CCC is designed to do one thing – file financial class action claims for institutions, particularly institutions with a huge number of beneficial owner accounts. CCC currently has nearly 2,600 institutional clients that manage more than US$5 trillion in assets and represent 5 million beneficial owner accounts. CCC has been building this business for nearly 30 years. Every day brings incremental improvement in our processes and systems. CCC has flawlessly filed well over 10 million individual claims and recovered more than US$1 billion dollars for harmed class members. We anticipate recovering another $500 million for our clients over the next few years. We were the pioneers and now we are the unwavering leader of our claim filing industry.
CCC has perfected the ten pillars of class action recovery. CCC finds every class action litigation; tracks every class action litigation; retrieves, normalizes and assimilates all transactional data, no matter how ancient; files every claim flawlessly; tracks every claim filed; projects every recovery; distributes efficiently; reports every aspect of the claim filing process; services all our customers promptly and courteously; and retains staff perpetually
Our expertise and services are exemplified by our client retention. Clients do not leave CCC. Our retention rate exceeds 99 percent. Similarly, our senior staff never leaves. This is critical. Staff turnover kills class action filing efficiency by creating turmoil which leads to mistakes. Mistakes lead to missed recoveries. Malcolm Gladwell writes that it takes 10,000 hours to become proficient in a field. Our senior operations staff spent years in the Chicago options and futures clearing industry before becoming claim filers and has over 40,000 hours each filing claims and processing financial data and payments. That proficiency is indispensable to successful outcomes.
Hiring CCC makes retrieving money owed to their clients seamless. Once the data is retrieved, CCC does the rest. All the broker needs to do is absorb its clients’ accolades and watch their return on equity rise.
There are numerous questions a firm should ask a third-party filing firm. Those include how do you ensure that no cases are missed; how do you integrate data; can you assimilate legacy data; how do you protect our data; do you undergo a SOC I Level 2 audit each year; how do you ensure that no claims are missed; what is your track record for missing claims; do you calculate recognized loss; do you project pro-rata distribution; will you distribute as we request; do you reconcile payments; can you help with closed accounts; how robust is your reporting site; do you answer your phone; is your customer service staff knowledgeable; does your staff have a high turnover; can we get customized reports; can you file antitrust claims; what is your track record with antitrust claims; and can you file claims for foreign class action settlements.
Why, Mr Tharin, might a money manager want to use you directly rather than use a custodian which might use your service?
Tharin: CCC’s clients are money managers of every stripe. Typically, we collaborate only with the money manager. That money manager has access to our exemplary reporting site, analytics, and expert staff. The underlying custodial accounts typically access CCC through their custodian. Custodian banks typically have minimal service when it comes to tracking securities class action settlements and making filings. As a rule of thumb, their fees are melded into the overall fees and with margins shrinking there is understandably no incentive to invest in building a robust full-service class action tracking and claims process. Therefore, by hiring CCC separately, the fund manager would have direct access to CCC and all of CCC’s services.
Third party claims filers, such as your firm Mr. Blockovich, charge either flat or contingency fees. How does a money manager decide which fee model to use?
Blockovich: The contingency fee is the model of choice, because there is no cost for the service unless proceeds are received. If the fund is new, then a contingency fee is preferred. It can take a while for the claim filing revenue to begin flowing, so why pay a flat fee? If the fund has experience with class action proceeds, then it can more easily project its annual revenues. A flat fee may be preferable in that instance, and many times outsourcing ends up being a replacement for full-time employee costs.
Can you compare Mr. Tharin the result a money manager or broker achieved using your service versus doing the work on its own?
Tharin: The difference between what CCC recovers and what custodians recover is often dramatic. One of our clients was filing through a well-known custodian bank and hired one of our exclusive back office partners. The client decided to pay CCC a contingency fee and we discovered numerous deficient claims and missed claims. The client ultimately received a ten-fold increase in the return using our service versus using its custodian. Because claim filing fees are incorporated into most custodial agreements, the custodian has little incentive to maximize claims and the money manager has no idea of how much money is being left on the table.
We’ve spent all of our time discussing securities class action settlements, but what about antitrust class action settlements. How do the operational requirements for collecting compensation compare Mr. Blockovich and why is outsourcing to a firm like yours a good idea?
Blockovich: Financial antitrust class action claim filing is far more complicated that securities class action claim filing. Procedurally, securities class actions follow the Public Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA instituted definitive procedures – such as when the lead plaintiff attorney must be chosen and who can serve as lead plaintiff, to name a few. Moreover, plaintiff attorneys and administrators have established procedures. These procedures normalize the flow of securities class actions and solidify their presence in the world of corporate actions.
That’s not the case with financial antitrust cases, such as CDS, FX, Isdafx, Libor and many others. Financial antitrust cases follow Rule 23. The judge is all powerful in Rule 23 cases. There are no clearly defined administrative processes that the judge must follow, resulting in very different rules and procedures for each case. Thus, every case is tricky for practitioners. Tricky means risk. These cases are indeed too risky for anyone but the most expert practitioner to file.
Futures, derivatives, swaps and other esoteric financial instruments have unique identifiers. There is no uniform cusip identification code that aids in data retrieval, as there is usually in securities class actions. Identifying, or even discovering the appropriate data can be quite problematic and time-consuming. Missing data leads to missing claims leads to missing money.
Often the claimant in financial antitrust cases is a high frequency trader. In that instance, the trade data can be so voluminous that it’s unwieldy to receive, index and normalize, let alone file and file correctly. Moreover, filing an individual financial antitrust claim takes an enormous amount of a staff’s time. In our experience, rarely are antitrust claims filed correctly by any fund manager and we have corrected countless deficient antitrust claims for those that filed on their own. Because of the complexity, most custodians are not equipped to and refuse to file antitrust claims. They cannot do it, and it’s rarely a condition of their custodial contracts. CCC has the unique expertise to file antitrust claims. We have the databases, software, processes, and, most importantly, the personnel to retrieve every dollar possible. It is significant – more than US $5 billion. CCC expects to claim US$500 million of that for its clients.
What final words of advice, Mr. Tharin would you give money managers, broker-dealers and bank about how to deal with claim filings for securities class action settlements?
Tharin: Hire CCC, of course.
This interview represents an adapted version of a webinar conducted by FinOps Report with Chicago Clearing Corporation on May 19, 2021. For further questions on CCC’s services, please contact Mr Brian Blockovich at bblockovich@chicagoclearing.