The Costs of Institutional Apathy: Investors Leave Behind Billions in Uncollected Settlement Funds

COLCHESTER, CT, Jun. 2006 -- As part of his leading role at this year’s Scandinavian Institutional Investors Summit, Scott + Scott partner David R. Scott made the case that institutional investors are overlooking millions and possibly even billions in unclaimed money from settlements in securities fraud class action cases.

The article “Letting Billions Slip Through Your Fingers,” 58 Stanford Law Review 411 (November 2005) by James D. Cox & Randall S. Thomas, presents the results of an empirical investigation of the frequency with which institutional investors submit claims in settled securities class actions.  The authors combine an empirical study of a large set of settlements with the results of a survey of institutional investors about their claims filing practices. The authors conclude that more than 70% of institutional investors with provable losses fail to submit their claims in securities class action settlements. According to the authors’ research, each institutional investor suffered an average mean loss of approximately $850,000.  Thus, one commentator analyzing the results of the authors’ predecessor study suggested that each year slightly more than $1 billion is left on the settlement table by non-filing institutional investors. 

This is not merely a U.S. phenomenon, however.  According to a May 2005 article in the London-based Financial Times newspaper, Europe-based institutional investors in 2004 failed to collect $2.4 billion recovered on their behalf, representing almost 40% or total 2004 investor recoveries as a whole.  The same article reports that Europe-based institutional investor failure to collect monies recovered on their behalf in U.S. securities class action litigation accounts for roughly 95% of recoverable sums awardable to them. 

While the reasons for these institutional failures to collect recovered sums vary, one fundamental reason cannot be ignored – the general failure of institutional investment fund trustees’ and fiduciaries’ to take steps to adopt acceptable processes aimed at recovering available settlement funds.  However, any sound long-term investment strategy should necessarily include a loss-minimization component in the form of monitoring and managing class action settlement fund recovery.  Indeed, Cox and Thomas argue that any such failures should be evaluated as potential breaches of the duty of care consistent with the monitoring obligations embraced in Delaware's Caremark decision. Applying this standard to the problem, trustees of institutional investors must, in good faith, insure that their fund has an adequate system in place to identify and process the fund's claims. Furthermore, they should create a monitoring mechanism to insure that this system is adequate, and if they learn it is inadequate immediate measures should be taken to remedy any deficiencies.

The more institutional investors that are active participants in the process, the more pressure will be placed on the system to improve.  Institutions are in the best position to push for needed changes.