A brief overview of best practices and challenges for institutional investors looking to recover funds they have lost due to fraud or mismanagement in their portfolio holdings.
1
Understand the Enormity of the Issue
During the period from 2006 to 2008, more than $35bn in securities class actions and regulatory settlements were finalized. It is fairly well settled that an institution cannot abandon (without reason)
a claim to recover funds in a securities class action settlement, though an institution could, consistent with its fiduciary obligation to maximize the value of its beneficiaries’ assets, decide
not to file a claim on the basis of comparing the costs to submit the claim with the expected
award from the settlement. But, according to a series of academic studies conducted over the
last decade, as well as anecdotal evidence from market participants, anywhere from 30% - 70%
of investors that are eligible to participate in a given settlement fail to file a claim form and
thus leave the money on the table.
2
Recognize the Potential Consequences of a Misstep
The costs of not filing, or not filing properly, can be very high. In January 2005, more than 40 mutual fund managers were sued by shareholders in class action lawsuits alleging that the funds had failed to collect nearly $2bn in settlement payouts to which the funds (and the funds’ shareholders) were entitled. The lawsuits alleged that the funds’ failure to claim this money was a breach of the manager’s fiduciary duty, and was in violation of the Investment Company Act of 1940. The lawsuits sought compensatory damages for all of the money that the funds left on the table, as well as punitive damages and the forfeiture of all commissions and fees paid by fund shareholders. In 2007, a publicly traded investment advisor took a $56m charge as a result of having to reimburse certain clients for mistakes they made in filing claims for those clients.
3
The "Double-Whammy" Effect
Moreover, unclaimed funds are typically distributed on a pro-rata basis to those investors
who do file claims in a particular settlement, providing them with an additional measure of
recovery that they otherwise would not have received. In this era of negative returns for many
portfolios, it is more important than ever to ensure that an investor claims every dollar, euro
or pound that they are entitled to.
4
Three Ways a Claim Can Be Mishandled
But, even when a fund has a system in place for monitoring, filing, and tracking claims, issues arise. A claim can be missed on three different levels: A fund may fail to file a claim form for the entire case or settlement; the fund might file for less security types or series than the settlement encompasses; lastly, the fund might miss a portion of their eligible accounts.
5
It All Boils Down to Lack of Information
A number of reasons are posited for the seeming lack of interest in recouping money lost due to
fraud or other malfeasance, but virtually all of them point back to just two issues – lack of information
(or access to information) or a misunderstanding of the process. Fragmentation of the claims administration industry largely explains the former, and inconsistent or incomplete policies or contracts between funds and their prime brokers or custodial banks explains the latter.
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