Q. Why is securities class action litigation relevant to the hedge fund space?
A. Securities litigation is critically important to hedge funds because there is ample opportunity to recover a significant amount of money. In securities litigation, a complaint is brought against a publicly traded company for some alleged wrongdoing which caused the stock to drop. Hedge funds that invested in that security have – at times – lost a significant percentage of their investment based upon that alleged wrongdoing. A securities class action is the opportunity to rectify a given company's misdeed. Many of ISS’ clients recover millions of dollars a year throughout various and numerous different class action settlements. Based upon losses, oftentimes a fund may only recover eight to 15 cents on the dollar – but this becomes a cumulatively significant amount for hedge funds and asset managers. It’s therefore very important for hedge funds to be track and participate to ensure they’re getting every last dollar of which they are entitled to.
Q. How do you serve your clients?
A. As I noted above, it’s vital for hedge funds to participate as there are significant recovery opportunities… but their focus is, as it should be, to grow their assets and increase returns on their funds. This is where ISS comes in to play – as we track every single class action and related securities litigation around the entire globe. We are singularly focused on behalf of our clients to monitor all litigation and participate any time our clients have eligibility. We have a research team on multiple continents that closely monitors all securities litigation, which ensures 100% coverage. ISS’ class action operations team, also located on multiple continents, works closely with clients to obtain their historical data in order to participate once a case settles. This is a critical component as holdings and transactional data are required to prove and validate that the hedge fund did, in fact, own a particular security when the alleged fraud took place.
Once a settlement occurs, the ISS class action team will automatically file claims for our clients, meaning these hedge funds and asset managers effectively have a reliable, dedicated, and outsourced solution; all of the heavy lifting is incumbent upon ISS. The claims filing process is often tedious, time consuming, and incredibly complicated – which is why 500+ firms outsource this process to ISS. We also have an online database that tracks all securities-related litigation, enabling our clients to see where a particular case is in the life cycle of litigation and whether ISS has in fact filed a claim on their behalf.
Q. Who can participate in litigation?
A. Most litigation happens in the US with around 100-to-125 settlements per year. If you are a hedge fund and investing in US securities, the opportunity to participate in litigation is practically inevitable. Even if you invest in well-governed companies and perform thorough due diligence before investing in a particular company, it's just a matter of time before that company has a class action against it and where they have agreed to some type of settlement. For example, from 2017 to 2019, an average of 50 S&P 500 companies faced a new class action complaint – or roughly one in ten. In terms of settlements, during the last 15 months alone, a number of S&P 500 companies settled litigation for significant amounts… including a few examples such as Valeant Pharmaceuticals at $1.2bn, Wells Fargo at $500m, Signet Jewelers at $240m, and Equifax at $149m.
Traditional accounting-related irregularities and alleged fraud cases are continuing to grow in spite of the current Coronavirus pandemic. In 2021, approximately $2.7bn in settlements have already become available to the investment community, which follows an impressive $4.7bn in 2020 settlements.
Q. Do any of the current cases relate to the pandemic specifically?
A. Yes, absolutely. To date, there have been just under three dozen Covid-19-related class actions filed in the United States, with allegations against a wide array of companies such as those in the healthcare and pharma, technology, travel, financial services, and consumer products industries. It’s important to remind investors that newly filed cases don’t always lead to settlements.
A lot of the legal issues here relate to companies that have allegedly promoted various activities which have been become untrue, such as a healthcare company promising certain benefits to a vaccine, or travel-related companies having potentially overpromised and underdelivered on its revenue and future guidance. Added examples include Wells Fargo facing allegations related to PPP loans from the CARES Act and Zoom facing data and privacy issues following a significant increase in users as the work-from-home environment grew last Spring.
These cases are making their way through the US legal system, which often takes anywhere from two to four years to settle, and that’s if a case settles… more than 50% of all newly filed cases are dismissed. Hedge funds can take solace in knowing ISS’ class action team will continue to closely monitor these class actions, just like all others.
Q. Is it always clear from the outset whether repayment is going to be coming?
A. Unfortunately not. There is something of a dark hole once the case is settled and before the disbursement date occurs. The average timeframe for a disbursement following the settlement date is around 16-to-18 months, but the bad news is that during this timeframe, the court system is typically quiet, meaning they will not share details of when a case will disperse nor details surrounding the average investor recovery. And large, complicated settlements may take even longer than this length of time before a case disburses. The good news for ISS’ clients, though, is that we are in touch with each of the claims administrators’ and the lead counsel to ensure we never lose sight of where the payment process is currently at.
Q. What amount can hedge funds expect to recover on an annual basis?
A. While a fair question, however the truth of the matter is that it's impossible to know what the future recoveries are going to be for any given hedge fund or asset manager. It depends upon a number of factors, but traditionally speaking assets under management will sometimes dictate the overall amount. Let me explain: traditionally speaking, recoveries from a settlement will correlate to the firm’s losses from the trading period where the alleged fraud took place. This is called the “Recognized Loss” and recoveries are often 8% - 15% of this amount. Thus, the larger the losses – the larger the recovery.
As an example, if a hedge fund had a million dollar Recognized Loss in a particular investment and that company has settled, the average recovery for that client, from this example, would be from $80,000 to $150,000. This is a range, and to be clear, there are many settlements that have either lower and higher percent pay-outs, depending upon a number of factors including the total number of eligible claimants.
So back to your question, annual client pay-outs truly have broad ranges, as it will depend upon the number of settlements for which a firm is eligible and what type of losses the client has in each of the settlements. But clients can be confident that ISS has the process and controls to ensure full participation, where eligible.
Many of ISS’ clients recover significant amounts – in the millions of dollars annually. And I can share that the total of all ISS’ claims filing clients recovered more than $1bn in the last two calendar years.
About Jeff Lubitz
Jeff Lubitz, executive director of ISS Securities Class Action Services, works closely with many of the world’s leading hedge funds, mutual funds, and pension funds to help deliver critical asset recovery solutions with a goal of maximising settlement recoveries and mitigating risk. Lubitz oversees all ISS SCAS thought leadership, including all webinars, white papers, and reports. He is a frequent speaker at industry events on the complex topic of global securities litigation, with appearances across the United States, Europe, and Australia. Lubitz is also a contributor to the press with his expert commentary featured in Reuters, Fortune Magazine, Bloomberg Law, Law360, and elsewhere.