Academic journal article Vanderbilt Law Review

Automating Securities Class Action Settlements

Academic journal article Vanderbilt Law Review

Automating Securities Class Action Settlements

Article excerpt


Securities class actions, like nearly all class actions in the United States, are ostensibly opt-out lawsuits.1 Under the opt-out model, individuals who fall within the class definition are automatically members of the class unless they take affirmative steps to opt out.2 This model was a deliberate choice by the drafters of modern class action rules back in the 1960s,3 and it has been vigorously protected ever since.4 It is thought to breathe life into class actions by ensuring that individuals who do not have the financial incentive to opt into a lawsuit nevertheless get their day in court.5

Yet the reality has never been this rosy. True, class members in securities class actions are automatically part of the litigation, but that does not mean that they will get any money as a result. Even if a securities class action ends with a multimillion-dollar settlement, investors do not receive any money from the settlement unless they file a claim as part of the settlement administration process.6 In this process, they must prove that they purchased the corporation's securities during the class period, usually by presenting the claims administrator with detailed records of their relevant transactions.7

Investors often fail to participate in the settlement process. A well-known empirical study published in 2005 by Professors James Cox and Randall Thomas found that less than one-third of large institutional investors actually filed claims in securities class actions.8 The percentage is likely even smaller for less sophisticated investors.9 This study sparked a number of changes in the claims administration process, including a burgeoning industry of third-party claim filers that assist larger institutional investors with filing their claims.10 As a result, the percentage of submitted claims is likely higher today. Still, however, no one thinks that all or nearly all shareholders receive their share of the settlement funds. Opt-out securities class actions are still opt-in, at least if investors want their money.

No one set out to create an opt-in requirement for securities class actions. The complexities of the claims administration process developed not out of malice, but because courts do not think they have another way to accurately distribute settlement funds. In a securities class action, damages are based on the number of shares that each class member purchased in the defendant corporation during the class period, as well as the price they paid for those shares.11 There is no global database that tracks securities purchases down to the level of individual customers.12 The companies themselves do not have this information, nor do any of the securities intermediaries or clearinghouses that are involved in these transactions behind the scenes.13 As a result, the only way to identify class members has been to require them to identify themselves, typically by filing a claim and documenting their transactions. In short, the opt-in requirement at the settlement stage is a result of a critical gap in the available data.

Yet the data now exists to automate this process. This Article identifies two possible ways to automate the distribution of settlement funds in securities class actions. The first approach relies on market innovation. Right now, only individual banks and brokers have records that identify transactions by particular customers in a company's securities.14 Each bank and broker has data that identifies its own customers' transactions, but there is no centralized database that collects this data.15 But claims administrators could create an automated system that collects the relevant information from individual banks and brokers. This system could then calculate every class member's pro rata share of the settlement and send each one the appropriate amount of money. This approach would require the cooperation of multiple players, including courts, banks, brokers, and plaintiffs' attorneys, but it would not be technologically difficult to obtain the customer data and distribute the settlement funds. …

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