Why Individual Actions

Securities fraud costs investors billions of dollars every year, destroying wealth by undermining the efficient flow of capital from willing investors to worthy businesses. Despite a proliferation of class action litigation, and the reward of billions of dollars in attorneys' fees to the class action plaintiffs bar, securities fraud has grown seemingly unabated and investors have seen little in the way of meaningful compensation for their losses. At Dietrich Siben Thorpe LLP, we believe that individual securities actions, under the right circumstances, provide the best means by which our clients can combat securities fraud and achieve meaningful recoveries of investment losses. The empirical evidence and our own experience prove the point.

Please click on the links below to learn more about each area.

Class Actions Provide Poor Compensation

Institutional investors already know from experience: securities class actions rarely obtain meaningful recoveries for investors. Securities class actions typically settle for between 2-3% of investors' losses.

Median Investor Loses

Dr. Jordan Milev, Robert Patton, and Svetlana Starykh, Recent Trends in Securities Class Action Litigation: 2011 Mid-Year Review: Filings on the Rise but Settlement Amounts Decline; Ratio of Settlement to Investor Losses is at Record Low (July 26, 2011).

"Mega-fraud" cases with massive investor losses typically settle for even less than the median. Recoveries of between two to three pennies-on-the-dollar are the norm in relatively small cases, but as investors' damages increase recoveries decline.

It's not that securities class actions are without merit. Rather, in our opinion, the class action mechanism suffers from inherent flaws preventing substantial recoveries in most cases. Once removed from the shackles of class action litigation, securities fraud victims in individual actions are oftentimes capable of obtaining substantial recoveries. DST's founders have been at the forefront of individual securities actions and are dedicated to maximizing our clients' recoveries outside the class action mechanism.

Individual Plaintiffs Recover Multiples Over Class Members

The empirical data overwhelmingly demonstrates that institutional investors that opt out of securities class actions have successfully recovered multiples over what they would have received had they remained members of the class case. As John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School, has found: "Institutional investors have seen that large recoveries are possible in individual suits and are now prepared to sue. . . . When institutional investors exit the class and sue individually, they appear to do dramatically better - by an order of magnitude!" Accountability and Competition in Securities Class Actions: Why "Exit" Works Better Than "Voice", 30:2 Cardozo L. Rev. 407 (2008).

Most of what is publicly known about opt out settlements is the result of public pension fund disclosures - hedge fund and mutual fund settlements are typically confidential. The available data is quite compelling. The Retirement Systems of Alabama recovered $49 million of its $57 million Enron loss by suing several of Enron's banks under Alabama state law. Several Ohio public pension funds recovered 36% of their AOL/Time Warner losses, settling for $175 million ($144 million after fees) or about 16 times more than the $9 million the funds would have recovered in the class settlement. Five New York City pension funds settled their WorldCom claims for $78.9 million - about 61% of their damages. Michael Cardozo, the New York City funds' corporate counsel, said in a statement: "This settlement fully validates the decision of the funds' trustees to opt out of the class action to pursue an individual case."

The following chart summarizes some of the more significant opt out settlements announced by public funds

Fund & Case Opt-Out Settlement (Millions) Estimated Class Recovery Opt-Out Recovery Multiple
Alaska Funds AOL/Time Warner $50 $1 50x
Alaska Funds Qwest $19.0 $0.4 44.5x
Texas Teachers Qwest $61.6 $1.4 44.0x
Colorado Pub. Empl. Ret. Assoc. Qwest $15.5 $0.4 38.8x
CalSTRS Qwest $46.5 $1.6 30x
New Jersey Tyco $73.25 $4.2 17x
U.C. Regents AOL/Time Warner $246 $14.5 16-24x

The empirical data clearly demonstrates that settlements in individual securities fraud actions can be quite substantial. By contrast, as Ohio's attorney general explained in justifying Ohio's decision to pursue an individual action rather than remaining in the class case against AOL TimeWarner: "The class-action lawsuit, you get peanuts at the end of it . . . . The only guys who make money are the lawyers."

Our founders are uniquely experienced in the prosecution of individual securities fraud opt out actions. Our founders have litigated opt out cases to recover investors' losses in AOL/Time Warner, Tyco, Qwest and WorldCom, and are extremely knowledgeable about the facts and circumstances of the above referenced cases. We understand the factors that enable opt out litigants to successfully recover significantly more of their investment losses as compared to participants in securities class actions, and we look to this experience in counseling our clients.

Speed Of Recovery

Time is money. Unfortunately for participants in securities class actions, distributions of settlement proceeds oftentimes take between one and two years. Why? Upon settlement of a securities class action, the court grants preliminary approval, notice is sent to all class members who are given an opportunity to object to the settlement before final approval by the court can be granted. After the court issues a final approval of the settlement, class members are given a period in which to fill out claim forms that are filed with the claims administrator. The forms must then be processed by the claims administrator to assure there are no fraudulent or incorrect applications. Only after the numerous claims forms are submitted and reviewed can settlement proceeds begin to be distributed.

Once a settlement is reached in an opt out case, the plaintiff is typically paid in a few weeks. There is no arduous claims administration process or requirement for court approval. As a result, investors who file individual actions oftentimes are able to obtain significantly larger recoveries of their investment losses, and they regularly recover their losses faster than do class members.

Which Private Funds Are Filing Individual Actions

Some of the most prestigious names in the investment community have recognized the merits of bringing individual securities fraud actions to recover their investment losses. While numerous public pension funds, including CalPERS, the Teacher Retirement System of Texas, and New York State Teachers, have publicly reported achieving excellent results through filing opt out cases, many well-regarded mutual funds and hedge funds have quietly achieved the same results. Many of these funds prefer to avoid publicity of their legal claims, which we respect. These hedge funds and institutional investors have discovered that bringing an individual action to recover investment losses is not only superior to participating in the class action settlement, but a beneficial utilization of the fund's resources and in the best interests of the fund's fiduciaries. Indeed, some funds have brought more than one individual action. If you are considering filing an opt out action, are interested in the names of other funds that have done so, we can provide you with this information upon request.

Why Have Individual Actions Recovered More Than Class Cases?

There are several reasons institutional investors have recovered more by opting out of securities class actions than they would have received had they remained in the class. Professor John C. Coffee, Jr. of Columbia University Law School sets forth a litany of factors supporting individual case recoveries in his excellent article Accountability and Competition in Securities Class Actions: Why "Exit" Works Better Than "Voice", 30:2 Cardozo L. Rev. 407 (2008). While we agree with Professor Coffee's work, we also have our own theories on the matter. See Recovering Investment Losses, The Investment Community Routinely Complains About Class Action Securities Fraud Settlements, But What Is A Hedge Fund Manager To Do About It? Knowing why individual securities fraud cases have done better than their related securities class actions is our stock-in-trade. At DST, we know what drives securities class actions and how to spot securities fraud cases that will translate well into individual actions. From this unique vantage point we then turn to the facts of each individual investor's case because we recognize that what might be right for some other fund may not be right for your fund.

Should Your Fund File An Individual Action?

Securities fraud class actions rarely obtain meaningful recoveries for investors, but that does not mean institutional investors should reflexively file individual cases to maximize the recovery of their investment losses. There are instances when remaining in the class action makes sense. Indeed, we oftentimes advise funds to remain in a class action for reasons not readily apparent to lawyers unfamiliar with opt out litigation. At DST, we have unparalleled experience litigating both securities class actions and individual securities fraud cases, and we welcome the opportunity to guide your fund in analyzing whether an individual case is right for you. We are happy to investigate potential claims for your fund, free of charge. We work on a contingency fee basis, and are paid only by what we can recover of your investment loss. Accordingly, we are selective in the cases we bring and we will only recommend filing suit if we believe your claim has substantial merit and is highly likely to provide a meaningful recovery for your fund.