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OCTOBER 14, 2002
Recovery, recovery, recovery…..
by Brad Heffler
Over the last year, investors in the United States have suffered two distinct losses from which they need to start the recovery process. Much has been written and discussed about the devastating attacks of September 11th and how they changed the overall psyche of the average American. However, besides recovering from the emotional shock of the attacks, investors also need to recover from the aftershock that affected the financial markets. In discussions with both institutional and individual clients, there is a sense of extreme caution about jumping back into the market. This feeling must be overcome if the market is to achieve any sustained recovery.To make matters worse, this last year, we have seen an unprecedented number of corporate wrongdoings including massive fraud. WorldCom, Enron, analysts conflicts, excessive stock options, IPO laddering suits, arrests of corporate officers, and the list goes on and on. Investors, now skeptical of large corporations and their executives, are facing the reality that their life savings disappeared in a matter of months.
Following in the footsteps of these highly publicized corporate debacles were the inevitable class action lawsuits. These suits have often been characterized as frivolous by those that have been targets. However, it is time that investors recognize the value of these suits in recovering a portion of their lost funds.
Over the past five years, class action recoveries have helped put approximately $10 billion back into the hands of investors. Previously, institutional investors, including hedge funds, mutual funds and pension funds, have looked at these cases with disdain. The pervasive perception was that filing a claim involved a tremendous amount of work in gathering and copying old trading records in addition to deciphering the complexities of the claim filing process. In addition, these same investors held the view that potential recoveries were miniscule and not worth the time and effort of the laborious claim filing process.
This perception is beginning to change due to an interesting combination of occurrences. The primary factor is the increased size of the average class action settlement during this period. Besides the large increase in the average settlement, the magical billion dollar threshold was exceeded in two settlements, Cendant Corporation Litigation and the Nasdaq Market-Makers Antitrust Litigation. In addition, the acceptance of electronic filing methods by certain claims administrators has reduced the amount of paperwork involved in the claim filing process.
It is now time for various institutional investors to take a fresh look at
class actions. With the market's decline, shareholders are looking for ways to
cut expenses and increase returns. If an institutional shareholder decides to
undertake the potentially steep learning curve in the claims filing process, he
also needs to be diligent about tracking class action filings and settlements.
Class action recoveries have the potential to provide a much needed shot in the
arm on the income side without incurring a significant increase in expenses.
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