Corporate & Securities Law

7th Circuit Court Of Appeals Cautions Institutional Funds To Retain Securities Lawyers To Monitor And To Collect From Class Action Lawsuits Involving Securities That They Have Owned

By James Eccleston

A U.S. Court of Appeals sent a strong message earlier this year to institutional investors that they are expected to have procedures and policies in place to monitor securities class actions in which they have a financial interest and viable claims.  In Larson vs. J.P. Morgan Chase & Co., the $40 billion Colorado Public Employees' Retirement Association, Denver, sought to intervene in a securities class action after being notified of a proposed settlement that failed to include a recovery for certain claims worth several million dollars to the pension fund, according to the case in the 7th Circuit U.S. Court of Appeals, Chicago, in June.  The disputed claims were initially part of the class action, but were dismissed during an earlier stage of the litigation.

The court, in an opinion written by Judge Richard Posner, denied the Colorado pension system's motion to intervene as untimely because it found that the pension fund is a "sophisticated litigant with a large stake who had no good excuse for failing to seek intervention (or bring its own suit) years ago."  In reaching its decision, the ruling stated that "large pension funds have securities lawyers on retainer, and their lawyers would have known about and monitored the progress of the class action whether or not the fund trustees did."

Although not all institutional investors have securities lawyers on retainer to monitor their viable claims, the court's assumption was not surprising, as most recommended best practices and model shareholder's litigation policies make clear that institutional investors and fiduciaries should, at the very least, actively monitor ongoing litigation to ensure that they are fulfilling their duty to preserve viable claims, protect assets and recover funds lost as a result of securities fraud.

It is now well established that institutions, at a minimum, have a duty to recoup losses resulting from securities fraud, regardless of the origin or jurisdiction of the suit.

Since securities litigation reform was enacted by the federal government in 1995, $58.9 billion has been recovered through 2007 for injured shareholders, and an additional $9 billion is now in the "settlement pipeline," which includes settlements that have been agreed upon but funds not yet distributed.  Nevertheless, more than $12 billion went unclaimed.  That number is staggering, considering that most of the money is being left on the table by institutions, run by fiduciaries with a duty to collect it.  In fact, a recent study found that less than 30% of institutions with recoverable losses file the proof of claim forms necessary to collect their settlement proceeds.

As presupposed by the court in the Larson decision, many institutions have indeed turned to securities lawyers to help develop securities litigation policies and to facilitate class-action recoveries.  Typically, portfolio monitoring allows law firms to work in conjunction with custodians and investment advisers to ensure that institutions and fiduciaries are alerted to pending class actions and are kept informed of important events throughout the litigation.

Those institutions who would like further information regarding portfolio monitoring please contact attorneys at SNSFE.

Source: Pensions & Investments

Full post as published by FinancialCounsel on December 22, 2008 (boomark / email).