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In January 2005, over 40 mutual fund managers were sued by shareholders of those funds alleging that the funds failed to collect as much as $2 billion in settlement payouts. The thrust of the allegation of these suits was that these mutual funds breached their fiduciary duty to their shareholders by failing to file claim forms. While it does not appear that any court has addressed this threshold issue of whether an institutional investor has a fiduciary duty to file claim forms, it is clearly well established that officers and directors of a corporation owe a duty to shareholders to protect the corporations assets. As such, it is likely that a mutual fund has an obligation to shareholders of a mutual fund to collect money from settlements of securities class actions. It is also likely that the fiduciaries of pension fund would be found to have an identical obligation.
In fact, in the article by Professors James D. Cox and Randall S. Thomas, they argue that institutional investors have a clear legal duty to file claims in securities fraud class action settlements. This view derives from the Caremark Derivative Litigation, where the Delaware Chancery Court ruled that a board of directors had a duty to monitor whether the corporation was operating within the boundaries of the law to accomplish its purposes. Specifically, Chancellor Allen wrote that directors had a duty to make a good faith judgment that the corporations information will come to its attention in a timely manner as a matter of ordinary operations. If a corporation failed to make this good faith judgment, a corporation could be liable for losses caused by non-compliance with applicable legal standards. Under this theory, institutional investors could face liability if they fail to have an adequate system in place to file claim forms.
While some of these mutual funds did, in fact, file claims in settlements, which resulted in the dismissal of the complaint against particular funds, in all probability many of these defendants did not file claim forms. The mutual fund industry is not alone in not filing claim forms. In fact, Professors Cox and Thomas found that only 28% of institutional investors surveyed actually filed claims in class action settlements. This number is appallingly low considering that in 2004, securities fraud class action settlements produced $5.45 billion in cash to be distributed to defrauded investors. As a result of institutional investors failure to file claim forms, they are leaving anywhere from $1 billion to $2 billion on the table in unclaimed settlement monies. Institutional investors failure to file claim forms also leads to a financial windfall for those fiduciaries that do file claim forms. Since settlements are distributed in a pro-rata share to the proportion of losses suffered, institutional investors are awarded additional monies when they file their claim forms due to the high proportion of institutions that do not file claim forms. In addition, the money being recovered by responsible fiduciaries is far from insignificant. The State of Wisconsin Investment Board estimates that it recovered approximately $7 million last year in class action settlement money, while the Pennsylvania School Employees Retirement System estimated that it recovered approximately $12 million last year. Other institutional investors regardless of size could also recover monies, but for a variety of reasons fail to file the claim forms. Under the aforementioned Caremark standard, institutional investors, such as public pension funds and union pension funds, would not only fail to recover money from settlements but also could face the possibility of litigation if they are not diligently filing their claim forms.
There are, however, solutions for institutional investors to protect themselves from the threat of litigation while simultaneously fulfilling their fiduciary obligations. Barroway Topaz Kessler Meltzer & Check, LLP offers a full service portfolio-monitoring program that will track every class action settlement where an institutional investor has an interest. This service is free to our clients and is unique because it does not only monitor the settlements where an institutional investor has a financial interest, but also Barroway Topaz Kessler Meltzer & Check, LLP actually files proof of claim forms on behalf of its clients. This free service is the perfect safe harbor that allows institutional investors to fulfill their fiduciary obligations, fend off potential litigation and most importantly recover monies from class action settlements. For more information about our portfolio monitoring services, please contact Darren J. Check, Esquire at (610) 822-2235.
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