In this blog post, I will discuss some potential benefits of “opting-out” of investor class actions. Bottom line: large investors often achieve better results by bringing their own case.
How Do Investor Class Actions Work?
In a typical shareholder lawsuit, an institutional plaintiff is appointed to represent an entire class of similarly situated investors. The lawyers for the institutional plaintiff are also appointed to be lawyers for the class.
But these “lead counsel” will rarely, if ever, receive input from the majority of shareholders. Only the “lead plaintiff” will be making decisions for absent class members.
For example, in the class action challenging AT&T’s acquisition of Time Warner, the class might consist of all Time Warner shareholders who received AT&T shares in the merger. The lawyer(s) appointed to represent the former Time Warner shareholders will then seek recovery for all similarly situated shareholders. Thus, the fate of every class member rises and falls depending on the success of the lead plaintiff and their counsel.
Class Actions Can Have Disadvantages
Because investor class actions do not require shareholder input, they are useful for those who have suffered small losses, or prefer to sit back and take whatever benefits come from the litigation.
However, there can be significant disadvantages to being a passive class member. Unfortunately, recoveries in class actions can be low. According to one study, the average settlement in securities class actions netted only 2.6% of total investor losses.
But for shareholders with significant losses, or who want to control their own claim, an individual lawsuit may be best.
Individualized, Opt-Out Actions
At Restis Law Firm, we represent individual shareholders who prefer to pursue their own “opt-out” lawsuit. Individual investors “opt-out” of the class, and bring their own case. Opt-out plaintiffs have a direct relationship with their lawyer, call the shots on their own claim, and have direct control over the timing and terms of any settlement.
The biggest advantage for opt-out plaintiffs is the ability to recover more than would be possible in a class action settlement. Empirical data reveals that large investors who opt out of investor class actions can recover many times what they would have received as members of the class.
According to Columbia Law School Professor John Coffee Jr., “investors have seen that large recoveries are possible in individual suits and are now prepared to sue. … [When they] 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).
For example, in 2004, eight pension funds opted out of the WorldCom investor class action and recovered approximately 3 times more than if they had participated in the class settlement. In the AOL Time Warner litigation, the State of Alaska settled its opt-out claim for $50 million, which was “50 times what we would have recovered from the class.” In the Qwest investor class action, the Teachers Retirement System of Texas recovered $61.6 million, many times more than the estimated $1.4 million it would have received as a passive member of the class.
When Does An Opt-Out Action Make Sense?
Opt-out actions make the most sense for investors that suffered significant losses, such as institutional investors, pension funds or high net worth individuals. These investors should ask their attorney whether it is possible to bring their own case, as opposed to simply staying in the class action.
If you are an investor who has suffered large losses on your investments and would like to inquire about the possibility of an opt-out action, The Restis Law Firm, P.C. is here to help.
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I am not your attorney, and this is not legal or investment advice.