Editor: Describe the reasons why you decided to focus on opt-out cases in securities class action settlements.
Harris: There were several reasons. Amir and I both do a lot of work in the securities litigation area. One of my principal areas is as defense counsel in securities class actions. We have both seen the process that a typical case goes through before resulting in a global settlement of the class action.
Sometimes there are no opt-outs, and sometimes you have significant opt-outs. We were both curious about the characteristics that trigger one or more opt-outs. Why do people take the step of actually filing their own lawsuits? To answer that question, Amir suggested that he and his team take on the task of doing the quantitative work that was involved.
Rozen: Over the years we’ve received various requests from our clients to get information about opt-outs but faced the difficulty of identifying publicly available resources that contained information about those opt-outs. We had a lot of information about most aspects of class actions, but almost none about opt-outs – and what we had was largely limited to anecdotal evidence.
Chris just mentioned that we worked together on various cases, including at least one with an opt-out. That experience caused us to collect all publicly available information about the opt-outs over a number of years. We started digging through various databases such as the electronic and other court filings and public press to identify opt-outs. Our main motivation was to assemble in one place all the information we could find about opt-outs.
Editor: Tell us about the report’s data sources and research.
Rozen: We sifted through class action settlements for the period from 1996 to 2011 – starting with the Stanford Law School Securities Class Action Clearinghouse, of which Cornerstone Research is a founding sponsor. That database includes information on more than one thousand class action settlements. This was the initial data set. We then expanded our research to include electronic and other court filings and the public press to identify any potential opt-outs in these cases. It was an iterative process of looking at all of these data sources to identify opt-outs.
Harris: Once we identified through these searches the cases that included opt-outs, we expanded our effort to find information about the amounts of the overall settlements, which included combing through court records – a very lengthy and time-consuming process. The final step of finding the details of the opt-out settlements themselves was even more difficult and required a big effort. The settlement of opt-out cases is private and doesn’t need to be filed with the court. They are unlike class action settlements that are public because the court has to approve the class members getting the settlement and then release of their claims.
Editor: In what percentage of the cases did at least one plaintiff opt out of the class action settlement and pursue a separate case against the defendant?
Rozen: We found that in approximately three percent (38) of the 1,272 cases from the beginning of January 1996 through 2011, there was at least one opt-out case from the class action settlement.
Harris: The number of opt-outs increased dramatically when the size of the class action settlement increased. We found that when the class action settlement was at least $500 million, an opt-out case was brought more than 50 percent of the time. That makes some sense because in a smaller case it’s just not worth the money for an individual to bring his or her own lawsuit.
Editor: In cases with opt-outs, how did the recovery received by the settlement plaintiffs compare with that of the class action settlement?
Harris: We have only limited anecdotal data for a few cases, and in those limited instances some opt-out settlement plaintiffs seem to have done better and others seem to have done worse. We can’t judge with any certainty whether opt-out plaintiffs end up getting more or less than they would have received if they had stayed in the class. We just don’t have the data to draw any conclusion one way or the other.
Editor: In how many of the cases reviewed did the opt-out settlements exceed 20 percent of the class action settlement value?
Rozen: We identified six cases in which the total opt-out settlements represented more than 20 percent of the class action settlement value.
Editor: In how many of the opt-out cases reviewed did the opt-out settlements exceed $10 million?
Harris: There were seven opt-out settlements that were above $10 million. Not surprisingly, the opt-out settlements are much smaller than the class action settlements because they are brought by individual investors. However, we can’t tell you whether those investors would have done better or worse by staying in the class action.
Editor: Who files the majority of opt-out cases?
Harris: One of our interesting findings was that pension funds filed the majority of opt-out cases. Many of them were pension funds of unions and public employees. We can’t speak to the question of why those pension funds chose to bring the cases.
If your class contains large pension funds, you should be aware when you’re formulating the class action settlement that there is a heightened chance that those pension funds will opt out. We think that’s an important thing for defendants and their counsel to keep in mind as they are evaluating wrapping up a lawsuit.
Rozen: We also found that, in addition to pension funds, frequent filers of opt-outs also included other institutional investors such as asset management companies, hedge funds, and the like.
Editor: What were the report’s observations and conclusions?
Rozen: As Chris mentioned, the likelihood of an opt-out increases as the value of the class action settlement increases. What we found was that there is at least one opt-out settlement in 53 percent of class action settlements with a value of over $500 million. We also found that opt-out settlements represent an average of 12.5 percent of the value of the class action settlement. We talked about the six cases in which the opt-out settlement represented at least 20 percent of the class action settlement. Lastly, the majority of the plaintiffs in our cases are pension funds.
Harris: The report provides practical information for in-house and outside counsel who are considering settling. They need to know the class with which they are dealing. If the size of the class and the amount of the settlement are large and there are pension funds or large institutional investors in the class, they need to bear in mind when they are counting their dollars for settlement that there is a heightened risk that one or more opt-out cases may be brought.
Many of these pension funds or other investors are essentially public institutions. Opting out may trigger various provisions that end the class action settlement or make it more difficult for the class action settlement to go forward, given the amount of money that may have to be set aside for opt-out cases. While these public funds are attempting to obtain a better return for their constituency, they may be hurting the ability of the rest of the class to obtain a settlement. That’s an issue beyond our analysis, but it’s something for the public institutions to consider.
As to the future, Amir and his team are considering going back and looking at more recent data we just obtained. This may be a basis for updating the results reflected in the report. Also, we would like to uncover information that would enable us to compare how opt-out plaintiffs would have done if they had stayed in the class - that’s another piece of the puzzle we’re thinking about.
The views expressed in this interview are solely those of Messrs. Rozen and Harris and do not necessarily represent the views of Cornerstone Research or Latham & Watkins.