Developing a Policy to Participate in Securities Litigation Class Actions
Every Public Pension Plan should develop and adopt a policy setting forth procedures for monitoring and participating in class action securities litigation.
Public pension plan (plan) governing bodies (the Board of Trustees) and staff have a fiduciary obligation to recover funds lost through investments in public securities as the result of corporate mismanagement and/or fraud. A pension plan, or any other holder of record during the class period, can recover losses through class action or individual securities litigation.
Class action is initiated when a complaint is filed with an international, federal, or state court. The 1995 Private Securities Litigation Reform Act (PSLRA) requires federal courts to appoint one or more members of the putative class with the largest financial interest and willingness to serve as the lead plaintiff(s). Once the lead plaintiff has been appointed all the pending legal actions are consolidated under the control of the lead plaintiff and the litigation proceeds. Every entity or individual that purchased stock during the class period and sustained a recognized loss from alleged securities fraud becomes a “class member” for purposes of litigation and any future settlements. In other words, plans do not need to take any affirmative action to become a class member. However, if and when there is a settlement, a settlement administrator is appointed and gives notice of the settlement to all class members. At this time, plans must notify the settlement administrator of their desire to participate in the court-approved settlement by filing a notice (proof of claim) by the prescribed deadline. Missing the deadline for filing this claim means forfeiting the plan’s share of the settlement to other class members.
The plan’s governing body can choose to participate in a class action litigation either as lead plaintiff or as a passive class member through the settlement process. Should a plan decide to pursue lead plaintiff status, they need to be prepared to dedicate staff resources that will be necessary throughout the process. Staff should be prepared to compile information during the discovery phase of the litigation that will include:
- Relevant minutes of meetings of the respective board and investments;
- All policies related to the plan, including a policy governing entering into litigation as a lead plaintiff; and,
- Transaction data for relevant investment activity.
As lead plaintiff, plan representatives will need to:
- Review all legal documents and materials to understand the lawsuit;
- Prepare for and participate in depositions;
- Be engaged in and stay informed of the progress of the litigation; and
- Be prepared to possibly attend trial if parties do not agree on a settlement.
At a minimum, resources may include staff from finance, corporation counsel, information technology, other administrative resources as well as plan advisors, consultants, and custodial banks.
There are two alternatives to class action: individual action and group action. A plan can opt out of the class and file an individual action, which might allow it to recover several times the damages it would have gotten as a member of a class. A plan can also file as part of a group of funds that bring together their individual actions to form a single action, or “group action.”
This best practice will focus on developing a policy to address the more common and pressing problems of monitoring a plan’s eligibility to participate as a member in a class action litigation and recovering losses from settlements.
GFOA recommends that public pension plans develop and adopt a policy setting forth procedures for monitoring and participating in class action securities litigation. The policy should include the following:
The first component of a securities litigation policy should be an agreed upon set of objectives, which may include:
- Fulfilling the plan’s fiduciary duty by effectively managing claims as plan assets.
- Maximizing recovery of plan assets on claims while minimizing fees paid to obtain recoveries.
- Bringing individual cases on behalf of plans with large losses (opting-out of the class action).
Serving as Lead Plaintiff
Pursuing lead plaintiff status requires a separate evaluation not covered as part of this recommended practice. Most plans will likely not meet the lead plaintiff eligibility requirements, so they often prohibit seeking lead plaintiff status—although the decision to seek lead (or co-lead) plaintiff can be made on a case-by-case basis. Some establish a minimum loss threshold that must be met before the plan considers seeking lead plaintiff status. Others may do so because of social policy issues or based on a cost-benefit analysis.
The policy should identify clear, written procedures for monitoring class action litigation and settlements. Key issues to consider in designing these procedures include:
- A single person or entity (the monitor) should be assigned to monitor securities litigation and agree to established monitoring procedures. A plan may utilize internal staff; negotiate with its custodian bank to perform this service; or hire external securities litigation counsel or another third-party claims advisory service. Regardless of who will conduct the monitoring, the plan should conduct periodic reviews to ensure the monitoring procedures are being followed.
- Each class action litigation, from the filing of the complaint through to the settlement and recovery, should be monitored and plan eligibility determined.
- One individual should be designated to evaluate whether the plan should seek to serve as a lead plaintiff. This requires having a securities law firm monitor the plan’s portfolio and determine whether its losses in a particular security exceed a threshold amount. If so, the law firm should notify the designated individual with a detailed memorandum about the case and the potential for recovery. This information should then be provided to the board of the plan for consideration and potential action.
- One individual should be designated to evaluate when it is appropriate to opt out of the class action and file an individual claim. Typically, this is based on the size of the loss incurred by the plan exceeding a threshold amount. This decision should also be elevated to the board level for timely consideration.
- Clear procedures should be established with the custodian bank as to the action that should be taken when a notice of a settlement is received. Depending on how long the custodian bank maintains records, the plan’s contract might need to extend this time period. Trading records should be maintained for at least ten years, as it sometimes takes that long to resolve a case.
- To assist in determining eligibility for settlement, the plan should maintain documentation on the purchase and sale of the securities that the plan currently holds and previously held, including the duration and amount owned as well as all transactions executed for each holding.
- Accurate record keeping is critical because settlement notices may not be circulated until many years after the loss is incurred. This is because filing a complete and valid claim often requires access to investment transactions and holdings that are many years old. Processes should be established to ensure the complete and accurate transfer of plan trade activity data if the custodian bank or other third-party maintains this data.
Participating in Recovery of Settled Claims
Loss recovery procedures are required for a plan to participate in the settlement as an eligible class member. The following issues should be considered when designing these procedures:
- Designate one individual or entity to file recovery forms (proof of claim). This is typically the custodian or counsel to the plan but may also include internal staff. If someone other than the monitoring official fills this role, procedures should be in place to ensure close coordination.
- Complete and file timely proof of claim forms, including supporting documentary evidence with the settlement administrator.
- Monitor the processing of filed claims until recovery is received.
- Periodically review the recoveries for larger claims to verify that the plan’s settlement allocation was calculated in accordance with the court-approved plan of allocation and to ensure the plan received all monies it was entitled to. This may be done internally or by a third-party.
- Even when a law firm files proof of claim forms, payments from the settlement administrator should be sent directly to the custodian bank to avoid delays in receipt of funds.
- All plans should have a standing directive with the custodian that designates where settlement funds should be deposited.
The policy should describe reporting requirements. For example, the policy should outline for any entity or individual involved with securities litigation on behalf of the plan, whether internal or external, the frequency of reporting and the scope of information for inclusion in a regular report to the Board. This information should include the status of all eligible claims and recoveries.
Roles, Responsibilities, and Selection of Legal Advisors
The policy should describe the roles and responsibilities of legal advisors and, if they are used, the selection process of external legal advisors. Plans that choose to utilize external legal advisors should first clarify their intended role. Solicitations for legal advisors should be coordinated through the plan’s internal or external legal advisor, plan executives, and Board, and an RFP process should be utilized. Most plans conduct an RFP process and re-evaluate outside counsel periodically (e.g. 3-5 years).
The internal or external legal advisor and plan executives should clarify the working relationship with outside legal counsel. This includes: agreeing on the plan’s goals/objectives and expected outcomes for the litigation; clarifying the roles and responsibilities of the outside counsel (if applicable), internal legal advisor, plan executives, and Board, with a particular emphasis on decision-making responsibility; and explaining how and when information is to be communicated and reported. If counsel is selected or appointed independent of the Board, the plan should consider specifying in writing (e.g. a Memorandum of Understanding (MOU) with counsel) to clarify the fiduciary and other responsibilities of each party.
1 Typically, only class actions arising from initial public offerings may be brought in state courts.
2 See 15 U.S.C. § 78u-4(a)(3)(B).
3 Plans should consider whether the involved entities are, or should be, a fiduciary of the Plan in accordance with state and local statute.
Key Entities Involved
Appointed or Elected Legal Counsel: The elected or appointed legal counsel for the plan who may have the authority to empower securities litigation counsel to pursue lead plaintiff status and/or settlement participation. This may or may not require the approval of the pension plan board.
Class Member: Entity or individual who held stock during the class period and had a loss. Class members do not have to take affirmative action until a settlement is reached.
Custodian Bank: Boards of most pension plans have a contractual relationship with a financial institution to serve as master trustee/custodian on behalf of its clients. The Custodian Bank receives notices of class action and can determine eligibility. With the consent of the Board, the Bank can then file a “proof of claim” to participate in the settlement.
Lead Plaintiff: The petitioning entity with the largest claimed losses as a result of securities fraud designated by the court to lead a class action lawsuit. The Lead Plaintiff selects the legal counsel to prosecute the case and is influential in setting the legal fees as well as negotiating a settlement.
Securities Litigation Counsel: Firms specializing in securities law that litigate, monitor class action complaints and settlements on behalf of a Plan and evaluate the Plan’s eligibility for lead plaintiff status and/or class membership.
Settlement Administrator: Appointed by the court to notify all potential class members of the court-approved settlement and collect submitted documentary evidence of class eligibility to participate in the settlement (proof of claim). Disburses settlement to class members based on the size of their loss.
- The National Association of Public Pension Attorneys (www.nappa.org).
- The Stanford Law School Securities Class Action Clearinghouse (http://www.securities.stanford.edu/).
- The National Association of State Retirement Administrators (www.nasra.org).
- The Securities Exchange Commission (www.sec.gov).
- Board approval date: Tuesday, October 31, 2006