Institutional investors are increasingly viewing the potential returns from opting out of US securities class actions and bringing direct actions against corporate bad actors as outweighing the costs of being an active litigant in the US. Opt-out and direct action rates in the US increased in recent years, from occurring in less than 3% of securities class actions from 1996 to 2005, to more than 11% between 2019 and 2022.
US Securities Class Actions
In the United States, when a corporate fraud or other corporate bad act is revealed and share prices tumble, a single plaintiff commonly brings a class action lawsuit seeking to represent all shareholders affected by the disclosure. Multiple plaintiffs may compete to be the “lead plaintiff”, and a court may appoint the plaintiff deemed best suited to represent the complete “class” of investors affected by the disclosure. Where a class action is successfully certified by a lead plaintiff and a settlement finally reached, all other investors in the class are bound by the outcome unless they “opt out” of the class before a court-established deadline.
Opting Out and Bringing a Direct Action
Opting out of a class action affords an investor the opportunity to bring its own “direct action” against the corporate defendant. Returns afforded to direct action litigants may be substantially higher than those received by investors who remain passive members of the class. But, historically, many investors have viewed the costs of being an active litigant, as well as the risk of not receiving a return that is greater than or even as great as the class’s, as being too high to justify opting out of a securities class action in order to bring their own direct action.
Increasing Rates
However, the tide seems to be shifting in favor of sophisticated investors considering and utilizing their ability to opt out of securities class actions and bring direct actions against corporate bad actors. A recent report released by Cornerstone Research found that from 2019 through June of 2023, 11% of securities class action settlements had at least one identified class member opt out. In contrast, only 3% of such settlements reached between 1996 and 2005 had an opt out. (The report is freely available here: Opt-Out Cases Securities Class Action Settlements: 2019-H1 2022 Update (cornerstone.com).)
While some investors may opt out for reasons other than to bring a direct action, the most apparent reason for opting out is to bring a direct action. In approximately 30% of the cases where an opt out was identified, the researchers were able to confirm that a direct action was brought by an investor that had opted out.
Cornerstone’s report also found that opt out rates were especially high in cases with larger ultimate class action settlements, where estimated damages were high at the outset, where matters were complex (as indicated by, among other things, a longer class period, a greater delay between the end of the class period and the filing of the action, and the inclusion of non-common stock plaintiffs in the class), and where the defendant had a high likelihood of ability to pay.
Sophisticated Players; Calculated Decisions
Many of the direct actions identified were brought by institutional investors, such as pension funds or mutual funds.
The sophistication of the direct action plaintiffs and the increasing rates of opt outs in larger, more complex cases suggests that decision to opt out is a calculated one, and that a growing number of investors are seeing opportunities for substantial returns beyond those seen by class members from opting out.
Deminor
Deminor maintains relationships with sophisticated US counsel capable of assisting institutional investors in opting out of securities class actions and bringing their own direct action. In addition, we may work to offer the best possible rate for our clients on a contingency fee basis. In some cases, a direct action may offer an investor the opportunity to obtain a larger settlement more quickly. If any investors are interested in opting out of a specific securities class action and bringing a direct action or just in learning more about opt out and direct action opportunities in general, they should feel free to reach out to Deminor’s Senior Legal Counsel, Michael Watson at michael.watson@deminor.com or Chief Strategy Officer, Investment Recovery, Edouard Fremault at edouard.fremault@deminor.com.
