To opt-out, that is the question. An opt-out action is when an investor chooses to remove itself as a class member of a securities class action suit with the intention of filing a direct action against the defendant. There are many reasons why it may be advantageous for an investor to proceed in this manner. As we have had an abundance of experience with direct action opt-outs, if the damages are large enough, this will likely be the best course of action for the institutional investor.
However, we must first address the U. S. Supreme Court decision in California Public Employees’ Retirement System v. ANZ Securities, Inc [1](“ANZ”), where the court held that statutes of repose are not subject to the doctrine of equitable tolling. This means that, even if the class action is filed timely, filing only pauses the statute of limitations and class members who choose to opt out must bring their own lawsuit before the expiration of the statute of repose (and often before the court rules on the merits of the class action suit). As such, claims brought under Sections 11 of the Securities Act of 1933 are subject to a 3-year statute of repose, and claims brought under Sections 10(b) of the Securities Exchange Act of 1934 are subject to a 5-year statute of repose[2] will become time barred, making certain transactions null and void from any claims. However, based on our experience, we still believe that in the right situation, the direct action is the correct route to take. The evaluation of the case and decision to file just comes a little sooner.
Opt-out actions have several distinct advantages over class action litigation. First, a direct-action plaintiff has the ability to choose from a wider array of legal claims and theories, which could be more beneficial than the strategy of the class litigation. For example, the pursuit of certain claims that cannot be brought in a class action, most notably claims that require proof of actual reliance. Although reliance is not necessary to bring a private direct action, if an investor is able to satisfy the reliance requirement of a Section 18 claim (which imposes liability on any person who makes a false and/or misleading statement of material fact)[3], it is attractive because it does not require proof of scienter. Further, the courts often find that bond purchasers cannot rely on fraud on the market presumption of reliance, which would leave the bond investor with little or no choice but to pursue their damages in a direct action. Another example of case strategy is the ability to file the claim in state court and relying on state securities claims that would not be available in a federal class action lawsuit. This could ultimately be a tremendous benefit.
A tremendous benefit to the opt-out plaintiff is that they are not tied to class counsel, giving them the ability to choose their own. Also, when filing the case, a direct-action plaintiff has the ability to name additional defendants, such as directors, auditors or other third parties that have been left out of the class action suit. This gives the investor a wider array of parties to collect damages, which could be a major advantage in the proceedings. As the class member has no decision-making ability, the opt-out direct action plaintiff can make different decisions along the course of the litigation that are more advantageous or beneficial to their specific case.
It has also been our experience that investors who take part in direct action opt-outs receive a substantial premium over the class member recovery as well as receiving their payments sometimes years before class members. Typically, in security class actions, class members will receive between 2% and 5% of their damages. On the other hand, the opt-out investor could receive 10% to 15% of their damages or even more[4]. As additional class members make their claims, the percentage recovery as a class member decrease.
As mentioned above, opt-out plaintiffs often receive their recoveries much faster than class members. Once there is a settlement in a direct action, recoveries are often received in 30 to 45 days, with no court approval needed. On the other hand, class members often wait one to two years after a settlement to receive their recovery as any settlement must first go through court approval followed by administrative “red tape” with the claim’s administrator.
The biggest drawback to filing a direct action is participating in discovery. However, we are very sensitive to institutional client’s discovery obligations and will work alongside our clients to minimize this impact, which could sometimes be minimal. In particular, if we are able to reach a settlement with the defendant prior to filing a complaint.
After weighing the options of an opt-out direct action versus staying in the class, if the damages are substantial, with strong legal merits, institutional investors may be better off filing a separate action as opposed to staying in the class. Although opt-out direct actions will require a little more work than a class member, we believe that this strategy will put the institutional investor in a better economic position, with a quicker return.
[1] 137 S. Ct. 2042 (2017)
[2] Section 11 claims relate to untrue statements of fact or material omissions of fact within registration statements and 10(b) claims relate to secondary market purchases.
[3] This is based on a theory of fraud and applies only to documents required to filed un the Securities Act of 1934 and includes annual, quarterly and special reports.
[4] Investors who opted out of the $2.65 billion AOL Time Warner settlement recovered over 30% of what the entire class recovered.