By Francesca Castagnola
Senior Managing Director/ Settlement Services, Western Alliance Bank.
Last year saw plaintiffs file 428 securities class actions across state and federal courts, the most ever filed in a single year, and the third consecutive year that U.S. courts saw more than 400 such cases. In the 10 years prior to 2017, the courts handled fewer than 200 new cases per year, on average.
The sudden, explosive growth in volume – driven by innovations in financial instruments, changes in the law and the globalization of financial markets – has created challenges across the system and for everyone involved in securities class litigation. Meanwhile, these cases, which were already some of the most complex of class actions, have become even more complex along with the increasing sophistication of investment products. And jurisdictions around the world have opened the door to class action-like securities fraud litigation, adding more opportunities to pursue recovery while also further complicating the procedural framework for pursuing it.
One industry leader with a finger on the pulse of this challenging, dynamic sector is Steve Cirami, Head of Corporate Actions and Class Actions at global fintech giant Broadridge. Steve has spent most of his career working in the class action field, as a practitioner and as Global Head and Chief Operator at Garden City Group. At Broadridge, he oversees a growing team of experts who help financial institutions monitor securities cases, identify claims and manage the litigation process to ensure they secure recoveries for their clients.
I recently spoke to Steve about the growth of securities class actions and the impacts it's having on the legal and financial industries.
We've seen three straight years with record volumes of securities-fraud class actions. Do you see that continuing, or could it drop back to the levels seen in most previous years?
While the pace is off from last year, we've had more than 500 COVID-related class actions filed this year in state and federal courts, and a number of those are securities cases related to the massive stock-market drops we saw in the first quarter.
And given the increasing complexity of financial instruments, new legal theories and expanding jurisdictions, I expect we'll continue to see a high volume of cases for the foreseeable future.
What impacts of the increased volume are you seeing across the class action litigation field?
It's impacting all parties, across the system. The courts are struggling to keep up with the flood of cases and the entire system is in danger of being overwhelmed. Once these cases begin to settle it potentially impacts claims administrators and financial institutions the most. There are only a handful of administrators that have the resources to handle these massive cases, and as the cases become more complex, those administrators will need to cultivate teams with the financial acumen to understand the complex securities.
Absent the ability to scale in size and understanding of these complex financial instruments, that could mean much longer recovery times for class members, many of whom are our clients. In addition, financial institutions who trade in these securities may have trouble keeping up with the volumes and complexities. Whether they trade on their own behalf, or as fiduciaries for fund holders or clients, these institutions must stay abreast of not only the volume but the expanding jurisdictions, the antitrust cases involving complex financial products, and the ever-changing filing requirements – all critically important functions to ensuring maximal asset recovery and to avoiding leaving money on the table.
Finally, it's important to note that in this age of unpredictability, banks with settlement services divisions must stay up-to-date on legal developments and current industry trends and topics, utilizing their experience to support all parties and phases of the settlement process and to tailor their solutions for each client and case.
You mentioned the increasing complexity of financial instruments, which is not only contributing to the higher volume of cases but also making the litigation itself more complex. How are Broadridge's clients grappling with that challenge?
As cases become more complicated, the data necessary to understand all the underlying transactions has become increasingly harder to understand. The trades covered by a class action claim might have happened 10-15 years ago, often include a variety of products, and in this age, might involve clients all over the world. So our clients have to sort through all of their data to understand whether their clients have a claim, and that's just the beginning.
But failure to identify who is eligible, and take the necessary steps to help them recover their funds could mean leaving money on the table — or, worse, it could open a financial institution up to claims that they didn't satisfy their fiduciary obligations, because fund managers have a duty to recover that money if it's owed to their clients. The stakes are quite high.
The short answer is that our clients are grappling with these challenges, and the ever-changing legal landscape, by preparing in advance. Tracking the cases at early stages, and ensuring that the data is preserved and in a usable format, is priority number one.
How are you helping clients manage those risks?
The industry is still largely in reactive mode – when a large settlement is announced, the financial services industry often scrambles to figure out which of their accounts and clients should participate in the settlement. But our clients are much more proactive in this regard. Broadridge, as a back-office provider to numerous financial institutions of all types, already houses our client’s data and business records. We have a robust database of every class action and collective action opportunity globally, which includes matters years before they settle. Lastly, our proprietary technology matches the two – so our internal client advocates as well as our clients know about a real asset recovery opportunity years before it becomes viable for them and their clients. This also allows Broadridge to work proactively with our clients on particularly complex cases such as antitrust settlements involving complex financial instruments.
The European Union recently agreed on language that directs Member States to enact collective-action regimes — which will create class action-like litigation for certain legal categories, including financial services. How will that impact your clients?
It's going to present both a challenge and a significant opportunity. It will add another layer of complexity, both for meeting their fiduciary obligations and for understanding the different rules across jurisdictions. For example, the EU won't require a lead plaintiff as U.S. federal courts do; in that jurisdiction, plaintiffs will have to set up nonprofit entities to manage cases. But the expansion makes sense; today's financial markets are accessible to anyone anywhere in the world, and legal systems should reflect that by protecting against fraud and malfeasance everywhere in the world.
Is the growing complexity, across the board, what prompted Broadridge to produce your recently published class action report?
As we've been discussing, cases are getting harder to manage both for the lawyers and claims administrators, and it's getting harder for financial institutions to track cases, file claims and collect funds. All of that increases the likelihood of errors at every stage of the process, which can be catastrophic when you're dealing with billions of dollars each year.
Our first annual report takes a close look at the most complicated cases from 2019 with an eye toward helping everyone involved in this litigation get a better understanding of the complexities. It's very instructional for financial institutions in particular — we hope it helps them understand the issues and track cases, so they can be more aware of what data they'll need and how they need to keep it up to date in anticipation of class litigation.
What else is Broadridge doing to help clients navigate the increasingly complex world of securities class actions?
We continue to add experienced class action experts to our team; since I joined late last year, we've brought on 10 veteran class action professionals, most of them in just the last few months. Most recently, we hired Christi Cannon, a class action veteran who's been on all sides of this kind of litigation – as a partner in a national securities class action firm, and as an administrator at Garden City Group. As we've discussed, the volume, complexity and jurisdictional expansion of securities class actions are almost certain to keep growing. Broadridge is investing in providing more class action support for our clients, and we're taking the necessary steps to help our clients navigate all of that growth.