At some point in any investor’s lifetime, they’ll receive notice that they are considered to be part of a class of shareholders due some kind of settlement from a securities class action lawsuit.
These securities class action lawsuits are fairly common, and in my 23 years of investing, I usually receive at least one notification every year. These securities class action lawsuits usually are filed after a stock experiences some kind of significant decline in price. In some cases, there is fraud involved and that can lead to a significant settlement.
These notices usually come with a claim form in which you are given the opportunity to prove that you were a shareholder during the specific certain period that the settlement covers. Often, these claim forms can be rather onerous to read, even more onerous to provide evidence for, and require you to hunt down and perform some complex calculations to see if you are even due some money.
Which leads us to a couple of questions: Should you take the time to fill out these claim forms? How much money can you truly hope to receive?
A 2016 Stanford University study revealed that the average recovery of estimated damages for securities class action lawsuits ranges between 2.5% and 7.4%. Then, all of the attorneys who filed class-action cases usually enjoy about a third of the recovery. That usually leaves a very small comparative recovery for shareholders.
No Big News, No Big Money
The first thing you should do when you receive a securities class action lawsuit settlement notice is to get an idea of how big the settlement is. Generally speaking, if it didn’t make the news, other than press release showing up in the company’s own financial newsfeed, it’s a pretty good sign that there won’t be too much money to recover.
A recovery of less than $25 million is not going to amount to much. Remember, that $25 million has to be spread amongst all the shareholders in the class. That could number in the tens of thousands.
However, if you are dealing with a small-cap stock, a settlement of just a few million dollars may work out very much to your favor, particularly if you owned a large number of shares of the company during the class period. Small-cap stocks tend to have far fewer shareholders than some of the familiar large-cap names.
When you receive one of these settlement notices, the first thing you should do is get a sense of how much money you may have lost as a result of whatever alleged dirty deeds a company engaged in to result in a settlement. The first thing to do is take a quick scan of the claim forms to look at the class periods that are included in the settlement.
Usually, what you will see is the entire affected period broken into five or more separate groups. Depending on when you purchased your stock and when you sold it, and if you are shareholder during the period that the settlement considered to be the most violative, you may be able to recover a decent sum of money.
What you will usually see is one specific period of time that is considered to have been the most egregious and violative, and a dollar per share amount of the stock price that was considered “artificially inflated” will be assigned for that time. Smaller amounts will be assigned to different periods, with periods before and after the entire settlement being valued at zero in terms of how much the stock price was “artificially inflated”.
Good Records Are Key
You want to grab your brokerage statements and take a quick look to determine if you have holdings during the top one or two periods in which the dollar per share is largest. If so, that’s the first inkling that there may be some decent money to be recovered here.
Obviously, if the largest amount is just a few cents per share, it’s probably not going to be worth your time to go to the claim form. You’ll see larger numbers, however, if a stock experienced a huge selloff.
Then it’s just a matter of how you value your time. If you see that you held a thousand shares of the stock during the period in which the recovery is $0.25 per share, you would expect to receive about $250. Then you just have to decide how much time it would take to pull together all the documentation that you need. In general, in my experience, it takes about 1 to 2 hours to pull everything together.
The largest recovery I ever had was several thousand dollars from the famous $2.8 billion settlement with Cendant Corporation back in 1999. However, it looks like I’ll be receiving about a couple of thousand dollars in the $6 million settlement in the case of EZCORP Inc (NASDAQ:EZPW).
So you can never really tell based on the size of the settlement alone what you can expect. EZPW’s case is exactly that small cap scenario I mentioned above, where I happen to have a large number of shares in the highest recovery period.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.