The money grabbers
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It was recently estimated that European-based shareholders failed to pick up in the region of $2.4bn (£1.32bn) last year from securities class action lawsuit settlements in the US which rightly belonged to them. It is a staggering amount to be left on the table, apparently lying there for the taking. But where did that sum come from?
"That's the figure we were told when we went into the offices of various claims administrators and asked what was out there but hadn't been claimed by Europeans," explains David Monks, managing director at Magenta One, a company specialising in advising clients who have been short-changed in securities class actions. "We added those sums together and then took away 10 per cent just in case they were a bit wrong." Monks, a former stockbroker, estimates that only one in five people that are entitled to claim does so, which is why he set up Magenta One to track down the missing billions.
The company was set up three years ago by Monks together with his partner Graham Heaster. The first two years were spent assembling a system to monitor and track down the settlements. The idea was first put to them by William Lerach, a partner at US firm Lerach Coughlin Stoia Geller Rudman & Robbins, and one of the leading securities lawyers in the US. Lerach has headed the prosecution of hundreds of securities class and stockholder derivative actions, resulting in recoveries for defrauded shareholders amounting to billions of dollars.
"We realised that the lawyers were approaching it from the wrong angle. We put together a plan and then realised there was a potential to have a company that could help pension funds and charities," Monks recounts. He calls it an "untapped market". The biggest settlements last year included that of Lucent Technologies, which settled at £517m. "We're in the process of claiming for 90 different companies in the WorldCom case; and in the first tranche, the CitiGroup contribution is worth $2.65bn (£1.45bn) and they've admitted no liability," adds Monks. He claims that Magenta One has recovered $6m (£3.3m) for one UK investment bank.
While $2.4bn sounds like a lot of money, Thomas Vita, who leads Norton Rose's US corporate finance group, believes that sum should be seen in context. "Yes, it's a big amount of money, but it's picking up what's left over after the whole thing has fallen apart," he says. "Unless you're a huge investor in one of those companies, the individual amount you're claiming is probably a relatively small amount."
Robert Brownlie, co-chair of DLA Piper Rudnick Gray Cary's securities litigation group, is also unsurprised by the figures. Typically, securities class actions settle for a fraction of the damages, he points out, maybe 12 cents on the dollar or less. "What helps provide a decent recovery is that the undistributed funds are then redistributed into the settlement fund to those investors who make claims," explains Brownlie. "So if more investors make a claim, that actually dilutes the amount of payment to participants in the settlement."
Vita is unconvinced that Magenta One adds much value to the process. He says claiming a stake in a settlement is often just an issue of "filling in the required form". However, the lawyer says that there remains the question of whether the European investor is being included in all of the classes that they should be. "If you leave it to the plaintiff bar in the US, they're going to put together as large a class as they can, but they'll also take the path of least resistance," he says. "They might not include non-US investors because it's too much hassle."
Monks reckons that European fund managers should take note of developments on the other side of the Atlantic. A series of lawsuits were filed against mutual funds in the US in January, contending that they did not claim money owed to their investors from settlements of securities class action lawsuits. The actions have named more than 40 fund managers and alleged that they have breached their fiduciary duty to investors by failing to file claims for money from settlements of shareholder lawsuits. "These funds are failing to actually go out and capture that money," Randall Pulliam, a lawyer at US firm Baron & Budd, told the press. "They have no valid excuse not to file proofs of claims."
Magenta One claims to have developed an IT system that enables its team to crunch the numbers and process in the region of 2.5 million trading positions in a couple of minutes. Monks says the company is currently tracking 1,900 cases - "all securities class actions, whether accountancy fraud, prospectus fraud or mismanagement" - across the globe. The company has 10 people in London, three in Jersey and three in New York. So how does Magenta One keep up?
"There are only so many cases that settle per week," says Monks. "Then you have a 90-day to 120-day period to process those; and although the figures are quite large, the system works and the computer runs through the night." On why they called the company Magenta One, Monks is not sure, and reveals that he hates the name. "I voted against it. It sounds like a lady's lipstick," he says. "But strangely enough, it seems to be working."