Automating Securities Class Action Settlements
Jessica Erickson | 72 Vand. L. Rev. 1817 (2019) |
Securities class actions are supposed to vindicate the rights of investors injured by corporate fraud. Yet, despite multimillion- or even multibillion-dollar settlements, many injured investors never receive a dime in compensation. To receive money from a settlement in a securities class action, investors must comply with a cumbersome claims process, documenting their transactions in the defendant corporation’s stock and detailing their losses. Faced with this hurdle, many investors never claim their shares of the settlement funds. Courts continue to insist that investors comply with cumbersome claims processes because they do not think they have another way to accurately identify class members. Companies do not know who purchased their shares during the class period, nor has there been a global database that tracks securities purchases down to the level of individual shareholders. As a result, the only way to identify injured investors has been to require them to identify themselves, typically by filing a claim and documenting their transactions.
This Article argues that the time has come to modernize the distribution of settlement funds in securities class actions. There are two possible ways to modernize this process. The first approach relies on market innovation, proposing an automated system that collects the relevant transaction data from individual banks and brokers. Claims administrators could then use this data to calculate every class member’s pro rata share of the settlement and send them their money. The second approach relies on regulatory innovation using the SEC’s Consolidated Audit Trail, which, once it is up and running, will contain a complete record of nearly all securities transactions in the financial markets. The Consolidated Audit Trail will contain exactly the type of data needed to automate the distribution of settlement funds in securities class actions. Neither of these solutions is turnkey, and both would require the cooperation of courts and lawmakers, but they have the potential to revolutionize how investors recover money lost to corporate fraud.