November 16, 2018 Articles

A Guide to Settlement Plans of Allocation in Securities Class Actions

By Stevie Thurin

A plan of allocation is a stated methodology by which a class action recovery is allocated among eligible claimants; literally, it is a plan for allocating the settlement fund. Typically, in a class action settlement, and especially in a securities class action settlement, a class member does not automatically receive a specific portion of the settlement fund, even though the class member does automatically release claims (unless he, she, or it opts out of the class). Although giving a release is automatic in order to give the defendants the global peace for which they bargain, to be potentially eligible to receive a portion of the settlement, the class member must timely submit a valid claim with supporting documentation to the claims administrator. The claims administrator then reviews the claim for verification; determines whether deficiencies in the claim exist; and if the claim is valid, calculates the value of the claim under the plan of allocation. The value of the claim for purposes of the plan of allocation is not necessarily the amount the claimant will receive; rather, it is the value of the class member’s claim relative to other class members’ claims used for pro rating the net settlement fund.

In the simplest of examples, rarely if ever in securities class actions will all class members who submit eligible claims receive something and receive exactly the same amount. Where class counsel has obtained a common fund for the benefit of the class, under this simplified example, this amount will equal their proportionate share of the total recovery amount. So if there is a $10 million pot and 50,000 class members submit valid claims, each would receive $200 ($10 million / 50,000).

But plans of allocation in securities class actions are anything but simple. Rather, in a typical securities fraud class action, the plan of allocation requires a claimant to itemize and submit documentation supporting all of the claimant’s transactions in, and holdings of, the relevant security during a specified time period, usually at least during the class period and sometimes also 90 days thereafter. The most frequently dispersed settlement fund is one for claims brought under section 10(b)(5) of the Securities Exchange Act of 1934, and the plan of allocation is based on the lead plaintiff’s damages expert’s damage analysis. That damage analysis often uses the expert’s event study, an analysis that attempts to measure the impact on the price of the securities as a result of the alleged wrongdoing as opposed to other market and industry conditions, i.e., the alleged artificial inflation. While those event studies and damage analyses work well for estimating damages and entering into settlement negotiations, they attempt only to measure damages; they are not drafted to fully address all scenarios and equities for purposes of allocating recoveries to claimants.

In a perfect world—which is rarely the world in which securities class action settlements live—once a settlement amount is reached, the lead plaintiff’s expert will draft the plan of allocation, lead counsel will carefully review and approve it, and then it will be reviewed by the settlement claims administrator. And this will all be done, and fully vetted, before the parties sign the settlement papers, which attach the notice and the plan of allocation, and before they are presented to the judge when seeking approval to send the notice to class members. In reality, because there is typically around only a 30-day window from the time at which a settlement is agreed to in principle, to when the parties are either ordered or agree to submit the settlement papers to the court, the plan of allocation is not the primary focus, and it sometimes even gets plugged in during one of the very last days before execution. Therefore, the parties should come prepared and have the damages expert and claims administrator engaged as early as possible to give them time to draft and review the plan of allocation, respectively. But the luxury of time is not always present, and the parties themselves should be able to efficiently and effectively review the plan of allocation.

The first thing to think about is whether the plan makes sense. The high-level idea behind this review is to do a gut check for an obvious error or gray area of interpretation that can be corrected. An example might be a securities plan of allocation that references an amount “per option” where what was really meant was “per the 100 underlying shares of common stock represented in the option contract.” The difference in this example can skew calculations by a factor of a 100, so it is crucial to correct or add clarifying language to ensure appropriate interpretation.

The next question to ask is whether the plan of allocation can be implemented. For this review, one needs to have a full understanding of the data being requested from the claimant (or obtained from other sources) as well as an understanding of the coding principles that can be used to plug those data points into a computerized calculation model. For example, to implement a provision that calls for a different calculation of purchases that occurred after business hours, the administrator would need the time zone and the time of purchase, and may need a lookup calendar for holidays and other considerations that would affect what are “business hours.” This is an area where consultation with an administrator can be crucial to avoid a plan that could never actually be coded.

Is there anything missing or that overlaps? This is usually the most difficult to spot and can lead to a lot of problems if not corrected. If not all populations or scenarios are covered by the plan of allocation, class members whose claims are eligible may nevertheless recover nothing. On the other side, it is also problematic if more than one provision of the plan of allocation could arguably be applied because of overlapping scenarios without explicit instruction on how to rank the competing clauses. Both scenarios could lead to claimant disputes and to class member objections and appeals, potentially delaying the settlement approval process and distribution.

Finally, when reviewing a plan of allocation, it is important to know if there is standard language and if the plan of allocation in question follows, or deviates from, the standard language (and if that was intentional). Specifically, in the realm of securities class actions, 90 percent of plans of allocation contain the same 5 or 10 provisions based on the nature of stock trades and the governing laws. Examples include provisions dealing with netting transactions by a single claimant against other transactions by the same claimant, provisions limiting the claim amount to a net market loss, and provisions specifying whether FIFO or LIFO is used when considering multiple transactions.

If one of the customary provisions is changed or missing, it is not necessarily fatal to the plan, and there could be very good reasons for deviations, but typically the change was unintentional and, once noted, can be adjusted to meet the standard. Conforming to these standards in securities cases leads to efficiency of coding, reduces the risk of errors in attempting to “reinvent the wheel,” and helps reduce confusion and disputes. Where a change from standard is intentional, being aware of the digression also allows the administrator to perform added review to ensure coding is done properly.

It is essential that plans of allocation be correct and clear before the class notice is mailed. While most notices will include a disclaimer that there could be modifications to the plan without additional notice to the class, courts may order supplemental notice to at least the portion of the class that may be harmed by the revision, depending on the nature of the revision. In addition, even if no renotification is needed, having conflicting plan provisions causes unnecessary confusion for the class members and increased likelihood of objections and disputed claims. Involving an experienced claims administrator early can increase the likelihood of identifying and addressing unusual provisions, addressing whether they make sense in a particular case, and identifying whether there are gaps in the plan. This will also result in a more streamlined approval process and ultimately a smoother administration and distribution.

Stevie Thurin is a project director at Epiq in Portland, Oregon.

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