In Class Action Suits, Stop Relying on Custodians Regarding Settlement Payments
LAW GUIDE

Class action litigation is one of the few ways that institutional investors can get their money back after they have been defrauded

Institutions including public pension funds, hedge funds, and other investors, recoup billions of dollars each year through such litigation that returns monies lost in corporate mismanagement or fraud. Often, recouping these funds is not just a matter of pride but a fiduciary obligation.

However, for every dollar that is recovered through such lawsuits, many others are lost through errors in filing or collecting settlement payments. The worst mistake many institutional investors make is relying on their custodian, or the bank that holds and manages their financial assets. While custodians can be helpful when filing lawsuits, many fall short when it comes to collecting the settlements.

The best practice for institutional investors when it comes to managing settlements is to ensure that they collect the money themselves. Here are a few reasons why relying on a custodian could be costing you money.

Relying on Third Parties Leads to Poor Communication

One of the biggest issues with relying on a custodian or other third party to recoup money won in settlement payments is the potential for miscommunication. The more parties are involved, the more likely it is that information will not get to the relevant parties.

A custodian may not even know that an institutional investor won a class action suit. It is the obligation of the other parties involved in a suit to send investors notice of settlement, however, that notice often winds up with the wrong person.

In Class Action Suits, Stop Relying on Custodians Regarding Settlement Payments

A claims administrator may send it to the wrong person at a custodian institution, or they may send it to the previous custodian if an institutional investor has recently switched.

Others do not bother sending notices directly at all and simply print them in the financial press. If a custodian is not paying attention and neither is the institutional investor, then the deadline will pass without anyone claiming the funds.

The best reaction by an institutional investor is to be proactive and monitor any potential suits where they could recoup funds, instead of relying on another institution to do so.

The Role of the Custodian Is Too Opaque

Custodians may not be proactive about settlement payments because they do not know that falls within their responsibilities, not because they are malicious. Too often, the role of the custodian is not defined in its contract with an institutional investor. For example, the contract may include holding title for an investor’s securities, which would include forwarding notices from claims adjusters. However, their duties do not explicitly include scanning the financial newspapers for news of lawsuits or actively filing claims.

A custodian bank can be very helpful during the litigation process. Some will actively follow news in the financial world for potential settlements, while others will file claims on behalf of institutional investors. However, if an institutional investor wants their custodian institution to be proactive in terms of class action suits, they must outline those duties in a contract. Banks do not have the incentive or the time to go beyond their existing responsibilities.

How Does Changing Custodians Affect Class Action Litigation?

One of the problems institutional investors that rely completely on custodians face is that their custodian institutions are not fixed. Many investors change custodians frequently as a way to monitor the performance of vendors. While switching custodians is beneficial for some parts of the investment process, it can affect administrative tasks, including lawsuits.

Often, the communication between old custodians and new ones is not complete, if it exists at all. New custodians will not know the full history of the portfolios they now manage, which makes it difficult to know when an institution has a viable claim to file. They also may not know if existing lawsuits are going on that could yield settlements.

A previous custodian also lacks the obligation to continue working for a client whose portfolio they no longer manage. Thus, institutional investors cannot expect an old bank to continue monitoring The Wall Street Journal on their behalf or forward notices of class action lawsuits. However, investors can protect themselves somewhat during periods of turnover by including provisions that an old custodian bank has to keep monitoring litigation on their behalf in a contract.

In Class Action Suits, Stop Relying on Custodians Regarding Settlement Payments

Custodians Don’t Have Incentive to Chase Settlement Payments

This is a truth that can be difficult to swallow. No matter how good the relationship is between an institutional investor and custodial bank, at the end of the day, it is a business relationship. Custodians do not have a reason to be proactive about hunting down settlement payments when they will see little of that profit themselves.

Most custodian institutions are set up in a way that discourages them from filing claims on behalf of clients. Most banks have to pay the cost of filing class action claims themselves while only collecting a fixed fee from institutional investors, which does not cover the cost of additional filing fees. Filing claims is also very complicated and the involved nature of the forms rivals the complexity of tax forms.

Thus, custodian banks actively lose money and time that could be spent on profit-generating activities when they file claims on behalf of their clients.

What Can Your Institution Do?

Institutional investors have no protection if a custodian fails to let them know about a settlement. The best way is to prepare for this situation ahead of time.

One way that institutional investors can ensure that they get the settlements they are entitled to is to be specific about a custodian’s duties regarding settlements in the contract. They can also check up on the custodian by performing audits or hiring third-party investigators to see if the custodian is fulfilling their duties.

Finally, an institutional investor can share responsibility with others when it comes to settlement filings. Many hire law firms or claim filers just for class action suits, which is more reliable than trusting a custodian for everything.

Eduard Korsinsky | Litigation View

About the Author: Eduard Korsinsky

Eduard Korsinsky has represented clients in securities cases, derivative actions, consumer fraud, and complex commercial matters for over 20 years. Since 2003, He has been a Managing Partner of Levi & Korsinsky LLP, a firm with over 65 employees in four offices.
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