Class Actions and Individual Arbitration Claims

A class action is  a form of lawsuit in which a large group of people collectively bring a claim to court or in which a class of defendants are sued. Class action lawsuits for stockbroker fraud offer a number of advantages because they aggregate a large number of individualized claims into one representational lawsuit.

As William R. McLucas, the Securities & Exchange Commission’s former enforcement chief once said, private securities law claims, referring to the class action bar, are the “bull work of enforcement” of the federal securities laws. But for class actions, and class wide claims, many violations of the federal securities laws would go unpunished. The problem is that small recoveries do not provide the incentive for any individual to bring a individual action to prosecute their rights but a class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone’s (usually a fraud attorney’s) labor.

For example, thousands of shareholders of a public company may have losses too small to justify separate stockbroker fraud lawsuits, but a class action can be brought efficiently on behalf of all shareholders who have been defrauded.

The class action bar is generally vigilant in detecting and bringing claims for the sale of defective financial products or services sold to the investing public on a class-wide basis. Examples include the Prudential partnership cases of the early 1990s, Auction Rate Securities, Inverse Leveraged ETF funds, the various offerings of financial preferred securities, mortgage pools, structured products, and other securities generally directed at the offerors, and sometimes the underwriters of these securities.

When a case emerges, class counsel filing the complaint is required under the Private Securities Litigation Reform Act to issue a press release, advising the public and prospective members of the class that the entity with the largest financial interest in the outcome of the case, may petition the court to be appointed as lead plaintiff.

Typically, as a result of this press release, purchasers of securities during the class period may contact the stockbroker fraud law firm filing the class action complaint. However, before a class can be certified as a class, unless for settlement purposes, generally, months even years may elapse between the filing of a consolidated class action complaint, the appointment of lead counsel, and the litigation of motions to dismiss, where in some cases a complaint may be dismissed in its entirety.

Do Not Wait Too Long To Sue Your Broker

However, during this period, the time limitations or statutes of limitations for investors who may have claims against the brokers or brokerage firms who sold them these securities may continue to run. Sometimes, when the class action is finally adjudicated or dismissed, the time for these investors to sue their stockbrokers may have already elapsed.

More importantly, a bigger problem may arise when a class action claim is settled. When a class case settles it is generally certified as a class action for purposes of settlement. It has preclsuive effect, and class members who do not “opt out” of the class action are bound by the settlement.

Make Sure You Know Which Claims Are Included

In 2007, we represented an individual investor, an early retiree from Detroit, who received a lump sum retirement benefit, and based upon misrepresentations made by her Ameriprise stockbroker, including the amount of income that these funds would otherwise safely generate, invested in a series of proprietary and otherwise aggressive mutual funds, resulting in the loss of substantially her entire life-savings. She subsequently filed for bankruptcy.

In 2004, in connection with the settlement of a class action, Ameriprise Financial Services paid $100 million to 2.4 million customers (or approximately $41 to each customer) based upon
claims against Ameriprise relating to the sale of proprietary or self-space funds, undisclosed kick-backs from certain funds, and the provision of “canned” investment in pushing its own funds, which were among the poorest performing mutual funds on the market. In re American Express Financial Advisors Securities Litig., Civil Action No. 1-04-cv-1773 (S.D.N.Y.).

However, when it came time to draft a settlement order, which would be binding and have preclusive effect on all the members of the class, Ameriprise, with the complicity of class counsel, drafted the broadest possible settlement barring all class members from “instituting, commencing or prosecuting, either directly or in any other capacity, any and all Released Claims against any and all Released Persons.” As part of the settlement, the lawyers for the class received approximately $32 million in legal fees. Our former client received approximately $300.

Here, the Released Parties, included “all present and former agents of Ameriprise,” and all Released Claims all “claims are alleged to arise out of the common course of conduct that was alleged, or could have been alleged, in the Action.”

Similarly, in 2009, we represented an individual investor in a claim against a stockbroker for the fraudulent sale of an annuity. The investor was a senior citizen for whom an annuity was wholly unsuitable, (at least for the him, as the broker reaped commissions in excess of $10,000).

At or about the same time we brought our individual action against the broker and his brokerage firm, a class action lawsuit was filed against the annuity company for the failure to disclose a small administrative fee. However, once again, when the class action was settled (there class counsel made $9 million in fees), the Settlement Order was written so broadly to include all claims, including all claims against agents of the annuity company, i.e. our stockbroker, for fraud or misrepresentation in connection with the sale of the annuity. This time, however, we were successful in opting out, or excluding our client from the class settlement.

This practice continues. On March 4, 2011, the United States District Court for the Northern District of California approved a Class Action Settlement in In Re Countrywide Financial Corporation Securities Litigation, No. cv-07-05295 (N.D. Ca. 2007), which included the release of all claims against the “underwriters” and their “agents” of Countrywide securities. Accordingly, any claims against the stockbrokers associated with these underwriters, which include Morgan Stanley, Merrill Lynch, Citigroup, Wachovia, UBS Financial Services, and others, and which include claims for the recommendation of unsuitable investments, the failure to conduct due diligence, breach of fiduciary duty, and the failure to supervise, are also included.

The same is true in other cases, including cases against the issuers and underwriters or FannieMae, FreddieMac, American Home Mortgage, and the countless issues of the preferred and debt securities of Wachovia, Merrill Lynch, Morgan Stanley, and others, including Charles Schwab YieldPlus.

Counsel for the class certainly is not serving the interest of the class by advising clients to opt out of any class, thereby undermining the integrity of the class and the prospect of any substantial settlement. In fact, recently opt outs in the Charles Schwab YieldPlus class and the Countywide Class, permitted defendants in both cases from initially withdrawing from these settlements.

Accordingly, even at the investigatory stage of any claim it is very important that should you receive notice or learn that any claim, or any security that may be the subject of a claim against the broker or brokerage firm that the client carefully review any such class action settlement, and advise counsel to determine whether they may be required to opt-out and request to be excluded from any such Class Action, or else their arbitration claim may later be determined to have been included, and thereby barred in connection with the settlement or disposition of any class action.

FINRA has also warned investors that “If you choose to pursue arbitration in lieu of being part of a class action, you may need to opt out of the class. Specifically, you must demonstrate that you will not also participate in the class or any recovery that may result from the class action, or that you have withdrawn from the class. FINRA rules provide that you cannot pursue a claim against a broker in arbitration if you remain part of a class action that is based upon the same facts and law and involves the same parties. FINRA rules also prohibit firms attempting to prevent investors from participating in judicial class actions by adding waiver language to customer account agreements.”

Investors beware.

Often when investors suffer damages as the result of the recommendation and sale of defective financial products, where the stockbroker or their brokerage firm failed to conduct due diligence, or lacked a reasonably basis to recommend these securities, the issuer of the securities themselves are often subject to a class action lawsuit.

The class action device is an efficient and sometimes is the only mechanism where thousands of victims, with otherwise insufficient damages to be prosecuted individually, can band or join together putatively as a group, through a class representative, on behalf of others similarly situated, and attract competent counsel to pursue these claims as a class action, typically, in the securities context, in federal court.  In class actions, legal fees are determined, or at least approved by the Court, based upon, among other things, “lodestar,” the reasonable value of the lawyers collective time and efforts, plus a “multiplier” to reward them for taking the case on a contingent fee basis.

Class actions have their utility, and often, but for class actions, many investors would have no source for the recovery of their losses, because the company or issuer cooked the books or lied to everyone.  However, in fact, in many cases, information obtained in response to class action complaints, including answers and most typically, motions to dismiss, these same defendant issuers are quick to point out that the omitted information was disclosed but no one was paying attention and the firm selling these securities failed to conduct their due diligence or closely examine the offering materials.

Perhaps more importantly, in many cases, stockbrokers will blame the issuer for their own failure to conduct due diligence, and offer solace or the prospect of redemption to the injured investor by joining, or at least alluding to the prospect of the initiation of a class action.   The problem is that many such cases do not survive a motion to dismiss, and during the period in which the class action, if it survives works its way to settlement, or class certification in connection with any settlement, where the investor may only receive pennies on the dollar, the time to sue or bring a claim in arbitration the stockbroker or their employer, may have lapsed.

Problems are also encountered when class action settlements, (or even common fund settlements through a trustee or receiver), include as certain “released parties” the sellers or underwriters of these securities and preclude the investor, who failed to opt out of the class action, from bringing a claim against the stockbroker or broker-dealer who sold them the securities at issue.

Rule 12204(b) of The Code of Arbitration Procedure

Rule 12204 of the Code of Arbitration Procedure provides that:

(b) Any claim that is based upon the same facts and law, and involves the same defendants as in a court-certified class action or a putative class action, or that is ordered by a court for class-wide arbitration at a forum not sponsored by a self-regulatory organization, shall not be arbitrated under the Code, unless the party bringing the claim files with FINRA one of the following:

(1) a copy of a notice filed with the court in which the class action is pending that the party will not participate in the class action or in any recovery that may result from the class action, or has withdrawn from the class according to any conditions set by the court; or

(2) a notice that the party will not participate in the class action or in any recovery that may result from the class action.

(c) The Director will refer to a panel any dispute as to whether a claim is part of a class action, unless a party asks the court hearing the class action to resolve the dispute within 10 days of receiving notice that the Director has decided to refer the dispute to a panel.

Accordingly, investors are well advised to consult with counsel as to whether they should participate and be bound by a securities class action, or if the facts support a claim against the stockbroker and brokerage firm, or securities broker-dealer, that recommended or underwrote the issuance of the securities at issue based upon their sales practices, the failure to conduct due diligence, or the recommendation of unsuitable securities and other misconduct.

Guiliano Law Group

Our practice is limited to the representation of investors. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you. There is never any charge for a consultation or an evaluation of your claim. For more information, contact us at (877) SEC-ATTY.

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