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The Role of the Claims Administrator in Securities Class Action Settlements

The claims administrator plays a critical role in the class action process and it is important to have a general understanding of their responsibilities and how they impact your claims.  In short, the Claims Administrator is a neutral third party retained to comply with the requirements set forth in the Court approved Stipulation of Settlement.  This is essentially a blue print of exactly how to administer the settlement from beginning to end.

The first step is the notification process and the goal is to notify as many potential class members as possible.  This is primarily accomplished through the use of media publications and mailing claim packets to the names and addresses provided by the defendant’s transfer agent.  Most administrators also maintain a database of brokers and nominees who are notified of each settlement and ordered to either provide names and addresses of clients who are potential class members or request a bulk number of claim packets to mail directly to their clients.

Once the notification process is complete, the administrator will start receiving manually completed claim forms as well as electronically filed claims from financial institutions.  Each claim is data entered and documentation is evaluated to substantiate each claim.  Any claim that is deemed deficient or incomplete is notified of the claim defects and given an opportunity to rectify the claim.  The administrator will also calculate a recognized loss in accordance with the Court approved Plan of Allocation to identify the population and value of eligible claims.  It is also worth noting that a recognized loss is not the same as a market or “out of pocket” loss.

The next step is to provide recommendations to Class Counsel of all rejected claims and all eligible claims and their recognized losses.  Class Counsel will review these findings and make a motion to distribute with the Court.

Finally, once the Court approves the distribution, the administrator will distribute the funds to all eligible claims on a pro-rata basis.  For example, if there is 1 million dollars to distribute and the recognized losses for all claims total 2 million dollars, everyone will receive 50% of their recognized loss.

During these steps, there are a number of audits and data integrity checks that are performed by the Claims Administrator. If there are any issues on a claim, the administrator can and will reject a claim entirely or partially.  If a claim is partially rejected, that portion of the claim will be excluded from the calculation and reduce the value of the claim.  Administrators may also request independent documentation such as statements or additional data to further validate a claim.  In most cases, the stipulation only requires an administrator to notify claimants once of any defects with a 20-30 day response deadline.  As you can imagine, these defects will ultimately be subject to rejection if not addressed by the claimant in a timely manner.

Now that we know what the administrator does, most of you are probably wondering how they do it?  And this is most important as this determines the eligibility and value of a claim.  An administrator will use all information, data, and documentation available to evaluate a claim and verify that it meets the definition of the Class.  This means that the claim must include eligible security identifiers and the dates and holdings must balance and conform to the Class Period.  They will also utilize historical pricing to ensure that claim data is aligned with the market trading of a security and review net amounts to ensure that they reasonably correlate with quantities, prices, and commissions.  Documentation is requested and reviewed to substantiate a claim and any electronic data must meet formatting requirements and specifications. Of course, these requirements and specifications will vary amongst administrators and this lack of consistency further complicates the process.

The administrator is not required to accept claims if they do not meet the settlement or formatting requirements outlined in the Court approved documents and they are also not obligated to decipher questionable or incomplete data.  For example, an administrator will not trace transferred shares across multiple claims for the same beneficial owner. All in all, they are not allowed to make any assumptions when reviewing claim data as these assumptions are a liability and could artificially inflate or deflate the value of a claim.

In closing, an administrator is only as good as the data and documentation submitted by class members and the quality of this information can vary greatly across financial institutions such as custodian banks who file claims on behalf of multiple clients.

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