Securities Class Action Settlements Explained
When a company's stock drops after misleading statements come to light, investors may be able to recover part of their losses. Here is how securities settlements work.
Securities class action settlements compensate investors who bought a company's stock or other securities at prices that, according to the lawsuit, were inflated by false or misleading statements, and who lost money when the truth came out. If you bought the security during the class period, you may be able to file a claim for a share of the settlement, calculated from your actual trades.
The laws behind these cases
- ✓Securities Exchange Act of 1934, Section 10(b) and Rule 10b-5: the most common basis, covering misstatements or omissions that affect the market price of securities.
- ✓Securities Act of 1933, Sections 11 and 12: used for misstatements in registration documents for public offerings, such as IPOs.
- ✓Private Securities Litigation Reform Act of 1995: sets procedures, including how a lead plaintiff is chosen and what notices must say.
Some cases involve mergers or SPAC deals and are brought under state corporate law, often in Delaware, on behalf of stockholders who held shares at a particular time.
Who qualifies
The class is usually defined as everyone who purchased or acquired the security during the class period, often with specific dates, and was damaged. Common exclusions include the company, its officers and directors, and related parties. Some classes include options and bonds. Merger cases may cover shareholders who held shares on a specific date.
How payouts are calculated
Unlike most consumer settlements, securities settlements pay based on a detailed formula in the plan of allocation. That formula usually calculates a "recognized loss" for each purchase based on:
- ✓When you bought, and how much artificial inflation was in the price at that time
- ✓When you sold, or whether you still held the shares after the corrective disclosures
- ✓The number of shares involved
Your payment is your recognized loss as a share of everyone's total recognized losses, applied to the net settlement fund. Some plans set a minimum payment, below which no check is sent. Shares you bought before the class period generally do not count, and shares you sold before the truth came out may have no recognized loss.
You can lose money on a stock and still get nothing if your trades fall outside the dates or price movements the formula counts. The plan of allocation, not your account balance, decides.
Who files the claim
Shares are usually held in "street name" by your broker, so the company does not know who you are. Administrators send notices to brokers and other nominees, who forward them to clients or provide client lists. Institutional investors often use claims filing services. As an individual, you usually file yourself with your trade records. Our step-by-step guide to filing a securities claim covers the process.
Securities settlements vs SEC fair funds
The SEC sometimes collects money from a company in an enforcement action and distributes it to harmed investors through a fair fund. That is separate from a private class action, with its own administrator and claim process. An investor can sometimes be eligible for both.
Timeline
Securities cases often take years before settlement, and payment usually comes months after the claim deadline, since the administrator must review trading records for every claimant. See settlements for investors for more.
How a case usually unfolds
- 1A company announces bad news, such as a restatement, failed trial or investigation, and the stock price falls.
- 2Law firms file complaints and publish notices inviting investors to seek appointment as lead plaintiff.
- 3The court appoints a lead plaintiff, often a large institutional investor, and lead counsel.
- 4The defendants usually move to dismiss. Many cases end here, but those that survive often settle.
- 5If a settlement is reached, notices go out through brokers, and investors file claims.
Because so many cases are dismissed early, a lawsuit announcement is not a promise of a payout. Wait for a settlement before spending time gathering records.
One more thing to know: you do not need to have been a long-term investor. A single purchase during the class period can qualify, though small positions often produce small recognized losses. If your calculated payment falls below the plan's minimum, you may receive nothing even with a valid claim.
If you trade individual stocks, add the companies you have invested in to SettleScout. It will flag new securities settlements that match them and remind you before each claim deadline.
Frequently Asked Questions
Do I need to have lost money to claim a securities settlement?
You need a recognized loss under the plan of allocation, which depends on when you bought and sold. Some investors who lost money have no recognized loss, and the formula decides, not your account statement.
Will my broker file the claim for me?
Usually not for individual investors. Brokers often forward the notice to you, but you typically need to file the claim yourself with your trade records. Check with your broker if you are unsure.
Can I claim if I still own the stock?
Often yes. If you bought during the class period and held through the corrective disclosure, you may have a recognized loss even if you never sold. The plan of allocation explains how held shares are treated.
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