Defrauded investors who are deciding whether to participate in a securities class action or to “opt out” and pursue an individual arbitration claim should take into consideration the results of several independent studies that examined potential recoveries under each alternative. An investor’s likely recovery is only one of the many factors that need to be considered. However, getting the best possible recovery is clearly an important consideration.
Securities Class Actions: According to a study of securities class action cases conducted by economic consulting firm NERA for the year ending 2009, the ratio of settlements to investor losses has remained around 2.5% for the last few years. That is equivalent to recovering 2.5 cents for every dollar lost. According to NERA, as investor losses increase, recoveries increase at a much lower rate. However, recently filed class actions flowing from the credit crisis have led NERA researchers to speculate that investors may achieve potentially higher settlements in the near future.
A second study of securities class action settlements that was conducted by Cornerstone Research came to a similar conclusion and found that the median settlement rate for class actions in 2009 was 2.3% percent of estimated damages. However, settlement rates varied widely depending upon a large number of variables including the type of case involved and the jurisdiction where the case was filed. Neither study focused on cases against broker-dealers.
Securities Arbitration: After analyzing nearly 14,000 securities arbitration awards between 1995 and 2004, researchers Edward S. O’Neal, Ph.D. and Daniel R. Solin, Esq. concluded that the expected recovery for a large arbitration claim against a major brokerage firm was 12% of the amount claimed (excluding legal costs). During their analysis, the two men determined that the expected recovery for claims decreased along with an increase in both the dollar amount of the claim and the size of the brokerage firm. For example, an arbitration claim against one of the top 20 brokerage firms seeking damages of $20,000 or less has an expected recovery of 28%, whereas a claim above $250,000 has an expected recovery of only 12%. Expected returns against smaller firms were significantly better. A $100,000 claim against a non-top 10 brokerage firm has an expected recovery of 40%. According to my own research of arbitration awards for cases decided in San Francisco during 2009, investors recovered approximately 79% of their claimed damages.
As small as the arbitration award percentages may seem, they are significantly better than the 2.5% recovery rate for securities class action cases. Based on my own experience having handled scores of arbitration cases, I remain convinced that securities arbitration provides investors with a significantly greater opportunity to recover a larger share their investment losses than a class action will.