Articles Posted in Class Actions

Thumbnail image for ubs building.jpgOn December 20, 2012, a class action complaint was filed on behalf of all investors who purchased or held the UBS Willow Fund L.L.C. at any time after January 1, 2008. The matter of Ken Boudreau vs. UBS Willow Management L.L.C, UBS Alternative and Quantitative Investments L.L.C, UBS Fund Advisor, L.L.C., Bond Street Capital L.L.C, Sam S. Kim, George W. Gowen, Stephen H. Penman, Virginia G. Breen and Meyer Feldberg was filed in the U.S. District Court for the Southern District of New York. The class action complaint alleges that the UBS Willow Fund made material false and misleading representations and omissions that were communicated to investors through the fund’s offering materials and quarterly summaries. As alleged in the complaint, the Willow Fund fundamentally changed its stated investment strategy in January 2008 and began aggressively trading in credit default swaps (“CDS”) without disclosing this fact to investors. Eventually, in October 2012, investors were notified that the fund was liquidating primarily because it had suffered significant losses from trading in CDS. The class action seeks damages in excess of $200 million.

In addition to recovering losses through a class action, investors who have suffered significant losses should fully explore their other legal options, including the filing of a securities arbitration claim directly against their financial advisor. Individuals with meaningful claims can often obtain a much larger potential recovery through arbitration. See related blog post: Securities Arbitration vs. Class Actions: Which is More Financially Rewarding?

This is an update to our February 21, 2013, blog post: Charles Schwab Allowed to Prevent Customer Class Action Lawsuits.

Yesterday, a spokesperson for the Financial Industry Regulatory Authority (FINRA) announced that an appeal had been filed with the National Adjudicatory Council (NAC)–an internal appeal board that reviews initial decisions rendered in FINRA enforcement actions. However, an NAC decision may not put an end to this important issue because NAC decisions can be appealed to the Securities Exchange Commission (SEC).

If the FINRA ruling is ultimately upheld, brokerage firms will be able to prevent customer class action lawsuits and require all customers to pursue individual claims through FINRA’s securities arbitration program. A bar on class actions would have the greatest impact on investors with claims that are too small to pursue individually and also the legions of investors who are unaware that any wrongs have been committed until they receive notice that a class action lawsuit was filed on behalf of all affected investors.

Today, a Financial Industry Regulatory Authority (“FINRA”) hearing panel ratified Charles Schwab’s inclusion of a clause in their customer agreement that prevents customers from pursuing class action claims against the firm. After agreeing to pay $225 million to settle a class action lawsuit in connection with the beleaguered YieldPlus ultra short-term bond fund, Schwab promptly modified their customer agreement preventing customers from participating in class actions and requiring all disputes to be submitted to FINRA’s securities arbitration dispute resolution program. At this early stage, it is unclear whether FINRA’s Department of Enforcement will appeal the ruling. However, it is safe to assume that other brokerage firms may soon be following Schwab’s lead and amending their customer agreements to prevent class actions.

What Does This Mean for Investors?

According to a statement issued by Schwab, customers are better served through FINRA’s arbitration process because class action litigation is “cumbersome” and a “less effective” means of resolving disputes. Schwab is partially correct. As noted in a previous blog post, customers with meritorious cases may be able to recover a larger percentage of their losses in arbitration. See Securities Arbitration vs. Class Actions: Which is More Financially Rewarding?

scale_balance.jpgDefrauded 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.

Yesterday’s article in Investment News confirms my opinion about the disadvantages of pursuing mass-arbitration claims before the Financial Industry Regulatory Authority (FINRA), which I try to avoid in my California securities law practice. On the heals of the Medical Capital class action lawsuits, law firms have begun filing mass-arbitration claims against broker-dealers such as Securities America and Capital Financial Services, often grouping as many as 15 individual Medical Capital investors into a single arbitration case in what almost amounts to a “mini-class action.” In response, broker-dealers have vowed to vigorously defend these claims.

sheep_herd.jpgMass-arbitrations can be very profitable for law firms hoping to earn large contingent fees by aggregating as many clients as possible into a single arbitration. Unfortunately, the best interest of the individual investor/client may suffer as a result. The challenge of taking a mass-arbitration claim to hearing and proving that each client is independently entitled to an award can be great. As part of their defense strategy, broker-dealers are filing motions to sever these claims into separate individual arbitrations which will undoubtedly delay and disrupt the entire process. When clients start getting separated from the herd, will mass-arbitration attorneys still be interested in representing those clients who had marginal claims to begin with? Undertaking a mass-arbitration raises a number of ethical issues for attorneys attempting to jointly represent a diverse group of unrelated clients who may have varying levels of commitment to pursue their claims. A client recently showed me a proposed contingent fee agreement given to them by a mass-arbitration law firm that would essentially force them to accept a settlement if 60% of the other clients agreed to settle.

Combining customer claims into a single arbitration often makes sense from a practical and economic standpoint, such as when the clients are related or are customers of the same financial advisor. However, individuals with strong cases may be better off going it alone rather than joining a mass-arbitration and being lumped together with other investors who may have weaker facts. Before deciding to become part of a mass-arbitration claim, clients should explore their options with a great deal of care.

Investors who purchased the Schwab Yield Plus (SWYPX and SWYSX) money market funds, have until December 28, 2009, to decide whether to remain in the pending class action lawsuit or affirmatively “opt out” and pursue a securities arbitration claim. The following investors will be automatically included as class members if they do not take steps to opt out of the class action:

  1. Those that purchased the funds between November 15, 2006, and March 17, 2008;
  2. Those that purchased the funds between May 31, 2006, and March 17, 2008; and

Thumbnail image for Thumbnail image for medcap.jpgOn November 2, 2009, a class action was filed in the Central District of California against Wells Fargo Bank and Bank of New York Mellon on behalf of investors who purchased Medical Capital notes. The class action alleges that the banks failed to safeguard investor assets while acting as trustees of the Special Purpose Corporations created by Medical Capital Holdings. The action, Michel Rapoport v. Wells Fargo Bank, National Association et. al, has not yet been certified by the court.

There are currently two separate class actions arising from the Medical Capital fiasco. In addition, a growing number of investors are pursuing securities arbitration claims directly against the financial advisors that solicited their purchase of Medical Capital notes.

See related blog entry: Medical Capital Class Action or Arbitration: Investors Should Consider Their Options

A Notice of Pendency of Class Action was issued in the class action matter In re Schwab Corp. Securities Litigation currently pending in San Francisco federal court. Investors who purchased shares of the Schwab YieldPlus Fund that qualify as class members will be automatically included in the class action, unless they submit a request for exclusion from class membership. The court’s deadline for opting out is December 28, 2009. YieldPlus investors who opt out may want to consider pursuing a claim for their losses through arbitration before the Financial Industry Regulatory Authority (FINRA), as many investors have already done.

For more information, please click on the following links:

Blog Post: Securities Arbitration vs. Class Actions: Consider Your Options

Investors Have Choice to Make Regarding Medical Capital Corporation Fraud Recovery

Thumbnail image for Thumbnail image for Thumbnail image for medcap.jpgA class action lawsuit was filed in the Central District of California on September 18, 2009, against brokerage firms Cullum & Burks Securities, Inc., Securities America, Inc., Ameriprise Financial, Inc., and CapWest Securities, Inc., on behalf of investors who purchased so called “Medical Capital Notes” issued by Medical Provider Financial Corp. III, IV, V and/or VI on or after September 18, 2006.

The class action alleges that the defendant brokerage firms made materially false and misleading representations in the sale of the sale of the Medical Capital Notes. This class action has not yet been certified by the court. If the class is certified, the parties will be required to submit a proposed timeline for class members that want to opt out of the class action. Class members that elect to opt out can file a claim for their Medical Capital losses with FINRA. For more information about opting out of a class action and submitting an arbitration claim, please see our blog posting: Securities Arbitration vs. Class Actions: Consider Your Options. Investors who purchased Medical Capital Notes from brokerage firms that were not named as defendants are currently not included in the class action. If you believe you have a meritorious securities claim, speak with a securities attorney to discuss your rights and the advisability of opting out based on your individual circumstances.

A San Francisco federal judge has issued an order certifying a class action lawsuit against Charles Schwab & Co. alleging securities law violations in connection with Schwab’s beleaguered YieldPlus Fund. The parties are required to submit to the court by September 10, 2009, a proposed timeline for class members that want to opt out of the class action. An updated blog posting will be issued once the opt out deadline is known. Click here to view all YieldPlus blog postings.

Three Classes of Investors Are Included in the Class Action

The court’s order creates three different classes of plaintiffs. The three classes are:

  1. Yield Plus investors that acquired shares between November 15, 2006, and March 17, 2008.
  2. YieldPlus investors that acquired shares between May 31, 2006, and March 17, 2008.
  3. California residents who held shares in the YieldPlus fund on September 1, 2006.

YieldPlus investors not included in the above categories are excluded from the class action. However, investors omitted from the class still have the option of filing their own securities arbitration claim against Schwab to recover their YieldPlus losses. Unlike class actions, which must be pursued in court, individual claims must be submitted to arbitration before the Financial Industry Regulatory Authority (FINRA).

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