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What Makes Securities Plans of Allocation Complicated?

A securities class action settlement plan of allocation is the roadmap used to determine how class members damages are to be calculated. The plan of allocation may also exclude certain class members from payment because their damages result in too small a payment (e.g. Pro rata payments less than $5 will not be paid)

Sometimes plans of allocation are very complex and may include different weights depending upon when securities are purchased and/or sold. Of course, the more complicated the plan of allocation, the more costly the administration.

Expert Event Studies in Securities Plans of Allocation

In securities litigation, expert event studies are used to measure the impact of the alleged wrongdoing versus the impact of normal market fluctuation. These are often prepared prior to class certification.

Professor Daniel Fischel of the University of Chicago Law School described the methodology of an event study as, “the effect of fraudulent conduct on market price could be determined through a blend of financial economics and applied statistics.”

However, event studies can make things more complicated. Both Plaintiff and Defense counsel commission their own experts, who come up with competing studies. Creating a plan of allocation requires both parties to agree about the event study. This may require intense negotiations in determining how the plan is written and losses are calculated.

Often, Plaintiff counsel favor an event study that leads to a high damage calculation while Defense counsel may seek to lower damages. The key is to negotiate a fair and clear calculation.

In a securities class action settlement, it is not uncommon for class members to falsely believe their award is simply the difference between what they paid for the stock, and what it sold for. But damages actually equal the percentage of the stock that was impacted by alleged wrongdoing, as defined by the event study.

The struggle is to create a plan of allocation that correlates damages to losses, but not make it overly burdensome or complicated for class members. Again, overcomplication of the process could drive the cost of administration.

When to Engage an Administrator when Drafting a Securities Settlement Agreement

The biggest question to ask yourself when crafting a securities plan of allocation is, does it make sense?

  • Do the parameters for each class member fit the damages defined in the event study?
  • Are there any gaps, or are all scenarios for class members covered?
  • What data is being requested, and is it feasible to collect and validate?

While complicated in nature, a successful plan of allocation in a securities settlement lays out a clear and efficient path for the administration process. Using expert analysis to estimate damages, gaining a full understanding of the class and its subsets, and engaging an administrator to identify efficiencies and potential obstacles are all steps to creating a successful settlement agreement.

Working with an administrator prior to finalizing the settlement agreement helps identify things like gaps in coverage, overlapping requirements, and more. Bringing a settlement administrator in at this stage ensures all parties have an understanding of the standard language of the plan, and the reason for any deviations from that language that may require further clarifying text.

In addition, a settlement administrator identifies claims processing and validation methods that would be used to create efficiencies in data collection outlined in the plan of allocation. The earlier an administrator is engaged, the more input they can offer to create a clear plan of allocation prior to filing for preliminary approval.

In 1975, Heffler was the first to administer a Securities Class Action Settlement, handling notice and administration of the Atlantic Department Stores class action lawsuit. Since then, we have administered thousands of cases and are considered among the industry’s most experienced. Many of the processes and procedures we created with that first case are still used in securities class action matters today, and we continue to innovate with industry-leading technology. Contact us for a consultation or to request a proposal.

Edward Radetich
Edward J. Radetich, Jr., CPA (Ed), oversees management and operation of the firm. Having participated in the administration of hundreds of class action matters, Ed has been instrumental in developing the policies and practices of the claims administration group over the last 35 years and has established Heffler Claims Group as a leading provider of class action services for antitrust, securities, employment and labor, consumer and government enforcement matters.


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