Securities Class Action Opt-Out Claims: A Growing Problem


The exposure to Insureds and their D&O insurers from securities class action lawsuits has escalated greatly over the last ten years. Much has been written about the explosion in the magnitude of settlements in those lawsuits. Unfortunately, this exposure is now getting even larger and more complicated as a result of institutional investors opting out of the class action and individually pursuing their claims against the company and D&O defendants.

Under long-established rules governing the prosecution of class action lawsuits, any member of the class can opt-out of the class action and individually pursue its claims against the defendants. Historically, very few investors opted-out of securities class actions because it was prohibitively expensive to litigate the complex factual and legal issues on behalf of only one or a small number of investors. However, in recent years, large institutional investors are opting out of securities class actions with increasing frequency, which creates huge challenges and even larger exposures for the defendants and their insurers.

This recent trend has been driven principally by prominent plaintiffs' firms, who after being closed out of the position of lead counsel in the class action recruit large institutional investors to opt-out of the class action as an alternate means of recovering hefty attorneys' fees. For instance, according to the court in an opinion in the Worldcom Securities Litigation, Milberg Weiss "engaged in an active campaign to encourage pension funds not to participate in the class action and instead to file individual actions with Milberg Weiss as their counsel." Plaintiffs' counsel have been able to persuasively market to a growing number of institutional investors the legitimate and lucrative financial benefits of opting out of large securities class action settlements. [footnote omitted]

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