When Should Investors Opt Out of Securities Class Actions?

What to Do Upon Receiving a Class-Action Notice

It is important to understand what your options are and what action may be required. In many cases, potential class members do not have to take any further action to reap the benefits of a class action settlement. However, in some cases, you may have to opt in or opt out of the settlement. For instance, some class action notices state that class members who wish to participate in the settlement must take some affirmative action, i.e., complete the required paperwork. Conversely, there are some cases where those who do not want to join the class action must take specific actions to preserve the right to file an individual suit.

Risks and Benefits of Opting Out

In many cases, there is no benefit to opting out. However, where an investor has six-figure losses or claims not covered by the class-action suit, any recovery in the class-action may likely be insignificant compared to what a direct suit by the investor may yield.  Also, concerns about the success of the class action, or the ability to name additional defendants in a private action, or to seek a faster result, for example, through a FINRA, AAA arbitration, or mediation, warrant exploring the merits of opting out.

According to a new report by Cornerstone Research, investors are increasingly opting out of class-action suits. The study revealed that between 2019 and June 2022, more than 11 percent of securities class action settlements had at least one identified class member opt-out, compared to less than 3 percent opting out of settlements reached between 1996 and 2005.

Some class members who opted out went on to pursue direct actions. Cornerstone Research found that of the 2,061 sampled cases from 1996 to June 2022, 115 had at least one opt-out. Additionally, at least 10 confirmed direct actions arose from those cases.

According to Cornerstone Research, its research revealed that the class actions involving opt-outs shared certain characteristics. For instance, opt-outs become more likely as the size of the settlement increases. In addition, the study found that class settlements with larger simplified metrics of potential damages, indicators of greater complexity of allegations, or indicators of higher ability to pay by the issuer are more likely to have at least one identified opt-out, often an institutional investor.

“This analysis suggests that potential class members carefully consider whether or not to opt out of a securities class action based on attributes of the case,” Brendan Rudolph, a principal at Cornerstone Research and report co-author, said in a statement. “Our findings are consistent with opt-outs occurring more frequently when a putative class member might see an opportunity for a greater return on an individual claim.”

Another obvious upside of opting out is that you control your destiny. You can retain your counsel and determine your legal strategy. Opting out may be advisable if you have claims that are not asserted in the class-action suit, either because the lead plaintiff lacks standing or because such claims are unavailable in a class-action suit. In such cases, it is important to evaluate the size of your damages claims, their merit, the costs, and whether you have the required evidence to support your claims. 

Concerns to Address When Opting Out

Upon opting out, you generally forfeit your rights to participate in the class action, including the ability to share in any settlement proceeds. At the same time, if you choose to file your suit, you also run the risk that it may not be successful.

Accordingly, before opting out, it is imperative to ensure that your claim is still timely. The New York statute of limitations for breach of contract, fraud, and certain related claims is six years; most securities claims have a three-year statute of limitations.  In California Public Employees’ Retirement System v. ANZ Securities, Inc., the U.S. Supreme Court clarified that the three-year limitations period for bringing claims under the Securities Act of 1933 (Securities Act) is a statute of repose that is not subject to tolling for class members’ claims that have been asserted in a timely filed class action. That is, if you do not assert your claims by the statutory deadline, they are untimely and you lose the right to file them.

Investors should also determine whether the cost of pursuing an opt-out action makes financial sense. This involves determining your likely legal costs and weighing them against your potential recovery. The defendant’s ability to pay any eventual court judgment should also be considered.

Key Takeaway

The decision to opt out of a securities class-action lawsuit should not be taken lightly. Working with experienced counsel, investors should carefully analyze all of the practical, financial, and legal factors before determining the best course of action. Should you decide to opt-out, it is then important to determine the required procedure to opt out and preserve your ability to bring a direct claim.