Mailbag: What Should I Do About a Class Action Lawsuit Against One of My Mutual Funds?

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What should I do about a class action lawsuit against one of my mutual funds?

Unless there is an easy way to collect the materials required, It seems like a worthless exercise.

Don’t the lawyers collect most of the real cash anyway?


Greetings Sue,

Generally, financial advisors do not have the legal expertise to advise clients concerning their participation in class action lawsuits. There are at least three courses of action that could be taken:

(1) You can choose to participate in the class action lawsuit.

This usually requires you to provide proof of being qualified to be part of the class by showing statements either from your custodian or your financial advisor that you held the securities in question during the qualified period.

This documentation is not difficult to provide, but it may require entering this information into the plaintiff’s website.

(2) You can choose to ignore the invitation to participate in the class action lawsuit.

In this case it requires no time, nor do you receive any payment from the settlement. The choice between option (1) and option (2) is a cost benefit analysis between the time required by (1) and the expected payout received by (1).

The more you had invested in the security and the larger the settlement received the greater your hourly wage will be. Sometimes the documents provide enough information for you to compute the expected payout quickly.

For example if the settlement resulted in a $33 million payment and the number of outstanding stock is 330 million shares, the most shareholders could receive is $0.10 per share. So if you own 200 shares, your payment would be something under $20.

Or if the settlement is $33 million and the total assets in the mutual fund is $3.3 billion then you will get paid about 1% of the money you have invested. If you own $2,000 of the fund your payment will be something under $20.

The settlement will be distributed to shareholders minus the lawyers “reasonable costs”. There are so many class action lawsuits that other lawyers have become “professional objectors” and filed against the plaintiff attorneys arguing that the lawyers are getting too much and the class not enough. These professional objections include some advocates for tort reform whose aim is to make sure that the majority of class action settlements benefit the class and not the lawyers filing suit.

(3) You choose to opt out of the class action and pursue your own legal action.

While this seems, in my experience, extremely rare, it is cited as one of the primary reasons why an advisor should not given an opinion as they would be excluding this possibility.

We do not file on behalf of clients, but we do provide whatever documentation they ask.

Most of the class action suits that I’ve seen resulted in under $25, but a few have made it into the hundreds of dollars. These have been relatively large investments and relatively large settlements. If the settlement is small compared to the outstanding shares or fund size, and your investment is relatively small, and your time is precious, you may not want to bother with the time and trouble of filing.

On the other hand, if you have never filed to be part of a class action lawsuit, you may want to experience the process at least once. If nothing else, it will make you better informed about the political issues regarding tort reform.

Follow David John Marotta:

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.