Global Recovery Spotlight: 4 Common Challenges with Custodial Confirmations

Over the last four years, we have seen significant transformation of the non-US securities litigation landscape. Constant throughout these shifts, however, has been the increased importance of “custodial confirmations” in proving the existence and value of shareholder claims.

Sometimes called “trade attestations” or “document audits,” custodial confirmations are documents provided by custodians showing that a claimant held and traded the relevant securities during the claim periods. These are always required in PDF format on custodial letterhead and are often accompanied by cover letters which must be signed by the respective custodians. Every custodian has a different process for preparing these documents, way of formatting trade data, and policy for executing cover letters. Further, opt-in actions are often based on years-old transactions across multiple custodians, with any number of fund restructurings taking place during intervening years.

Consequently, confirmation requests are a significant pain point for investor recovery efforts in non-US opt-in actions – a fact that has not been lost on the defense bar, which consistently attempts to exploit them.

Unlike U.S. class actions and other “passive” group actions, in which settlements are reached either before or concurrent with claim submission, for global opt-in actions eligibility challenges are often joined earlier in proceedings. Once requested only near the point of settlement, at the defendants’ insistence, confirmations are now increasingly required near the onset of litigation. Everything from individual transactions to custodian and investment advisory agreements are being requested and scrutinized early on in proceedings. This provides defendants with opportunities to dispute not only the sufficiency of the allegations but also the standing of and loss suffered by individual claimants.

Anxious about absorbing costs for unsupported claims, organizers have become increasingly willing to drop claims and even seek cost reimbursement from claimants unwilling or unable to provide confirmations, making it very important for investors to work with third parties that can help them navigate these challenges.

Here are the four biggest challenges we’re seeing and how FRT is helping clients overcome them.

Custodial relationships

Frequently, the trade data requested goes back many years, and custodial relationships may have changed. When deciding whether to continue or end a custodial relationship, investors rarely consider the impact on their future securities class action filings and their ability to obtain confirmations. They will need to contact former custodians who have no economic interest in supporting them – especially if the relationship ended on poor terms.

Though custodians usually have a contractual requirement to keep data (at least for a time) and make efforts to confirm it when asked, their expediency and willingness to do so can be unpredictable. FRT has close working relationships with many custodians, including some of the world’s largest, which can help ameliorate these challenges.

Data formats

Custodians vary widely in how (and whether) they format data for PDF confirmations. Some of these formats are easily validated via an online portal, while others are more difficult. When data is poorly formatted, organizers frequently request assistance from claimants in parsing out the relevant information or reformatting the attestations.

Given our experience across hundreds of claims and dozens of custodians, FRT proactively engages with many of the world’s largest custodians and is adept at working with both them and organizers directly to resolve these issues without involving clients.

Related: 5 Takeaways from the Global Opt-In Deutsche Postbank Settlement

Data history

Often, accounts known by one identifier have changed or transferred to a new account between the end of the claim period and the time a claim is filed. This creates no shortage of headaches as the claimant, custodian, and organizer struggle to find the data supporting a claim.

There is no replacement for fastidious record keeping. FRT maintains an account map for all clients and preserves the custodial history for each transaction. This means we can often identify and request data from the proper custodians at the start of litigation, rather than waiting for the issue to surface later.

Organizer requests

The volume and variety of opt-in cases each year can make it difficult for claimants to evaluate the importance of given requests. Organizers often send custodial confirmation requests in the form of a “wish list,” lumping together need-to-haves (e.g., accurate, legible data) and nice-to-haves (e.g., specific wording in the cover letter) without any indication of their relative importance.

FRT’s opt-in experience over many years and across many jurisdictions has given us the experience and relationships necessary to identify which requests are most essential and prioritize accordingly. By focusing on what’s essential, we minimize the burden placed on clients.

Moving forward

The need for custodial confirmations in non-US opt-in litigation is here to stay. For that reason, it benefits claimants to understand these requests, why they are made, and to develop efficient processes for fulfilling them.

Whether handled internally or with assistance from outside service providers like FRT, it’s important to implement and continuously improve custodial confirmation processes, to proactively request confirmations years before they are needed by case organizers, and to build strong relationships with case organizers and custodians. In this way, claimants can overcome this growing obstacle to successful global recoveries.

FRT’s in-house Legal team has used a foundational template to help our clients build a shareholder litigation governance policy tailored to a firm’s risk tolerance and corporate objectives for opt-in litigation. FRT is now making these insights available to prospective clients.