Further Thoughts on the Stock Lending Settlement

Previously, I wrote about the upcoming claims administration for the $581M+ partial settlement of the antitrust class action involving stock lending.[1]  Given the prevalence of share borrowing and lending by institutional investors, we expect broad eligibility and encourage funds to start assembling their records now, particularly given that the alleged misconduct goes back to 2012.

The parties’ settlement agreements were likely encouraged by the Magistrate’s June 2022 Report and Recommendation that the Judge certify a class for litigation (the Litigation Class).  In re-reading that decision, a couple of things stood out about the class certified for these settlements (the Settlement Class) and the agreements generally that merit additional discussion.

The Settlement Class is much broader than the recommended Litigation Class.

When litigating, defendants typically assert many reasons why the court should not certify a class, or if it does, why the class should be narrowly drawn.  When trying to settle cases, however, their tunes change, as it is then in their interests to be more inclusive.  They want the broadest coverage and to release as many claims as possible to thwart any further litigation.  So, most of their earlier objections disappear.  As a result, Settlement Classes are often broader than Litigation Classes.

Here, for example, the Magistrate ended the recommended Litigation Class in 2017.  Plaintiffs had not previously indicated they would seek certification through 2023, and the parties had not exchanged discovery beyond 2017.  The magistrate was loathe to reopen discovery and further delay proceedings.[2]

By contrast, the Settlement Class preliminarily approved by the Judge runs through execution of the parties’ agreements (i.e., the Fall of 2023).  In other words, the parties added an additional six years, more than doubling the relevant period.

For investors, this is a good thing.  More will be included, and those covered will have more eligible transactions.  Inclusion of claims for the more recent years will also mitigate the potentially adverse impact on claimants with earlier claims that fall outside the time in which records must be retained by custodians.  Even if earlier claims fail, investors may still receive compensation for their later transactions.

On the downside, more claimants will share the recovered amount, lowering everyone’s pro rata distributions. While the total settlement amount is large, the percentage recovery on losses will be smaller because of the additional transactions eligible under the class period extension.

The settlements contain no provisions curbing ongoing, future harms.

By its nature, litigation looks backward rather than forward.  The extension of the Settlement Class to the Fall of 2023 ensures claimants recover for harm suffered to that date.  However, the settlements contain no provisions aimed at reforming the securities lending market or preventing future harm to share borrowers and lenders.  In other words, going forward, the litigation does nothing to compel changes to the anti-competitive aspects of the market.  It will be up to investor efforts and the SEC and European regulators to drive changes that create efficiencies and increase transparency.

To be fair, the absence of such provisions is not unusual for antitrust class action settlements.  To date, none have included non-monetary relief intended to change the markets impacted by anti-competitive conduct.  Settling defendants have no incentive to provide such reforms when they refuse to concede liability.

For investors, this suggests two takeaways.  First, they should ensure the preservation of transaction records for potential future suits since much of the underlying alleged market misconduct will likely continue.  Second, they should educate themselves on the anti-competitive activity at issue here, and, where possible, look for opportunities to avoid or mitigate it going forward when engaging in stock lending transactions.

[1] Michael Lange, Esq., Stock Lending Settlements: If “Interested”, Capitalize Now for Returns Later (October 30, 2023)

[2] The Settlement Class also differs from the Litigation Class in dropping two requirements (a) that claimants have at least 100 US Stock Loan Transactions; and (b) separate subclasses for borrowers and lenders.