Class Action Administration Challenges, Part 1: The Rising Tide of Fraudulent Claims

The following is Part 1 in a three-part series examining the increased challenges in today’s claim deficiency process. 

Securities class actions used to have a quiet problem: too few class members filed claims. Today, they have a much louder one: too many claims get filed, with a growing share of them not filed by class members at all. Bots, click farms, and AI-assisted scammers have flooded settlement administrators with fake submissions – imposing costs on third-party claim filers, administrators, and worst of all, the class members themselves.

In a recent piece, we explained why securities class action claim rejections have become more frequent, aggressive, and difficult to cure – and why lower-cost filing services providers are particularly ill-equipped to push back effectively. Here, we will take a closer look at the challenges causes by these rejections, with insights into how investors, third-party filers, and the plaintiff bar can navigate them.

Fraud is Rarely Subtle

In 2021, one settlement-banking provider, Western Alliance, processed claims with relatively modest fraud levels. By 2023, this same provider was flagging 80 million claims with indicators of fraud – a 19,000% increase in just two years.

The growing scale of fraud can be seen across the class action landscape:

• In the Celsius Holdings consumer settlement, 49% of submitted claims were fraudulent (roughly 870,000 of 1.77 million).
• In the Godiva “Belgium 1926” labeling settlement, 47% of more than 825,000 claims were invalidated after administrators discovered a foreign-operated bot was manufacturing claims.
• In the Artsana booster-seat settlement, 3 million claims poured in for a case with an estimated class size of 875,000. That’s four times greater than the likely universe of possible claimants.

These are not unusual incidents. When designing claims processes, administrators now assume that many claims are fraudulent and have designed anti-fraud measures to combat them across cases, including securities class actions.

How Fraudulent Claims Work

Modern fraudsters are more sophisticated than a lone bad actor, or even a call center full of them. Today, they use unmanned bot networks (“botnets”) that exploit digital infrastructure, making class actions more accessible to legitimate claimants.

The botnets, often hosted overseas, script the claim-submission process end to end. When a settlement website is published, the operator points the bot at the claim portal and submits thousands of claims within hours. One court filing showed 5,500 claims originating from a single IP address in a single case.

To make matters worse, generative AI can now draft plausible-sounding declarations, various form responses to defeat duplicate-detection heuristics, and can even attempt to fabricate supporting documentation. The same large language model technology that has embarrassed lawyers with fictitious case citations can produce trade confirmations, brokerage statements, or affidavits that appear realistic. Problematically, these are the exact documents requested by class action administrators to validate claims.

Net Effects on Securities Class Actions

One could read the above examples and conclude that the problem is limited to consumer-product settlements. In reality, it’s not.

Several aspects of securities settlements make them attractive to bad actors:

• Recognized loss amounts can be substantial. A successful fraudulent claim in a consumer settlement might net a few dollars; a successful one in a securities settlement can net thousands. The economic incentive scales accordingly.
• Trade data can be forged. Brokerage confirmation formats are well-known, widely templated, and increasingly accessible, leading to more fictitious supporting trade documentation for shareholder claims. Custodian statement formats, while more varied, are not beyond reach.
• The class is large and relatively anonymous. Unlike employee or product cases where defendants can cross-check claimant information against internal records, securities classes are defined by trading activity that companies cannot independently verify.
• The notice is widely distributed. Securities class action settlements are public information. The same channels used to deliver notices to bona fide retail investors also alert bad actors monitoring for new settlement portals.

The early evidence is that securities settlement administrators are aggressively pursuing this threat. However, their anti-fraud measures can also impact legitimate claimants.

Administrator Responses – and Unintended Consequences

Mike Lange, SVP Worldwide Litigation at FRT, recently observed that claim scrutiny and deficiency challenges by administrators have increased in number and intensity across the board. Rejection rates are climbing, response windows are shrinking, rejection codes are becoming vaguer, and the typical securities settlement administration timeline has compressed from roughly twelve months to seven.

Three administrator practices have emerged that create class action risks for legitimate filers:

1. Universal third-party audits. In securities class actions, administrators typically only audit a small percentage of submitted claims in more detail – often those with the largest losses. They request additional supporting documentation and information to verify the relevant trades. Some administrators, however, are now demanding independent custodian documentation for every claim, not just the high-value ones. In principle, this ensures full legitimacy. In practice, overreliance on custodial records can result in the rejection of legitimate claims. For example, a retail investor whose broker labels a trade BUY while the custodian labels the same trade RECEIVE_VS_PAYMENT may have a claim rejected because the two systems use different vocabulary for the same transaction. The decision to treat custodian records as the authoritative source – over alternatives, such as equally reliable records from brokerages or other legitimate sources – is arbitrary, and not required by either Rule 23 or the language of most settlement agreements.
2. Shorter, vaguer deficiency notices. Rejection notices are giving claimants increasingly shorter windows in which to respond, while also providing reason codes that an average investor may find unfamiliar (“D-17,” “Insufficient Substantiation,” “Mismatch”) without a full explanation of what’s needed to cure the underlying issue. Claimants – particularly retail claimants without dedicated recovery counsel or service providers – frequently miss the window to respond simply because they do not understand what is being asked.
3. “Comply or forfeit” postures. Some administrators have moved toward a posture of treating any mismatch, missing field, or naming-convention disparity as grounds for rejection, with the burden entirely on the claimant to push back and substantiate. This, again, may be difficult and burdensome to the average investor.

Sloppy Filers Make Matters Worse

There is one more contributor to the deficiency surge: poor practices by third-party filers themselves.

Some service providers, competing for clients on price, submit claims in large volumes with minimal underlying diligence – pulling transaction data from custodian feeds without verifying it, filing without confirming class eligibility, or submitting accounts with other basic entitlement defects. Class counsel, administrators, and courts have noticed. As a result, administrators are responding with greater scrutiny on all claims, including those filed properly and substantiated by documentation.

The full cost of non-conforming submission is borne not only by the filers, but also by every legitimate claimant whose claim now sits in a longer queue, faces tougher scrutiny, and is more likely to receive a rejection code due as administrators attempt to counter fraud. Both trends push administrators toward a default stance of suspicion, making it harder for rightful claimants to be paid.

Why This Matters, and What Comes Next

The class action system rests on a simple bargain: in exchange for releasing their right to sue individually, the collective gets a more streamlined path to resolving their claims. Fraud now threatens both sides of this bargain. Bona fide claimants – bound by release language regardless of whether they ever see a dollar – are seeing their share of the recovery shrink, payouts delayed, or claims rejected outright due to more stringent anti-fraud processes.

Securities claimants are uniquely positioned to demand better. Unlike a consumer with a $5 estimated loss, a securities claimant is more likely to have a six- or seven-figure recovery on the line, as well as the standing and resources necessary to challenge wrongful rejections. That combination makes the securities space a promising front for administration improvements.

Part 2 will examine the scaffolding that already exists to protect claimants – such as Rule 23(e)(2)’s “fair, reasonable, and adequate” mandate, the case law addressing settlement agreements as contracts enforceable by class members, and gaps in standard settlement-agreement terms.

In Part 3, we will suggest potential solutions: technological tools that can more easily separate fraudulent submissions from legitimate ones, without burdening the latter, and the kind of industry coordination – among claimants, filers, class counsel, and administrators – that could better align everyone’s incentives.

Ensuring responses are coordinated and fair, rather than reactive and indiscriminate, could improve class action settlement administration for all involved.