FX Case Update (March 19, 2018): Understanding the potential downside of “Option 1”

Mike Lange, Securities Litigation Counsel, Financial Recovery Technologies

The deadline for filing claims in the $2.3 billion FOREX settlement was just extended (from March 22 to May 16, 2018 – read our blog). Ultimately, the size and complexity of the required data, which is being sourced from multiple entities, has been greater than the court and claims administrator initially anticipated.

Because of its size and complexity, even with the revised deadline, many firms are still scrambling to decide whether and how to submit. Some may simply opt for the administrator’s estimate of their losses (i.e. Option 1). This could prove a costly choice.

Under the settlement, claimants have two filing options:

  • Option 1: accept the administrator’s estimate of their eligible trades and losses; or
  • Option 2: submit their trade data for a more accurate determination of eligible trades and losses.

While Option 1 is easy, there are numerous reasons why the administrator’s estimates could significantly understate true losses and claim value. Below are a few we’d like to highlight:

1. INVESTORS HAVE NOT RECEIVED NOTICES FOR ELIGIBLE FUNDS

Many FRT clients have received dozens, hundreds and in some cases thousands of notices and claim forms. Yet some have not received them for funds they know to be eligible. Without the unique login credentials contained in the notices, they cannot access the administration site to elect Option 1. Clients may not have received notices because, as detailed below, the administrator may not have sent them or if it did, they may have been mis-delivered or failed to reach the right persons at their organization.

2. EVEN WITH A NOTICE/CLAIM FORM, OPTION 1 MAY UNDERSTATE ELIGIBLE LOSSES

Eligible losses will be based on trade volumes and under Option 1 the administrator will determine volumes using customer records provided by the settling defendants. Those records have known gaps, particularly in earlier years, requiring the administrator to extrapolate volumes for those time periods which may differ from your actual volumes.

3. THE SETTLING DEFENDANT’S RECORDS MAY NOT REFLECT YOU

If the settling defendants’ records don’t connect you and your trades, the administrator won’t include them when calculating your eligible trade volumes, or will heavily discount them if it’s not clear the trades were with a settling defendant. For example, this will happen if you:

  • Traded with Credit Suisse, the lone non-settling defendant, whose records will not be available to the administrator;
  • Transacted in exchange traded instruments which will not be available to the administrator;
  • Traded through a third party, like a prime broker or investment/asset manager, as the settling defendants’ records will reflect their names, not yours; or
  • Traded using electronic communications networks (ECNs), as these won’t always identify whether your counter-party was a settling defendant.

4. OTHER REASONS

Given the enormous volume of trade data, errors can occur in even the best administration. We’ve seen other cases where claim forms were sent to the wrong entities or addresses. Some claimants may be mis-identified as domiciled outside the US. This is important as non-US domiciled claimants must show an additional ‘nexus’ or connection between their trades and the US in order to be included; so erroneous domicile determinations can result in eligible trades not being counted by the administrator.

CONCLUSION

With the deadline quickly approaching, it’s essential to identify all accounts you think might have eligibility, identify any for which you don’t have notices and log-in credentials, and ensure that you are in a position to elect Option 1 before the deadline. In addition, pulling your data will not only assure that all accounts that need an Option 2 filing will have the most cohesive filing possible, but also provide clients who file Option 1 a way to cross-reference, analyze and potentially challenge the Claims Assessment Notification to ensure they receive the largest possible recovery.

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