Stock Lending Settlements: If “Interested”, Capitalize Now For Returns Later

Two partial settlements, in the Stock Lending Class Action,[1] totaling $581M were recently preliminarily approved by the US District Court for the Southern District of New York. 

Upon final approval, these settlements will resolve claims against all defendant banks except one: Bank of American/Merril Lynch (Bank of America).  As in earlier antitrust class actions, the court is using a two-step process: approving the settlements on a preliminary basis now but postponing approval of the class notice, which includes a claim submission deadline, and distribution plan with recognized loss (RL) formulas.

Investors should use the time between now and distribution of the notice to prepare for what is expected to be a large and complex claim submission process.  They should start gathering relevant data now to maximize future payouts.

Background

In November 2017, plaintiffs filed an amended class action complaint against seven banks, alleging a conspiracy among major dealers in stock loans to jointly boycott efficient, all-to-all trading platforms and price-transparency providers.  Plaintiffs claimed that competition from new entrants who could act as intermediaries in the stock lending market, and the increased transparency, would have resulted in better terms for plaintiffs and other class members.  In September 2018, the court denied the defendants’ motions to dismiss and allowed the action to proceed.  The parties then engaged in extensive discovery, including 100+ depositions and the review and production of terabytes of data and millions of pages of documents.

The court referred the issue of class certification to a magistrate judge.  During briefing on this issue, plaintiffs reached an $81M ‘icebreaker’ settlement with one of the defendants, Credit Suisse, which the judge preliminarily approved in February 2022.

On June 30, 2022, the magistrate judge issued her report and recommendation that the class be certified.  Defendants objected to it, while plaintiffs sought clarification on the scope of the class and damages.  Following the report, five more banks settled, adding another $500M to the total settlement fund.[2]  Class certification remains pending with the judge.

In connection with the two partial settlements, plaintiffs requested and obtained preliminary approval but deferred to a later “practicable date” their submission of a proposed class notice and distribution plan.  Epiq has been appointed as the claim administrator.  The class certified for settlement purposes includes:

All Persons who, directly or through an agent, entered into Stock Loan Transactions with the Prime Broker Defendants, direct or indirect parents, subsidiaries, or divisions of the Prime Broker Defendants in the United States from January 7, 2009 through the Execution Date (the “Settlement Class Period”), inclusive.”[3]

A Stock Loan Transaction is defined as “any transaction, including any transaction facilitated by a prime broker or agent lender, in which an owner of a stock temporarily lends the stock in exchange for collateral or in which a borrower of a stock provides collateral to temporarily borrow a security, and in which the stock is ultimately returned to the lender at a later date, at which time the lender returns the collateral to the borrower.”[4]

Reasons for delaying class notice and distribution details

We suspect plaintiffs’ counsel chose to delay submission of the class notice and distribution plan for two reasons.

First, the parties are likely attempting to reach resolution with Bank of America.  As the sole holdout, that bank is under pressure to resolve the case given the magistrate’s lengthy recommendation to certify the class as well as provisions in the two partial settlement agreements that require the settling banks to cooperate with plaintiffs in their prosecution of claims against Bank of America.  In other words, all parties may put pressure on the last bank.

Second, plaintiffs’ counsel likely needs additional time to formulate the distribution plan.  Some work has already been done.  The class certification presentations involved a ‘battle of the experts’ over how the stock lending market works, how competition from new entrants would have impacted terms, how compensable losses should be measured, and how proceeds can be fairly allocated among claimants who lent different shares at different times through different banks, while ensuring formulas are practicable for implementation.  These issues are complicated, and it takes time and effort to reduce this information into specific RL formulas.

What investors should do now.

While the combined settlement amounts are large, we also expect the volume of submitted claims to be massive.  Most institutional investors engage in stock lending.  As a result, eligibility will be more pervasive than in earlier antitrust cases except, perhaps, the Forex action.  In addition to a tremendous volume of claims, we expect each claimant will have large volumes of trades and transaction details.

Like earlier antitrust settlements, claimants here will face challenges regarding data identification, extraction, and mapping to the claim form.  From our preliminary review of client data, banks and custodians recorded stock lending activity very differently.  For some, lending activity is not readily identifiable from the data.  Others used codes and designations that differ from each other.  As a result, querying strategies will need to be customized for each data set, employing different strategies for clients with data from multiple sources.  The large volume of transactions will also require more lead time to reconcile and map to the fields in the claim form.

All of this will take time, and the time to start is now.

Conclusion

The upcoming settlement administration in this case will be big and messy and reinforces the need for investors to work with third party claim filers who have the necessary experience to handle significant data challenges and the technological ability to manage massive amounts of data and transaction details.  With so many funds submitting claims against a limited, albeit large, settlement fund, you’ll want to ensure your recoveries are maximized.

[1] Iowa Public Employees’ Retirement System, et al. vs. Bank of America et al., 17-cv-6221.

[2] In addition to significant monetary recovery, these settlements are unique in requiring the banks to reform the way they interact including new procedures intended to discourage future anti-competitive behavior.  We will profile these benefits in a forthcoming blog.

[3] Each class runs “through the Execution Date” and since the settlements had different execution dates, their certified class periods will end on different dates.  Any conflict will be resolved during final approval of the action and in the distribution plan.

[4] Excluded from the definition of Stock Loan Transactions are “non-equity securities lending and stock repurchase (repo) transactions.”