KATELIA DEEPAK (CN)
QALQON LTD (CN)
| 28 Claims 1 . A method of exchanging data, the method including the steps of: receiving client long securities data; receiving court data; cross-referencing data for a match; and sending a notification to a potential claimant. 2. The method of claim 1 , wherein the court data is received from at least one of manual data input or automatic Al feeds. 3. The method of claim 1 or claim 2, wherein the client long securities data is received from at least one of manual data input or automated data collection. 4. The method of any one of claims 1 to 3, wherein the cross-referencing of data is cross-referencing of securities data and court data. 5. A computer-implemented method of exchanging data, the method including the steps of: receiving first data from a first party; creating an event record; receiving second data from a second party, the second data including first and second parameters, and wherein the first parameter relates to a first characteristic and the second parameter relates to a second characteristic; displaying information regarding the first and second characteristics; calculating a score based on the first and second characteristics; cross-referencing the first and second data for a match; and providing an indication of the match. 6. The method of claim 5, wherein the score based on the first and second characteristics is weighted. 7. The method of claim 6, wherein the weighting of the score is dependent on pre-determined weighting parameters. 8. The method of any one of claims 5 to 7, further including the steps of receiving at least one input from a third party; and assigning second data to the third party; and outputting the or each assignment. 9. The method of claim 7, further including the steps of: calculating whether a predetermined deadline has passed; and if the predetermined deadline has passed and some third parties do not have second data assigned thereto, assigning second data to the third party. 10. A method of determining a lead plaintiff in a class action, the method including the steps of: creating a first data record for a plaintiff; receiving details of the plaintiff, including information about the plaintiff’s position and loss, and populating the first data record therewith; determining eligible plaintiffs from the first data records; creating a list of eligible plaintiffs from the first data records; querying the list for the plaintiff with the largest loss; setting the plaintiff with the largest loss to the lead plaintiff in the class action; sending a request to the selected lead plaintiff to accept the position as lead plaintiff; and sending details of the lead plaintiff to a third party. 11 . The method of claim 10, wherein the step of determining eligible plaintiffs includes comparing the plaintiff’s position and loss with at least one predetermined threshold. 12. The method of claim 10 or claim 11 , wherein the third party is a legal services firm. 13. A method of calculating unrealised loss, the method including the steps of: receiving at least one account position; receiving at least one item of court data; comparing the or each court data against the or each account position; determining whether there is a match, and if there is a match, marking market prices at the time of a key event; receiving diffident and relevant corporate action data post event; calculating the unrealised loss, wherein the unrealised loss is calculated by (high price-low pricefnumber of shares per account minus dividends and corporate action; and outputting reporting by account showing the unrealised loss. 14. A method of receiving funding for a class action, the method including the steps of: setting up a funding request; receiving an input of a funding requirement or a set fee; outputting data relating to the funding requirement or set fee; receiving data from potential investors which relates to funding amounts and expected fee return; receiving funding and keeping the funding in a safekeeping account; determining whether the funding requirement is met; and allocating the funding to a legal services firm or returning unsuccessful bids. 15. A method of settling a class action, the method including the steps of: receiving a settlement awarded by a court; setting ex rec and pay date as per corresponding times; receiving settlement award information, wherein the settlement award information is calculated by the total settlement award divided by total number of shares; calculating a final settlement amount per account; and issuing payment. |
Description
Field of Invention
This specification relates to a digital platform for information exchange. In particular, this specification relates to a digital platform where information is input from a plurality of parties, and parties are directly matched based on a number of boundary elements.
Background of the Invention
There are a number of different types of service firms that act with a third party on behalf of a client, for example in the legal or financial sectors. When such a firm acts on behalf of their client with a third party, only the firm’s name may be recorded or known in relation to the act, and there is little to no traceability of the act between the client and third party.
In some cases, it may be that the third party has acted such that the client has cause for legal recourse, for example, legal damages or is entitled to settlement consideration. However, it is known that information relating to these acts does not typically reach the client. This bottleneck of information has created a number of problems as described in this specification. As such, no legal recourse is typically taken by the client where the client would be eligible to do so because they are unaware of such eligibility.
The following example is described in relation to the current global financial system. Historically, when an investor invested in a security, a corresponding company issued a physical share certificate. When companies issued physical share certificates, they had a record of the beneficial owners of those shares on their company registers. Since global financial systems transitioned from physical to digital transactions, only the large custodian banks (firms) who have the clearing accounts on stock exchanges are the names that appear on those company (third party) registers, as they take custody of investors (client) assets on clearing accounts with the central securities depositories of those exchanges. As the central security depositories of stock exchanges around the world moved away from physical share certificates and bearer bonds to digital recording, the beneficial owners or investors of those securities have become further removed in the information exchange such that the beneficiary or investor who owns the shares is not provided with any information relating to, for example, why a loss may have occurred on a particular security or if there has been malpractice by the third party where settlements have been collected but not passed on to the final beneficiary.
Subscription rates for claiming settlements in securities class action lawsuits are understood to be as low as 20%. This indicates serious inefficiencies in the market segment with servicing levels and access to legal recourse failing the majority of investors who are eligible to participate.
A lack of any requirement to report such events in service level agreements, technological limitations with messaging, systems not configured to handle class action lawsuit events, and malpractice in the industry where settlements are collected but not passed on to final beneficiaries, highlights there are problems in the current system and failings with the regulatory framework which are meant to be designed to protect investors and put their interests first before the financial institutions that service them.
There is, therefore, a need to alleviate one or more problems associated with efficient information exchange in service industries.
Summary of the Invention
Accordingly, a non-exclusive object of the subject-matter of the present application is to provide a more efficient platform that improves information exchange between a plurality of parties. The present invention may also increase efficiency of information flows, consolidate the information to be exchanged, remove communication difficulties, and improve such information exchanges. In addition, it may also serve to improve access to, and participation in, class actions. According to a first aspect, the present invention provides a method of exchanging data, the method including the steps of receiving client long securities data, receiving court data, cross-referencing data for a match, and sending a notification to a potential claimant.
Preferably, the court data is received from at least one of manual data input or automatic Al feeds.
Conveniently, the client long securities data is received from at least one of manual data input or automated data collection.
Advantageously, the cross-referencing of data is cross-referencing of securities data and court data.
Another aspect of the present invention provides a computer-implemented method of exchanging data, the method including the steps of receiving first data from a first party, creating an event record, receiving second data from a second party, the second data including first and second parameters, and wherein the first parameter relates to a first characteristic and the second parameter relates to a second characteristic, displaying information regarding the first and second characteristics, calculating a score based on the first and second characteristics, cross-referencing the first and second data for a match, and providing an indication of the match.
Preferably, the score based on the first and second characteristics is weighted.
Conveniently, the weighting of the score is dependent on pre-determined weighting parameters.
Advantageously, the method further includes the steps of receiving at least one input from a third party, assigning second data to the third party, and outputting the or each assignment.
Preferably, the method further includes the steps of calculating whether a predetermined deadline has passed, and if the predetermined deadline has passed and some third parties do not have second data assigned thereto, assigning second data to the third party.
A further aspect of the present invention provides a method of determining a lead plaintiff in a class action, the method including the steps of creating a first data record for a plaintiff, receiving details of the plaintiff, including information about the plaintiff’s position and loss, and populating the first data record therewith, determining eligible plaintiffs from the first data records, creating a list of eligible plaintiffs from the first data records, querying the list for the plaintiff with the largest loss, setting the plaintiff with the largest loss to the lead plaintiff in the class action, sending a request to the selected lead plaintiff to accept the position as lead plaintiff, and sending details of the lead plaintiff to a third party.
Conveniently, the step of determining eligible plaintiffs includes comparing the plaintiff’s position and loss with at least one predetermined threshold.
Advantageously, the third party is a legal services firm.
A yet further aspect of the present invention provides a method of calculating unrealised loss, the method including the steps of receiving at least one account position, receiving at least one item of court data, comparing the or each court data against the or each account position, determining whether there is a match, and if there is a match, marking to market prices at the time of a key event, receiving diffident and relevant corporate action data post event, calculating the unrealised loss, wherein the unrealised loss is calculated by (high price-low pricefnumber of shares per account minus dividends and corporate actions, and outputting reporting by account showing the unrealised loss.
Another aspect of the present invention provides a method of receiving funding for a class action, the method including the steps of setting up a funding request, receiving an input of a funding requirement or a set fee, outputting data relating to the funding requirement or set fee, receiving data from potential investors which relates to funding amounts and expected fee return, receiving funding and keeping the funding in a safekeeping account, determining whether the funding requirement is met, and allocating the funding to a legal services firm or returning unsuccessful bids. Another, further aspect of the present invention provides a method of settling a class action, the method including the steps of receiving a settlement awarded by a court, setting ex-entitlements, record and pay date as per corresponding times, receiving settlement award information, wherein the settlement award information is calculated by the total settlement award divided by total number of shares, calculating a final settlement amount per account, and issuing payment.
Brief Description of the Drawings
Embodiments of the information exchange platform are described, by way of example, with reference to the accompanying drawings, in which:
Figure 1 shows an illustration of positions of three parties in a first class action scenario;
Figure 2a shows a representation of potential difficulties with current information exchange techniques in class actions;
Figure 2b shows an exemplary representation of an information exchange technique in class actions;
Figure 3 shows an example of client long positions;
Figure 4 shows another exemplary representation of an information exchange technique, which shows a process flow for matching clients and class actions;
Figure 5 shows a further exemplary representation of an information exchange technique, which shows a process flow for associating clients and law firms;
Figure 6 shows a yet further exemplary representation of an information exchange technique, which shows a process flow for determining a lead plaintiff;
Figure 7 shows a yet further exemplary representation of an information exchange technique, which shows a process flow for an unrealised loss calculation; Figure 8 shows a yet further exemplary representation of an information exchange technique which shows a process flow for competitive funding;
Figure 9 shows a yet further exemplary representation of an information exchange technique which shows a process flow for a settlement of a class action; and
Figure 10 shows an illustration of positions of three parties in a second class action scenario.
Detailed Description of Embodiments
The present application relates, as discussed above, to systems and methods for providing a more efficient platform that improves information exchange between a plurality of parties. In some cases, this information exchange may relate to a class action or class actions. This will be discussed in more detail later. Before discussing the present invention in detail, further background will be set out.
By way of further background, the following example sets out an example scenario for a class action situation, and gives an explanation of the positions before, during, and after an event which leads to a class action and the subsequent class action.
This is a relatively simple model with 3 investors. These three investors are an Institutional Investor (e.g. Pension fund), an Activist Investor (e.g. Professional Investor), and a Passive Investor (e.g. Private Individual Investor).
An illustration of these three investors and their positions is set out in Figure 1 .
As can be seen from Figure 1 , the Institutional Investor uses an Investment Bank as an intermediary, and the Passive Investor uses a Stock Broker as their intermediary to trade securities. In turn both of these intermediaries use Custodian A as their Custodian, who in turn uses Custodian B as the sub-Custodian who has a clearing account on the Stock Exchanges central securities depository. The Activist Investor uses Custodian B directly as their Custodian. In this illustration, there are 2 law firms, Law Firm A who charges 65% fee and has a minimum loss required of $1 ,000,000 to represent an investor, and Law Firm B who charges a lower 50% fee but has a minimum loss required of $50,000,000 to represent an investor.
Additionally, to fund the class action in the example, a Hedge Fund is willing to provide the required $2,000,000 sunk cost, and expects to receive a 100% return on the settlement of the case (i.e. $4,000,000 for a net return of $2,000,000).
Finally, the government is assumed to receive a 10% tax on any settlement awarded, retrospectively in this example.
In this example scenario, on 31 st Dec 2019 the share price of the Company is trading at $100 per share. An adverse event occurs on 1st Jan 2020 resulting in the Company shares being suspended by the exchange with the last traded price at $100. Once investors have had time to digest the news, the shares have the suspension lifted on 2nd Jan 2020 and they open trading down 90% at $10 per share. Subsequently all 3 investors sell all of their shares at $10 per share.
The Passive Investor had originally bought their 100,000 shares at $15 per share on 1st Jan 2015. Both the Activist Investor (200,000 shares) and Institutional Investor (700,000 shares) bought their shares on 1 st Jan 2019 at $80 per share.
The current scenario dictates the following occurrences.
Custodian B sends a notification to its clients Custodian A and Activist Investor that the Exchange has issued a warning and suspended the Company shares on 1 st Jan 2020.
Custodian A has a limited service agreement where its systems are not capable of sending this type of message to its clients, and there is no provision in its service level agreements to provide such information, as this is not a typical corporate action where they will receive a distribution in stock or cash (for example a dividend) from the Company. This creates a bottleneck in the information flow, with the Investment Bank and the Stock Broker not receiving any notice of the event. The knock-on impact is the Institutional Investor and Passive Investor are unaware of the event.
As stated above, all three 3 investors sold their shares on 2 Jan 2020.
The Activist Investor raises the class action with the higher fee charging Law Firm A (as their realised loss of $14,000,000 is below the $50,000,000 threshold for Law Firm B to represent them), and they become the Lead Plaintiff in the class action despite not being the largest shareholder. On the basis of this, Law Firm A then raises a securities class action lawsuit with the Court.
Investment Bank has the expertise to know there is an event and pending court case despite not being informed by Custodian A. Again, the Investment Bank has no service level agreement to notify their client the Institutional Investor of this particular type of event, and they know they can profit unethically by using their clients holding which is held in their omnibus account with Custodian A in the Investment Bank’s name. They also subscribe to Law Firm A with the higher fee charged due to the lower loss requirement. They do not become the lead plaintiff, because as a large financial institution and intermediary, they do not want to appear activist in the press.
Law Firm A required $2,000,000 to underwrite the cost of resourcing such a large and complicated lawsuit. They are unable to raise the funds required from traditional money lenders or markets, as the risk associated with such lawsuits is relatively high. Therefore, they use the alternative investment industry and as highlighted above, Hedge Fund provides the $2,000,000 required as a sunk cost, with an expected $4,000,000 returned to them on the settlement of the case. Despite the relatively high cost, this is the only way the legal case can be financed and fought in court.
The case is successfully settled in court, and the Court awards damages for the realised loss per share to the shareholders who claimed.
As can be seen from Figure 1 , in summary, the example Scenario 1 ends such that:
- 900,000 shares are subscribed in the claim, giving a 90% participation of the total shares issued; - A total sum of $63,000,000 is awarded, some $18,000,000 less that the true unrealised loss of $81 ,000,000);
- The cost of legal fees in the claim are 65%, a cost of $40,950,000;
- The cost of underwriting the class action is $4,000,000; and
- The investors who have participated receive $20.05 per share, the net payout totalling $18,050,000.
As stated above, the lead plaintiff in this example Scenario 1 is the Activist Investor. The taxation cost in this Scenario 1 is 10%, settled retrospectively.
A further example scenario, Scenario 2, will be discussed later.
With reference first to Figure 2(a), and the example Scenario 1 discussed above, a first problem associated with efficient information exchange in service industries is illustrated. Figure 2(a) illustrates it may be that firms (for example, law firms) and clients (for example, investors) may have become far too separated, with information having to pass through many participants who have their own incentive (which may be financial, for example) for the final beneficial owners not to subscribe on their entitlements.
When these entitlements are class actions relating to securities, it is often the case that investors may not be aware of class actions which are being brought, and as will be discussed in more detail later, finding and assigning a lead plaintiff may present difficulties. In many cases, a law firm or service provider may display a call for a lead plaintiff in a class action on their website, but this information is not easily disseminated, nor found, which may make it difficult for participants or a lead plaintiff to be found or assigned. The methods described herein seek to address these issues.
Furthermore, law firms may require a large minimum loss to enable participation in a class action. In practice, even investors with average-sized funds may not meet the loss criteria required by law firms, which may cause their exclusion from participation in a class action. Individual investors are also likely excluded from such class actions. The methods described herein also seek to address these further issues. Figure 2(b) illustrates an example of an information exchange platform in the form of a Class Action Law Suit Information Exchange. This may be advantageous to protect clients (for example, investors) and provide them access to full legal recourse. The platform illustrated in Figure 2(b) demonstrates a streamlining of the information exchange over that described in Figure 2(a). This exemplary information exchange may assist in removing the bottlenecks and firms’ conflicts of interest. Further, it may be advantageous to remove information hand-offs between firms (for example, financial institutions), so only the interested parties and beneficiaries can interact directly with each other. This may reduce the number of interactions required, and reduce the number of parties involved in the information exchange, thus increasing the efficiency thereof.
The method shown in Figure 2(b) may include the steps of receiving client long securities data, receiving court data, cross-referencing data for a match, and sending a notification to a potential claimant.
Each of these steps will be discussed in more detail.
Client long securities data may be provided by the clients themselves, by way of manual data entries. Alternatively, client long securities data may be provided on a daily basis by an automated feed from the clients. By way of example, a client may provide a daily snapshot of their positions, and this snapshot may be provided as an XML, CSV, or any similar appropriate sort of file. This daily snapshot may be provided automatically. The automatic snapshot may be the result of an SQL query run across investor’s positions within a database.
This data may then be aggregated, and this will be discussed in more detail later.
The client long securities data may be provided to give details of the relevant positions with a date. These positions and dates may be used to track positions across a date range, and these positions and date ranges may be used to crossreference against potential adverse events. This is discussed in more detail later.
An example of a client long securities position is shown in Figure 3. This long securities position data may be used to match potential claimants with a relevant class action. The long securities position data may be cross-referenced against court data which may be received manually or automatically, as discussed in more detail below, to determine a match, and to alert potential clients that they may be eligible to join a relevant class action. Figure 4 sets out an example of how this may occur.
Court data regarding class actions or potential class actions may be obtained in a number of ways. One source of information regarding class actions, particularly in the US, may be the Public Access to Court Electronic Records, ‘PACER’ system. Such a system may be interrogated to retrieve information about upcoming class action suits, which may be fed into the system described herein.
Additionally, Artificial Intelligence, ‘Al’, may be used to curate details of potential class actions which are to be launched, are launched, may be seeking a lead plaintiff, or similar.
An implementation of Al may be configured to scan online news feeds for information regarding class actions. This Al may be configured further to analyse the information found, to determine whether this information relates to a class action which is upcoming, and may provide information regarding the potential class action.
In some situations, data which has been collected from the Al may be cross- referenced with the data from PACER, to give further information or detail regarding upcoming suits which are reported. This may provide further detail and richer data regarding the suits.
It may also be the case that individuals or corporations may also provide information regarding class actions, and such information may be fed into the systems and methods described herein.
In addition, it may be the case that a law firm could create a class action event, and this event may be communicated by the law firm into the systems and methods described herein. In summary, a law firm may generate a class action event which may be used as described. Therefore, in summary, the information exchange platform may utilise automated feeds from court systems to capture class action law suits, and also may allow manual input from law firms to set up the required event and related details. Details may include key dates, eligible security codes (such as ISINs, Tickers, Symbols), participating law firms, and the like.
The methods described herein may be provided as a service to end clients, and the service may be subscribed to by, for example, position holders, that is to say the service may be provided ‘as a service’, and position holders may have systems which may be configured to send long securities positions at a predetermined time of day, or at predetermined intervals.
In an example, clients (for example, investors) may upload their data (for example, security position data) into the information exchange platform either automatically or manually. This may be completed with a file upload as described above. Exception queues may help eradicate mistakes with uploaded data, and where a client’s position matches with an event that has been set up, clients may be matched within the exchange platform to an event. This may be advantageous so that clients may now be able to participate in a class action lawsuit directly, and may have access to a number of law firms to promote competition.
The event may include fail safes, and these fail safes may for example, include selecting a default option for an aspect of the event automatically. This may be advantageous to further protect clients. One such fail safe may be a negative affirmation which may exist for eligible clients who are part of the class but did not select a law firm to represent them by the deadline. Thus, the client may be assigned a default option for the law firm.
The default option may be selected in the following way. A deadline may be set for selecting a law firm for participation in the class action. If an investor fails to select a law firm by the deadline date, a law firm may be selected by default.
To enable a decision to be made, each law firm offering to clients would input their required fee on a particular event, and investors with a position on this event can elect freely who they chose. If they fail to do so, the platform may be configured to calculate a value based on the fee and wimloss ratio, and the lowest score offers the best value to the investors. In the example shown below, Law firm C is the chosen default option.
The calculation is VALUE(FEE) I VALUE(RATIO), giving the values in the SCORE column, and the ranking selecting the lowest score as the best option. This should prevent potential participants from losing out on any settlement they are due.
This may enable a client to be assigned a default firm and thus participate in a class action.
Referring now to Figure 5, the exemplary information exchange platform may include the steps of receiving first data from a first party, creating an event record, receiving second data from a second party, the second data including first and second parameters, and wherein the first parameter relates to a first characteristic and the second parameter relates to a second characteristic, displaying information regarding the first and second characteristics, calculating a score based on the first and second characteristics, cross-referencing the first and second data for a match, and providing an indication of the match.
With reference to Figure 5, a further problem associated with efficient information exchange in service industries may be a lack of competition between service providers and intermediaries controlling the information exchange, making it difficult for clients (for example, investors) and firms (for example, law firms) to interact directly. This results in abnormal profits being made by the firms, and higher fees taken from the settlements to the detriment of the beneficial owners (for example, clients). This is discussed in more detail in connection with Scenario 1 described above.
A solution may be to crowd these clients (e.g. investors) and firms (e.g. law firms) together, in an open and competitive process to seek each other out and match them together. In the investors and law firm example, this may be advantageous to encourage lower fees, higher returns for impacted investors, and full participation rates for all investors, both large and small.
The information exchange platform may permit firms to enter data which promotes them to a client over other firms. For example, as described above in connection with the fail safes, a law firm may enter a bid for investors by competing on fees, and displaying their success ratios. This may be advantageous to allow investors, regardless of size, to make informed decisions to participate on fees and success rates of the participating law firms in the market.
Therefore, the information exchange platform may improve information flows and competition in a market, particularly for class action law suits. For example, the ability to crowd investors together enables legal firms to benefit from scale, providing better representation from improved funding, with competition encouraging better service levels for customers including lower fees. The information exchange platform may promote improved competition, with full legal recourse available to all investors.
In simple terms, all related investors in the impacted security are automatically part of the class in the eyes of the law, but have to subscribe with a law firm to get a settlement. Each law firm that joins the case requires a lead plaintiff for their case, ideally the largest possible shareholder. The systems and methods described herein may allow the lead plaintiff to be discovered in a “dark pool” to maintain anonymity until they agree to be represented by the law firm requesting. Law firms currently put out prospective notices online for example, which is inefficient and leads to CalPERS being the most frequent lead plaintiff in the USA which highlights inefficient operating of the market.
Referring now to Figure 6, a yet further problem associated with efficient information exchange in service industries may be that firms (for example, law firms) find it difficult to find lead plaintiffs who are, for example, the larger share or security holders.
Figure 6 provides an example scenario in which a lead plaintiff may be selected for a class action. The lead plaintiff may be selected by a service provider, in this case the law firm selected to act for the class. The selection of the lead plaintiff may be based upon data which has been uploaded by a position holder, and the lead plaintiff may be selected based on the plaintiff with the largest or most significant position.
The determination of the lead plaintiff may be made based upon the plaintiff with the largest position, or with the largest loss. The chosen lead plaintiff may be determined automatically, as described above, and may then be contacted to request that they be the lead plaintiff. If they accept, they become the lead plaintiff in the class action. If they do not accept, they become a party in the class, but do not become the lead plaintiff, and the process may repeat, determining the plaintiff with the next largest position or largest loss, and they may be invited to be the lead plaintiff. The process may be repeated until a lead plaintiff accepts.
The information exchange platform provides a way for firms (for example, law firms) to discover lead plaintiffs without disclosing clients and security holding positions, until the clients have accepted the role as lead plaintiff.
To simplify and streamline the information flow, and find a lead plaintiff, the information exchange platform may centralise information and allow law firms to discover investors with the largest position holdings in the impacted security, who can then indicate they will participate as lead plaintiff before the investor, and their position, is disclosed to the firm. This may be advantageous to provide anonymity for the investor.
The firm may set up an event on the system to discover a lead plaintiff. Investors who have previously sent in their position files, may be cross-referenced by the information exchange platform, and notified that a firm is looking for a lead plaintiff they can represent on their case, starting with the largest position holder on the information exchange platform for a particular security and key date. The largest security position holder may then accept the invitation to be the lead plaintiff, and their details and security position may be passed on to the firm of their choice who raised the event notice for a lead plaintiff. If the investor declines or takes no action in the specified time, the option is passed down to the next largest security holder and so on, until the firm has an offer accepted from an investor to be their lead plaintiff.
Referring now to Figure 7, a problem associated with efficient information exchange in service industries may be incorrect estimates of losses (for example, financial losses) to base the final settlement on. The current calculation method may be crude (that is to say a realised loss as opposed to an unrealised, or paper, loss) and may provide an incorrect valuation despite the total number of fully paid up shares in issuance, and stock market price information being readily available. The subscribers, not the eligible class, therefore receive unfair and distorted settlements as a result of the prevailing system.
The information exchange platform can improve the accuracy of the calculations and overcome these limitations.
The investors may upload their security positions, and an event may be triggered as outlined previously. The information exchange platform may analyse feeds (for example, price feeds) from securities exchanges from before and after the news of the impacted event came to light. This therefore captures unrealised loss per share. Multiplying this by the number of shares issued and fully paid for by the company, plus the short interest in those shares (described later) would give the true financial loss faced by investors. This avoids the crude calculation of buy/sell price differences, and low participation rates by crystallising the true unrealised loss.
Company shares are often suspended as news breaks of a negative event. Negative events may lead to a class action law suit. It may be advantageous to capture the share price prior to and subsequently of the news breaking, as time is then provided for investors to digest the news and price the shares accordingly. The calculation from the market data, can be passed on by the exchange to law firms saving them and their clients the investors the time and cost of calculating the loss in the prevailing way.
With reference to Figure 7, the information exchange platform may be executed to calculate the actual unrealised loss faced by investors and provide that information to firms.
To illustrate the unrealised loss, an explanation of calculation of unrealised losses is set out below, contrasted against the calculation of a realised loss.
A realised loss methodology is overly simplified, with a number of limitations which fail to adequately compensate investors, because it is not a dynamic calculation, failing to capture demand and supply price movements over time, long term investors are at a disadvantage where share price movements are greater over longer periods of time, and Corporate Actions where income is distributed by the company (eg dividends, return of capital), or changes to share structure (e.g. rights issues, stock splits) can alter the share price and should therefore be captured in any calculation. An unrealised (paper) loss methodology is more advantageous to investors, as it helps to overcome these limitations.
To illustrate we can look at the calculation of the losses under the two different scenarios.
The assumptions under both scenarios are as follows;
Investor A purchases her 100 shares on 1 st Dec 2019 at $20 per share at a total cost of $2,000;
Investor B purchases his 100 shares on 31 st Dec 2019 at $100 per share at a total cost of $10,000;
The Company has announced a dividend of $10 per share with an exentitlements date (Ex Date) of 1 st Jan 2020, and a payment date (Pay Date) of the 8th Jan 2020;
The Company has also announced a 2 for 1 stock split with an Ex Date of 1 st Jan 2020, where investors receive 1 additional share for every 1 share they currently hold, with a Pay Date of 8th Jan 2020; An adverse event occurs after market close on 31 st Dec 2019, with the company shares suspended on 1st Jan 2020. On 2nd Jan 2020, the suspension is lifted with the shares trading lower; and
Both Investor A and Investor B sell their 200 post-split shares on 6th Jan 2020 for $10 per share.
Firstly, we consider the realised loss in such a scenario. Using a simplified realised loss, where the court calculates the difference between the purchase price and the sale price per share for each investor, the realised losses are calculated as;
However, this is an overly simplified calculation. Both investors have collected a dividend of $10 per share, and there has been a 2 for 1 share split, and both events have an impact on the share price which has failed to be captured in the above scenario. Additionally, the investors receive 100 more shares on Pay Date 8th Jan 2020 for the stock split. Therefore, a more dynamic calculation is required to factor in the real true loss for investors to overcome the flaws with a simple realised loss calculation, to be used to standardise the methodology globally and set a best practice to be adopted.
Now considering the unrealised loss in this scenario, using the unrealised loss methodology. This scenario does not factor in what the shares were bought or sold for. It instead calculates the unrealised or paper loss by identifying the true impact on the share price from the last price before the news was announced ($100 on 31 st December market close), and the first price after the suspension was lifted ($10 on 2nd Jan 2020), multiplied by the number of shares held, less any deductions for corporate action and income distributions from the company.
Therefore a $10 per share dividend would result in the share price dropping by $10 per share on the Ex Date 1st Jan. This needs to be deducted from any loss as the investors will receive this cash on the pay date, avoiding double counting in the loss from scenario 1 .
Additionally, the 2 for 1 stock split would result in the share price halving on Ex Date as investors will receive double the amount of shares they hold on Pay Date. This needs to be factored into the realised loss calculation to improve the accuracy of the overall loss.
Therefore, if we take the $100 closing price on 31 st Dec 2019, subtract the $10 dividend per share, then divide by 2 to reflect the 2 for 1 stock split, the true Ex Date price will be $45. As the post suspension price starts at $10 after investors have had a chance to digest the negative news, the unrealised loss per share is $35.
If the investors are compensated $35 for each post-split share, you can see the total value of their shareholding plus compensated losses ($10,000) is exactly the same as at market close on 31st Dec 2019 before the negative news hit, perfectly compensating the investors.
This corresponds to the realised loss awarded in scenario 1 , where investor A is under compensated, and Investor B is overcompensated.
Therefore, an advanced loss calculation is required to ensure shareholders receive the true unrealised loss they suffer through the negative actions of a company’s management team.
Furthermore, we propose that this distribution from a securities class action lawsuit settlement should be paid through our platform, to overcome a further limitation of the complexities of the financial system.
The unrealised loss of $35 per share could not be processed like a traditional corporate action event such as a dividend, because the financial services industry has a complex web of transactions including hedging and shorting, which results in the sum of investor long positions often being larger than the issued shares of a company. If a distribution was made in such a way as a traditional dividend, short position holders would be liable to pay the lender of those securities the dividend on their short position, through no fault of their own, so our platform would be able to bypass the short liabilities and determine all the long position holders to be compensated.
To illustrate, the below shows a Company with 100 shares issued. Investor A owns all the shares, and then lends 50 shares to Investor B who short sells those 50 shares to Investor C. On the Company share register, they have 100 shares issued, and the Custodian shows 100 shares on their clearing account with the stock exchange, but we have two investors with total long positions of 150 shares due to the complexed nature of the financial system where short selling and hedging activities are permitted in certain markets.
If there was a dividend of $10 per share, the share price would drop by $10 on ex date (all other things being equal). Investor A would only receive the dividend on the 50 shares long in their account, and the short seller (Investor B) would benefit from the $10 price drop, but is also liable to pay the lender (Investor A) $10 x 50 shares = $500 to fully compensate, with no one being left worse off as a result of this scenario. However, if the Company were ordered to pay the settlement as a type of special dividend to ensure 100% participation, this would penalise short sellers who would be liable to compensate the lenders on their borrows. They may have realised a firm was under performing through their own research, so should not be held liable for the negative event related to this Company.
Our platform would give greater transparency to identify the beneficial holders, and the sum of all the long positions, and that multiplier over the shares issued. This would also provide a disincentive to Companies to commit corporate frauds etc, if they know they will be liable to a much larger class of investors holding long positions in their Company’s stock.
Such an unrealised loss calculation may therefore include the steps of receiving at least one account position, receiving at least one item of court data, comparing the or each court data against the or each account position, determining whether there is a match, and if there is a match, marking to market prices at the time of a key event, receiving diffident and relevant corporate action data post event, calculating the unrealised loss, wherein the unrealised loss is calculated by (high price-low price number of shares per account minus dividends and corporate action, and outputting reporting by account showing the unrealised loss.
Such a loss calculation may not necessarily be used in non-financial class actions, but it is to be understood that such a calculation may be used. An alternative calculation, based on different factors, could of course be used.
With reference to Figure 8, a yet further problem associated with efficient information exchange in service industries may be high fees charged for underwriting the cost of the securities class action lawsuits, with a relatively low number of participants to provide financing from the alternative investment market.
A new marketplace with transparent pricing is required to improve information for clients, investors and law firms to make much more informed decisions and allow impacted investors to help underwrite their own cases to enhance their returns from a settlement.
Additionally, outside of the USA the fees are different with upfront payments, so the platform will allow the facility to make such payments in an open and transparent bidding process. These two elements will provide the vehicle to finance class action lawsuits in a way that is fairer for the investors and help them take a greater share of the final settlement.
Funding arrangements are generally individual law firms making unilateral decisions themselves, they may have a limited number of preferred funding sources, and there is a lack of information, competition and transparency around how this financing is secured, which will ultimately impact investors in the costs that are passed back to them through the settlement process.
To overcome these limitations, willing funding participants (including the investors themselves), and law firms should be brought together on an exchange, to compete at the lowest rates to provide the financing, and therefore providing the best financing rates to law firms to resource and pursue a class action lawsuit.
A new class action lawsuit exchange would allow law firms to indicate their funding requirements, and interested parties that can include impacted investors, can bid in an open, transparent and competitive process to provide the required financing or part of that figure, at a specified rate of return.
An example scenario employing the methods described herein will now be described.
In the following example, an example scenario is set out, for a class action situation, and gives an explanation of the positions before, during, and after an event which leads to a class action and the subsequent class action.
As with Scenario 1 , this is a relatively simple model with 3 investors. These three investors are an Institutional Investor (e.g. Pension fund), an Activist Investor (e.g. Professional Investor), and a Passive Investor (e.g. Private Individual Investor). An illustration of these three investors and their positions is set out in Figure 10.
All participants are members of the platform described herein. Investors can choose whichever law firm to represent them, otherwise a default law firm will be chosen as described above and be matched together in the exchange.
The law firms are competing to represent the Investors based on fees (both have 50:50 win-loss ratio).
The platform is used by law firms to find a lead plaintiff for their case and uses the more advanced loss calculation method described above to determine the true loss caused by the adverse event. Additionally, the platform allows all participants to contribute to the underwriting of the costs to bring the case to court to enhance their returns in a competitive process.
The platform helps to distribute the settlement and withholds 10% of the settlement to pay the tax liability to the Government.
Law Firm B creates an event on the Class Action Lawsuit Exchange on 1 st Jan 2020 seeking a lead plaintiff and to represent investors at a 50% fee and requires $50,000,000 in total losses. Law Firm A joins the event at a fee of 65% and requires $1 ,000,000 in total losses in competition with Law Firm B.
All 3 investors have had their positions uploaded onto the platform, and they are cross referenced against this manually created event by the Law Firm B. They receive an exception report or can view on their user interface that they have an event outstanding and pending a response. Additionally, the Institutional Investor receives a request for a lead plaintiff as they are the largest shareholder with a position on the platform. They agree to be the lead plaintiff for Law Firm B, so the lead plaintiff discovery search is ended.
With the lower fee of the two Law Firms, the Institutional Investor and Activist Investor decide to choose Law Firm B to represent their claims in Court. Passive Investor fails to take action, but as a fail-safe to avoid a potential financial loss, Law Firm B is selected on the deadline date as the default law firm to represent their position as a negative affirmation, as they have the lower fee but the same success rate as Law Firm A. Therefore, Law Firm B is the most competitive and represents all 3 investors. The platform uses the enhanced loss calculation method using the unrealised loss values for all clients, which is the true economic impact of the adverse event. This saves the law firm having to calculate old buy/sell trading data, helping to decrease the bureaucratic burden.
Next, the Law Firm B requires $2,000,000 sunk cost to finance the resources required to proceed with the legal case and raises the requirement on the platform. Hedge Fund decides to participate at $4,000,000 expected return, Institutional Investor decides to participate at a $3,000,000 expected return. As Institutional Investor offers the lowest cost to finance the legal resources required, they win the competitive process to underwrite the class action lawsuit.
The case is settled successfully in court, based on the unrealised loss methodology described herein.
As can be seen from Figure 10, in summary, the example Scenario 1 ends such that:
1 ,000,000 shares are subscribed in the claim, giving a 100% participation of the total shares issued;
- A total sum of $90,000,000 is awarded, some $27,000,000 higher than under Scenario 1 ;
- The cost of legal fees in the claim are 50%, a cost of $45,000,000 (only $50,000 more than Scenario 1);
- The cost of underwriting the class action is $3,000,000 ($1 ,000,000 less than Scenario 1 , bringing down total cost by $950,000 for both legal and underwriting fees); and
- The investors who have participated receive $42.00 per share, totalling $42,000,000 (up $21 .95 per share);
- The Lead Plaintiff is the institutional investor (having 700,000 shares); and
- The distribution is paid, less 10%, thus withholding tax for the relevant government. Overall, the new exchange can be demonstrated to:
Increase participation rates to replicate the spirit of the laws that everyone is included in the class;
Include all investors in the action - no investor is locked out if they fall under law firm’s minimum loss thresholds; and
Improve and make more accurate total settlements awarded to investors.
It may also be seen from the example Scenario 2, that malpractice has been prevented by improving the information flows and removing those bottlenecks, shutting out the intermediaries (in this example the Investment Bank) from taking advantage of their position.
As a further result, the increased competition has lower average legal costs and underwriting costs that are ultimately passed on to investors, enhancing the settlement figures received.
As mentioned above, the largest shareholder has been determined as lead plaintiff, giving the court and law firms improved information related to the case brought in front of the courts.
Larger tax revenues raised by the government at the same eg 10% rate from larger and more accurate settlements, plus lower fees from competition to the benefit of society as a whole.
Referring to Figure 9, a problem as a result of the bottleneck of information may be that of the final settlement figure being dispersed on a proactive claim basis, which discriminates against those without the correct knowledge. The final beneficiaries are automatically part of the class, so 100% of the settlement should easily be dispersed like the existing dividend process. Additionally, as discussed above, in some territories, settlement proceeds are liable to taxation, which is currently not withheld upfront in an efficient manner like many traditional corporate events.
To prevent a change and improve the accuracy and transparency of losses incurred by shareholders both realised and unrealised, a more accurate way of calculating is required, setting a benchmark for the industry. This will help protect the impacted shareholders and prevent them being comingled with newer securities holders post the event in question.
The platform would be able to handle the calculation and settlement dispersal in the form of a special type of dividend, paid before the regular dividend to ensure fairness using a record date with a specified time that captures the impacted shareholders correctly. This approach also ensures that the end beneficiaries are the ones who receive the settlements, removing malpractice in the financial industry where financial firms and custodians who can also demonstrate positions of their client’s holdings, can claim without further discretion from law firms and courts. This should be considered the end state of what is trying to be achieved.
Companies could decide to use this route through the platform to avoid court costs and put settlements to the holders directly. The company could pay the settlement award though the class action exchange, and tax, fees etc could be withheld to pay tax authorities and law firms, with the full beneficial owners receiving their settlement in a similar fashion to a dividend payment, reducing the scope for unethical practices carried out by the institutions who currently control the flow of information.
It is also noted that financial class actions are increasing in popularity around the globe, with the US being a significant arena for financial class actions. Financial class actions are gaining in popularity in China, with the market for class actions in the financial sector growing rapidly.
Financial class actions are also occurring in other countries around the world, including in the UK and New Zealand.
Participation in financial class actions, particularly in the US, is relatively low, and such participation may be increased if the methods and techniques described herein are employed.
The methods described herein could be used in the context of other types of class action, for example those relating to goods. Again, with reference to the US, class actions for goods of perceived low quality, or goods having other problems, are relatively popular, and such class actions may be improved using the methods and techniques described herein. With particular reference to providing a position, such a method could be used to alert those who own a particular product, around which a class action may be launched. In an example, a register may be kept of those who have bought a particular car or household product.
Such a list may be interrogated in a scenario where a class action is launched in connection with such a product. Using the techniques described above, and using the US as an example, the register of positions, in this case a register of those who own such a product, could be combined with Al or PACER data as described, to compile a list of potential class action members. This may increase participation in such a class action.
While the invention has been illustrated and described in detail in the drawings and preceding description, such illustration and description are to be considered illustrative or exemplary and not restrictive; the invention is not limited to the disclosed embodiments but is defined by the scope of the appended claims.
Other variations to the disclosed embodiments can be understood and effected by those skilled in the art in practicing the claimed invention, from a study of the drawings, the disclosure, and the appended claims. Each feature of the disclosed embodiments may be replaced by alternative features serving the same, equivalent, or similar purpose, unless stated otherwise. Therefore, unless stated otherwise, each feature disclosed is one example of a generic series of equivalent or similar features.
In the claims, the word “comprising” does not exclude other elements or steps, and the indefinite article “a” or “an” does not exclude a plurality. Any reference signs in the claims should not be construed as limiting the scope.
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