As a financial advisor, it makes sense to help your clients with anything related to their investments. That could include helping them to get a slice of the payout from class actions against companies being sued for crooked accounting and other instances of malfeasance that resulted in huge stock losses. Of course, this is a touchy issue for reps who told customers to put money into these faulty vehicles.

But more brokers are swallowing hard, picking up the phone and offering help to clients who can gain a little bit of money and perhaps a bit of closure by participating in a class action. “A number of large brokerages are approaching us to see if we can handle the entire filing process on behalf of their clients,” says Brad Heffler, CEO of the Blue Bell, Pa., based Claims Compensation Bureau, which helps investors file claims. “They don't have to do this. They simply realize this is just good PR.”

With the size and number of class actions on the rise, brokers have plenty of opportunity to lend a helping hand. From December 1995 through 2002, investors recovered $10 billion from such suits, with the average settlement running $25 million. James Newman, executive director of the New York-based Securities Class Action Services, a subsidiary of Institutional Shareholder Services, thinks total settlements for this decade could reach as high as $50 billion.

But only 25 percent to 30 percent of qualified investors actually participate in recovery. That is perhaps because of the perception that the little guy won't get very much. According to The Wall Street Journal, however, “Investors are typically collecting 8 to 15 cents for each dollar lost, meaning a $20,000 loss can lead to a $3,000 settlement check.” Given the 90-percent-plus declines in some stocks — and the total wipeout of others — that's money worth pursuing.

Stanford University Law School, which maintains one of the most extensive databases on U.S. equity-related class actions, found that federal litigation suits increased by 31 percent between 2001 and 2002 to 224 cases. This increase excludes the massive number of IPO-related suits.

A sampling of some of the most prominent cases currently pending includes AOL TimeWarner, Motorola, Sprint and Veritas Software. Lawyers in these suits are asking a whopping $200 billion in damages. In the coming years, this number is likely to increase as a result of recent Congressional action.

The most startling statistic released by Stanford is that 3 percent of all companies listed on the national stock exchanges were defendants in securities class action lawsuits in 2002, compared with 2.3 percent in 2001. Manchester, N.H., attorney Alan Cleveland quips, “If these trends continue, there's going to be more money coming out of securities class-action cases than from dividends.”

How the Process Works

From filing to distribution, class actions usually take two to four years to resolve.

Filing a claim is free and only requires investors to show that they bought shares during the class period and how much they paid. Lawyers work on a contingency basis. The Sarbanes Oxley bill, passed in 2002 in the wake of the Enron scandal, loosened some of the restrictions on shareholder actions that were enacted by Congress in 1995 to cut down on allegedly frivolous suits. The new law extends the statute of limitations, allowing plaintiffs to sue over fraudulent behavior that goes back five years instead of three. It also extended the filing period from one to two years after the malfeasance is discovered.

Knowing when to file a claim in the first place is the hard part. When an event occurs that materially affects a stock, like when Dutch supermarket holding company Ahold announced that it overstated earnings by $500 million, lawyers will seek out investors who got hurt. Those with the largest losses are likely to be selected by a judge as the lead plaintiffs, and their law firm often becomes the attorney of record. All other investors are automatically represented by this firm.

For most legitimate claims, companies and plaintiffs usually hammer out a settlement before the case gets heard. But a judge must still sign off on the settlement. Either way, after a settlement or a win by plaintiffs, an administrator handles the distribution process. Because stock is usually kept in street name, the claims administrator must then work with brokers to track down all individual investors who bought shares during the time in which the fraud occurred.

Brokers are then given the choice to mail out settlement notices or to provide the claims administrator with all client names and addresses. In either case, the envelope containing the claims form will appear to come from the claims administrator, indicating that important shareholder information is enclosed. Because the envelope fails to indicate that the recipient is eligible to recover damages on an investment, it's quite possible that the letter gets tossed before ever being opened. At a moment like this, a call from the rep will be appreciated.

What Can You Do?

If your firm doesn't have personnel overseeing the settlement process, here's what you can do:

Check Web sites such as and to identify companies being sued.

Develop a list of your clients' most widely held stocks and cross check them with settled class cases. While it's a long shot, see if your IT people could develop a program that would generate this list automatically and periodically.

Email your clients, asking them if they are aware of the class action and whether they have filed a claim. Take this time to explain that you were as misled as they were, but that they are ultimately responsible for filing the claim.

Remember, claiming a settlement usually involves a purchase that happened a while ago. Eligible clients may no longer be with you. But if your firm opts to do the mailing, it is responsible for finding those old clients when notices come back marked “wrong address.”

Clients may ask you to research old sales records to determine their eligibility to participate in a settlement. Some firms charge for this service. Don't! That sends the wrong message.

Consider hosting a client meeting during which you explain issues related to class actions. Sure, it doesn't make you money. But it's good PR and may help you keep your clients when your investment acumen alone isn't doing the job.