Settlement of NASDAQ Litigation -- Role of Investment Advisers in the Litigation -- Special Issues Regarding Mutual Funds and Hedge Funds -- More Information or Assistance | OVERVIEW On June 11, 1999, the United States District Court for the Southern District of New York (the "Court") issued a "Notice Regarding Proposed Plan of Distribution, Hearing and Proof of Claim" regarding the class action antitrust litigation involving Nasdaq and certain Nasdaq market-makers. The settlement covers Nasdaq transactions in over 1,600 primarily small cap and technology stocks for varying time frames during the period May 1, 1989, through July 17, 1996. If you have not received material from the Court regarding the settlement, you should visit the following website that provides information about the litigation: http://www.nasdaqlitigation ROLE OF INVESTMENT ADVISERS IN THE LITIGATION Investment advisers that placed trades through Nasdaq with market-makers that are defendants in this litigation are deemed to be members of the plaintiff class, either individually for their own accounts, or as agents for their clients for whom such trades were placed. (See Footnote 1.) The Advisers' clients are also individually members of the plaintiff class. As members of the plaintiff class in an agent capacity, many advisers have asked us whether they are required to participate, on behalf of their clients, in the claims procedure established to settle the litigation. The notice from the Court states that advisers should not file claims on behalf of their individual clients. (See Footnote 2.) Further, advisers ask whether they are obligated to provide information to their clients who do plan to file their own claims. Advisers also ask who (the adviser or the client) should bear the cost of gathering the required information. The Court does not impose an obligation on advisers to provide information to their clients. In fact, the notice from the Court states that advisers who "wish to assist their customers in filing claims may transmit data to their customers for inclusion by the customers in the customers' claims, but should not submit such data directly to the Claims Administrator." This leaves the question of whether (the Court's language aside) advisers owe their clients an independent fiduciary duty to provide clients with the data with respect to trades the advisers have caused to be placed for their clients. In that connection we note that:
Under these circumstances and given the potentially considerable cost involved in providing the information needed to prove claims in the Nasdaq litigation settlement process, we do not believe that general fiduciary principles obligate advisers to expend significant resources to provide the required information. (See Footnote 3.) The Court has provided advisory clients and other class members with certain trade information directly. Also, in addition to the information maintained by advisers or provided by the Court, the broker-dealers who effected the trades can provide the requisite data. The broker-dealers that are defendants in the litigation and certain other brokers-dealers that are not involved in the litigation have agreed to make the necessary information available to clients on computer disk at a cost not to exceed $15 per disk. Custodians can also make the data available. In fact, banks that act as custodians can file electronically with the Court the data required for claims. We believe that advisers should notify their clients of the settlement. Where advisers have received claim information from the Court for their clients, the advisers should forward that information to their clients to enable them to file their claims as part of the settlement process. (Advisers should document that notice and transmittals of claim forms received from the Court have been sent to the appropriate clients.) While we recommend notification as a minimum fiduciary response, we do not claim that advisers generally have a fiduciary obligation to do more. (See Footnote 4.) SPECIAL ISSUES REGARDING MUTUAL FUNDS AND HEDGE FUNDS Mutual Funds The decision to pursue claims on behalf of a registered investment company is the responsibility of the fund's board of directors. The adviser is responsible for notifying the board and providing the relevant information to the board to allow the board to decide on the appropriate course of action. Unless the adviser's agreement with the fund encompasses providing special litigation assistance of this sort, if the board asks the adviser to undertake to provide the requisite data and/or to file claims on behalf of the fund, the fund should reimburse the adviser. Other parties could also be asked to assist (e.g., the fund's administrator or legal counsel). Private Investment Funds For a private investment fund, the decision to pursue claims on behalf of the fund rests with the general partner, the managing member or the board of directors of the fund, as applicable. Where the adviser also occupies one of these positions, special care is necessary to insure that the adviser acts in the best interest of the fund and its investors. In cases where the general partner, managing member or board of directors authorizes the pursuit of claims on behalf of the fund, then reimbursement of expenses for such action should be appropriate, unless limited by the offering documents or agreement with the fund. October 6, 1999 December 8, 1999 Although the Court is currently accepting claims in the Nasdaq litigation settlement, the Court will not finalize the settlement until on or after the October 8, 1999, hearing date. Thus, the Court could possibly change the settlement terms or the claims process. However, due to the nature of the litigation process, it is unlikely that the Court will make significant changes in either the settlement or the way claims are filed. While you or your clients could wait to file a claim until after the Court has finalized the settlement, you or your clients run the risk of not having sufficient time to do the necessary research and to compile the data required to support a claim. 1/ An adviser that is an affiliate of any of the defendants in the litigation may not be deemed a class member for its own account(s) and may not be able to file claims on its own behalf. return 2/ The rationale for this statement in the Court notice appears to be that an advisory client may have accounts with more than one adviser and claims need to be consolidated for filing. return 3/ Of course, unusual circumstances may create a fiduciary obligation. If you have any questions, please contact an attorney. return 4/ Advisers who are concerned about client relations and who wish to play a more active role in assisting their clients in pursuing their claims may, of course, do so. For example, an adviser may assist its separate account clients in gathering data from relevant sources to forward to the Court. Since the settlement process requires claimants to submit all individual claims together, advisers who do assist their clients need to be aware of this requirement and not file on behalf of their clients. return Client Alert is published solely for the interest of friends and clients of Paul, Hastings, Janofsky & Walker LLP and should in no way be relied upon or construed as legal advice. For specific information on recent developments or particular factual situations, the opinion of legal counsel should be sought. PHJ&W is a partnership, including professional corporations. |
Settlement of NASDAQ Litigation
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