Underestimation of Securities Fraud Aggregate Damages Due to Inter-Fund Trades

Abstract

Aggregate damages in class action securities cases estimated using standard methodologies and public volume data may be understated due to the frequent occurrence of inter-fund trades. Inter-fund trades are internal crossing trades between funds within the same fund family, and are one of the few instances of trading transactions that are not reported publicly. Consequently, while inter-fund trades show up in submitted claims they are omitted from the public trade volume data generally used to estimate aggregate damages. Using actual claims data obtained from a claims administrator in a recent case, we find a significant number of damaged shares attributable to inter-fund trades, which traditional damage estimation models do not account for without an adjustment to the models’ trading volume input. Our findings have implications for how aggregate damages should be estimated, and call for policy reform in the reporting of inter-fund trades.

Keywords: inter-fund trades, class action securities cases, damages estimation, aggregate damages, two-trader proportional trading model

JEL Classification: K22, G14, G23