The Missing Millions: Cy Pres in Federal Securities Class Actions

Abstract

Under prevailing cy pres doctrine, class-action-settlement residuals that cannot efficiently or fairly be distributed to the class may be distributed to a third party that represents the “next best” recipient consistent with class interests. Judges embrace cy pres despite theoretical concerns over inattention, conflicts, and abuse. We shed empirical light on the cy pres debate by examining an original, hand-collected dataset of 373 class-action settlements entered between 2010 and 2018. We document that the theoretical concerns have empirical merit. More than 57% of the settlements lack any evidence in the public record of the identity or court approval of cy pres recipients. We estimate the value of unaccounted-for residuals in all federal class action settlements since 1996 as exceeding $25 million. Among identified cy pres recipients, most have little or no relationship to interests of the class, and we find some evidence of conflicts of interest. These findings raise concerns about potential breaches of fiduciary duty and noncompliance with Federal Rules of Civil Procedure. We suggest that these deficiencies are caused by a combination of self-interest and inattention on the part of plaintiff’s counsel, lead plaintiffs, and the courts. We also offer solutions to remediate these deficiencies. Prospectively, we propose presumptions for the selection of appropriate recipients of the residual, mandatory disclosure of conflicts, and prior judicial approval of cy pres distributions. Retrospectively, we urge courts to order disclosure of missing information and to consider appropriate disciplinary measures, contingent on the information disclosed.

Keywords: cy pres, rule 23, class actions, class settlement, settlement administration