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$440 million investor fund clears hurdle
Courts are grappling with how to return millions of dollars to burned investors. A look at one plan.
April 11, 2005: 5:28 PM EDT
By Krysten Crawford, CNN/Money staff writer
Do you have a claim?
Qualifying stocks, firms and dates

NEW YORK (CNN/Money) - A New York federal judge will soon greenlight a plan to return $440 million to investors who bought stock based on tainted Wall Street research.

"I am provisionally approving the plan," U.S. District Court Judge William Pauley III said Monday morning at the end of a hearing on the proposed distribution. Pauley said he will officially sign off on the plan within days.

Once approved, the plan moves a critical step closer to delivering money back to customers of Wall Street's biggest investment houses who purchased stock in AT&T Corp., WorldCom Inc., Ask Jeeves and approximately 50 other companies during certain periods from late 1999 until mid-2002.

Since 2003, 11 Wall Street firms and former Merrill Lynch analyst Henry Blodget have agreed to pay $1.5 billion to settle government charges that they misled investors by hyping the stock in companies that their research analysts were privately deriding at the same time.

Of that settlement pool, $433 million was set aside for burned investors. With interest accrued, the investor fund is now worth about $440 million, according to Francis McGovern, a Duke University law professor who is overseeing the money's distribution. The banks are paying separately for all administrative costs.

Once the distribution plan is approved, McGovern expects in the next several weeks to mail anywhere from 50,000 to 100,000 claims forms to investors whom the investment banks have identified as eligible claimants. Investors who don't receive a claim in the mail by June 3 and think they are owed money have until July 8 to notify McGovern.

McGovern told Judge Pauley on Monday that, once his distribution plan is approved, he expects it will take another nine months before checks are in the mail.

The plan is based on some core principles. Investors had to have bought stock from one of the 11 investment banks during a specified period of time. (See the full list of qualifying stocks, dates and firms.) They had also to have lost money on the stock purchase.

Investors don't have to prove they bought stock in any of the companies based on tainted research reports.

Another criterion: small investors will be favored over large investors on the theory that big buyers of stock have more research at their disposal and, hence, are less likely to be bilked.

Just how much money can an eligible investor hope to recover? McGovern said Monday that it is "simply not possible" to estimate a dollar amount until the number of valid claims have been determined. He did say, however, that it's possible that some investors would recoup 100 percent of their losses.

While large, the investor fund in the so-called Global Research Analyst Settlement is just one of a string of securities-related settlements awaiting distribution to shareholders.

Overall, there is $16 billion that has not yet been returned to shareholders who bought stock in companies that later settled lawsuits accusing them of misleading investors, according to Claims Compensation Bureau, a 9-year-old company that specializes in helping individual and institutional investors recover money in these kinds of cases.

"This is an unprecedented time in the securities class action industry," said Brad Heffler, the CEO of Claims Compensation Bureau. "There have been more billion-dollar cases and hundred-million dollar cases in the past six months than there have ever been in a five-year period."

Most of the time investors pocket only 5 to 15 cents for every dollar lost, said Heffler. But he said there are exceptions when investors recover significantly more. The size of the payouts is determined not just by the amount of money available but also the number of claims filed. So the fewer claims there are, the more money that's available for those who do file claims.

Last month's WorldCom settlements look promising for investors who bought bonds before the company declared the largest bankruptcy in U.S. history. Of the record-breaking $6 billion that WorldCom's banks have agreed to pay, some $5 billion is earmarked for bondholders. Their expected recovery: at least 30 cents on the dollar.

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