### What Is A Securities Class Action?

##### According to Wikipedia, a securities class action is

…a lawsuit filed by investors who bought or sold a company’s securities within a specific period of time (known as a “class period”) and suffered economic injury as a result of violations of the securities laws.

### How Does This Affect Your Investment Portfolio?

##### Since the company was found to have done something illegal, they can be taken to court and you can be compensated by the company for your loss due to the unlawful action.  The process of the lawsuit where the company is taken to court to pay for the stock holder’s losses is called a class action.

Visually: first the stock price goes down due to the unlawful action, the company gets taken to court, investors are paid.

### How Are Class Actions Reflected in the Performance Return of An Investment Portfolio?

##### How should litigation income be accounted for? Should it affect performance?

The Standards do not specifically address the effects of the receipt of funds due to a litigation or bankruptcy settlement on performance. It would seem most appropriate that the settlement proceeds would be accounted for when the firm becomes aware of the timing and amount of funds expected by the portfolio. This might be upon receipt of the funds. The funds received would increase the value of the portfolio (would not be treated as a cash flow) and would thus impact the current performance of the portfolio. This assumes that the portfolio was under the firm’s management at the time the litigation event occurred. If the litigation event occurred before the firm began managing the account the litigation income should be reflected as a cash flow as the firm is not entitled to the benefit of the receipt of the income.

• Categories: General/Miscellaneous
• Source: GIPS Executive Committee

### Should The Class Action Proceeds Be Booked as a Profit/Gain or a Cash Flow?

##### Have a different thought?  Comment or question?  Let me know!
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