The caper was a simple one: the money was just sitting there unclaimed, so Kevin Waltzer would claim it.
In this case, the unclaimed money was sitting in common funds for three securities class-action settlements--In re Nasdaq Market-Makers Antitrust Litigation, In re Cendant Corporation Litigation, and In re BankAmerica Corporation Securities Litigation. To claim it, Waltzer posed as a financier who had traded the stocks at issue in each case. With the help of several accomplices (including one at the accounting firm that made the disbursements for the settlement) Waltzer cleared more than $40 million before he was caught by the IRS, and turned on the rest of his crew.
Today's case, United States v. Negroni, details the fallout from the scheme. The legal issue revolves around whether the trial court had justifiably departed downwards from the Federal Sentencing Guidelines when sentencing several of the defendants. The Third Circuit said it did not, and remanded the case for resentencing. Its primary reason for doing so was oddly similar to some class action appeals -- the trial court had not adequately explained its reasons for the downward departure.
But what's more relevant to class-action practice is the nature of the scheme. The defendants here were fraudulently claiming proceeds from securities class-action settlements. And, like with most criminal activity, it's hard to imagine that the crooks who got caught were the only ones committing the crime.
Negroni shows that there is good reason to build verification mechanisms into a class settlement. Plaintiffs' lawyers often argue that these mechanisms serve only to depress claims. But Negroni shows exactly how individuals can make false claims; and the richer the proposed settlement, the more likely it is that it will attract con men like the defendants here.
Less important from a practical perspective, but more interesting from a theoretical one, this decision undermines the more extreme versions of deterrence that some academics use to justify increasing attorneys' fees in class actions. If class actions were only about deterring bad conduct and it didn't matter where the money went, there'd be no reason to punish these defendants. In class actions, there is rarely a high claims rate against the common fund. So, from a "pure deterrence" perspective, the fact that this money went to con men instead of deserving shareholders should not matter. But, of course, it does matter. And why is that? Because courts recognize that class actions--like other civil lawsuits--are devices for making wronged victims whole, as opposed to simply deterring alleged bad actors. Even if current practice occasionally renders that goal a legal fiction, it's an essential legal fiction. Shattering our suspension of disbelief by allowing con men to walk away with the proceeds, whether they be posing as class members, lawyers, or experts, does extraordinary damage to a delicately balanced system.