Securities Class Actions and Recovery Responsibilities

For several years the US has been the world’s most developed legislature for securities class actions.  However while the country is still the dominant centre, other class action lawsuits surrounding securities are growing elsewhere. The growth is predicted to mirror what was seen in the US in the early 2000’s.

This international diversification of class actions has resulted from a combination of restrictions on jurisdiction definitions in US Federal courts, along with a growing desire to develop domestic class action procedures in many other parts of the world. A handful of countries appear to be allowing international class actions to be tried in their courts, even when the stocks and shares in question are quoted on a non-US exchange, and the case involves only a minority of domestic investors.

A landmark court ruling of 21 June 2010 in the case of
‘Morrison vs National Australia Bank’
, which decreed that US securities laws apply only to companies listed on US exchanges, has limited the ability of overseas plaintiffs to bring securities class action claims within the US. To be precise, it has wiped out the eligibility of what have become known as ‘f-cubed’ actions, which involve a non-US shareholder suing a non-US company whose stock was purchased on a non-US exchange and who is bringing a case in a US court.

As a result, plaintiffs are now instigating litigation in more flexible jurisdictions in Europe and overseas. This means that international companies listed on multiple exchanges are now defending themselves against securities class actions in multiple jurisdictions. The trend is further exacerbated as regulators tighten regulation following the 2008 global financial markets crisis and governments institute fiercer enforcement measures.

There is a growing pressure of global class action cases looking for a home in a legislature that is able to define and prosecute a global class. The current front runners appear to be Germany, the Netherlands, Canada, Australia and Japan. It is quite possible that all these legislatures could allow global securities class actions and become regional centres for the prosecution of such cases. While some jurisdictions may not have as robust a securities litigation framework as these five countries, recent developments across different regions reinforce the need for global firms to monitor potential litigation venues around the world. 

A Wake-up Call for Fiduciaries

A recent study by
Goal Group
forecasts that settlements in securities class actions outside the US will rise to US$8.3bn per year by 2020. The study also identifies that if the non-participation rates seen in US class actions are experienced in non-US activity, by the end of the decade US$2.02bn of investors’ rightful returns will be left unreclaimed each year.

In recent years it has become clear that fund managers and custodians have a fiduciary duty to ensure that their clients participate in securities class actions that may recoup some of their investment losses. The UK’s National Association of Pension Funds (NAPF) has underlined that fund managers and custodians have a fiduciary duty to ensure their clients participate in securities class actions that may recoup some of their investment losses in one of its advisory documents (see the NAPF publication
‘Securities Litigation – Questions for Trustees’
[2007]). 

Moreover, the ex-chairman of the NAPF has launched the International Institutional Tort Recovery Association (iiTRA) with the aim of helping pension funds and other investors recover their ‘fair share’ of class action awards.  It is no surprise then that many custody Request for Proposals (RFPs) from major pension funds now include these responsibilities as contractual clauses; breach of which would naturally give legal recourse.

Goal’s report also warns that because non-US legislatures require participants to register at the beginning of a case, investors need to participate now to receive their rightful returns. Any level of non-participation presents fiduciaries, such as fund managers and custodians, with a potential legal risk. 

Experience in the US, along with emerging contractual obligations, suggests that fiduciaries may be sued if they do not ensure investors participate in class actions to recoup a proportion of their investment losses. Back in 2005, over 40 mutual fund managers were reportedly sued by shareholders of those funds in class action lawsuits alleging that the funds failed to collect as much as US$2bn in settlement payouts to which the funds’ shareholders were entitled*. The lawsuits claimed that the funds’ failure to attempt to recover this money during the class period was a failure of fiduciary duty, was negligent, and violated the
‘Investment Company Act’
of 1940. They sought damages for all of the money allegedly left on the table, as well as damages and the forfeiture of all commissions or fees paid by fund shareholders.

Conclusion

Some custodians are still not ensuring client participation in non-US class actions, and there even remains a level of non-participation by eligible parties in US cases. In the past, custodians, trustees and fund managers have sometimes regarded the effort and cost of participating in class actions as being disproportionate to the likely settlements pay-out achieved. However this is no longer the case, with a number of service providers automating the complex process of class action participation across many international legislatures. 

It is likely that the sheer volume and international variety of tracking and participation of securities class actions will rise through the rest of the decade, and will become more widely applicable to a greater breadth of portfolio holdings. Therefore, custodians, fund managers and trustees will have to make sure that they are on top of securities class actions right across the world.  This applies to institutional and private investors, but by far the largest proportion of equity investment – and therefore losses subject to a class action – are attributable to institutional investors.

*A Savett, The Importance of Best Practice and Procedures in Securities Class Action Settlements, (JDSupra) November 2009

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