Class action activity has been confined to US courts, but non-US investors are starting to smarten up, as Giovanni Legorano reports
US law firms specialising in securities class actions have increasingly considered western Europe and in particular the UK as a major source of business in recent years. Initial contact with UK pension funds started six to seven years ago and activity has now grown to such an extent that larger firms have developed their presence outside the US and compete fiercely to represent foreign institutional investors.
Marketing activity outside the US greatly intensified last year, particularly as a result of the financial crisis. Several legal firms often travel to Europe to meet prospective clients and speak at events.
t is better not to fight among ourselves and to focus our attention on the defendants and to the benefit of our clients
Labaton Sucharow’s senior partner Thomas Dubbs travelled to London last May to take part in the Parliamentary Roundtable – US Class Action: Making it work for UK Pension Funds. At the time, he told Global Pensions there was an “increasing awareness” among UK and European schemes about US class actions.
Labaton Sucharow is one of the firms involved in the RBS lawsuit in the US, which seeks damages for losses incurred by investors as a result of the massive fall in the value of their investments when RBS was bailed out by the UK government.
Dubbs said: “Non-US schemes are also increasingly aware of how they might positively impact scheme members by obtaining compensation as well as obtaining corporate governance reforms involving executive compensations and other issues.”
Labaton Sucharow of counsel Dominic Auld added competition between law firms looking to develop relationships with European pension funds is fierce but “friendly”.
He explained: “Because of the nature of the US system for prosecuting securities class actions, we quite often end up working with competitors. At the end of the day, the most effective way of keeping control is to present to the court the institutional investors with the biggest losses, the most power and the most sophistication.”
Co-operation
Most law firms agree the initial fierce competition often turns into forced co-operation once the class action is at a more advanced phase.
Coughlin Stoia Geller Rudman and Robbins (CSGRR) partner Patrick Daniels said: “The cases are big, complex and the reality is that we are better off co-operating in many instances than we are ruthlessly competing. It is a very competitive business, but at some point we all reach the same good business sense conclusion. It is better not to fight among ourselves and to focus our attention on the defendants and to the benefit of our clients.”
European pension funds’ level of involvement in US class actions has varied considerably with some of them at the forefront, collecting settlement money for some years. The UK’s Universities Superannuation Scheme (USS) is one of them.
USS co-head of responsible investment Daniel Summerfield said USS had been participating in lawsuits and class actions for the last seven years. Its trustees have taken the view that simply claiming USS’s share of any class action settlement would be non contentious.
He explained: “We outsource this particular aspect to an independent monitoring service provider which monitors our transactions and cross-checks them against any settlements that have been made in US courts. It then completes and processes the necessary documentation.”
The choice of an independent provider – as opposed to a law firm – was a deliberate strategy, he said, since such firms do not have a vested interest in trying to entice schemes to pursue any type of lawsuit.
He said: “A law firm that offers any of these services may be inclined to encourage a pension fund client to join one of their lawsuits. Instead we prefer that law firms approach us with specific proposals that we will consider on a case by case basis, whether it is to opt out of a class action or to pursue private litigation. We will evaluate each case on its individual merits.”
USS is also one of the pension funds that want to see governance improvements built into any potential settlement when it considers whether to join an individual or collective action or not.
However, when it comes to becoming the lead plaintiffs, European funds have mixed feelings. A UK scheme, who asked not to be named, told Global Pensions: “Our general current policy is not to get involved as lead plaintiffs, particularly if the intention is seen as merely trying to extract money from the company and shareholders. We don’t need the kudos and we don’t want to take the reputational risk.”
It added: “We participate at the end of the process by using our custodian and retained US lawyers to claim where possible on settled actions – this is quite lucrative. However, we regularly turn down requests to take the lead – the effort required to support such lead actions is not insubstantial.”
By contrast, other European schemes have generally had a very different attitude. In the class action against RBS, for example, two UK pension funds and one Dutch fiduciary manager – Merseyside Pension Fund, North Yorkshire County Council pension fund and MN Services – asked to be co-lead plaintiffs, but were knocked out of the running on the basis they were not the investors who suffered the largest losses.
US bias
US jurisprudence has not always had the same attitude towards the participation of non-US investors to US class actions, let alone letting them be the lead plaintiffs.
Bernstein, Litowitz Berger & Grossman senior counsel Beata Gocyk-Farber explained there are various reasons for non-US investors to be excluded from class actions in the US. In particular she said US courts apply ‘conduct’ and ‘effects’ tests to verify whether there is sufficient nexus to the US to justify the exercise of jurisdiction of a US court.
The ‘conduct test’ would ascertain to what extent the alleged fraudulent conduct would occur in the US, while the ‘effects test’ would consider whether an illegal activity abroad caused damage within the US. Gocyk-Farber said: “There has been some reluctance by federal courts to assert jurisdiction over claims that are brought by or on behalf of F-cubed plaintiffs unless the US conduct is particularly strong.”
F-cubed refers to claims where a foreign security has been bought by a foreign investor on a foreign exchange.
In case of exclusion from a class action, a pension scheme could try to bring forward an individual claim, but Gocyk-Farber pointed out it might be difficult if the individual claim is accepted when the membership status in the class action was refused.
Other courses of action
Nonetheless, some schemes have in the past chosen to opt out of the class action and proceed with an individual claim brought before US courts, an option at times chosen by investors with a substantial stake in the company and who suffered a substantial loss.
However, as far as the RBS case is concerned, CSGRR is recommending a different strategy to its clients as opposed to the ongoing class action still pending before US courts. Daniels said CSGRR has been advising European pension funds and institutional investors to opt out of the US class action against RBS and to seek damages in the UK.
In close collaboration with US law firm Grant & Eisenhofer, he said they were investigating different alternatives to the ongoing lawsuit, as non-US investors are set to face a number of challenges to seek redress in the US and may be excluded from the class action.
Daniels said: “There is a bad combination of factors that led us to think that, on balance, these investors could be better off suing RBS individually in UK courts.”
In particular, he said a recent judgment on National Australia Bank – a case the US Supreme Court has recently agreed to hear – created a precedent which raised questions as to whether foreign investors could be included in US class actions.
In a nutshell, Daniels explained this case involved an Australian company that had a large US subsidiary which conducted an accounting fraud. But when the accounting fraud was exposed, the stock price collapsed and investors were harmed. A case was brought in the US against National Australia Bank. The court said although the actions to prepare the fraud may have occurred in the US, the decisions to what disclosures to make to the shareholders were made by the Australian headquarters of the company. Therefore the actual fraud happened in Australia.
Several European schemes, as well as law firms, are said to be closely watching the evolution of this case as participation to US class actions could become much more difficult for them in the future given this precedent.
In addition, Daniels said those funds had chances to get a higher portion of the losses incurred if they acted individually in the UK. Currently CSGRR is speaking to its largest non-US clients and evaluating the different options.
Merseyside Pension Fund – which is still included in the class action against RBS – head Peter Wallach said: “CSGRR is advising us as to alternative courses of actions. We have not agreed to anything so far, but we are interested to see what proposals they bring forward.”
