Investors fail to recover $12 bn in class actions
February 14 2008, 2:43 pmNon-participation in US securities class actions by institutional investors resulted in nearly $12bn being left on the table between 2000 and 2007, according to the new report.
The report by European withholding tax and class actions services specialist, GOAL Group, claims some $3.6bn of this can be attributed to European investors. Around the millennium, corporate governance scandals such as Enron were the main instigator of class actions, but the mantle has now passed to the subprime mortgage market crisis. With average settlements sitting at some $54 million, and filings again on the rise, investors and fund managers can no longer ignore the opportunity to claim damages to which they are legally entitled.
In the absence of established mechanisms for joint actions in other legislatures (with the notable exception of Australia), class actions in the US court are being used successfully by European shareholders to seek redress for their losses. When US investors control the litigation, there is a possibility that foreign investors may not automatically be included, because the fewer the claimants, the greater the cut of any settlement; and legal complexities can slow down the process. This has inspired European companies to become active litigants in US courts – in cases against European and US companies. In the Parmalat case, all of the lead plaintiffs are European.
The typical European share portfolio has become strongly international – the average balance is currently in the order of 75 per cent domestic shares, 25 per cent foreign shares – and this is driving European shareholders’ awareness that they could be left out of securities class actions in the US unless they take an active role in a lawsuit. However, it is a fact that keeping track of the opportunities to make a claim and the processes required to do so successfully, can be a complicated and daunting task – and many institutional investors believe that the cost and time involved is likely to outweigh the benefits. This is often a misapprehension, but perhaps explains why 25 per cent of claims that could be filed by entitled parties are left unprocessed.
Commenting on the report, Stephen Everard, managing director of GOAL Group, said: “It is the judgement of the legal profession that there is a clear duty of care for institutional investors to register claims on behalf of their clients, but our research show that non-participation is costing investors dearly.
“A downturn in filings in 2006 raised the possibility that shareholder class actions were on the wane. The figures from 2007, however, give this the lie, as we have seen renewed vigour in the courts and an overall increase in filing over 2006. Although the Sarbanes-Oxley Act and European equivalents are undoubtedly suppressing the possibility of further Enrons and Parmalats, new factors have arisen in the financial and corporate markets where class actions are being used to try and claim compensation for shareholders and investors. We are currently seeing a surge of class action lawsuits inspired by the international credit crisis, the resolution of which will take anywhere between five and seven years.
“It is true that participating in a class action requires timely and accurate information about the relative merits and procedural processes, and time and resources to review and evaluate relevant settlement provisions. Investors much then cross-reference these outputs against extensive individual trading activity data and compile and submit the often complex paperwork necessary to make a valid claim.
“But outsourced, automated services are available on the market to process class action claims without incurring high expense. It should be pointed out that some astute and responsible institutional investors are already using such services.”
Jason Conway
