Europeans losing out in US lawsuits
March 30 2008, 11:26 amEuropean pension and fund managers are missing out on billions of dollars by not participating in class action lawsuits against companies whose managers indulge in improper corporate behaviour.
According to Goal Group, a class action services specialist, $12bn (£6bn, €8bn) was left on the table by investors between 2000 and 2007. Of this, $3.6bn is attributable to European investors, who may not have even been aware that lawsuits relating to their investments were launched, since they nearly all take place in the US. Other investors believe class action lawsuits are too expensive to participate in, even though services exist to collect class action money on a no-win, no-fee basis.
Stephen Everard, Goal managing director, points to tangible evidence that European investors are able to benefit from class action lawsuits as well as their US brethren. “Sacks containing 800 cheques for UK institutions from the WorldCom case have just arrived at our offices,” says Mr Everard. Those cheques are dispatched to fund managers, who are grateful to see a small return on an investment they had thought was worthless.
The average payout from a class-action is 14 cents per dollar of “recognised loss”, meaning that a UK fund manager who suffered a loss – the level of which is decided by a US judge – of $10m, could receive $1.4m in compensation. Fred Fox, a partner at US law firm Kaplan Fox, which specialises in securities fraud cases, says payouts can be even higher. “We have had a number of cases where we have been able to recover more than 50 per cent of the damages,” Mr Fox says.
On average, settlements are about $54m each. Not bad for simply signing up to a service that typically takes 10 per cent of the damages awarded.
And the signs are that this could be a productive time for new cases. The last big wave of class actions, around 2000, are currently being settled, with cases involving Enron, Lucent and AOL in their final stages or finished. But the current subprime crisis has thrown up a hatful of new cases, with the promise of many more to come. In 2007 alone, 32 subprime class actions were filed, mainly against mortgage companies and lenders that had allegedly improperly inflated the value of their mortgage books.
Cases have also been launched against UBS, Merrill Lynch, Bear Stearns and Citigroup. Mr Fox, who was involved in the case against Merrill Lynch’s former technology analyst Henry Blodget, says his firm is likely to be acting for litigants in upcoming bank cases. “There are several claims against large banks that have taken big writedowns,” says Mr Fox. “In essence, the claims are that the banks concerned hid their exposure to CDOs, subprime mortgages and other asset-backed securities. Some of the major monolines [single line insurers] such as Ambac and MBIA are also subject to claims.”
In addition, the impact of Sarbanes-Oxley is still being felt. The Act’s stringent requirements on transparency and reporting open the door to more class actions. The European Union’s Mifid directive in Europe could create a similar effect.
But Mr Everard points out that European investors are in danger of missing out on the class action bonanza. “With US investors leading the litigation, European investors need to actively seek inclusion. For US investors, the inclusion of European investors means a smaller cut of any settlement – and the accompanying legal complexities can slow down the process.”
The risks of missing out have been heightened by diversification in institutional portfolios. While 75 per cent of shares are held in domestic companies, a considerable 25 per cent are now in foreign companies. Mr Everard warns that pension firms and investment firms should be acting in the interests of their clients. “Many observers will say there is a clear duty of care for institutional investors to register claims on behalf of their clients. But our research shows that non-participation is costing investors dearly.”
Of course, any investor signing up to the kind of service that Goal offers can expect a long wait to hear any good news. Of the 235 federal actions filed in 2000, 90 per cent have reached some form of resolution – 60 per cent have been settled and 30 per cent dismissed. But some still have further to go – eight years down the line.
European investment managers have to make a modest commitment of time and resources to join in class actions. Goal requires them to hand over trading data dating back to 1999, which is then scoured for relevant cases. When they are identified, Goal provides legal advice, tracks the class actions and finally recovers the money.
However, the idea of handing over trading data does not please everyone. Mr Everard says: “Hedge funds are loathe to do this because they think someone might work out their trading strategy.” Those that muster the confidence to take part in class actions might, possibly, add sufficient returns on their assets to pass a high water mark, or avoid a drawdown.
At the same time, however, investors need to bear in mind that not every loss is recoverable. Mr Fox says a sharp fall in a company’s share price is not usually enough to trigger a class action, despite the appearance of wall-to-wall litigation activity in the US.
“In order to have a claim, even in the US, you have to be able to allege – even before any discovery takes place – that whatever caused the share price drop was fraud-related,” says Mr Fox.
