Compensation Class
December 1 2010, 9:54 amPension Funds Online
At the peak of the economic crisis in 2008, Northern European pension schemes lost a total of €450 billion of their portfolio value, of which €60 billion (£51 billion) was in their US investments. One third, €27.4 (£21billion) were attributed to UK pension funds. Within the Northern European territory, around 7% of those losses (€3.9 billion, of which the UK amounts to €1.7 billion) is expected to be recouped through class action litigations over the next few years. However, a proportion of pension schemes are missing out on the opportunity to participate and are leaving a significant amount of €1 billion unclaimed on the table – in the U.K. €436 million (£368 million). These are the results of GOAL Group research, completed in 2010, and drawing on a wide range of proprietary and third party data sources.
The research aims to measure the scale of losses Northern European pension funds incurred during the heights of the financial crisis in 2008 as well as the sums likely to be left unclaimed through non-participation in U.S. securities class action lawsuits by countries such as Germany, U.K., Ireland, France and the Netherlands. The results show that a significant portion will remain unclaimed. Netherlands pension funds are expected to miss out on €466 million, followed by the U.K. at €436 million, France at €56 million, Ireland at €40 million and Germany at €8 million unclaimed.
According to a study conducted by Stanford Law School and Cornerstone Research, the number of U.S. securities class action filings has fallen slightly compared with the same period last year. However, fund managers and custodians are paying attention to participation opportunities in claims for financial market crisis losses in the U.S. The report states that the actual amount of money represented by losses covered in these lawsuits has risen on a year-by-year basis.
In the past, class actions used to be a legal practice restricted to the U.S. However, this opportunity for investors to collectively sue to recoup losses suffered as a result of fraudulent corporate behaviour or mismanagement is now creeping beyond U.S. borders: France, Italy, and Finland have dealt with class action cases in the past, while Argentina, Australia, Belgium and Israel are currently doing so.
Encouraging investors to take action
While older cases reach settlements, the present focus appears to be moving to cases born out of the recent international credit crisis. Enron, one of the high-profile U.S. corporate governance scandals that came in full swing in early 2000, encouraged non-US stakeholders to fight for the redemption of losses incurred. However, the extensive timescale to finalise class action cases can become off-putting: the Enron Victim Trust is expected to start distributing to investor victims of the fraud this month or early next year.
The cause for a relatively high non-participation rate (around 25%) is for the most part due to false perceptions. First of all, many investors are not aware that they have a valid claim. This can be tied to the second possibility, that some fund managers and custodians may not be making their clients aware of potential claims. Thirdly, the perception that filing a case is far too complex and difficult to manage persists, although the process can be largely automated through a number of service providers. Investment funds have incurred large losses during the economic downturn and their eagerness to find ways to recover these losses should encourage them to take advantage of this accessible opportunity to participate in U.S. class actions.
Nevertheless, which pension funds were the most affected? Those who invested a third or more of their assets into equities are those experiencing the greatest distress. Ireland and the United Kingdom were the most severely hit, with 52% and 46% respectively of total assets invested in equities. The Netherlands suffered at a similar rate. However, pension funds in Germany and France had larger proportions of their assets invested in bonds, incurring less damaging losses. Moreover, Germany’s minor exposure to foreign assets (about 5%) kept losses to a minimum.
Losses in 2008 have been on such a large scale, that only a small fraction has been recovered: The Netherlands and Ireland regained 5% up until the middle of 2009. 2009 and 2010 show a more promising development as pension funds are making gradual recovery, with sound equity returns. However, there is growing responsibility for institutional investors and fund managers to register and monitor class action claims in order to recoup a portion of their losses.
Northern Europe: Claims in the U.S. versus claims at home
The prospect for class actions in the U.S. is well-established; however investors need to be proactive to ensure they are included in cases over the coming years. Class actions are beginning to make headway in local legislatures throughout Northern Europe, with the Netherlands currently taking the lead and several Northern European investors are already participating in U.S shareholder litigation in order to support good governance and challenge those companies that do not meet best practice.
The Netherlands
Claims in the U.S: The Netherlands has a high level of participation in U.S. class actions. Last year, the Dutch industry-wide pension fund Stichting Pensioenfonds Zorg en Welzijn (PjZW) was one of five international pension funds granted the privileged status of lead plaintiff in the case against Bank of America. It was alleged that key information had been withheld or distorted in relation to its acquisition of Merrill Lynch. A similar case was conducted by the Dutch Pension Fund and Investment Manager MN Services, who manage around €56 billion for pension funds in the Netherlands and attempted to represent in the consolidated class action against the Royal Bank of Scotland.
Claims at home: The case against Royal Dutch/ Shell Group was the first class action to be finalised within Europe, originally established in the U.S., it was moved to the Netherlands. In 2005 the Dutch Act on the Collective Settlement of Mass Claims authorized the Amsterdam Court of Appeals to enforce Shell to pay $450 million in 2009. It involved the compensation for misstatements between 1997 and 2003 regarding oil and gas reserves. This Act puts the Netherlands at the forefront for developments of mass disputes, since it is the only country in Europe with such legislation in place. It does not work like the U.S. model, although it is based around it – the Dutch version requires parties to try to settle claims out of court first, which can be made binding by the court.
Germany
Claims in the U.S: Claiming in the U.S. is particularly attractive to German investors, since the costs of taking legal actions are far less in the U.S. than in Germany. In the U.S., fees only apply when a case is successful whilst in Germany the costs have to be laid out before proceedings. Hence there is an array of cases filing to be lead plaintiff, for instance Germany’s Activest Investmentgesellschaft against General Motors. It was alleged that forged and misleading statements were issued to deceive investors as to GM’s financial performance going back to 2000. Frankfurt-based Union Investment was appointed lead plaintiff in the case against U.S. computer manufacturer DELL. The German fund alleges that earning manipulations caused the stock to drop, with reports estimating losses around $20 million.
Claims at home: Germany is also becoming a forerunner for collective litigations at home. Germany’s largest investor lawsuit, the Deutsche Telecom case – in which investors claim they were tricked by misleading or omitted prospectus information issued in 1999 and 2000, overstating the value of its real property by €2 billion – enacted the Capital Markets Model Act in 2005. Depending on the verdict expected this month, the five-year test case may be implemented into the German Civil Procedural Code. If passed, it may lead to many comparable class action cases, as well as to the instalment of a permanent collective litigation procedure in Germany.
United Kingdom
Claims in the U.S: The West Midlands Pension Fund is one of a growing number of U.K.-based funds that has been proactively ensuring to be included in all possible cases of all sizes, among others, cases against A.T.&T. Wireless, Cable & Wireless and Federal Home Loan. In March of last year, Merseyside and North Yorkshire pension funds filed a motion to become lead plaintiffs in a U.S. securities class action against RBS. A court in New York ruled that only U.S. investors would be entitled to pursue this action; however, the U.K. pension fund is currently in discussions to have the case passed on to the U.K. High Court.
Claims at home: The U.K. Civil Justice Council recognised in a recent report the “unmet need” for better compensation for potential financial services litigants. This is due to the fact that the U.K. has group litigation orders and representative claims, but no U.S.-style class actions procedure that ensures the finality of claims in place. The latest Financial Services Bill draft included clauses to allow class actions against financial institutions. However, these clauses were eliminated before being passed into law as part of a move to get the Bill enacted before the Parliament was dissolved in April 2010. The Financial Reform Act of May 2010 does not mention class actions but they are expected to reappear on the governmental agenda.
France
Claims in the U.S: France is among the 40 European pension funds which has filed a law suit against the for the aforementioned Royal Dutch Shell.
Claims at home: Despite multiple debates on this issue, France has no working group litigation or class action procedure in place. French investors are ensuring that class actions remain on the French court’s agenda, but the legal landscape is not yet ready to put a collective litigation into action.
Ireland
The Irish law doesn’t allow for class actions but for restricted and rarely used test cases and representative actions. An independent statutory body that reviews the law and promotes reforms, the Irish Law Reform Commission, proposed the inclusion of class action procedures in 2005. However, the Minister of Justice disapproved of the recommendation, making it unlikely that any such laws will be passed into legislation in the near future.
Conclusion
North European pension funds have experienced severe losses, and although a certain level of recovery took place in 2009, pension funds still have a long way to go. Our research shows that over €1 billion is likely to be left on the table by Northern European investors relevant to cases referring to incidents in 2008, but only now coming to court in the US. This reinforces the need and legal responsibility for funds to take action on behalf of their beneficiaries. As class action filings come to resolution over the next decade, we can expect to see higher average settlement amounts to match. Yet too many fund managers and institutional investors are not taking class actions into consideration, nor actively monitoring or filing claims.
Now is the time for investors and fund managers to become actively involved in the filing and participation process to recoup a proportion of their losses through class action litigation, either in US or European courts. However, keeping track of the opportunities to make a claim and the processes required to do so successfully, can be a complicated and daunting task – with many investors mistakenly believing that the cost and time involved will outweigh the benefits. In fact, specialist services are now available to handle the class action participation process, often on a no-win, no-fee basis.
Company profile
The Goal Group of Companies was incorporated on 1 November 1989 and is widely-acknowledged in the financial services sector for its innovative and creative solutions to highly-specialised niche processes.
Goal Group, ISO 9001:2008 accredited, has a truly global, blue-chip client base including several of the world’s largest global custodians, asset managers, private banks, pension funds, local government agencies, hedge funds, high net-worth individuals, investment banks, prime brokers and fund managers spread widely across Europe, Asia and the United States.
Goal Group’s class actions service is provided via its wholly-owned subsidiary Goal Global Recoveries Limited (‘GGRL’) and supports investors and corporate entities who have suffered financial loss from owning shares in a company where there has been proven mis-management and/or unlawful behaviour.
Goal Group’s withholding tax solutions include GTRS, GQI, GOAL TaxBack and GDMS. Research by Goal has shown that in excess of USD 10 billion of withholding tax remains unclaimed each year by the rightful owners and beneficiaries. Goal’s solutions facilitate the reclamation of circa USD 11 billion per annum and assist its clients to benefit from relief at source wherever practicable and possible to do so.
For further information about the Goal Group of Companies, please visit www.goalgroup.com
Stephen Everard
Managing Director
Goal Group Ltd.
