Compensation Class
January 13 2011, 3:19 pmFunds with the belief that corporate wrongdoing has affected their returns should not shy away from the courts, says Stephen Everard, managing director at GOAL Group
According to the latest research from Stanford Law School and Cornerstone Research, the number of US securities class action filings has fallen slightly compared with the same period last year. Yet does that mean that investors, fund managers and custodians can afford to pay less attention to participating in claims for financial market crisis losses in the US courts? Not at all. A further quick look at the same research report shows that the Disclosure Dollar Loss (the actual amount of money represented by losses covered in these lawsuits) has actually risen year-on-year. Moreover, GOAL Group’s own research has shown that as many as 25 per cent of potential claimants are failing to participate in these class actions, and are therefore leaving their rightful claims on the table.
This non-participation is largely, we believe, caused by a number of false perceptions. First, many think that participation is difficult and complex, despite the fact that the process can now be largely automated through a number of service providers. Secondly, many investors are simply not aware that they have a valid claim. Thirdly, fund managers and custodians may in some cases not be making their clients aware of potential claims. At a time when investment funds large and small, private and commercial, are looking for every way of recovering their capitalisation, failing to participate in US class actions is certainly irresponsible, and may sometimes be negligent. This article reviews the situation for investors in Northern Europe, quantifying the scale of losses, and the cost of non-participation for investors with relevant US equities in their portfolio.
Class actions, where investors can collectively sue to recoup losses suffered as a result of fraudulent corporate behaviour or mismanagement, used to be a phenomenon solely restricted to the US. However, it is worth noting that there have also been historical cases in France, Italy and Finland in addition to current cases in other countries including Argentina, Australia, Belgium and Israel. Since the high-profile corporate governance scandals of the early 2000s such as Enron, class actions in the US courts have been brought to the attention and used by non-US shareholders to seek redress for their losses. While this is encouraging, some major corporate mismanagement cases, occurring around the millennium or before, give an indication of the timescale involved in finalising a class action case. The Enron Victim Trust is only expected to begin distributing to investor victims of the fraud in late December 2010 or early January next year.
Credit Crisis Cases
As these cases reach settlement, the mantle appears to be moving to cases born out of the recent international credit crisis. Those pension funds where equities represented a third or more of their total invested assets experienced colossal losses. In 2008, in Northern Europe, Irish pension funds were exposed to equities at 52 per cent of total assets, followed by the United Kingdom at 46 per cent and the Netherlands at a similarly high rate. Other pension funds, however, such as in Germany and France, benefited from having a larger proportion of their assets invested in bonds. This picture is mirrored in these countries’ exposure to foreign assets, as a percentage of their total assets. Whilst the Netherlands and the United Kingdom both had high exposure, Germany (circa five per cent) remained relatively low.
In 2009/10, it appears pension funds are gradually making a recovery, boosted by sound equity returns. The losses experienced by investors in 2008, however, have been on such a large scale that only a fraction has so far been recouped. The Netherlands and Ireland both reported a five per cent return or less in the period up until June 2009. Clearly, a long road lies ahead for Northern European pension funds and there is an emerging duty of care for institutional investors and fund managers to register and monitor class action claims in order to recoup a proportion of these losses.
Furthermore, according to NERA Economic Consulting, the median settlement in the first Compensat ion Class Funds with the belief that corporate wrongdoing has affected their returns should not shy away from the courts, says Stephen Everard, managing director at GOAL GroupEXCLUSIVE25LegalFocushalf of 2010 was considerably higher than in any prior year. At $11.8 million, the median settlement exceeded 2009’s value of $9 million by almost one-third, crossing the $10 million mark for the first time.
Northern Europe – Claims in the US
Germany
When it comes to applying as lead plaintiff in securities class actions cases, it appears that German asset managers are leading the charge. Commentators have also noted that German investors are keen to pursue losses in the US as it is less costly than taking legal action in Germany. In the US, fees only apply when a case is successful whilst in Germany, the financial risk is far greater with costs having to be laid out before proceedings. This may explain the abundance of cases such as Germany’s Activest Investmentgesellschaft filing to be lead plaintiff in the case against General Motors – having alleged that false and misleading statements were issued to deceive investors as to the company’s financial performance as far back as 2000.
Another high-profile case involves Frankfurtbased Union Investment, having been appointed lead plaintiff in the case against US computer manufacturer Dell. The German fund manager alleges that earning manipulations caused the stock to drop, with reports estimating losses to be around $20 million.
The Netherlands
A similarly high level of participation in US class actions is being experienced in the Netherlands. In July 2009, Dutch industry-wide pension fund Stichting Pensioenfonds Zorg en Welzijn (PfZW) was one of five pension funds (including some Swedish and American) to be granted the privileged status of lead plaintiff in the case against the Bank of America, alleging that key information had been withheld or distorted in relation to its acquisition of Merrill Lynch. Likewise, Dutch Pension Fund and Investment Manager MN Services, which manages around €56 billion for pension funds in the Netherlands, attempted to be represented in the consolidated class action against the Royal Bank of Scotland.
For Dutch pension fund PfZW, represented by PGGM Vermogensbeheer B.V., the national fund for healthcare and the social sector (and the second largest pension fund in Europe), using all available tools to uphold corporate governance is a well established concept. They describe participating in collective litigation in much the same way as German fund managers, as a suitable tool to fulfil “a duty to represent global investors’ interests by striving for adequate loss recovery for all shareholders and essential corporate governance…”.
United Kingdom
In the UK, West Midlands Pension Fund was one of the first funds to point out that participating in shareholder litigation, where appropriate, is key to best practice. As such, they are now one of a growing number of UK funds that have been proactive to ensure they are included in all possible cases, of various sizes, including those against AT&T. Wireless, Cable & Wireless, Federal Home Loan and Royal Ahold NV. Talking to GOAL Group, Tony Doyle, senior investment manager – equities & corporate governance, West Midlands Pension Fund, commented: “The fund supports good governance challenging companies that do not meet best practice, perceiving poor governance as a risk to its longterm financial interests. The Fund therefore submits class actions globally where it believes that it has suffered a financial loss through fraudulent or irresponsible corporate behaviour.”
In March 2009, Merseyside and North Yorkshire pension funds filed a motion to become lead plaintiffs in a US securities class action against Royal Bank of Scotland (RBS). North Yorkshire pension fund had invested as much as £23 million in RBS and said it was keen to participate in the litigation process in order to “safeguard the value of the fund in the long term”. A New York court recently ruled that only US investors would be able to pursue this action, but the UK pension funds involved are currently in discussions to see if the case could be pursued in the UK High Court.
France
40 European pension funds, including funds from France, Netherlands, UK, Germany, Sweden, Norway and other countries filed a suit against Royal Dutch Shell for alleged misreporting of oil reserves and its subsequent financial impact. This was then withdrawn from the US action, to be moved to an EU-located legal action, the first such class action case to be finalised in Europe. The action meant it was possible for Shell to be ordered to pay $450 million by the Amsterdam Court of Appeals in June 2009 to compensate for alleged misstatements over oil and gas reserves.
GOAL Group: Losses and Projected Recoveries, 2008
Northern Europe – Quantifying the Loss
A recent research report from Goal Group quantified the scale of losses suffered by Northern European pension funds, defined as Germany, UK, Ireland, France and the Netherlands – at the heights of the financial markets crisis in 2008, and the amounts likely to be left on the table through non-participation in US securities class action lawsuits. In order to calculate losses, and the sums likely to be left on the table through non-participation, Goal Group combined its historical records of registration and settlement claims, with a variety of other data sources.
The results were stark. Over €450 billion has been lost by Northern European pension funds in 2008. Over €60 billion of these losses were in their US investments. €3.9 billion of this total would be recoverable but with class action participation left at its current rate, over €1 billion is likely to be left on the table and distributed amongst only those who successfully filed a claim.
The Netherlands, the United Kingdom and Ireland (taking into account its smaller GDP) were found to be the countries with highest proportion of their investments in the US – and all with high equity exposure, resulting in large losses in these investments – €28 billion, €26 billion and €2.4 billion respectively. The amount invested in U.S. markets by Germany and France, however, was decidedly smaller, resulting in comparatively fewer losses by German funds of €485 million and French funds of €3.4 billion.
Based on historical trends, €1.8 billion is expected to be recovered by Dutch pension funds through class action participation, €1.7 billion by those in the U.K. and €156 million by those in Ireland. Due to Germany and France having fewer investments (and therefore losses) in the US, German pension funds are set to recover €31 million and French funds €216 million.
The focal point of these findings, however, is that a significant proportion of these funds will remain unclaimed, with a percentage of investors not participating in available class action cases. The Netherlands is expected to leave a vast €466 million worth of funds on the table, followed by the UK at €436 million, France at €56 million, Ireland at €40 million and Germany at €8 million.
As our research demonstrates, over €1 billion is likely to be left on the table by Northern European investors, highlighting the urgent need (and indeed, legal obligation) for institutional investors to make claims on behalf of their clients where a class action is involved. And since there are now low-cost specialist services which are already enabling many financial organisations to do so, there remains no excuse for ignoring their fiduciary duty to shareholders.
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