Class Action Panel - Class act

Tony Gelderman
Counsel
Bernstein Litowitz Berger & Grossmann
Gelderman heads the firm’s Louisiana office and counsels the firm’s institutional investor clients with regard to US securities claims. Prior to joining the firm, he served as chief of staff and general counsel to the treasurer of the State of Louisiana. In 1995, Gelderman was profiled by the American Bar Association in Barrister magazine as one of the 25 young lawyers in America making a difference in the legal profession.

Robert M. Roseman
Partner
Spector, Roseman & Kodroff
Roseman is one of the founding partners of Spector, Roseman & Kodroff which is based in Philadelphia. He concentrates his practice on investor protection issues, including the enforcement of the federal securities laws and state laws involving fiduciary duties of directors.
Roseman is chairman of the firm’s domestic and international securities practice.

Steven Toll
Partner and head of international practice
Cohen Milstein Hausfeld & Toll
Toll joined the firm in 1979 and has been lead or principal counsel in some of the most highly publicised stock fraud cases over the past 28 years. He is a member of the Securities Fraud/Investor Protection practice group.
Some of Toll’s more notable cases include those against Lucent Technologies, which was settled in 2001 for approximately $575m (£280m) – at the time, the second largest securities class action settlement ever achieved.


How important is it for trustees to be aware of the opportunities surrounding class actions? Is there a danger that many in the UK are uninformed about them?

Gelderman: There are very compelling reasons for trustees to keep an eye on the securities fraud class action arena.
In particular, class action recoveries in the US are significant – there is currently in excess of $11.5bn (£5.75m) available to damaged investors in pending securities litigation settlements. Having a securities fraud portfolio monitoring system in place allows institutional investors in the UK, who hold significant positions in securities traded on the US markets, to stay apprised of the status of potential cases affecting their holdings.
In fact, many US funds, and now a number of UK funds, have already put such systems in place. Indeed, the active monitoring of portfolios for fraud losses and potential claims is now widely considered a best practice in the US public pension fund community.

Roseman: Over the past few years, trustees in the UK have begun to recognise the importance of keeping informed about US class actions.
Primarily, they have become keen to the reality that ignoring US shareholder actions means that a trustee may be forgoing monies that his members are entitled to recover from shareholder action settlements.
Ignoring shareholder actions also means that European investors are letting other investors – namely American investors – make decisions about good corporate practices and the future health of the companies in which they invest.
This is becoming increasingly important to investment funds and pension schemes as they diversify their portfolios to include securities from European and American companies.

Toll: It is increasingly important for trustees to be aware of class actions. Over $37bn (£18.5m) has been made available to investors across the world from US shareholder actions in the last five years alone.
Most importantly, however, even though UK investors are often entitled to claim a portion of this money, US courts generally do not require UK investors be notified of these actions – even when the rights of UK investors are impacted. For this reason, there is a real danger that many UK investors remain uninformed about these opportunities.


Although litigation systems differ between the US and UK, should schemes be watching shareholder group litigation cases closely?

Gelderman: Absolutely. First, the amount of money lost due to fraud and consequently, the amount of money recovered in securities fraud litigation, is significant and material. Second, shareholder group litigation – or as referred to in the US, class action litigation – has in many cases achieved significant corporate governance reforms instrumental in improving the efficiencies of our capital markets.
Schemes that employ an active portfolio monitoring system through qualified securities litigation counsel can appropriately be kept apprised of meritorious claims and the progress of important litigation in which they may have stake.

Roseman: Although a large percentage of securities fraud litigation ends in a settlement, many US courts do not require notice of class action settlements to be sent outside the US.
As a result, European investors may never know a settlement has been reached or that they may be entitled to recover some of the monies they lost due to securities fraud – unless they closely watch shareholder class action litigation. In fact, studies show almost three out of four institutional investors unknowingly fail to recover monies due to them under class action settlements by not filing claims for this money.
Therefore, it is imperative European investors know to file claim forms when they are eligible and actually file such claims. Otherwise, they may be leaving behind monies owed to them, quite possibly in breach of their fiduciary duties.
More and more of our European clients are now requesting that we monitor their portfolios to alert them to settlements in the US.

Toll: Because US shareholder group litigation can directly impact UK investors, British pension schemes should monitor these actions.
One of the primary reasons to do so is to avoid exclusion. For instance, if there exists a US class action against a UK company, and such action is led by an American, rather than a UK, investor, there is a real danger that UK investors will be excluded from recovery in the action.
This has already happened in several US class actions against European companies. For example, Deutsche Telecom was sued in the US by its shareholders for causing them to lose money due to its improper conduct. Yet, the American investor leading the shareholder action chose to exclude investors who purchased shares outside the US. This meant most European purchasers – the majority owners of Deutsche Telecom stock – were barred from claiming the $120m (£60m) recovered in the action.
To prevent exclusion from future recoveries, pension schemes should, at the very least, monitor US shareholder actions.
At times, schemes may also want to consider assuming leadership roles in US shareholder actions. The risk of exclusion has already motivated many European investors to do just that.
For example, Cohen Milstein currently represents Italian institutional investors in the massive Parmalat shareholder action – in the US. The firm also represents a Greek institutional investor in an ongoing shareholder action against the Swiss reinsurer Converium AG, and it represents a Belgian institution in the ongoing shareholder action against Netherlands-based Chicago Bridge and Iron.
Furthermore, US shareholder actions are used to implement important corporate governance enhancements, including therapeutic measures such as creating truly independent boards, ensuring the proper functioning of audit committees, and addressing excessive director and officer compensation.
Such legal actions are often necessary to achieve corporate governance changes, particularly in US companies. If pension schemes want to play a role in forming these governance changes, it is imperative they stay abreast of what actions are currently pending and take part in the appropriate action.

With the UK not benefiting from the “no win, no fee” style of US litigation, does Institutional Protection Services offer the safest means for claiming settlement money?

Gelderman: First, as a point of clarification, UK pension schemes do benefit from the “no win, no fee” style of US litigation, or as we refer to it in the US, contingency-fee litigation. This is the case when they are holders of securities traded on the US markets which are the subject of securities fraud litigation.
It is true that once these fraud cases are settled, it is vitally important UK pension schemes have procedures in place for claiming settlement money. IPS is a leader among third-party service providers offering administration of post-litigation claims to UK funds. In addition, certain US-based custodial banks also offer administration of post-litigation claims.

Roseman: It can be extremely time-consuming for investors to keep track of all newly-filed shareholder litigations and recent settlements in which they may be entitled to recover monies, so utilising the procedures offered by IPS can be invaluable.
This is particularly relevant for European institutional investors, as they are increasingly investing in a global portfolio and will need to stay informed of securities litigation around the world.
Most importantly, retaining IPS to monitor a pension scheme’s portfolio and process claim forms in settled actions can save trustees large amounts of time, and will nevertheless aid them in fulfilling their fiduciary obligations. I understand that IPS uses state-of-the-art data software programs.

Toll: Despite the lack of a “no win, no fee” system in the UK, it is still possible for UK pension schemes to take advantage of the US “no win, no fee” system.
They do this by simply submitting claim forms where monies have been recovered to which they are entitled. This process of knowing when and how to submit claim forms, and ensuring that the scheme’s money is returned to it, can be complicated.
This is particularly true for UK and European pension schemes that do not have direct access to information on US shareholder actions. London-based IPS has responded to this problem by providing bespoke claims filing and administration services to UK and European pension schemes for no out-of-pocket cost.
The ability to outsource claims administration has made it very simple for UK schemes to ensure they are claiming their monies without undertaking the administrative burden.

Since pension schemes invariably spread their investment risk, they are unlikely to have a sufficiently large holding in any one company. Does this render the cost of bringing a claim unjustifiable?

Gelderman: Not at all. The size of a fund’s holding is naturally relative to its total assets under management. As a result, even a fund’s smaller positions may still be sufficiently large to justify active involvement in all potential avenues of recovery, including, on occasion, bringing an action.
Depending on the facts of the case, prosecuting a securities class action in the US typically requires only a modest commitment of time. Importantly, studies have shown institutional investors obtain significantly higher recoveries than individual investors when they decide to actively participate in securities actions.
Additionally, the willingness of the institu-tional investment community to privately police the market through securities litigation is, in and of itself, a powerful deterrent to fraudulent activity. In fact, in the US, many public pension schemes view active participation in securities fraud litigation as a shared responsibility within their community.

Roseman: There is no monetary cost for a pension scheme to bring a US class action claim, because the US legal system permits attorneys to represent clients on a contingency fee basis.
Additionally, although pension schemes may not maintain a large holding in a particular company, bringing a US class action to recover the moneys they lost can still be of great benefit to them and their shareholders. Bringing a shareholder litigation claim can help pension trustees to fulfill their fiduciary obligations, protect the interests of their beneficiaries and lead to larger recoveries by their investors.
On average, the size of settlements significantly increases when institutional investors serve as a lead plaintiff in a claim. Furthermore, median settlement amounts with institutional leads were twice those of non-institutions for all years between 1996 and 2003.
Taking an active role in a US class action can also help guarantee that European investors are not excluded from the settlement – especially when a European–based company is sued – and that they are kept informed of deadlines by which claim forms need to be submitted.
Acting as a lead plaintiff in a shareholder action, especially against a US company, can also enable institutional investors to sit down with the company’s management and discuss ways to improve the company’s corporate governance.
Instituting such measures can help ensure that the future conduct of the company’s officers and directors will be in the best interest of its shareholders.

Toll: If a scheme wishes to take a more active role and seek to become the lead plaintiff in a US shareholder action, there again is no defined minimum holding a scheme must have. Under US law, however, there is a presumption that the investor with the largest losses of those investors seeking such a role should be appointed lead plaintiff. Although this means that the larger the losses a scheme has suffered, the more likely it is to be appointed as lead plaintiff, even relatively small losses can suffice in many cases.
This is because pension schemes do not necessarily invest in the same stocks, nor do they tend to seek an active role in all of the same cases. This responsibility is often spread out, with schemes effectively taking turns in stepping forward.
Ultimately, the return for getting involved in shareholder actions, either passively or actively, is substantial and justifiable regardless of the holdings a scheme may have in the subject company. As discussed above, there is never any out-of-pocket cost for an investor that decides to participate.
Many of our clients have attested to the fact their involvement has resulted in the recovery of millions of dollars for individual institutions. Furthermore, the growing trend of European investors seeking to lead meritorious shareholder class litigation in the US has provided pension schemes with another tool to defend their interests and satisfy their fiduciary duties