One newly noted, and well received, trend in corporate litigation these days is a decline in securities fraud class-action lawsuits. But legal experts warn that another ominous trend in securities litigation is brewing to pick up the slack: globalization.
More and more overseas investors are participating in U.S. securities class actions—a trend that isn’t likely to abate, according to a panel of securities litigation experts.
“We’re seeing a developing trend of non-U.S. investors participating much more vigorously in United States securities class actions, and even serving in some high-profile cases as lead plaintiffs,” according to Pierre Gentin, managing director and head of litigation at Credit Suisse. Gentin made his remarks during a May 17 panel discussion at the 2nd Securities Litigation Conference hosted by LegalIQ in New York.
Gentin noted that foreign investors were “featured prominently” in recent U.S. securities class actions against Parmalat, Royal Dutch Shell, and Royal Ahold and even served as lead plaintiff in class action litigation against Parmalat and Nortel Networks. All four companies are headquartered overseas but are listed on U.S. exchanges and do extensive business here.
Gentin cited three reasons foreign investors increasingly participate in America’s securities class action regime. Foremost is the larger opportunity for financial recovery under the U.S. legal system, he says; Europe is attempting to provide similar class-action opportunities, but they “are quite limited and restrictive,” he says. Some overseas investors such as pension funds also have fiduciary obligations to investors and face pressure to take all possible steps to recoup losses they sustain.
And, Gentin admitted, “The real downside to participation is limited.” The existence of contingency fees in the United States means investors can participate with little or no cost, and the “sweeping discovery” available in here is unavailable in most European countries, he said.
The “phenomenon of a massive jury verdict”—a rarity in Europe—is alluring to institutional investors, Gentin said. “If foreign investors can overcome the significant cultural impediment to voluntarily insert themselves into a U.S. litigation, it appears they are becoming increasingly comfortable availing themselves of the same rights and remedies as U.S. institutional investors.”
Formal collaboration between American law firms that specialize in class actions and European law firms is also helping drive the trend, Gentin added.
House
Tim House, a partner in the London office of Allen & Overy, agreed that the reluctance of European investors to participate in U.S. class actions is ebbing. Historically, American-style class actions have been seen “as an evil which reduces competitiveness and not actually as a vehicle to better corporate governance,” House said.
But, he quickly added, “attitudes are changing.” Institutions increasingly worry that the risk of leaving money on the table could breach their fiduciary duty; activism from hedge funds and other shareholder groups has also spiked in recent years.
American Attitudes Go Global
Another dynamic, House said, is the growing acceptance of “collective redress” actions in the European Union. While EU collective actions are considerably different from U.S. class actions, “the market is getting more used to it,” he said.
Great Britain, for example, allows for group litigation orders, a method to combine management of multiple cases. Unlike U.S. class actions, however, shareholders can’t opt in or out. British courts also provide for representative actions, where multiple plaintiffs have the same interest in a particular claim, but those are “limited and extremely rare,” House noted. In addition, he said, some countries are moving to allow consumer organizations to sue on behalf of their members.
House said that the question of whether EU authorities will recognize judgments by U.S. courts is still “undecided.” A real fear among companies, he said, is the increased risk of plaintiff classes being certified worldwide rather than just within one nation. In March, a New York district court certified a class of investors from the United States, France, England, and the Netherlands in a securities fraud case against French conglomerate Vivendi. “I think the Vivendi judgment will trouble [defendants],” he said.
Mann
Meanwhile, said Michael Mann, a partner with the law firm Richards Kidde & Orbe and previously the first head of the SEC Office of International Affairs, the United States is increasingly willing to assert its jurisdiction outside of its own borders.
“Foreign conduct that may be legal in a foreign country, that may occur in a foreign country, that may be directed at other people in a foreign country, may still be within the jurisdiction if there’s a nexus to a U.S. company,” said Mann, citing a number of recent cases where SEC asserted its jurisdiction overseas against non-U.S. citizens, companies, and even trusts. In one week this month alone, the SEC brought three insider trading cases outside the United States.
“The point is, jurisdiction can be found in a whole variety of places,” Mann said. “The SEC will look for it.”
Mann noted that the SEC’s ability to repatriate assets has been “quite effective” and that U.S. ability to obtain assistance is “extraordinary.” To wit: The SEC has memorandums of understanding with 30 countries and a global MOU with the International Organization of Securities Commissions covering another 40 countries, all to boost international cooperation in prosecuting fraud and other illegal acts.
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