Class Actions: Winning Streak

There is a certain mystique surrounding the class action lawsuit, perhaps resulting from its portrayal in American cinema, or more likely its association with seemingly unimaginable global scandals; see Enron, WorldCom, or the current unfortunates associated with Bernard Madoff as cases in point. However, while it is indeed these scandalous disasters that hit the headlines, there are some 300 class actions brought about every year, many of which most people never hear anything about.

In reality the class action is far from mysterious, simply being a regulatory process, predominantly in the US, but emerging in Europe, Australia and Canada, designed to compensate investors where corporate fraud or other financial delinquencies have caused them to lose money. And according to Institutional Protection Services (IPS) to date investors have recovered some $50bn through this process since 2000.

In saying that, it seems that the class action is not entirely understood by some European investors who may be loath to involve them-selves in what they see as international litigation. But depending on how that investor chooses to proceed, the actual involvement in litigation can be nil.
"I think there's still confusion in Europe over what participation in a class action actually is, as participation can mean various things," says Caroline Goodman, managing director of IPS. "You've got a choice and you can be actively involved in the case or you can wait until the end of litigation when there's a settlement. I think sometimes there's confusion that participation in a class action means that you've got to get actively involved, but the way that US class actions work means you can do things post-litigation."

In fact, unless you're the lead plaintive, you're actually joining in once the case is done, dusted and settled, explains Stephen Everard, managing director of Goal Group. "The money is sitting there waiting for you to fill in your form and go and get it."

The difficulty, says Everard, comes down to identification. While it may be easy to identify a case like Enron, splashed over the front pages of newspapers, this is not so with the majority of class actions taking place. "It's the smaller ones or the medium sized companies that aren't publicised where there's good money sitting there that just doesn't get claimed back by the beneficiaries who have a right to claim in the first place."

With something like a thousand live cases at any one time to monitor globally and no central source of information, it becomes clear why identification is so onerous; much more onerous in fact than some realise. Some funds, says Goodman, may believe that they automatically have a comprehensive system in place to do that identification for them, i.e. through their custodians, "but custodian monitoring can be pretty rudimentary, and can miss cases quite often".

Other funds think they can track this in-house, she says, "because they see probably five to ten cases a year in the press, and they think that is a relatively easy thing to take care of. What's missed perhaps is just quite how many class actions are out there, quite how many of those are relevant to European pension funds, and quite how much can be collected through the process."

Despite this lack of awareness, Dan Summerfield, co-head of responsible investment for the UK's Universities Superannuation Scheme says that over the last few years he has seen pension funds beginning to recognise the low risk benefits of making claims on class action settlements, his own scheme included. "It is clear to us that there is money sitting on the table that is ours to be claimed, and therefore we have a fiduciary responsibility to claim that money. We would, as
a matter of course, claim all the settlements that have been made to which we are entitled. We
would also look on a case by case basis at other proposals such as opting out of a class action and pursuing a separate case or becoming a lead plaintiff."

Making a claim
Opting out and lead plaintiff aside, for US class actions notice is sent to class members, so those who were negatively affected during the period where the fraud or similar took place, that they have a potential claim - however IPS says that estimates suggest a mere 20 per cent of claim forms are properly delivered outside the US - while European or Australian class actions require opting in at the outset. Either way, when it comes to actually claiming, there is a considerable amount of paperwork necessary to ensure the claim is successful, this in itself a potentially off-putting task.
So what is a pension fund to do? Well it could either have a dedicated in-house person or team to monitor its portfolio, identify potential class actions and make claims, or it can outsource this to organisations like IPS or Goal for a contingent fee.

On balance, it seems that outsourcing is the easiest way to go about this, with little time or effort required of the fund and no payment unless there is a successful claim. "Every one of our clients has been really surprised by how many class actions impact them and how much they can recover through this process," says Goodman. "Pension funds can do this with certainly a couple of providers at least on a contingent basis, so it can be a pure revenue stream."

"I'll do the calculations," says Everard. "We'll send them the forms in an email, say you have a claim, this is how much we think you can claim if you want to go ahead, and there's no reason you wouldn't, just sign here and send the form back and we'll submit it and get your money for you.
"We have a lot of pension fund clients. Those that do it get a significant amount of money back. Others I speak to say they should do it, but because the pension fund world is fairly chaotic and traumatic at this point in time, with deficits etc, there's always something ahead of it on that pile. Whereas if they actually got round to filling the forms in, they may be able to work off some of that deficit."

The UK's West Midlands Pension Fund did get around to doing it, and is seeing the benefits. Tony Doyle, the fund's senior investment manager - equities and corporate governance, says: "We have been involved in numerous class actions over the years, varying in size, including A.T. & T., Cable & Wireless, Federal Home Loan and Royal Ahold NV. We have recovered over $500,000 to date.
"All funds have the responsibility to ensure that they are actively fulfilling their fiduciary duty to shareholders and should encourage corporate management to behave honestly and responsibly. Participating in shareholder litigation, where appropriate, is an effective tool."

Doyle makes a good point. This is not simply about money and deficits; it is a matter of fiduciary duty for trustees to try and recover losses. As Thomas Dubbs, senior partner at law firm Labaton Sucharow says: "A pension scheme or institutional investor should monitor its portfolio in order to make sure that it has a claim and that it will submit appropriate documentation at the appropriate time. Custodians historically have done that, but a double check is prudent given the fiduciary duty of the scheme trustees or other trustees.

"It is clear that scheme trustees owe their scheme participants a fiduciary duty to monitor assets of the scheme which include claims in litigation."

Everard says that while legislation in Europe is somewhat weaker than Sarbanes Oxley for example, that fiduciary obligation still exists, and could potentially be taken to a personal liability level if trustees fail to act on class actions. "It's not as if anyone can say now, 'class actions, what's that, never heard of it'," he says.

So there is a corporate responsibility element to class actions, fiduciary duty and of course the actual funds that are reclaimed through the settlement, but is there a downside? What is the risk to a pension fund joining a class action? Dubbs explains: "Under the US system there is no loser pays system, therefore even if the case is lost, investors including any scheme that becomes lead plaintive are not liable for the other side's legal costs."

This means that there is really no good reason not to be claiming on class actions. Particularly if
the process is outsourced on a contingent basis, this simply becomes an additional source of revenue for very little effort. And as the class action atmosphere continues to thicken in Europe, Australia and elsewhere, doing nothing is rapidly deteriorating as an option.

Written by Christopher Andrews, a freelance journalist

    Share Story:

Recent Stories

Mitigating risk
BNP Paribas Asset Management’s head of pension solutions, Julien Halfon, discusses equity hedging with Laura Blows

Europe’s pensions challenges
Francesca Fabrizi meets Matti Leppälä, Secretary General and CEO of PensionsEurope, to discuss the key aims and objectives of the association today.