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United we stand

Written by Peter Carvill
November/December 2011

Peter Carvill explains how pension funds can take part in class actions and whether such cases will arrive in Europe

Class actions are an affir-mation that most things in this world are done better in company. Traditionally more popular in the US, they have become increasingly popular in Europe. Their concept is a simple one, in that they are the legal proceeding by which a lawsuit is filed or defended by an individual or small group, themselves acting on behalf of a larger group.

There are two types of class actions. The first, most popular in the US, are what are known as ‘opt-out’, meaning that entities are automatically included in the pro-ceedings. If they do not wish to take part, they have to opt-out. Outside the US, class actions can also be ‘opt-in’, where claimants need to choose to be part of the process.

Pension funds can benefit by taking part in class actions to recoup investment losses incurred through fraud. However, the return on those losses can be small, with some reports putting the average at just 12 per cent.

“The return varies considerably by how many rightful claimants there are,” says Institutional Protection Services managing director Caroline Goodman, “because settlement pools tend to be shared out on a pro rata basis. The return can be between five and 30 per cent - it’s a broad range and varies quite considerably.”

There are many reasons for pension funds to seek redress as part of a class action rather than individually through the courts. In fact, says K&L Gates partner in the commercial litigation practice group Anne McCarthy: “If there is a common pursuit through a commonality of interest, a group action is always better than going it alone.”

K&L Gates special counsel in the commercial disputes group, Clare Tanner, weighs in:. “If a fund has a claim against a third party, that claim is an asset of the scheme as much as any other asset. It’s one they need to give consideration to, and think of how they can realise its value. One way of doing that, if there are a lot of other schemes who have suffered the same loss, is to combine into a group action. The advantage is that there may be cost savings or risk sharing so you can see the advantages in coming together.”

The benefit for pension funds taking part in a class action are that such ventures are often a good revenue stream, undertaken at little cost since most US cases are fought on a ‘no win, no fee’ basis. It can also be argued that pension trustees have a legal duty to pursue all avenues for their fund.

For the ‘opt-out’ class actions undertaken in the US, proceeds need to be claimed from the settlement pool with unclaimed proceeds dispersed among the other claimants. Goodman puts it simply, saying that there is no downside to taking part in a class action.

However, there are risks. With opt-in actions, funding can be an issue. “Opt-in actions are funded,” says Goodman, “but they tend to be funded by a third-party litigation funder so it’s quite important to look at what the funding protocol is. Are there any adverse costs? That can be important in non-US jurisdictions. What is the process that investors have to go through in order to claim? Is it the right jurisdiction? There could be parallel cases in different jurisdictions, in which one may be better than another. So there are questions there that need to be considered before investors can make a choice.”

The funding risks, says McCarthy, can be mitigated. “What has been developing over recent years are funding mechanisms that enable trustees to manage that risk through a three-fold package of conditional fee agreements for the lawyers, after-the-event insurance and, potentially, third-party insurance. You can put them together to try and manage the risks.”

There are more prosaic down-sides in terms of the nuts-and-bolts of taking part. “Class actions can involve a lot of work from the pension fund, or its agents, in preparing the supporting evidence and documentation,” says National Association of Pension Funds head of corporate governance David Paterson. “If you talk to people that have been involved, depending on the suit, they have found themselves spending more time on it than the loss incurred. If you’ve lost tens of thousands of dollars in the US, you have to look at whether it’s worth making a claim, and if the cost will absorb the eventual amount claimed.”

Recently, the environment for class actions within Europe has seen rapid change. Allen & Overy’s report Class Actions 2011 offers a concise summation of the environ-ment. “The number of major class actions being brought not only in the United States, but around the globe, has risen steadily in recent years. Once thought of as only a US. phenomenon, class actions are now becoming commonplace elsewhere, in particular in Europe.”

There are two reasons for this. Firstly, Morrison vs. National Australia Bank – otherwise known as the Morrison Ruling – reduced the ability of litigants to seek redress through the US courts. The second reason has been the advent of regulatory change within Europe.

In Class Actions: A Global Update, Allen & Overy partner Andrew Jeffries offers this appraisal: “In Europe, the introduction of further class action regimes has led to a growth of claims, and also to a growing jurisprudence on inter-national enforcement of US class action judgments and settlements. Class actions in Italy in particular have grown rapidly since their introduction in January 2010.”

The same report says, a few sentences on, “The Dutch law on settlement of global class actions is proving a popular international alternative to US class action litigation, and the courts there are developing significant jurisprudence in this area. Financial services and antitrust are the biggest growth areas for class action claims.”

The Morrison Ruling by the US Supreme Court declared that ‘F-cubed’ claims - where a foreign investor sues a foreign company over shares bought on a foreign exchange - must not be pursued in US courts but taken instead to the domestic court. Following the ruling in June 2010, media reports predicted a growth in class actions brought in Europe.

“It is still early days,” says Tanner, “but you can see that that ruling will limit the ability of European investors to bring or take part in US class actions. The consequence of this may be that they try to bring them instead in Europe. The difficulty is that the mechanisms and ‘culture’ regarding such claims in Europe are very different. Also, there is no pan-European system for bringing such claims.”

In 2005, the Dutch government brought in the Dutch Act on the Collective Settlement of Mass Claims, which allowed for the pursuit of US-style class actions in the courts of the Netherlands. A further ruling, this time by the Amsterdam Court of Appeal in May 2009, said that the Shell oil reserves settlements were binding to all non-US shareholders.

In addition, according to Class Actions 2011, “In November 2010, the court also declared an international collective settlement binding in a F-cubed case, where the majority of the parties involved resided outside the Netherlands.”

There are indicators that similar pan-European legislation may soon arrive. Says Paterson: “It is possible in the European Union to achieve a similar result through collective redress, which is part of the consumer protection regime. And I think that the European Commission has been consulting on how to address consumer protection issues. So there is more work going on with the European Commission which may lead to a more class action-friendly regime in Europe.”

However, he points out that class actions are still only one tool that trustees can use to manage their business. “The point to bear in mind,” he says, “is that class actions are used in extremis rather than the normal way of helping to run money.”

Written by Peter Carvill, a freelance journalist



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