Securities class actions: Unintended consequences
In just about a year’s time, unless the case is settled, the largest UK litigation will come before the courts. Investors, including around 35,000 individuals and around 1,000 institutions, are suing Royal Bank of Scotland for around £12B following its rights issue in 2008. The claim is that the Bank did not disclose full information in its prospectus when it raised the money, and when shortly later it was nationalised the investments were all but worthless.
This is not the place to discuss the pros and cons of the litigation but the RBS case illustrates the curiosity that securities class actions, once limited to the US, have become accepted as a remedy for institutional shareholders around the world.
Non-US investors have characteristically been deeply suspicious of securities class actions. First they had to deal with US lawyers, always a tricky road to travel. Second, the money seemed to be going round in a circle, from one group of institutional shareholders (who held shares in the miscreant company), to the same shareholders in the same company, with 30% or so being shaved off by the lawyers in the process. Thirdly, non-US institutions had a visceral suspicion of litigation.
But recently much of that has changed. First, institutions are being pressured by the corporate governance action groups to pick up money lying on the table for their members; it seems rude not to. Second, securities class actions have become more widespread across the globe – just look at what is happening in Germany with Volkswagen and their emissions problems – partly due to increased regulatory intervention by the SEC and the FCA.
And rather unexpectedly, in the UK at least, has been the virtual repeal of that bit of Magna Carta which created those ancient liabilities of maintenance and champerty (and embracery and barratry). For reasons related to knights in armour, it was illegal for anyone not connected to litigation to take an interest in it.
Over the last 10 years all those medieval rules have gone. But so has the general availability of civil legal aid. That double whammy has opened the door for a new approach to enforcing civil rights, so that individuals again have the ability to recover losses in their investment portfolios which arose because of misfeasance. English judges in a 180-degree turnaround have now blessed and even encouraged both litigation funding (with funders now being quoted on the stock market instead of landing in jail) and after the event insurance (ATE). ATE helps institutions and private citizens cope with the English Rule, which provides that if you lose you have to pay the costs of the other side. These new freedoms, intended originally to protect the little man trying to recover losses against powerful institutions, now ironically protects other institutions who take part in litigation, especially big-ticket litigation.
Which is why securities class action litigation seems to be on the increase in the UK, Europe and the Far East, as it is in the States (look at the latest research from Cornerstone and NERA). Now there are Forex cases, Lloyds Bank cases, Tesco cases and a small host of lesser known names. With the political and legal ramifications of Brexit as yet undetermined, and the consequent complexities of disentangling contracts and other arrangements, as well as an unstable regulatory environment, it currently seems increasingly likely that this kind of securities class action will grow significantly. It seems improbable that we’ll get to the proliferation of litigation that happens in the States, if only because the lawyers here can’t make the profits they do there, and will never make enough to run private jets as in the John Grisham novels. But who would have thought that the virtual disappearance of legal aid would have led to more money being available for financial institutions, and in particular for pension funds and their members?
Robin Ellison is chairman of the Board at Goal Group