Top Tips for Recovering Securities Damages within Europe
Noah R. Wortman, director of Global Business development at Goal Group of Companies and Marc Schiefer (pictured), Associate at TILP Rechtsanwaltsgesellschaft GmbH comment on solutions for recovering securities damage through a class action lawsuit.
Securities class actions are a type of lawsuit that allows a person or entity to progress an action on behalf of a group with a common interest. By participating in a securities class action, pension fund investors can recover damages suffered as a result of a company or its management misrepresenting important facts about the business.
Analysis[i] has shown that the typical European share portfolio has become strongly international. The average weighting is currently at 60% in domestic shares and 40% in foreign shares. These weightings have highlighted to European shareholders (and responsible fiduciaries) that they could miss out on chances to claim rightful returns in the U.S. or in any other foreign legislature should they fail to monitor legislative opportunities to process securities class actions globally.
Research by Goal Group, a global class action and withholding tax services specialist, has revealed that between 2000 and 2012, investors’ non-participation in U.S. securities class actions has resulted in over £18bn (€14.57bn) being left unreclaimed. This is a striking figure and it is possible to estimate that a quarter of eligible claims are left unprocessed. European pension funds make up a large proportion of equity investment.
Securities class action claims in Europe
Opportunities to process class action, group and collective redress claims in Europe have grown in recent years as a result of the United States Supreme Court’s 2010 ruling in Morrison v. National Australia Bank Ltd. case[ii] which stated that U.S. securities laws only apply to companies listed on U.S. exchanges. This has wiped out the eligibility of what have become known as f-cubed actions (a non-U.S. shareholder suing a non-U.S. company whose stock was purchased on a non-U.S. exchange, but who is bringing a case in a U.S. court).
It is important that those responsible for monitoring and ensuring participation in securities class actions, group, and collective redress actions, demonstrate business integrity, financial transparency and strong corporate governance as an integral part of fulfilling their fiduciary duties to protect the assets in their schemes. This responsibility is increasingly being recognised and could potentially present a legal threat to fiduciaries. For example, having acknowledged the significant benefits of participating in securities class actions, many custody RFPs (Request for Proposals) from major pension funds are now including liability for identification as a requirement for a class action service.
Although many European states have developed or are developing class action, group or collective redress legislation, for the most part, European systems differ from the U.S. For example, most states have an opt-in system and require participants to register at the beginning of a case. Only active investors can reach a settlement and it is not possible to wait and see how another major plaintiff is acting against the defendant. Defendants also rely on a ‘loser pays rule’, knowing that many investors fear the cost of litigation. As a result, defendants are unlikely to suggest a settlement offer without being sued.
With this in mind, when seeking to recover damages and/or settle a claim in Europe, it is logical to consider the other investors that purchased securities on the same stock market and to start a joint action to put greater pressure on the defendant. It is advisable to use the specialist knowledge that investors and fund managers have of the defendant to support the claim for all investors.
Settlement options in Germany, an emerging jurisdiction
For the purposes of this article, we shall highlight Germany as an example of an emerging European jurisdiction that has strengthened its mass litigation laws to allow for securities class actions.
Germany has extended the trial of its Kapitalanlegermusterverfahrensgesetz ‘KapMuG’ (Capital Market Investors’ Model Proceeding Act) to the 1st November 2020; it may then be incorporated into the Zivilprozessordung (ZPO), the German Code of Civil Procedure. It covers all civil lawsuits where capital market information has been used in the sale and distribution of financial products, as well as claims based on pre-contractual breach of duty, for example, the presentation of a defective prospectus.
In November 2005, the KapMuG was first introduced as a five-year experiment, prompted by approximately 17,000 investor claims filed against Deutsche Telekom AG. Early rulings were substantially in favour of the defendant; for example, the effectiveness of the KapMuG in its original form was brought into question in 2012 when the court ruled in favour of Deutsche Telekom AG. The German system took twelve years to reach a judgement, however class action litigation brought in the United States for U.S. investor losses, over the same offering, was settled for over USD 120 million back in 2005. The KapMuG underwent review, however, and amendments have been made to enforce deadlines. For example, the process has been accelerated by the implementation of a six month deadline within which the application for a model case proceeding must be brought.
Revision of the KapMuG allows claimants to register a claim and apply for inclusion in a model case (ten similar claims are required for its establishment) before deciding to formally bring a claim. A model case is chosen from individual claims, and it allows for either the plaintiff or defendant to clarify and establish legal questions which will ultimately justify or wipe-out a claim. The model claimant is selected by the court for reasons such as the size of the claim, or if the court deems the claim to cover the majority of issues relevant to the dispute.
Whereas 100% agreement across all participants was once required for a settlement to stand, a binding settlement can now be reached if more than 70% of claimants accept it (or do not opt out). The Higher Regional Court then approves the settlement allowing for a quicker, more accessible process. A general ‘loser pays’ principle applies, but should a model claimant lose, the cost of the model trial is divided between all registered claimants in relation to the value of each party’s alleged claim. Contingency fee arrangements for lawyers are only permitted in special circumstances. Third party funding can cover court and attorney fees, however, in exchange for a percentage of a successful claim settlement.
Germany has clearly recognised that allowing collective claims will enforce stronger corporate governance, and its dedication to developing the KapMuG and extending its trial period demonstrates belief in the Act. Institutional investors are recognising the opportunity to process mass claims within Germany, for example, a model case proceeding concerning holding company Hypo Real Estate has been initiated, as well as several institutional investor claims in Germany against Porsche Automobil SE and Volkswagen Group (although the latter case may struggle to prove the alleged insider trading and market manipulation).
Responsible parties can no longer ignore the opportunity to claim international damages as there is an increasing possibility that such neglect will result in legal action. However, keeping track of opportunities to make a claim, and the actions required to do so successfully, can be a complicated and daunting task, particularly when spread across the globe. Such an undertaking requires timely and accurate information about the relative merits and procedural processes of the actions. It also requires the time and resources to review and evaluate relevant settlement provisions. Investors must then cross-reference these outputs against extensive individual trading activity data and then compile and submit the often complex paperwork necessary to make a valid claim. In the past, custodians, trustees and fund managers have sometimes regarded the effort (and cost) to participate as being disproportionate to the likely settlements payout achieved. This is no longer an accurate representation however, as there is a number of service providers that can automate the complex process of class action participation across all international legislatures.
Despite the availability of such services, there are some custodians across Europe failing to ensure client participation in securities class actions. In some quarters, the class action identification and participation remains an entirely manual process, subject to incompleteness and errors that may lead to participation opportunities being missed, or claims being rejected because of inaccuracies and mistakes. Such action can lead to billions being left unreclaimed and to discontent amongst investors. Not only is investor satisfaction a benefit of securities class actions, the corporate governance of the defendant can be improved and the example set can encourage others to do the same.
As securities class action, group, and collective redress actions globalise and opportunities to recover damages within Europe increase, one might like to consider this practical guide to effective damages recovery:
- MONITORING of cases and case opportunities is necessary via specialist service providers/law firms
- ACTIVITY: Investors need to be active to participate in a settlement
- FILING A CLAIM is mandatory in most jurisdictions in Europe as most legislation operates with an ‘opt-in’ system
- ASSIGNMENT of claims, where possible, to minimise court and attorney fees
- COLLECTIVE ACTION: Starting a collective action to share risks and costs and put pressure on defendants
- STATUTES OF LIMITATION: Investors need to check on the relevant statutes of limitation in each jurisdiction and can’t rely on U.S. proceedings; any attempt to start proceedings in the USA only, based on common law fraud or state law claims can jeopardise valid claims in other jurisdictions
- FUNDING: Acting with a litigation funder for an action in Europe is somewhat essential as litigating in most jurisdictions of the EU is expensive; furthermore, EU countries operate the ‘loser pays’ rule.
[i] MindMetre Research independent analysis data
[ii] Morrison v. National Australia Bank Ltd., 567 U.S. 247 (2010).