Un­ac­cept­able losses

Se­cu­ri­ties class ac­tion specialist, Goal Group, has re­vealed that be­tween 2000 and 2012, in­vestor losses through non-par­tic­i­pa­tion in se­cu­ri­ties class ac­tions rose to over USD 18bn. Just over USD 194 mil­lion of this fig­ure can be at­trib­uted to Aus­tralian

Business First - - CONTENTS - By An­dreas Costi

It has long been the case that non-par­tic­i­pa­tion in US se­cu­ri­ties class ac­tions has cost in­vestors and funds dearly. Par­tic­i­pa­tion rates for US domi­ciled in­vestors were typ­i­cally higher be­tween 2000 and 2007 when com­pared to those of Aus­tralian and other non-US in­vestors. Since 2007, how­ever, it is fair to ac­knowl­edge that par­tic­i­pa­tion rates of non-US domi­ciled in­vestors have in­creased. Goal Group’s anal­y­sis of its class ac­tions knowl­edge base has shown that global non-par­tic­i­pa­tion is now be­tween 23% and 24%, with mar­ginal dif­fer­ences be­tween US and non-US el­i­gi­ble in­vestors. Nev­er­the­less, USD 194 mil­lion of right­ful in­vestor re­turns is not an amount to be ig­nored, par­tic­u­larly as, in re­cent years, it has be­come clear that fund man­agers and cus­to­di­ans have a fidu­ciary duty to iden­tify and en­sure that their clients par­tic­i­pate in se­cu­ri­ties class ac­tions. Fail­ure to do so could po­ten­tially prompt le­gal ac­tion by in­vestors. Hav­ing es­tab­lished this fidu­ciary duty, how­ever, the task of ful­fill­ing it has be­come a lit­tle more com­plex due to the in­creas­ing glob­al­i­sa­tion of se­cu­ri­ties class ac­tions.

Se­cu­ri­ties class ac­tions are mov­ing away from a sin­gu­lar and rel­a­tively straight­for­ward ju­ris­dic­tion – the US – to a mul­ti­ple and com­plex se­ries of le­gal sys­tems through­out the world. This in­ter­na­tional di­ver­si­fi­ca­tion of class ac­tions can be at­trib­uted to a com­bi­na­tion of re­stric­tions on ju­ris­dic­tion def­i­ni­tions in the US Federal courts, along with a grow­ing de­sire to de­velop do­mes­tic class ac­tion pro­ce­dures in many coun­tries around the globe. As a re­sult of the Mor­ri­son v. Na­tional Aus­tralia Bank se­cu­ri­ties class ac­tion case in 2010, the US Federal courts ruled that f-cubed ac­tions (which in­volve a non-US share­holder, su­ing a non-US com­pany, whose stock was pur­chased on a non-US ex­change, bring­ing a case in a US court) were no longer al­lowed to be brought in the US.

As a re­sult, al­though the US is still the most dom­i­nant leg­is­la­ture, plain­tiffs are now in­sti­gat­ing lit­i­ga­tion in more flex­i­ble ju­ris­dic­tions glob­ally. As an ex­am­ple, Aus­tralia has been es­tab­lish­ing it­self as a home for se­cu­ri­ties class ac­tions in the Asia-Pa­cific re­gion. The out­come of such de­vel­op­ments has meant that in­ter­na­tional com­pa­nies listed on mul­ti­ple ex­changes must now de­fend them­selves against se­cu­ri­ties class ac­tions in mul­ti­ple ju­ris­dic­tions. This is fur­ther in­ten­si­fied as reg­u­la­tors tighten reg­u­la­tion fol­low­ing the global fi­nan­cial mar­kets cri­sis and gov­ern­ments in­sti­tute fiercer en­force­ment mea­sures.

Class ac­tion growth out­side the US is pre­dicted to mir­ror the growth of the US class ac­tion scene in the early part of the 21st century. It is likely that the vol­ume and in­ter­na­tional va­ri­ety of track­ing and par­tic­i­pa­tion will in­crease through­out the next decade to be­come more widely ap­pli­ca­ble to a greater breadth of port­fo­lio hold­ings. This, in turn, re­quires cus­to­di­ans, fund man­agers and trustees to make sure that they are vig­i­lant when mon­i­tor­ing se­cu­ri­ties class ac­tions across the world. This ac­tiv­ity is ap­pli­ca­ble to in­sti­tu­tional and pri­vate in­vestors, but by far the largest pro­por­tion of eq­uity in­vest­ment (and there­fore losses sub­ject to a class ac­tion) can be at­trib­uted to in­sti­tu­tional in­vestors. Ex­cuses for fail­ing to mon­i­tor and en­sure par­tic­i­pa­tion in class ac­tions in­ter­na­tion­ally are in­creas­ingly un­likely to be tol­er­ated how­ever, as there are a num­ber of ser­vices com­mer­cially avail­able that min­imise the com­plex­ity and cost of this ac­tiv­ity.

De­spite an in­crease in par­tic­i­pa­tion rates, the added pres­sure fac­ing fidu­cia­ries (mon­i­tor­ing and par­tic­i­pat­ing in claims in­ter­na­tion­ally) may re­sult in non-par­tic­i­pa­tion rates ris­ing again. This is in light of some cus­to­di­ans lim­it­ing the scope of their class ac­tions ser­vice to a selected group of coun­tries. A lack of in­ter­na­tional par­tic­i­pa­tion must not be tol­er­ated as anal­y­sisii has shown that the typ­i­cal Aus­tralian share port­fo­lio has just un­der 20% of its stock in­vested in for­eign shares. Goal Group pre­dicts that se­cu­ri­ties class ac­tions set­tle­ments in leg­is­la­tures out­side of the US will rise to USD 8.3 bil­lion an­nu­ally by 2020, how­ever it is also es­ti­mated that USD 2.02 bil­lion of global in­vestors’ right­ful re­turns will be left un­re­claimed each year.

Con­clu­sion

Aus­tralian fidu­cia­ries face the threat of le­gal ac­tion should they fail to iden­tify and en­sure par­tic­i­pa­tion in rel­e­vant se­cu­ri­ties class ac­tions. Re­spon­si­ble par­ties can no longer ig­nore the op­por­tu­nity to claim in­ter­na­tional dam­ages to which in­vestors are legally en­ti­tled. How­ever, as class ac­tions glob­alise, mon­i­tor­ing be­comes chal­leng­ing as there is a more com­plex global net­work of share­holder lit­i­ga­tion to con­sider and re­spond to.

Many fidu­cia­ries have his­tor­i­cally strug­gled to keep track of op­por­tu­ni­ties to make a claim and the pro­cesses re­quired to do so suc­cess­fully have at times been con­sid­ered dif­fi­cult and daunt­ing. Now, in re­al­ity, there is lit­tle ex­cuse for fail­ing to en­sure par­tic­i­pa­tion in rel­e­vant se­cu­ri­ties class ac­tions as, al­though many have an Amer­i­can fo­cus, there are specialist ser­vice providers that can au­to­mate the process across in­ter­na­tional leg­is­la­tures, and at a rel­a­tively low cost. The pres­sure of the process can be dra­mat­i­cally eased as such providers can glob­ally cover class ac­tions in all mar­kets, while man­ag­ing on-go­ing re­la­tion­ships with var­i­ous le­gal firms world­wide and a net­work of pay­ing agents.

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