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
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.
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.