What do funds have to loose?

The number of securities class
action suits in American courts
has been growing consistently, a
fact that those foreign companies
listed on US exchanges are well aware
of. According to the Stanford University
Securities Class Action Clearinghouse,
there were 327 securities class
action lawsuits filed in 2001, an
increase of 60% over the previous year.
(The involvement of foreign companies
is also growing – 22 were named
in securities class actions in 2002, up
from 15 the previous year.)
This exponential growth is in part
caused by the fallout from the passage
of the Private Securities Litigation
Reform Act (PSLRA), passed by a
Republican-dominated Congress in
1995, over President Clinton’s veto.
This established that the lead plaintiff
in a securities class action suit has to be
the individual or, more likely, the institution
that has incurred the largest
loss. The ongoing globalisation of
investment means that the lead plaintiff
in a securities class action increasingly
may be European or other international
The dollar amount of settlements
has been growing dramatically, along
with the number of cases. Before the
adoption of the PSLRA in 1995, the
average settlement was less than $7m
– by 2003, it had risen to a startling
$25m and has continued to grow since
then. From 2003 to 2004 the average
settlement size increased by another
25%, according to Washington DCbased
Cornerstone Research.
Cornerstone found that in cases
where the lead plaintiff was an institutional
investor, the settlements were
much higher – a median settlement
value of $10.1m against $4.9m without
an institution at the lead. In the
latest case involving a non-US listed
company to reach a conclusion, Dutch
retailer Ahold settled in a Maryland
court for $1.1bn at the end of November,
and that was negotiated down significantly
from what the plaintiffs were
originally seeking.
With the PSLRA, Congress had
hoped to control the number of cases–
and also to rein in law firms, on the
assumption that large institutional
investors would cap their legal fees.
Legal fees are now negotiated – but
the number of cases has grown, settlements
have increased, and American
law firms involved in securities class
actions are extending their reach overseas.
European institutional investors
confront sound business reasons for
getting involved in US-based securities
class actions, according to Deborah
Sturman of Milberg Weiss Bershad
& Shulman, one of the earliest firms to
turn its attention to European institutional
investors. “If you are an investor
in US securities, you are involved in
class actions, whether you know it or
not,” she explains. “There is a strong
argument that you have a fiduciary
duty to at least file claims.” In short, if
there is a chance to recoup losses, it
would be irresponsible not to.
Sturman pointed out that substantial
amounts remain unclaimed and the
pool of money is divided equally only
among those investors who submit
claims. “It is important to know that
your interests are represented,” she
maintains. One way of doing so is by
establishing a relationship with a law
firm. American investors, with long
experience, have automated systems
that keep them aware of the potential
for signing on to securities class
actions. Milberg Weiss, like other law
firms, offers a securities monitoring
service to their clients.
There are several points during the
process when legal representation is
key. For example, non-US investors
are not automatically included in the
class for securities suits, explains Milberg
Weiss partner Michael Spencer.
“When the amended complaint is filed
after the lead plaintiff is chosen, the
decision is made whether to include
foreign investors or not.” If the lead
plaintiff is a foreign investor, however,
the class will inevitably include foreign
If the class is defined to exclude foreign
investors, there is potential
recourse. The Daimler Chrysler US
suit and settlement did not include foreign investors, but Milberg Weiss
brought a follow-on suit to include
It is also possible to opt out of the
class and to pursue an individual
action. This route may be taken if an
institutional investor has losses so substantial
that they prefer to go it alone;
public funds are less likely to get
involved in this route than are other
kinds of institutional investors. While
class actions are tried in federal court,
individual actions can be tried either in
federal or state courts, and state laws
may offer the potential for recovery
that would not be available federally.
While the settlement may be higher,
the process is more time-consuming
and there is a longer wait for settlement,
especially if a class action is being
heard at the same time.
Most cases - “99%” in the words of
one lawyer - settle out of court. Yet it
is not a quick process by any means.
Only 48%of class actions reached a settlement
within five years of first filing,
according to a study by NERA Economic
Consulting. However, it is the
law firm that finds itself out of pocket,
not the plaintiff.
All securities class action suits in the
US are conducted on a contingency
basis. This means that the law firm covers
the costs of bringing the case and
only recoups its expenses – and
charges its fee – if the case is won.
“It is a very expensive and challenging
process,” says Tony Gelderman,
partner in Bernstein Litowitz Berger
& Grossmann (BLBG), the firm feted
for its $6.2bn victory in the World-
Com case. “We can spend millions just
organising and reviewing the documents.”
In addition, plaintiffs’ lawyers
face up against the deep resources of
the banks and large corporations.
“They have the best legal representation,”
says BLBG partner Douglas
McKeige, “so you have to bring the
best against them.”
The fees and expenses, which are
deducted from the settlement, are
substantial. In 2003, class action
lawyers won some $3bn on behalf of
their clients but also took a total cut
from that of some $800m. As a percentage
of settlement, fees and
expenses ranged from 23.5% for
BLBG to 30% for Milberg Weiss, and
up to 40% for other leading firms,
according to research by Securities
Class Action Services and Verteris.
Another factor limiting the risk for
clients is the fact that there is no ‘loser
pays’ rule in the US. “If you lose,
under normal circumstances at worst
there may be some nominal costs,
which the law firm will pay, and even
then the foreign investor has demonstrated
a constructive willingness to be
active against fraud,” points out Milberg
Weiss’s Spencer.
The law firms do more than just
make the financial investment
upfront. They also bear the burden of
the workload, according to Hubertus
Becker, legal counsel for Activest, a
German fund manager that has served
as plaintiff in several US class action
suits. “It is not expensive – the law firm
handles all the costs, so we do not pay
any money.” Nor is it time-consuming:
Becker estimates that he only puts
in around one hour a week in looking
after the fund’s role in the US courts.
“If we were to do it on our own, I do
not think it would be so easy. There is
a lot of paperwork,” all handled in
New York by its law firm.
“There really is no catch” for non-
US institutional investors who chose
to be plaintiffs in US securities class
action suits, says Darren Check, partner
and director of institutional relations
for Schiffrin & Barroway, based
near Philadelphia. “Sometimes we
have to convince them of that. The big
fear is that the American lawyers are
coming over trying to make money off
of them.”
The firm “almost fell into” working
with European investors “by accident”,
says Check. Around two and
half years ago, the firm was contacted
by a Swiss bank regarding a case
against a US company. “This was our
wake-up call,” he explains. Since then
the firm has taken what it terms “an
educational approach” to growing its
international client base, running
seminars, speaking at conferences and
meeting with potential clients. Initial
efforts focused on Scandinavia, Germany,
Austria, the UK and Italy, and
the firm has more recently ventured
into France, Belgium and the Netherlands.
BLBG, noted for its long-term relationship
with many US public pension
funds, is taking a similarly gentle
approach to the European market.
“We do not want to go and challenge
the culture necessarily. We just want to
make sure that European investors
know that our services are available
here,” Gelderman explains. In the US,
BLBG is known for its good relations
with many of the large public funds.
There is more than just money
involved in securities class actions.
Such suits often have a corporate goverance
angle. So in addition to financial
recompense, investors can gain a
PR advantage, particularly in their
home country, by taking part in US
securities class actions. Milberg
Weiss’s Sturman mentions one client
of the firm’s, an Austrian bank,
involved in the Parmalat case, which
has been receiving positive coverage in
its domestic press for its willingness to
step forward.
“The pension fund community is
realising that it has a shared responsibility
to regulate the marketplace,”
says Gelderman. “Serious frauds
demand restitution.”
The fear of lawsuits is one deterrent
against corporate fraud. In addition to
that, “there is an option in settlements
to effect corporate governance
reforms,” Gelderman explains. With
the advent of public pension funds as
lead plaintiffs, they have tried to
change corporate culture, asking for
settlements that have included corporate
governance reforms, he says.
These changes have included amending
the election structure for board
members to eliminate staggered
boards; insisting on effective independent
audit committees; and prohibiting
the resetting of stock option prices
without shareholder approval.
Opinion is pretty evenly split among
investors, according to Check of
Schiffrin & Barroway. “Some want
corporate governance reforms; some
just want their money back,” he notes,
pointing out that “there are only certain
cases in which you can get corporate
reforms. A lot of cases are just
about getting your losses back”.
Even as US law firms are actively
prospecting for business from overseas
clients, they are also seeing legal
changes abroad to open courts to similar
class actions suits.
In Germany, class action suits are
now possible, although the system is
geared more towards retail investors –
Deutche Telekom is the first big case
to hit the courts, and there are others
in the pipeline. And in January, Canadian
law is also changing to come more
into line with the American system.
Hubertus Becker of Activest has a
positive impression of the American
system of securities class actions.
“Sometimes it is not easy to understand,
but we are getting more used to
it. I think it’s a really good system.”
These changes are also smoothing
conditions for the American law firms,
suggests Check of Schiffrin and Barroway.
The firm has strategic partnerships
in Europe that help build its
client base and has found growing
interest from potential partners.
“With the laws changing, they not
only are able to provide additional services
to their clients, but they are also
able to learn about the process,” he

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