The term class action conjures thoughts of the US legal system – and rightfully so, as the origin of mass litigation. However, over the past several years many other countries have either expanded existing class action laws, or adopted their own mechanisms for collective redress. The result is expanded opportunities for asset managers, hedge funds and other institutional investors to recoup losses from alleged wrongdoing.
In many cases, the settlements are substantial and represent an opportunity to recover losses sustained from alleged securities fraud, including ESG violations, according to Steve Cirami, Head of Corporate Actions and Class Actions at global fintech firm Broadridge Financial Solutions.
Figures from Broadridge’s Global Class Action Annual Report show that asset recovery opportunities rose a significant 50% from $4 billion in 2019, to $6 billion in 2020. Moreover, the average settlement amount (excluding ongoing litigation) doubled compared to 2019.
The ten most complex cases in 2020 accounted for $3.4 billion - or over half of the final tally. While the financial industry ratcheted the most settlements last year, the most notable was Valeant Pharmaceuticals International, now Bausch Health Companies, at $1.21 billion.
Looking ahead, Cirami notes there is no shortage of funds to be recovered. He says Broadridge identified more than 450 newly filed class or collective actions worldwide related to investments in publicly traded securities.
“This brings the total of active cases that have not been settled to over 1,000, a substantial number when compared to the 140 new settlements that comprised the $6 billion in total recoveries,” Cirami says.
The VW turning point
He believes that one reason for the brimming pipeline is changes in the worldwide legislative landscape. There has been a cultural shift in the UK and European Union which has long lagged behind the US in class action lawsuits. He points to the Volkswagen emissions (‘Diesel-gate’) scandal as a key turning point in Europe. As of last year, Volkswagen and fellow German carmaker Daimler have paid more than €30 billion in fines and compensation around the world since it was revealed in 2015.
Cirami notes that the VW incident spurred the European Commission to introduce the Collective Redress Directive. It started pushing for the initiative in 2018 to create a standardised framework for collective redress across all EU countries. Formally adopted by the EU parliament in December 2020, the new law requires all 27 member states, by June 25, 2023, to translate the directive into national law by enacting representative action mechanisms to address mass harms.
Cirami notes that while the EU directive differs from the US approach to collective redress in several ways, it nevertheless signals significant change and paves the way for institutional investors to recover more money than ever before. For example, one difference that will impact institutional investors is that in some countries, they will need to “opt-in” to the litigation in order to recover funds. Practically speaking, this means a potentially more active role in the process then merely filing a claim with a claims administrator. However, the rules and requirements will vary from jurisdiction to jurisdiction.
Currently, only Belgium, France, Italy, Portugal, Spain and Sweden offer what the European Consumer Organisation considers to be a full collective redress system.
Individual countries are also reviewing their laws. Cirami cites the Netherlands as a pioneer in developing a legal platform for collective redress in the EU, and has already seen several Billion Dollar settlements.
On the rise
Although some of the regulation is still working its way through the system, the number of class action suits in Europe is on the rise. The CMS European Class Actions Report 2021 showed they surged by over 120% between 2018 and 2020. The UK has also seen a growth in class actions in recent years most notably in the area of competition law.
All eyes next year will be on the £10 billion Mastercard lawsuit on behalf of 46 million consumers in what is Britain’s biggest class action-style lawsuit.
“Keeping track of this fast paced and evolving legal and regulatory landscape is difficult but it is particularly challenging in the financial services industry with the increasing complexities of financial instruments and high volume of cases,” says Cirami. “Methods to identify settlements are complicated, processing requirements are arduous and often bespoke, and the seemingly endless wave of new legal theories, laws and jurisdictions can be difficult to monitor.”
As a result, even when opportunities are identified and claims are timely filed, says Cirami, “they often fail because of poor planning or errors in the claim filing process.”
“This means that large amounts of money are potentially left on the table when they should have been recouped. This is particularly important for investors such as hedge funds whose portfolios often have significant holdings in any one position.”
The solution is to have a robust, end-to-end portfolio monitoring and asset recovery process with no jurisdictional or financial product limits. “There are two ways to do this. Have an experienced, internal team with bespoke technology enabling them, or employ a firm that has both the legal expertise and technology,” says Cirami.
In addition to the increased volumes, cases are becoming increasingly complex. This is true because of the multiple jurisdictions, the financial instruments in play, or both. For example, Broadridge’s last Annual Class Action report notes that Valeant Pharmaceuticals International faced class action suits in both the US and Canada. This complicated matters and involved review and quality assurance processes to confirm the accuracy and completeness of the claims administrator’s findings and to ensure an accurate recovery. Also, between the two cases, there were more than a dozen types of eligible Valeant securities which had to be identified through a standard portfolio. Additional work was then required to ensure all data was populated into the required filing format prior to submission. The inability to do so would have led to a failure to file, a reduced distribution, or a rejected claim.
Given the many moving parts of the recovery process, firms need not only be able to track and monitor the cases but also house, scrub and prepare the data so that the right information is on hand to prove a claim. Navigating the complexities in jurisdictional, judicial and/or filing requirements as well as the multiple deadlines is also no easy feat. It is also key to keep abreast of the competing litigations brought by different law firms and funder groups.
“There is no ‘one size fits all’ solution because each case is different with its own set of idiosyncrasies and issues,” says Cirami.
This feature first appeared in Funds Europe.