The US saw a long list of class actions filed by angry foreign investors appearing in its courts in 2008, as the financial crisis took hold. Now, three years later, Pension Funds Insider asks how European pension schemes can still pursue such claims, after restrictionshave beenplaced on pursuing non-US firms on American soil

The US has a legal system in place which allows pension schemes and other investors, who have suffered damages due to corporate misbehaviour or fraud, to claim their money back through the courts. There is a jury who is inclined to pay out large sums of money, lawyers who are paid a contingency fee (a no win, no fee system), and legislation is generally in favour of investors. With a set-up like this, where plaintiffs have very little to lose, why would foreign investors opt to go somewhere else?

Well, the answer is that if the company accused of misbehaving is a non-US one, and has allegedly misbehaved away from the US, then they no longer have to fear an appearance in a US court.

This is due to what was decided one rainy afternoon last year – the day the Supreme Court ruled on Morrison v. National Australia Bank. The case saw foreign investors accusing the National Australia Bank of perpetrating a fraud involving a Florida subsidiary bank. It was claimed that the Florida connection was enough of a link to the US to justify the use of the American legal system. The bank said that the conduct took place in Australia and that the courts had no jurisdiction over the matter. The Supreme Court ruled in favour of the bank.

Ever since, 'F-cubed' cases have been denied a trial in the US; existing cases were thrown out and investors excluded from participating in the class actions.

The term 'F-cubed' refers to the foreign nature of the claim. The foreign investors, foreign issuers, and the alleged fraudulent conduct taking place in a foreign country.

As Dominic Auld, of counsel at Labaton Sucharow, who specialises in class action litigation, says, Morrison vs. National Australian Bank has affected the right of non-US investors, who bought and sold non-US securities and they bought them on non-US exchange: "This seems straightforward but nowadays many companies are truly multinationals and it is not always clear where the border lies".

"Essentially the US doesn't care where companies behave badly," says Auld. "They only care where investors bought and sold securities. Conduct doesn't matter anymore, this is the big change."

So how has this affected all the foreign investors such as European pension funds?

If they bought US securities or bought securities in the US, then they can still go there and make use of the system. In Europe, however, prohibitively high fees have to be paid regardless of the outcome. There is often no jury to appeal to and no real legislation that allows for class action litigations.

"When you are a pension scheme, because of your fiduciary duties it is virtually impossible to risk your pensioners' money to fund a lawsuit without ensuring you can cover the losses in some way," says Auld.

"In much of Europe there is downshifting of the costs," he adds. "In the US we don't have that, we can never be held responsible for paying the costs of the other party. But in the UK for example that would be why we need the insurance. We can't have our clients go to court and then basically end up paying a ton of money if the judge decides that he doesn't like the case. That is not an option for a pension fund, they clearly cannot afford that."

Stephen Everard, managing director of the Goal Group, a class action lawsuit specialist firm, explains that in the UK, like in other Northern European countries, class action legislation is non-existent. The former UK government, in an attempt to rush through the Financial Services Bill while still in power, left out clause 18-25 – which would have allowed consumers to pursue collective actions against companies that mis-sold to customers.

"Part of the problem for the government would be that if they brought in the legislation they would probably have to exclude the state owned banks," says Everard. "Obvious targets for lawsuits are RBS, Lloyds TSB and Halifax – all the banking groups that the public now own.

"So you would be bringing the final bill to the taxpayers, the bill for something they did not want in the first place. The government would have to exclude certain industries or certain institutions – imagine the implications."

Not a closed case

There may be some hope however. For European class actions that used to be in the US, there has been some effort to try and consolidate the court process through the Netherlands, says Everard.

"The Netherlands have the Act on the Collective Settlement of Mass Claims (Wet Collectieve Afwikkeling Massaschade – WCAM). This Act puts them at the forefront for developments of mass disputes, since it is the only country in Europe with such legislation in place," he says.

"In the Netherlands you have the best chance to get a settlement," agrees Auld. He explains that it is not the same system as in the US but based around it. The Dutch version requires parties to try and settle claims out of court first, which can be made binding by the court when they are agreed upon.

And who needs favourable legislation anyway? Auld believes companies could still be held responsible without such laws in the future. "Slowly you will see change. You'll see US firms partnering with for example French lawyers, (to) have people on the ground."

This sort of tie-up could work well with the option of using a 'third party system', as found in Australia, to fund lawsuits. Australian lawyers are not allowed to work for a contingency fee so there are third party funding firms who fund litigation. It is the funding companies that actually put out notices of fraudulent activity and then they gather the investors together to determine if they are interested in the case and want to go to court. If they do, then they hire lawyers.

Both Auld and Everard stress that the more cases will be filed outside of the US the more legislation we will see. The uproar over the fact that local pensioners lose their chance of a higher pension will be too important to ignore for politicians in the long run, they predict.

But before we reach that point all have to be onboard. Currently as many as 25 per cent of Northern European pension schemes do not participate in class actions over money that is officially theirs, according to GOAL. The firm reckons that if pension funds do not start taking up more cases then they will lose out on an estimated €1bn.

"I think there is a misconception that it is very difficult, very complex to do," says Everard.

"True, it isn't straightforward, there are loads of forms to fill in and lots of calculations to do. But what it comes down to is that if you do not participate you are probably not fulfilling your fiduciary responsibilities. There is money out there that is meant for the underlying pensioners which they are not going to get."

azeevalkink@wilmington.co.uk