Earlier this year, seventy of the world's largest pension schemes and institutional investors sent a letter to the US Securities and Exchange Commission (SEC). In it, they asked SEC to put forward a case to Congress calling for a return to the days of investors being able to pursue non-US corporations for fraudulent activity in American courts

The letter, which was signed by investors collectively running more than $2tn in assets, asks the SEC to help restore the rights of investors to sue in cases where there is a "significant link to the US". It was sent in response to a study concerning extraterritorial private rights of action which will be presented by the SEC to Congress early next year.

The investors, which include Britain's Royal Mail Pension Plan, Dutch pension provider PGGM and Denmark's public pension plan ATP, say that last year's Supreme Court ruling in the Morrison v. National Australia Bank case, prevents them from claiming that which they believe is rightfully theirs.

Private lawsuits over transnational fraud have almost come to a halt since the Morrison decision. It determined that investors cannot sue non-US corporations for fraud if company shares were bought on a foreign exchange even if the alleged misconduct took place on US soil.

Previous to the landmark ruling which changed investors' rights, the court allowed plaintiffs to join the class action litigation if it "was satisfied?if a substantial part of the wrongful conduct occurred in the US, the wrongful conduct substantially affected the US, or if some substantial mixture of the two appeared".

A number of global pension funds are determined to have the new rule overturned, partly because they see it as a simple case of fulfilling their duties as trustees.

"As worldwide asset managers we need to make sure we uphold the responsibilities that are trusted upon us by our members," explains Harmen Geerts, press officer for Dutch pension fund APG. "The US had a system in place with regards to class actions which really worked and we are asking the SEC for a return to those times."

Owen Thorne, investment officer at Merseyside pension fund, gives similar reasons for Merseyside's involvement. "We participate in these cases to live up to our fiduciary responsibilities," he says. "We have a responsibility to do what we can to claim the money back."

Merseyside has participated in various class action cases, the most memorable being the case against RBS, for which they were denied the status of lead plaintiff for similar reasons as in the Morrison case. The fund was not appointed the status because it wasn't clear if a foreign investor involved in an F-cubed action would be a good choice. The term 'F-cubed' refers to the foreign nature of the claim: foreign investors, foreign issuers, and the alleged fraudulent conduct taking place in a foreign country.

Thorne, however, also says that he still believes that as a general principle the US system is the most suitable to hold a company's management accountable if fraud is thought to have taken place.
Beata Gocyk-Farber, a partner at specialist law firm Bernstein Litowitz Berger and Grossmann, who helped set up the letter, says her firm dealt with over 50 letters to the SEC, all petitioning for a return to former rules. "They weren't all from foreign investors, some cases with US investors are also (affected) by the decision. If they didn't buy the securities in the US on the US stock exchange then that's it."

So what chance do the pension funds have? Asked why Congress would be against a U-turn on the legislation, Gocyk-Farber says that there is a belief in some quarters that US law should not apply outside the country. But she dismisses it as an argument that can be used when it comes to private litigation: "If the conduct happened here than the conduct and effects test [the former measurement used to determine if a plaintiff had a right to sue in the US] should be sufficient."

"We live in a global world," she says. "The US has to be careful that it will not be seen as a haven for misconduct."

Not just about the money

Annette van der Krogt, head of responsible investing at Syntrus Achmea, says that it is not just important for the American class action system to remain in use for European institutional investors in order to reclaim their lost assets, but also a way to create better standards in the industry.

"We see it as a way to improve corporate governance as well," she says. "It isn't just about the money. The US just has a more advanced class actions system in place than anywhere else and currently a lot of investors are affected by the ruling."

Thorne agrees, claiming that in the US class action cases are a way to create better corporate governance as they do not have the same rules as for example in the UK. "We find the Dodd-Frank reforms [of which this SEC study is part] to increase corporate governance in the US a step in the good direction."

The pension schemes and other mostly pan-European and Australian investors, who signed the letter, say that upholding the current status of the class action system could damage the reputation of US investors and could harm trade. They also warn that the decision of the court could affect, amongst others, the case against BP.

The oil giant has its primary listing on the London Stock Exchange and a secondary listing in New York. The fact that many of the foreign plaintiffs will have bought BP shares in London would exclude them from the class action, according to the ruling.

"The BP case just offers an example of why our (this) is needed. We feel investors should have the right to sue and should not be excluded from important cases such as this one," says Geerts.

Stephen Everard, managing director of the Goal Group, says the letter seems to be just the beginning of an "extremely lengthy process".

"These are all major investors and they make some valid and strong points. It will be very interesting to see the response of the SEC. The letter shows what the consequences can be if the court upholds the Morrison decision as a precedent for further litigation," he says.

"At the moment big cases are pending or are thrown out of the US courts. It is not only the BP case, there are others as well, such as Vivendi and RBS, which have been affected."

Everard explains that only the Supreme Court or Congress can overturn the decision but says that the pension schemes have a much stronger case with the SEC on their side. "This is an unusual thing, such a large group of angry investors coming together to take action. And they could get even bigger if they needed to make a stronger case for the courts. No doubt many other pension schemes would be very willing to sign (the letter)."

azeevalkink@wilmington.co.uk

First published 03.04.2011