As the volume and breadth of global securities litigation continues to grow, funders will need to address heightened expectations from their clients.
2019 trends
US shareholder opt outs rose - especially for large cases
In recent years, the number of institutional investors opting out of securities class actions has risen significantly—between 2014 and 2018 (the most recent year for which data is available), the opt out rate for settled cases increased from 4.6 percent to 8.9 percent. And all four securities fraud cases that settled for over $500 million in that time period generated multiple opt out lawsuits, according to a study issued in September 2019 by Cornerstone Research. In some cases, the financial impact and importance of the opt outs is greater than the class action itself, because large asset managers that have opted out represent a more significant liability to the defendant than the class.
European opt in participation grew
Europe has become an increasingly attractive venue for institutional investors to pursue recoveries against issuers accused of fraud. Investors’ willingness to “opt in” to group actions has likely increased for several reasons: The increasingly systematic approach by institutional investors to evaluating recovery opportunities; the widespread adoption of the EU’s corporate transparency regime, which has helped clarify legal standards for securities claims in multiple jurisdictions; and the availability of financing for largescale litigation. Perhaps most significantly, shareholder litigation in continental Europe is often significantly less expensive and less burdensome on claimants than in the US and other common law jurisdictions, as most jurisdictions don’t allow for pretrial discovery and many limit adverse cost awards.
Firms became more sophisticated users of legal finance
Institutional investors pursuing opt in claims in Europe are growing more sophisticated in evaluating proposals from multiple law firms and funders. While cost of capital remains a consideration, more firms are seeking out professionalized funders that can provide better service. Firms that work with Burford know that they are gaining a partner that works with the highest quality local counsel and economic experts, that provides a rigorous damages analysis at the very outset of a case. Burford also provides transparency into legal assessments and damages methodologies to help investors make informed decisions about whether to participate.
What to expect in 2020
Large US asset managers will seek efficiencies in opt out scenarios
As large asset managers increasingly opt out of the largest US securities fraud cases, there will be increased emphasis on seeking out efficiencies in their recovery efforts, both in terms of cost and strategy. By coordinating their efforts (e.g., hiring the same law firm, articulating one theory of damages and working with the same funder), institutional investors can pursue litigation in a more economical way and ultimately have more leverage to negotiate a more favorable settlement. A professionalized finance provider like Burford can help ensure parties have the financial resources and expertise they need to move seamlessly through the process.
European and Australian securities actions will continue to rise
The Supreme Court’s decision in Morrison v National Australia Bank largely foreclosed investors’ ability to pursue securities claims before US courts against foreign companies listed on foreign exchanges. With reduced access to the US class actions regime, US investors will continue to pursue securities litigation in European and Australian jurisdictions—where they face different burdens and challenges.
Australian securities actions will have a renewed focus on book building
Book building had diminished significance in securities class actions in Australia following the Federal Court’s decision in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148, which permitted use of common fund orders (“CFOs”) to bind all group members in an open class action to one set of funding terms. That may now change following a recent decision from the High Court, which held that the Federal Court and the Supreme Court of New South Wales do not have power to make interlocutory CFOs prior to settlement. While federal and state courts adapt to this decision, we expect there will be both a renewed focus on book building and investors assessing whether to pursue damages in securities actions as members of an open class, closed class or opt-out group.
INCREASED COMPETITION AMONG FUNDERS MEANS GREATER NEGOTIATING POWER (AND MORE RESPONSIBILITY FOR INVESTORS
Increased competition among funders means greater negotiating power (and more responsibility for investors)
For every strong, meritorious case outside the US, there may be as many as five or six legal finance providers and law firms that will approach investors about participating in group actions. While access to choice means asset managers have more negotiating power, it also makes diligencing prospective capital providers an imperative, as choosing the right partner is key to a successful securities fraud litigation. When considering a funding proposal, investors should consider:
• Experience, capital sources and funding obligations. A listed finance provider can provide greater transparency and ensure that capital will be available for the duration of a case.
• The scope of authority delegated to the finance provider. Some funders demand a greater level of control than others, particularly funders that cater to smaller investors. Burford typically works with larger institutional investors that remain involved in litigation and settlement strategy. Burford may be granted a limited delegation of authority to facilitate efficient case management, but the clients retain final settlement authority.
• The experience and reputation of the local counsel. Importantly, US plaintiffs’ firms organizing and funding cases abroad may be highly experienced in US securities litigation, but local counsel will ultimately be charged with litigating the case in court. Particularly in jurisdictions where the law governing securities claims is unsettled, working with top tier local counsel is imperative.
•The financier’s ability to address adverse costs risk in cost-shifting jurisdictions. Because Burford is a listed company, investors can evaluate Burford’s ability to indemnify adverse costs by reviewing its audited financial statements. In jurisdictions where adverse costs risk is more significant, Burford is able to offer “after the event” insurance through its own wholly owned Guernsey based insurer Burford Worldwide Insurance Ltd (BWIL).
• How the damages estimate was prepared. It is crucial to understand whether the estimate was prepared by a qualified third-party damages expert based on the relevant jurisdiction’s legal requirements. If this is not the case, investors may have an unrealistic expectation of their potential recovery.
Claim monetization as alternative to funding
Monetization can offer an alternative route to recovery: Investors may have the opportunity to monetize their claim and receive cash upfront from the financier rather than waiting for the case to resolve. Instead of following the claim through litigation, investors can choose to monetize their claims with to a third-party finance provider in exchange for immediate cash payments. This can be an attractive option for investors as it transfers much of the idiosyncratic risk of litigating in a foreign jurisdiction to the finance provider. Monetization is particularly useful for asset managers that may have to liquidate a fund that is a claimant in a pending litigation. In that case, monetization allows the fund to collect additional cash for distribution to shareholders in the liquidation, giving shareholders the benefit of a claim that may take several more years to resolve.
Conclusion
While Europe and Australia likely will continue to increase in popularity as a forum for securities fraud disputes, opt out activity in the US is clearly on the rise. In response to this growth globally, Burford anticipates that institutional investors will demand more innovation and sophistication from the finance providers with which they work.
Michael Sternhell is a Director of Burford’s investment team in New York. Michael works with the world’s largest asset managers to identify, evaluate and pursue securities litigation globally, leveraging his experience overseeing a diverse litigation portfolio as in-house counsel for a leading global asset management firm. He was previously Senior Vice President and Managing Counsel at OppenheimerFunds. Prior to his work in-house, Mr. Sternhell was a Senior Litigator at Kramer Levin Naftalis & Frankel.