In late 2022, Burford organized a securities litigation symposium with in-house counsel from some of the world’s largest asset managers and partners from leading global law firms that represent investment funds in securities litigation.
In late 2022, Burford organized a securities litigation symposium with in-house counsel from some of the world’s largest asset managers and partners from leading global law firms that represent investment funds in securities litigation. Charles Schwab, Franklin Templeton, Norge Bank and Vanguard, as well as Bartlit Beck, Pallas Partners, Quinn Emanuel, Scott + Scott and Stradley Ronon were all represented.
Below are key takeaways from each panel.
The in-house perspective: Building and managing successful recovery programs
Panelists:
- Christine Debevec, Associate General Counsel, Franklin Templeton
- Beata Gocyk-Farber, Lead Counsel, Litigation, Norges Bank Investment Management
- Lowell Haky, Managing Director of Corporate Legal Services, Charles Schwab & Co.
- Michael White, Associate General Counsel, The Vanguard Group, Inc.
The in-house counsel discussion made clear that asset management firms are approaching securities litigation with increasing sophistication. In addition to the likelihood and quantum of potential recoveries, firms consider the merits of claims, the risks associated with litigating in the relevant jurisdiction and the time and resources the firm and its investment personnel must devote to supporting the claim. Asset managers are also becoming increasingly discerning in their selection of law firms and legal finance partners.
Several of the in-house panelists noted that their firms’ case selection criteria encompass not only the potential financial recovery, but also how the proposed litigation and similar claims could impact the integrity of the capital markets and the relevant jurisdiction’s securities regulation regime. If the firm’s funds still have exposure to the issuer’s securities, they may also consider how the litigation could impact the issuer’s future financial performance and solvency.
There was a notable diversity of perspectives on how selective asset management firms should be in choosing to pursue claims, whether they should involve investment personnel in case selection, and how they manage cases and oversee counsel and funding partners. When deciding whether and how to litigate, the criteria fund managers use, and the personnel involved in decision-making, largely reflect the manager’s overall approach to investment management.
While asset managers have become increasingly active in pursuing affirmative litigation, the in-house panelists made clear that they remain laser focused on insulating their funds from any downside risk in these cases. In practice, that entails only pursuing claims backed by legal finance providers that have the resources needed to fund litigation through to a successful conclusion and fully indemnify or insure claimant funds for adverse costs in “loser pays” jurisdictions. Some panelists noted that they give substantial consideration to whether legal finance providers like Burford that employ relatively conservative case selection criteria are willing to fund the case.
Fund boards considerations
Panelists:
- Keith Dutill, Partner, Stradley Ronon Stevens & Young, LLP
- Joseph Kelleher, Partner, Stradley Ronon Steven & Young, LLP
“Funds, to state the obvious, are in the business of investing in the capital markets. They're not typically in the business of being adverse to their portfolio companies, let alone suing them and alleging fraud. That’s a significant step and it's not taken lightly at the board level. The board must answer a lot of questions to get comfortable that this is an appropriate thing for the fund to do and that it won’t hamper the fund manager’s ability to interact with other public companies.” - Keith Dutill
Most fund boards focus on five broad concerns that largely reflect the fact that suing is not the norm for their businesses.
A fund board’s primary concern is to avoid a loss in a fee shifting jurisdiction that could result in the fund having to pay the defendant’s legal fees. Most legal finance providers will offer indemnities for adverse costs or after-the-event insurance to address this risk, but it’s important to closely scrutinize the terms of these arrangements and the credit risk of the indemnitor or insurance carrier. This underscores the need for funds to work with a well-capitalized legal finance provider.
When a fund will be named on the complaint, fund boards often consider whether the proposed lawsuit aligns with the firm’s values, and whether participation in the lawsuit could damage the reputation of the fund or its manager.
Fund boards often consider whether there are viable alternatives to direct litigation. The US, Canada and Australia all have versions of a collective redress or class action regime that allow investors to remain passive while still recovering some portion of their losses in many cases. In some cases, funds can execute a tolling agreement with defendants to preserve their claim while waiting for ongoing regulatory investigations to conclude. Fund boards are also increasingly focused on choosing the right funder and law firm, and consider whether they are best suited to serve the interests of the fund and its shareholders over the life of the case.
Fund boards must consider whether litigation is likely to generate a materially greater recovery than if the fund remains passive or seeks a negotiated resolution of the claim before filing a complaint. Boards often must also evaluate competing proposals for legal representation and litigation funding to determine which law firm and/or funding partner is likely to generate the largest recovery for the fund, net of legal fees, expenses and funder entitlement.
The case may help demonstrate the fund’s commitment to ESG. Importantly, ESG considerations supplement, rather than replace, the board’s focus on maximizing fund recoveries and protecting the fund from reputational or financial harm.
Global trends in securities litigation
Panelists:
- Natasha Harrison, Managing Partner, Pallas Partners (London)
- Jan-Willem de Jong, Partner, Scott + Scott LLP (Amsterdam)
- Joachim Lehnhardt, Partner Quinn Emanuel Urquhart & Sullivan, LLP (Hamburg)
- Michael Lange, Senior Vice President, Financial Technologies (Moderator)
Natasha Harrison of Pallas Partners explains that “In England and Wales, we're at a bit of a tipping point…we were slow coming to the party on securities litigation, but over the last five years we've seen a number of cases being commenced. That is in part because the English courts have learned from some of their mistakes in the early proceedings, in particular around case management where we are seeing improvements.” She also noted that the acceleration of litigation funding in the market has contributed to funds’ pursuit of recoveries in securities litigation.
As other panelists noted, the Netherlands has become a leading jurisdiction of choice for collective actions in the securities context, with three of the five largest securities-related settlements outside the US recorded there, including the €1.4 billion Steinhoff International Holdings NV settlement in February 2022. In Germany, the courts have reaffirmed the permissibility of assigning collective action claims in the absence of opt out class actions—a desirable development for claimants as the cost and risk of asserting even the most substantial cartel damages claim individually can ultimately exceed the damages claimed. Pooling claims together allows claimants to pursue meritorious claims that would be uneconomical to pursue on an individual basis.
Overview of US opt outs
Panelists:
- Steven Nachtwey, Partner, Bartlit Beck LLP
- Cindy Sobel, Partner, Bartlit Beck LLP
In the US, asset managers and other large institutional investors are increasingly opting out of securities class actions to maximize recoveries and secure more control over case strategy. Class actions typically settle for pennies on the dollar and require a lengthy claims administration process that may force investors to wait years to receive settlement proceeds. In contrast, investors that opt out and pursue direct litigation may recover 20-30% of their damages, and plaintiffs generally receive proceeds within 30 days after executing a settlement agreement. Recent securities class actions against Petrobras1, ARCP2 and Teva3 led dozens of institutional investors to opt out of the class and pursue direct claims.
While opt out settlement recovery rates are typically multiples of class action settlements, investors face significant hurdles when pursuing direct actions including the cost of engaging their own counsel, discovery obligations, individual damages issues and counterparty risk. Investors may also have to deal with harmful evidence from their own investment personnel that could undercut claims of reliance. For these reasons, sophisticated institutional investors typically opt out in only the most egregious cases of corporate wrongdoing that have already resulted in government investigations and settlements, restatements of financial filings and executive terminations. Traditional securities fraud claims involving accounting irregularities and other financial misrepresentations are generally more attractive opt out opportunities than more novel claims involving adverse business developments that produce a significant stock drop.
Litigation finance for securities litigation
With the growing volume and breadth of securities litigation, more investors are searching for tools that support an approach that is more systematic, cost-effective and consistent with their investment objectives. In-house lawyers agree that legal finance has a role in supporting the fund’s investment strategy and its efforts to discourage corporate wrongdoing.
There is further unanimity in the criteria by which these proposals are evaluated, particularly outside the US—where nearly every shareholder litigation is funded. Regardless of the fund’s investment objectives, in-house counsel must evaluate funding proposals to ensure the funder has the financial resources to pursue the case through to resolution, while also ensuring that the fund manager keeps as much of the recovery as possible. Specific evaluation criteria include funder’s capitalization, scale, resources, adverse costs coverage and the experience and quality of the team.
At Burford, we’ve worked with clients to develop bespoke, portfolio financing solutions that allow our clients to pursue recoveries globally under an umbrella agreement and unitary fee structure. By funding a diversified, multi-jurisdictional portfolio of claims, we offer more favorable economics to our clients, and portfolio finance can also relieve the considerable burdens placed on in-house counsel who must otherwise evaluate and negotiate competing proposals from multiple law firms or funders for every new claim.
Director
+ 1 646 849 9355
Michael Sternhell is a Director with responsibility for delivering innovative litigation financing solutions to the asset management industry. Mr. Sternhell 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.