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Legal finance trends: Securities litigation in Europe

  • Michael Sternhell

The volume and breadth of global securities litigation continues to grow—especially as Europe and Asia become increasingly attractive venues for US asset managers to pursue recoveries against issuers accused of fraud. As the market evolves, funders will need to address heightened expectations from their clients.

US investors entering European actions

Following the US Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd., US asset managers have had to pursue legal remedies in unfamiliar jurisdictions when they suffer investment losses caused by a foreign issuer’s misconduct.

Because “opt-out” class actions are virtually unheard of outside of the US, investors must typically take affirmative steps either to bring or join an action or to face the prospect of a zero recovery. For that reason, participation by US asset managers in these jurisdictions has increased.

We expect that this trend will continue, and as US investors increasingly enter European actions, they should be aware of the different burdens and barriers they will face.

For example, because pre-trial discovery is more limited in most jurisdictions outside the US, the burdens on asset managers are generally lower than they would be in a direct action filed in federal or state court. However, the inability to obtain discovery from defendants can also present barriers to recovery. Pleading standards and damages methodologies can also vary considerably in different jurisdictions.

Additionally, because most European and Asian countries have seen relatively few complex securities actions, finding competent local counsel willing and able to pursue a claim can be challenging. Furthermore, as distinct from the US—where plaintiffs’ firms can assume the full risk of pursuing shareholder actions—asset managers must be prepared either to self-finance claims or to engage a litigation finance partner in jurisdictions where contingency fees are prohibited.

Demand for better pricing from funders

Arguably, increased participation by US asset managers in European and other actions will also lead to welcome changes in the litigation finance market that has historically served investor recovery actions.

In jurisdictions that prohibit contingency fees, asset managers have in the past relied upon niche litigation finance providers focused exclusively on investor recovery actions to bridge the gap between plaintiff funds and their counsel. These niche funders of group securities claims often act as both capital provider and case manager, controlling day-to-day litigation and settlement strategy. This dynamic can disadvantage fund plaintiffs for two reasons: A specialized funder overseeing a small pool of securities claims may be capital constrained and consequently motivated to invest too little capital in the lawsuit and settle early for less than the claim is worth. Separately, these funders typically offer standard, one-size-fits-all pricing models that reflect the binary risk of a complete loss on a single claim.

As more financiers enter the market, funders will be required to offer securities litigation financing solutions tailored to their clients’ needs. At Burford, we price all our capital according to risk and offer financing terms based on a number of factors, including the estimated damages and anticipated cost and duration of the litigation. Additionally, we are positioned to offer a range of financing structures to maximize recoveries for our counterparties. For example, we pioneered the portfolio financing concept, which offers more flexibility and often better pricing than traditional single-case financing. This approach to pricing allows fund plaintiffs, particularly larger more diversified funds with multiple claims, to retain a greater share of their recoveries. A portfolio approach also allows an asset manager to pursue multiple, unrelated claims across a diverse set of jurisdictions under a single umbrella agreement with a unitary pricing structure.

Professionalization of securities funding globally

Because financing of securities litigation outside the US has been dominated by smaller, specialized funders, funders have had little incentive to offer their clients anything beyond providing capital and basic case management. Increasingly, asset managers are demanding better service levels than specialized securities litigation funders can offer.

Burford can deliver asset managers better service in two key ways: We are committed to working with high quality counsel, and we complete rigorous damages analysis at the very outset of a case. We partner with our clients to match them with the best available local counsel and commit sufficient resources for the duration of a case to ensure counsel can achieve the best possible outcome. Unlike other funders that may present investors with simplistic loss estimates—which may significantly overstate their actual recoverable damages—we work with local counsel and economic experts to prepare robust damages analyses based on relevant statutory and case law.

When we do assume responsibility for ongoing case management, such as when investors assign their claims to a Burford sponsored SPV, we leverage the experience of our investment team, which includes veterans of top tier law firms and leading asset managers who understand the specific regulatory and fiduciary obligations of investment advisers.

Expectation of transparency

Asset managers who join a group action often complain about being left in the dark—after opting-in, they may not hear anything about the status of the case as it progresses until they’re sent a check in the mail.

Going forward, transparency will become the rule in securities group actions. At Burford, we address this in two ways. First, before investors join an action, we perform thorough diligence on their claim to help investors make informed decisions about whether or not to move forward. Second, after funding a claim, we regularly report on and account for the case for the duration of the litigation. We understand the demands placed on in-house lawyers and ensure our clients have the information they need to report on case developments to fund boards and investment personnel.

Partnering with Burford

With a team of over 100 and more capital than any other litigation finance provider, Burford is taking a new approach to financing securities litigation and can help fund plaintiffs address their evolving needs to ensure investment advisers and fund boards can fulfill their fiduciary obligations. Our extensive experience assessing and investing in matters throughout the US, UK, Europe and Asia allows Burford to help clients wherever their claims may be—eliminating the need for clients to identify and vet multiple funders in order to pursue global claims.