In June of 2019, Burford Capital and Fideres Partners LLP co-hosted a seminar in London for asset managers and securities fraud litigation experts. Ahead of that seminar, Burford Director Michael Sternhell invited panelists to address questions surrounding the legal frameworks, damages quantifications and group action regimes of securities fraud litigation across jurisdictions.
Dr. Nadine Herrmann, Managing Partner, Quinn Emanuel Urquhart & Sullivan
Simon Bushell, Partner, Signature Litigation
Marcel Evers, Founding Partner, Evers Soerjatin
Markus Niemeier, Partner, Fideres
Asset managers may have concerns about their investment personnel devoting time and attention to supporting a litigation rather than managing investments. How much ongoing involvement can investors expect if they join a shareholder litigation in Europe?
Nadine Herrmann: As reliance and causation are not needed for the typical case based on share price inflator losses, the management can expect to be able to continue their usual business with minimal time demands. The support for the litigation (expert opinions on damages, analysis of account statements, confirmations by custodians about shareholdings, etc.) will typically be handled by service providers instructed by the lead counsel with support from a litigation funder. The asset manager needs only to provide the relevant trading data and confirmations. Non-EU asset managers will also need to provide counsel with corporate information regarding legal existence and proper representation so that standing can be proved. As nearly all these cases will be funded, the investors need not worry about having to spend significant time on the litigation effort. They will be kept informed—usually through a steering committee—but the day to day management is handled by others.
Marcel Evers: Time spent by asset managers and other clients on these cases in general is concentrated in the beginning of the proceedings; it takes some time to substantiate a claim. If a claimant does not furnish sufficient facts to substantiate its claim, the court will reject it. The burden of proof lies with the claimant. It is advisable to engage professional parties that know what to assemble, how and when, and to present an event study at the outset. The efforts thereafter usually are relatively limited.
Simon Bushell: Institutional shareholders can participate as much or as little as they like in the management of the ongoing litigation. However, there must be an appropriate decision- making body and governance structure in place in any class action or group litigation. In very large cases that decision making body may represent several different claimant groups, which adds to the complexity. It is highly advisable to put this in place at the outset. This will help to avoid delays and other potential complications. There is of course a balance to strike between not being bogged down in the day to day management of the claim, and ceding control altogether. Key decisions such as settlement should be reserved to individual claimants.
The Rotterdam District Court took an expansive view of jurisdiction in the recent case against Petrobras. Do you think the court’s decision will lead to an increase in securities litigation filed in the Netherlands? Is it possible the legislature could step in to reverse that trend?
Marcel Evers: The Petrobras case demonstrates that the Dutch courts accept jurisdiction rather quickly if there is a link with the Netherlands, in that case based on the fact that two of the defendants were Dutch subsidiaries of Petrobras. For a specific type of cases—this concerns representative foundations initiating class actions—there is legislation underway that will somewhat reverse this. Under this future legislation, such foundations can only pursue claims before the Dutch courts if there is a sufficient link with the Dutch jurisdiction. This is the case when the represented investors are predominantly domiciled in the Netherlands; the issuer is domiciled in the Netherlands and additional circumstances create a sufficient link with the Dutch jurisdiction; or if the event giving rise to the damage can be located in the Netherlands. This legislation is expected to enter into force soon.
The Amsterdam Court of Appeals finally approved a €1.3 billion class-wide settlement of investor claims against Fortis last year under the WCAM. The process took nearly two years. What are some of the lessons learned from the Fortis case for institutional investors thinking about pursuing claims in the Netherlands?
Marcel Evers: At least two lessons: The court denied that active claimants were treated better than inactive claimants in the settlement. It ruled that the "free-rider problem" is inherent to the Dutch collective action system. The court also gave some consideration to the position of investors only having holder shares. Although the court approved that some compensation is paid for holder shares in this settlement, it noted that it is highly questionable whether holders of only holder shares actually have suffered damages and would have been able to successfully pursue a claim in a court case.
Securities fraud damages methodologies in the US have evolved over decades and been tested in thousands of cases. What approaches have been used in recent cases in Europe and how do they differ from prevailing methodologies used in US cases?
Markus Niemeier: There have been more than 5,000 securities fraud cases filed in the US and although the damages framework in the US keeps evolving, the basic principles are well established.
Two key principles underpin US-style damages methodologies: First, the efficient market theory, which establishes that if a financial market is efficient it incorporates any new piece of information released by a company in the price of securities; and second, the market reliance principle, as courts have long held that investors are implicitly assumed to rely on any statements released by listed companies. This principle is essential for proving common damages on a class action basis.
Across Europe we don’t have such established methodologies because there have been very few filings to date, and almost none of them have been tested in court.
The upshot of this is that economists still look at the US for guidance and employ event studies to determine damages. US-style event studies are regularly used as a benchmark to assess “indicative damages” in European securities claims. Other methodologies have been used in the past, such as fundamental valuations, but those are often looked at in addition to, and not instead of, event studies.
Unlike in the US, certain European jurisdictions recognize so-called “holder claims” by shareholders that purchased shares before the fraud occurred and held their shares until the fraud was disclosed. How are damages calculated on holder claims?
Markus Niemeier: Holder claims are brought by investors alleging that they retained the securities they purchased previously in reliance on the defendant’s misstatements and suffered damages when the share price fell after the truth emerged. Holder claims therefore present an exception to the usual rule in securities fraud cases that only investors alleging they bought or sold securities in reliance on a misstatement or omission may sue.
Damages for holder claims can be approached in different ways. One possible avenue is by looking at out of pocket losses. Following this approach, we would still apply event study methodology and adjust those out of pocket losses for sector and market movements in order to arrive at “excess” out of pocket losses.
What role have experts played in recent European securities fraud settlements?
Markus Niemeier: There haven’t been many European securities fraud cases to date, and even fewer settlements. However, in the few cases that we are aware of, experts have played an important role in providing forensic analysis to identify the correct set of disclosure dates, estimating damages, as well as opining on the reasonableness of the settlement agreement.
In terms of damages quantification, experts have typically run US-style event studies, and for opinions on the overall settlement amount, comparisons were drawn with other (typically US) securities fraud settlements and the amounts achieved in those cases.
Read more of "Expert insights: Securities fraud litigation in Europe":
Part I • Part II
To read the article in full, download the Summer 2019 Burford Quarterly.