Changing landscapes
31 Aug 2022
Experts from Goal Group, Pogust Goodhead, Libra Srl, and Phi Finney McDonald discuss the industry’s pain points surrounding the filing of claims, as well as their predictions for the future of class actions
Image: wellphoto/stock.adobe.com
Kris Verity
Vice president sales, Americas
Goal Group
Rob Okhuijsen
Director, advanced solutions aligned propositions BV and CEO
Libra Srl
Ben Phi
Managing director
Phi Finney McDonald
Noah Wortman
Director, global collective redress
Pogust Goodhead
Do you think there will be any further class actions in relation to the COVID-19 pandemic? If so, what do you think we can expect to see?
Noah Wortman: To date there have been hundreds of class actions filed in relation to the COVID-19 pandemic. Although the pandemic may not have produced the explosion of class actions some predicted, and there has been a mixed bag as to their success, they do not appear to be disappearing anytime soon.
What we can most likely expect to see now are cases akin to the recently filed securities class action against Amazon in the US District Court, that alleges Amazon made false and misleading statements to investors concerning its continued investments in expanding infrastructure and fulfilment network capacity. Investors were assured that this was driven not just by recent increased demand related to the pandemic, but also by “long-term trends” and “strong multi-year demand”. These statements did not necessarily ring true in reality. What we can probably expect to see are more claims being brought as company financials and results begin to crystallise as they relate to statements companies made during the COVID-19 pandemic.
Ben Phi: Unfortunately, the pandemic is far from over and further litigation seems likely. There has already been litigation against insurers across jurisdictions for denial of coverage, some of which are (or may be) framed as class actions. There have also been class actions brought against aged care facilities and other institutions seeking damages for negligence or breaches of contract in relation to their pandemic response.
Each of those circumstances could also give rise to shareholder class actions – for example, against insurers and listed institutional care providers – for failing to keep the market updated about the extent of their exposure to other claims.
Kris Verity: The pandemic has affected us all over the last few years, both personally and professionally. From a security litigation perspective, I would expect the number of actions to increase over the next few years. Many industries have been impacted, so we should expect to see litigation across the board including, but not limited to: pharmaceutical, video-conferencing, technology, supply chain, automotive, and transportation industries. In relation to the pharmaceutical industry, we have already seen the race to release the first vaccine impact some of the industry’s leaders. Therefore, I would not be surprised if that industry is hit hard, but I am also curious as to how and when the other industries will come into play.
What pain points are associated with the monitoring and filing of claims? How can these pain points be overcome?
Verity: Monitoring class actions is one of the biggest pain points as there is no centralised list of cases. Hundreds, if not thousands, of sources need to be researched on a daily basis. In addition, the increased complexity adds the challenge of identifying cases that impact a security and how that affects the asset owners.
Fortunately, companies such as Goal compile this information and simplify the process. Secondly, filing processes are not consistent. Each jurisdiction has its own process, system, documents, and laws. Although it would be simple and easy if every jurisdiction followed the same process, we all know that is unrealistic.
These are just two of the reasons why those looking to process securities class actions recoveries, and those who look to source external providers to remove their time consuming duties, have complex work to do.
Phi: Having worked with institutional investors for well over a decade, we have a good understanding of their pain points and modify our own practices in order to alleviate them. One common complaint is that lawyers and funders setting short deadlines for the return of documents can make the process worse, by not clearly communicating whether it is a hard or soft deadline.
Another complaint is lawyers or funders being opaque about whether investors have to ‘sign up’, or if they can participate as part of an open class. In addition, some funders in particular are inflexible about their contractual terms and amendments, and there is also the question of how to assess the relative merits of competing class actions relating to the same subject matter.
In the Australian jurisdiction, the rise of common fund orders and group costs orders has seen some lawyers and funders attempt to avoid scrutiny from institutional investors – particularly in relation to proposed fees – instead preferring to have that conversation with the Court. While some institutions are comfortable with that, most are taking a much more engaged approach to their class action participation. Many institutional investors are engaging deeply with the options available and taking positive steps to support their preferred legal teams and funding structures, rather than simply leaving such decisions to the Court. However, there is no one-size-fits-all approach.
Wortman: The monitoring and filing of claims in global class and group actions can be a complicated task that requires a great deal of time. It is likely that the sheer volume and international variety of class and group actions, of tracking and participation, will only continue to rise.
That is why it is important for institutional investors to have a regime in place to make sure that they are monitoring and managing global securities litigation and possible avenues of legal redress options across the world.
Participation can be achieved by instituting a class action policy that provides a framework around procedures and guidelines for monitoring a portfolio for potentially actionable losses, to protect interest and maximise any recoveries from those actionable losses. This includes understanding and evaluating securities class and group actions and other forms of collective redress on a global scale.
The following three-stage process of: monitoring and understanding, evaluation, and participation choice, provides a potential model. One step leads to the next, but it does not always have to result in the same outcome.
Ultimately, evaluation will lead to the choice of passive or active participation in a case. What form may active participation take: seeking participation in a class or group action or pursuing an individual or direct action?
One course of action does not necessarily rule out the other. For example, under certain circumstances, an investor could choose to participate passively, before moving towards more active involvement.
To maximise recovery, no matter the method you choose to pursue and evaluate such claims, it is crucial to be properly educated and informed. One way to effectively execute such a complex task is to partner with law firms and others that specialise in analysing and assessing cross-border opportunities, to seek legal redress and to advise on the various forms of shareholder engagement and legal strategy to aid in recovering money lost as a result of corporate malfeasance.
Should class actions be monitored as part of ESG policies? What has been your experience?
Rob Okhuijsen: In general, the market for ESG claims and third-party litigation funding (TPLF) in Europe continues to grow strongly. The market share for TPLF in Europe is now about 15 per cent of the global total. In the field of group and collective action, I mainly see an increase in ESG claims, data and privacy-related claims, and competition claims. At the same time, we see that there are a lot of assets available from more and more funders, law firms, bookbuilders, and platform providers who want to find their way to the same cases. This means strongly increasing competition, a shifting market field, and changing return on investment expectations.
Wortman: The past few years have shown that the current social justice zeitgeist has increased market and shareholder attention to company ESG policies. A growing number of lawsuits on the basis of ESG statements in securities filings, including bond offering documents, have been filed against corporations and governments. A stakeholder’s right to pursue civil remedies varies depending on jurisdiction, but the scope of information that can form the basis of a lawsuit is expanding with greater inclusion of ESG.
ESG disclosures have historically been governed mostly by voluntary frameworks. But the voluntary nature of ESG reporting is on the wane, as evidenced, for example, by the requirement for banks, private equity firms, pension funds, hedge funds, and other asset managers to comply with sweeping new European rules set forth such as the Sustainable Finance Disclosure Regulation (SFDR).
As ESG standards and disclosure become not just best practice, but mandated by various cross-cutting regulations, the opportunity for claims based on alleged negligent misstatement, misrepresentation, or omissions in these disclosures has opened. Such claims have built on an existing body of case law establishing the clear liability of businesses for providing misleading information about their business practices.
As countries increasingly mandate disclosures through legislation such as the SFDR, the Modern Slavery Act 2015 (UK), Transparency in Supply Chains Act 2010 (California), and the Duty of Vigilance Act (France), the publicly available information about companies’ ESG practices is only likely to increase.
The growing importance of social factors within corporate sustainability frameworks may continue to create new areas where investors or consumers identify gaps between disclosures and practices.
Areas that will most likely see increased ESG litigation in the coming years include consumer greenwashing, data privacy, labour-related issues, and health and safety.
Phi: We firmly believe that shareholder class actions, conducted well, play an important role in improving corporate governance standards. This is not only through the enforcement of private rights against a particular wrongdoer, but also the awareness that class actions raise disclosure obligations among company directors more generally.
When I completed the Company Directors Course run by the Australian Institute of Company Directors, I was pleased to see so many of my own cases being taught on the syllabus. Current and future directors were being taught about their legal obligations, and what they needed to do to avoid engaging in the type of conduct that could destroy investor trust and lead to expensive and embarrassing litigation. This can only be good for the market as a whole.
Many shareholder class actions engage with vital environmental and social issues that institutional investors and asset managers need to appreciate in the exercise of their mandates. Asset managers should also monitor for ‘non-shareholder’ class actions more generally, particularly if the asset manager is itself listed, or promotes itself as having ESG credentials or as an ethical investor.
Verity: Class action lawsuits and ESG strategy overlap in many ways. Class action monitoring and filing should be considered as part of an ESG policy, and I am sure awareness and participation will increase as cases continue to arise.
Many cases over the years have had a focus on fraud related to environmental impact, including Petrobras, Volkswagen, and Daimler, to name a few. From a governance perspective corruption, bribery, ethics, and risk are the foundations of security-based litigation. Asset owners should be monitoring all class actions globally as part of their ESG policy, and not just in the US.
What have been the main developments within the class actions landscape over the last year, and what lasting effects could these developments have on the industry?
Okhuijsen: In the Netherlands, the most important development is the introduction of the new Dutch Act on Collective Damages Claims Regime for Collective Actions, also known as WAMCA. The biggest changes compared to the old collective regime are that an exclusive representative (class representative) will be appointed by the court and that damages can also be claimed within the procedure. Under the old regime, the latter required a separate procedure. The new regime is also an opt-out regime, which makes it possible, as a class representative, to claim damages for the entire group of injured or grieved parties.The expectations of lawyers and funders of this new collective regime are enormous. Matters that previously seemed financially uninteresting and related to scattered damages have suddenly come into the picture. And the return expectations of funders and lawyers are high. Too high in my view.
There are a number of major risks here. More than 40 cases have already been filed under the new WAMCA regime. And the market is very fragmented. About eight parties look at almost every case, and for almost every case there are more parties that want to become the exclusive representative, and do not (yet) cooperate with each other. The claims mount up to many tens of billions. The progress is now proceeding slowly and the new regime still contains many uncertainties. The progress is therefore very phased.
The big question is what the rapid and sharp increase in the number of cases and the size of the claims will mean for the appetite of Dutch courts, and how they will look in practice at the fees that are reasonable for funders and lawyers. In a number of cases — take a securities case with only a limited price loss for the investors — you can also question whether these are actually beneficial for the claimants or, under this new regime, mainly for the funders. All this added together means ‘exhausting’ the market, in my opinion, and that is a serious threat.
In the meantime, the defence firms are conducting a counter lobby and keep repeating that we have ‘American practices’ in Europe now. And in a number of cases we are already seeing pushback by Dutch courts, with respect to the admissibility of claim vehicles. Not all parties take governance and procedural requirements seriously enough. Disappointments are therefore inevitable.
At the same time, under the influence of the European Commission and higher courts in, for example, Germany, we see an increasing professionalisation and legal clarity in the field of limitation issues and competition law claims — often to the advantage of claimants. Competition law claims can also be closely related to human rights law. Take, for example, matters concerning excessive pharmaceuticals pricing and ‘pay for delay’. In Germany there are also very favourable developments in the field of the validity of claims assignment models.
Verity: There are still new types of cases appearing, and increased actions on other fairly new cases such as anti-trust. We are also seeing other markets hold more serious discussions around introducing class actions, or similar redress mechanisms. China is one market that has recently confirmed recognition of class actions and this will probably contribute to the rise in volume of cases we anticipate in the near future. As the space expands, so will awareness and education around this topic.
Phi: The class actions landscape continues to evolve at a rapid pace around the world. The continued growth of the litigation funding and insurance markets is creating incredible options for claimants who are interested not only in pursuing their causes of action, but doing so at the lowest possible cost and with the least amount of risk. The globalisation of class actions is also continuing, with information and know-how being shared between jurisdictions.
By way of example, Phi Finney McDonald is now pursuing shareholder claims in the UK, and we are excited about bringing our ideas, energy and experience to the unique challenges in that jurisdiction. These trends will see the law in jurisdictions such as the UK develop at a rapid rate – hopefully in a way that promotes the interests of claimants, rather than protecting wrongdoers. Notwithstanding the current global pressures, the ESG movement is here to stay, with asset managers understanding the importance of promoting good corporate behaviour and long-term sustainability.
Wortman: The last year has seen many developments in the global class action landscape that are of note and impact consumers, investors, and people across the world. One of the most significant areas that saw development was environmental claims and the topic of jurisdiction, particularly as this applies to being able to advance claims in the UK against UK-domiciled parent companies regarding conduct of subsidiaries located outside the UK.
In Vedanta Resources plc and Konkola Copper Mines plc (Appellants) v Lungowe and Ors. (Respondents) (2019) UKSC 20, the UK Supreme Court issued a landmark judgment wherein it allowed over 1800 residents of Chingola, Zambia to bring proceedings in the English courts against Vedanta (incorporated in the UK) and Konkola Copper Mines (KCM) (its Zambian subsidiary), claiming that waste discharged from the Nchanga copper mine (owned and operated by KCM) had polluted local waterways, caused personal injury to local residents, damage to property, and loss of income.
In Okpabi v Royal Dutch Shell (2021) UKSC 3, the UK Supreme Court allowed a claim by Nigerian citizens against The Shell Petroleum Development Company of Nigeria Limited (SPDC) to proceed. The Okpabi claims arise from oil leaks from pipelines and associated infrastructure operated by SPDC as part of a joint venture in the Niger Delta and are brought into negligence. The claimant inhabitants of the region contend that RDS owed them a duty of care because it exercised significant control over material aspects of SPDC’s operations and/or assumed responsibility for SPDC’s operations, which allegedly failed to protect the appellants against the risk of foreseeable harm arising from them.
The UK Supreme Court’s recent decisions in Vedanta and Okpabi reinforces the position regarding the flexibility of the English courts’ jurisdiction over parent company liability claims. In both Vedanta and Okpabi, the UK Supreme Court held that there were real prospects of establishing control or responsibility for environmental policies at a group level. Additionally, in Vedanta, there was also concern that the claimants could not access justice in Zambia because of lack of legal aid, lack of experienced lawyers to bring this type of complex and large-scale litigation against very well-resourced defendants. Moreover, as shown in Okpabi, ‘real’ and ‘triable’ issues such as there being damage, the subsidiary was responsible, and there was a good and arguable case that the parent company controlled its activities.
Unlike in Vedanta and Okpabi, in Município de Mariana and Ors. v BHP Group UK Ltd. and Ors. [2022] EWCA Civ. 951, litigation had already been brought in Brazil in relation to the largest environmental disaster in Brazilian history when the Fundão Dam burst in November of 2015 and sent toxic mining waste over 700km along the waterways of the River Doce.
While at first instance the High Court held that the parallel proceedings in Brazil and the sheer numbers of potential claimants (more than 200,000 and whose first language was Portuguese) rendered any English action ‘irredeemably unmanageable’, the UK Court of Appeal found that conclusion to be unsustainable. The UK Court of Appeal also provided guidance in relation to best practice in class actions. It cited the “clear illustrations of case management options” provided by the claimants and solicitors, and the “well-structured, coherent and entirely digestible” Particulars of Claim as factors in its conclusion that the claim was not irredeemably unmanageable.
As result of the above, it should be expected that proceedings relating to ESG issues abroad will continue to be brought in the UK courts.
To what extent do you think digital assets will be impacted by class actions as their popularity grows?
Phi: This is definitely a space to watch. Much will depend on where the industry heads, whether it becomes more established, and the extent to which it is regulated. Without wishing to be disparaging, there is a ‘Wild West’ element at present, and investors that have suffered losses often have no means to claim those losses back.
Another digital asset that will be litigated is our personal information and data — who owns it, what can be collected, what it can be used for, and how much it is worth are all questions that we expect to see probed in the years ahead.
Verity: Considering the lack of regulation surrounding crypto-currency and digital assets, I expect there to be more class actions related to these products in the near future. As larger Tier 1 and 2 custodians and prime brokers build applications and release products to service these digital assets, it will build a foundation and provide a platform for class action lawsuits. I fully expect to see a wave of litigation surrounding these products similar to anti-trust over the last few years, especially now that regulations and control are being discussed.
Wortman: According to a May 2022 report by Morrison Cohen LLP, crypto has generated more than 200 class actions and other private litigation as at time of publication. This represents more than a 50 per cent increase since the start of 2020. Indeed, investors across the globe are facing approximately US$1.5 trillion in recent cryptocurrency losses, which has prompted the questions of: who, if anyone, is to blame, and who can be held to account. Interest rates and inflation continue to increase. Bitcoin has lost approximately 50 per cent of its value this year, and Ethereum is down approximately 65 per cent. The total value of crypto assets has dropped to less than US$1 trillion from its peak of US$3 trillion in 2021.
Digital assets are increasingly making their way into the economy with companies like Tesla, PayPal, and Square, plus financial institutions like J.P. Morgan, Mastercard, and Goldman Sachs backing cryptocurrency. Since 2016, investors have filed more than 35 securities class actions related to cryptocurrencies that include allegations that cryptocurrency token issuers and cryptocurrency asset exchanges are offering and selling unregistered securities in violation of applicable securities laws.
Given the millions poured into promoting crypto, often with celebrity endorsements, class actions and other regulatory enforcement was arguably inevitable. Charles Randell, chair of the UK’s Financial Conduct Authority stated in a speech to the Cambridge International Symposium on Economic Crime in 2021 that he could not say if the particular token was a scam “but social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation”.
It is not just cryptocurrencies under intense scrutiny by investors and government regulators, but other digital assets as well. This includes wire and money laundering in connection with non-fungible tokens. The advent of digital assets might be relatively new, but the alleged fraud being committed is nothing new at all.
However, prosecuting fraud in the crypto world is extremely difficult. In going after digital fraud you hit a central question which is: are cryptocurrencies securities? No cryptocurrency has registered as a security. The exchanges through which they may pass are not backed by the government, like the Federal Deposit Insurance Corporation in the US. Since crypto exchanges are not regulated by the U.S. Securities and Exchange Commission, it can be extremely difficult to find out who is on the other side of the trade. Therefore, it will be very tough to establish liability for losses.
Okhuijsen: The most important development for the coming years will be how the European Member States implement the new directive on representative actions for the protection of the collective interests of consumers. In most Member States, there is still no legal regime for collective actions, which can provide consumers with efficient and low-threshold access to justice.
For the Member States that already have a mechanism, this means further improvement. This will reduce legal inequality within the European Union, lead to an increase in collective actions, and put more pressure on multinationals to improve their behaviour. On the crypto matter, at time of writing, a landmark competition claim has been filed against major cryptocurrency exchanges, seeking damages of up to £9.9 billion. This claim is the first in competition law applying to the digital assets sector, on behalf of approximately 240,000 investors.
Phi: We see class actions becoming even more widely accepted as a mechanism for holding corporations and governments accountable for their misconduct. The costs of litigation will continue to fall, while the quality of legal and related services available to claimants will continue to grow.
Wortman: The world has continued to become an increasingly globalised marketplace. Class action lawsuits — from the Volkswagen “Dieselgate” emission scandal to environmental claims against oil giants or data privacy litigation against big tech companies — increasingly take on cross-border dimensions. This trend shows no signs of stopping anytime soon. The development of class and group action regimes in non-US jurisdictions will also continue to be explored and expanded by consumers and investors seeking access to justice to redress for the losses and injuries caused by the world’s largest corporate malfeasance.
Multiple consumers may easily be affected by the same harmful conduct of a trader due to globalisation and digitalisation. The European Commission’s New Deal for Consumers passed on 24 November 2020 and aims to improve the position of consumers within the EU by allowing consumer groups to initiate collective actions. Now that we are approaching the end of 2022, and the EU member countries are set to conform to the directive’s mandate, more consumer organisations are beginning to take a greater and proactive role in seeking collective redress for their constituencies.
There will be continued evolution of collective redress regimes across the globe — litigation finance will continue to mature, and legal technology companies will continue to innovate.
All of these factors will benefit claimants in current and future collective redress actions as the parties also become more sophisticated. There will be greater access to justice, and better tools to achieve the justice sought.
Verity: The class actions space is only going to continue to expand. Cases will continue to appear and possibly become more complex. As a result, the service to file these claims will move away from traditional service providers who are already struggling to find they do not have the resources available to stay up to speed on the current caseload, as well as the knowledge to handle the additional complexities.
To add to that, as the last few years have been so turbulent, many industries have been greatly impacted and I believe further actions will arise from this. This space is not one I envisage slowing down any time soon. In fact the opposite applies.
Vice president sales, Americas
Goal Group
Rob Okhuijsen
Director, advanced solutions aligned propositions BV and CEO
Libra Srl
Ben Phi
Managing director
Phi Finney McDonald
Noah Wortman
Director, global collective redress
Pogust Goodhead
Do you think there will be any further class actions in relation to the COVID-19 pandemic? If so, what do you think we can expect to see?
Noah Wortman: To date there have been hundreds of class actions filed in relation to the COVID-19 pandemic. Although the pandemic may not have produced the explosion of class actions some predicted, and there has been a mixed bag as to their success, they do not appear to be disappearing anytime soon.
What we can most likely expect to see now are cases akin to the recently filed securities class action against Amazon in the US District Court, that alleges Amazon made false and misleading statements to investors concerning its continued investments in expanding infrastructure and fulfilment network capacity. Investors were assured that this was driven not just by recent increased demand related to the pandemic, but also by “long-term trends” and “strong multi-year demand”. These statements did not necessarily ring true in reality. What we can probably expect to see are more claims being brought as company financials and results begin to crystallise as they relate to statements companies made during the COVID-19 pandemic.
Ben Phi: Unfortunately, the pandemic is far from over and further litigation seems likely. There has already been litigation against insurers across jurisdictions for denial of coverage, some of which are (or may be) framed as class actions. There have also been class actions brought against aged care facilities and other institutions seeking damages for negligence or breaches of contract in relation to their pandemic response.
Each of those circumstances could also give rise to shareholder class actions – for example, against insurers and listed institutional care providers – for failing to keep the market updated about the extent of their exposure to other claims.
Kris Verity: The pandemic has affected us all over the last few years, both personally and professionally. From a security litigation perspective, I would expect the number of actions to increase over the next few years. Many industries have been impacted, so we should expect to see litigation across the board including, but not limited to: pharmaceutical, video-conferencing, technology, supply chain, automotive, and transportation industries. In relation to the pharmaceutical industry, we have already seen the race to release the first vaccine impact some of the industry’s leaders. Therefore, I would not be surprised if that industry is hit hard, but I am also curious as to how and when the other industries will come into play.
What pain points are associated with the monitoring and filing of claims? How can these pain points be overcome?
Verity: Monitoring class actions is one of the biggest pain points as there is no centralised list of cases. Hundreds, if not thousands, of sources need to be researched on a daily basis. In addition, the increased complexity adds the challenge of identifying cases that impact a security and how that affects the asset owners.
Fortunately, companies such as Goal compile this information and simplify the process. Secondly, filing processes are not consistent. Each jurisdiction has its own process, system, documents, and laws. Although it would be simple and easy if every jurisdiction followed the same process, we all know that is unrealistic.
These are just two of the reasons why those looking to process securities class actions recoveries, and those who look to source external providers to remove their time consuming duties, have complex work to do.
Phi: Having worked with institutional investors for well over a decade, we have a good understanding of their pain points and modify our own practices in order to alleviate them. One common complaint is that lawyers and funders setting short deadlines for the return of documents can make the process worse, by not clearly communicating whether it is a hard or soft deadline.
Another complaint is lawyers or funders being opaque about whether investors have to ‘sign up’, or if they can participate as part of an open class. In addition, some funders in particular are inflexible about their contractual terms and amendments, and there is also the question of how to assess the relative merits of competing class actions relating to the same subject matter.
In the Australian jurisdiction, the rise of common fund orders and group costs orders has seen some lawyers and funders attempt to avoid scrutiny from institutional investors – particularly in relation to proposed fees – instead preferring to have that conversation with the Court. While some institutions are comfortable with that, most are taking a much more engaged approach to their class action participation. Many institutional investors are engaging deeply with the options available and taking positive steps to support their preferred legal teams and funding structures, rather than simply leaving such decisions to the Court. However, there is no one-size-fits-all approach.
Wortman: The monitoring and filing of claims in global class and group actions can be a complicated task that requires a great deal of time. It is likely that the sheer volume and international variety of class and group actions, of tracking and participation, will only continue to rise.
That is why it is important for institutional investors to have a regime in place to make sure that they are monitoring and managing global securities litigation and possible avenues of legal redress options across the world.
Participation can be achieved by instituting a class action policy that provides a framework around procedures and guidelines for monitoring a portfolio for potentially actionable losses, to protect interest and maximise any recoveries from those actionable losses. This includes understanding and evaluating securities class and group actions and other forms of collective redress on a global scale.
The following three-stage process of: monitoring and understanding, evaluation, and participation choice, provides a potential model. One step leads to the next, but it does not always have to result in the same outcome.
Ultimately, evaluation will lead to the choice of passive or active participation in a case. What form may active participation take: seeking participation in a class or group action or pursuing an individual or direct action?
One course of action does not necessarily rule out the other. For example, under certain circumstances, an investor could choose to participate passively, before moving towards more active involvement.
To maximise recovery, no matter the method you choose to pursue and evaluate such claims, it is crucial to be properly educated and informed. One way to effectively execute such a complex task is to partner with law firms and others that specialise in analysing and assessing cross-border opportunities, to seek legal redress and to advise on the various forms of shareholder engagement and legal strategy to aid in recovering money lost as a result of corporate malfeasance.
Should class actions be monitored as part of ESG policies? What has been your experience?
Rob Okhuijsen: In general, the market for ESG claims and third-party litigation funding (TPLF) in Europe continues to grow strongly. The market share for TPLF in Europe is now about 15 per cent of the global total. In the field of group and collective action, I mainly see an increase in ESG claims, data and privacy-related claims, and competition claims. At the same time, we see that there are a lot of assets available from more and more funders, law firms, bookbuilders, and platform providers who want to find their way to the same cases. This means strongly increasing competition, a shifting market field, and changing return on investment expectations.
Wortman: The past few years have shown that the current social justice zeitgeist has increased market and shareholder attention to company ESG policies. A growing number of lawsuits on the basis of ESG statements in securities filings, including bond offering documents, have been filed against corporations and governments. A stakeholder’s right to pursue civil remedies varies depending on jurisdiction, but the scope of information that can form the basis of a lawsuit is expanding with greater inclusion of ESG.
ESG disclosures have historically been governed mostly by voluntary frameworks. But the voluntary nature of ESG reporting is on the wane, as evidenced, for example, by the requirement for banks, private equity firms, pension funds, hedge funds, and other asset managers to comply with sweeping new European rules set forth such as the Sustainable Finance Disclosure Regulation (SFDR).
As ESG standards and disclosure become not just best practice, but mandated by various cross-cutting regulations, the opportunity for claims based on alleged negligent misstatement, misrepresentation, or omissions in these disclosures has opened. Such claims have built on an existing body of case law establishing the clear liability of businesses for providing misleading information about their business practices.
As countries increasingly mandate disclosures through legislation such as the SFDR, the Modern Slavery Act 2015 (UK), Transparency in Supply Chains Act 2010 (California), and the Duty of Vigilance Act (France), the publicly available information about companies’ ESG practices is only likely to increase.
The growing importance of social factors within corporate sustainability frameworks may continue to create new areas where investors or consumers identify gaps between disclosures and practices.
Areas that will most likely see increased ESG litigation in the coming years include consumer greenwashing, data privacy, labour-related issues, and health and safety.
Phi: We firmly believe that shareholder class actions, conducted well, play an important role in improving corporate governance standards. This is not only through the enforcement of private rights against a particular wrongdoer, but also the awareness that class actions raise disclosure obligations among company directors more generally.
When I completed the Company Directors Course run by the Australian Institute of Company Directors, I was pleased to see so many of my own cases being taught on the syllabus. Current and future directors were being taught about their legal obligations, and what they needed to do to avoid engaging in the type of conduct that could destroy investor trust and lead to expensive and embarrassing litigation. This can only be good for the market as a whole.
Many shareholder class actions engage with vital environmental and social issues that institutional investors and asset managers need to appreciate in the exercise of their mandates. Asset managers should also monitor for ‘non-shareholder’ class actions more generally, particularly if the asset manager is itself listed, or promotes itself as having ESG credentials or as an ethical investor.
Verity: Class action lawsuits and ESG strategy overlap in many ways. Class action monitoring and filing should be considered as part of an ESG policy, and I am sure awareness and participation will increase as cases continue to arise.
Many cases over the years have had a focus on fraud related to environmental impact, including Petrobras, Volkswagen, and Daimler, to name a few. From a governance perspective corruption, bribery, ethics, and risk are the foundations of security-based litigation. Asset owners should be monitoring all class actions globally as part of their ESG policy, and not just in the US.
What have been the main developments within the class actions landscape over the last year, and what lasting effects could these developments have on the industry?
Okhuijsen: In the Netherlands, the most important development is the introduction of the new Dutch Act on Collective Damages Claims Regime for Collective Actions, also known as WAMCA. The biggest changes compared to the old collective regime are that an exclusive representative (class representative) will be appointed by the court and that damages can also be claimed within the procedure. Under the old regime, the latter required a separate procedure. The new regime is also an opt-out regime, which makes it possible, as a class representative, to claim damages for the entire group of injured or grieved parties.The expectations of lawyers and funders of this new collective regime are enormous. Matters that previously seemed financially uninteresting and related to scattered damages have suddenly come into the picture. And the return expectations of funders and lawyers are high. Too high in my view.
There are a number of major risks here. More than 40 cases have already been filed under the new WAMCA regime. And the market is very fragmented. About eight parties look at almost every case, and for almost every case there are more parties that want to become the exclusive representative, and do not (yet) cooperate with each other. The claims mount up to many tens of billions. The progress is now proceeding slowly and the new regime still contains many uncertainties. The progress is therefore very phased.
The big question is what the rapid and sharp increase in the number of cases and the size of the claims will mean for the appetite of Dutch courts, and how they will look in practice at the fees that are reasonable for funders and lawyers. In a number of cases — take a securities case with only a limited price loss for the investors — you can also question whether these are actually beneficial for the claimants or, under this new regime, mainly for the funders. All this added together means ‘exhausting’ the market, in my opinion, and that is a serious threat.
In the meantime, the defence firms are conducting a counter lobby and keep repeating that we have ‘American practices’ in Europe now. And in a number of cases we are already seeing pushback by Dutch courts, with respect to the admissibility of claim vehicles. Not all parties take governance and procedural requirements seriously enough. Disappointments are therefore inevitable.
At the same time, under the influence of the European Commission and higher courts in, for example, Germany, we see an increasing professionalisation and legal clarity in the field of limitation issues and competition law claims — often to the advantage of claimants. Competition law claims can also be closely related to human rights law. Take, for example, matters concerning excessive pharmaceuticals pricing and ‘pay for delay’. In Germany there are also very favourable developments in the field of the validity of claims assignment models.
Verity: There are still new types of cases appearing, and increased actions on other fairly new cases such as anti-trust. We are also seeing other markets hold more serious discussions around introducing class actions, or similar redress mechanisms. China is one market that has recently confirmed recognition of class actions and this will probably contribute to the rise in volume of cases we anticipate in the near future. As the space expands, so will awareness and education around this topic.
Phi: The class actions landscape continues to evolve at a rapid pace around the world. The continued growth of the litigation funding and insurance markets is creating incredible options for claimants who are interested not only in pursuing their causes of action, but doing so at the lowest possible cost and with the least amount of risk. The globalisation of class actions is also continuing, with information and know-how being shared between jurisdictions.
By way of example, Phi Finney McDonald is now pursuing shareholder claims in the UK, and we are excited about bringing our ideas, energy and experience to the unique challenges in that jurisdiction. These trends will see the law in jurisdictions such as the UK develop at a rapid rate – hopefully in a way that promotes the interests of claimants, rather than protecting wrongdoers. Notwithstanding the current global pressures, the ESG movement is here to stay, with asset managers understanding the importance of promoting good corporate behaviour and long-term sustainability.
Wortman: The last year has seen many developments in the global class action landscape that are of note and impact consumers, investors, and people across the world. One of the most significant areas that saw development was environmental claims and the topic of jurisdiction, particularly as this applies to being able to advance claims in the UK against UK-domiciled parent companies regarding conduct of subsidiaries located outside the UK.
In Vedanta Resources plc and Konkola Copper Mines plc (Appellants) v Lungowe and Ors. (Respondents) (2019) UKSC 20, the UK Supreme Court issued a landmark judgment wherein it allowed over 1800 residents of Chingola, Zambia to bring proceedings in the English courts against Vedanta (incorporated in the UK) and Konkola Copper Mines (KCM) (its Zambian subsidiary), claiming that waste discharged from the Nchanga copper mine (owned and operated by KCM) had polluted local waterways, caused personal injury to local residents, damage to property, and loss of income.
In Okpabi v Royal Dutch Shell (2021) UKSC 3, the UK Supreme Court allowed a claim by Nigerian citizens against The Shell Petroleum Development Company of Nigeria Limited (SPDC) to proceed. The Okpabi claims arise from oil leaks from pipelines and associated infrastructure operated by SPDC as part of a joint venture in the Niger Delta and are brought into negligence. The claimant inhabitants of the region contend that RDS owed them a duty of care because it exercised significant control over material aspects of SPDC’s operations and/or assumed responsibility for SPDC’s operations, which allegedly failed to protect the appellants against the risk of foreseeable harm arising from them.
The UK Supreme Court’s recent decisions in Vedanta and Okpabi reinforces the position regarding the flexibility of the English courts’ jurisdiction over parent company liability claims. In both Vedanta and Okpabi, the UK Supreme Court held that there were real prospects of establishing control or responsibility for environmental policies at a group level. Additionally, in Vedanta, there was also concern that the claimants could not access justice in Zambia because of lack of legal aid, lack of experienced lawyers to bring this type of complex and large-scale litigation against very well-resourced defendants. Moreover, as shown in Okpabi, ‘real’ and ‘triable’ issues such as there being damage, the subsidiary was responsible, and there was a good and arguable case that the parent company controlled its activities.
Unlike in Vedanta and Okpabi, in Município de Mariana and Ors. v BHP Group UK Ltd. and Ors. [2022] EWCA Civ. 951, litigation had already been brought in Brazil in relation to the largest environmental disaster in Brazilian history when the Fundão Dam burst in November of 2015 and sent toxic mining waste over 700km along the waterways of the River Doce.
While at first instance the High Court held that the parallel proceedings in Brazil and the sheer numbers of potential claimants (more than 200,000 and whose first language was Portuguese) rendered any English action ‘irredeemably unmanageable’, the UK Court of Appeal found that conclusion to be unsustainable. The UK Court of Appeal also provided guidance in relation to best practice in class actions. It cited the “clear illustrations of case management options” provided by the claimants and solicitors, and the “well-structured, coherent and entirely digestible” Particulars of Claim as factors in its conclusion that the claim was not irredeemably unmanageable.
As result of the above, it should be expected that proceedings relating to ESG issues abroad will continue to be brought in the UK courts.
To what extent do you think digital assets will be impacted by class actions as their popularity grows?
Phi: This is definitely a space to watch. Much will depend on where the industry heads, whether it becomes more established, and the extent to which it is regulated. Without wishing to be disparaging, there is a ‘Wild West’ element at present, and investors that have suffered losses often have no means to claim those losses back.
Another digital asset that will be litigated is our personal information and data — who owns it, what can be collected, what it can be used for, and how much it is worth are all questions that we expect to see probed in the years ahead.
Verity: Considering the lack of regulation surrounding crypto-currency and digital assets, I expect there to be more class actions related to these products in the near future. As larger Tier 1 and 2 custodians and prime brokers build applications and release products to service these digital assets, it will build a foundation and provide a platform for class action lawsuits. I fully expect to see a wave of litigation surrounding these products similar to anti-trust over the last few years, especially now that regulations and control are being discussed.
Wortman: According to a May 2022 report by Morrison Cohen LLP, crypto has generated more than 200 class actions and other private litigation as at time of publication. This represents more than a 50 per cent increase since the start of 2020. Indeed, investors across the globe are facing approximately US$1.5 trillion in recent cryptocurrency losses, which has prompted the questions of: who, if anyone, is to blame, and who can be held to account. Interest rates and inflation continue to increase. Bitcoin has lost approximately 50 per cent of its value this year, and Ethereum is down approximately 65 per cent. The total value of crypto assets has dropped to less than US$1 trillion from its peak of US$3 trillion in 2021.
Digital assets are increasingly making their way into the economy with companies like Tesla, PayPal, and Square, plus financial institutions like J.P. Morgan, Mastercard, and Goldman Sachs backing cryptocurrency. Since 2016, investors have filed more than 35 securities class actions related to cryptocurrencies that include allegations that cryptocurrency token issuers and cryptocurrency asset exchanges are offering and selling unregistered securities in violation of applicable securities laws.
Given the millions poured into promoting crypto, often with celebrity endorsements, class actions and other regulatory enforcement was arguably inevitable. Charles Randell, chair of the UK’s Financial Conduct Authority stated in a speech to the Cambridge International Symposium on Economic Crime in 2021 that he could not say if the particular token was a scam “but social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation”.
It is not just cryptocurrencies under intense scrutiny by investors and government regulators, but other digital assets as well. This includes wire and money laundering in connection with non-fungible tokens. The advent of digital assets might be relatively new, but the alleged fraud being committed is nothing new at all.
However, prosecuting fraud in the crypto world is extremely difficult. In going after digital fraud you hit a central question which is: are cryptocurrencies securities? No cryptocurrency has registered as a security. The exchanges through which they may pass are not backed by the government, like the Federal Deposit Insurance Corporation in the US. Since crypto exchanges are not regulated by the U.S. Securities and Exchange Commission, it can be extremely difficult to find out who is on the other side of the trade. Therefore, it will be very tough to establish liability for losses.
Okhuijsen: The most important development for the coming years will be how the European Member States implement the new directive on representative actions for the protection of the collective interests of consumers. In most Member States, there is still no legal regime for collective actions, which can provide consumers with efficient and low-threshold access to justice.
For the Member States that already have a mechanism, this means further improvement. This will reduce legal inequality within the European Union, lead to an increase in collective actions, and put more pressure on multinationals to improve their behaviour. On the crypto matter, at time of writing, a landmark competition claim has been filed against major cryptocurrency exchanges, seeking damages of up to £9.9 billion. This claim is the first in competition law applying to the digital assets sector, on behalf of approximately 240,000 investors.
Phi: We see class actions becoming even more widely accepted as a mechanism for holding corporations and governments accountable for their misconduct. The costs of litigation will continue to fall, while the quality of legal and related services available to claimants will continue to grow.
Wortman: The world has continued to become an increasingly globalised marketplace. Class action lawsuits — from the Volkswagen “Dieselgate” emission scandal to environmental claims against oil giants or data privacy litigation against big tech companies — increasingly take on cross-border dimensions. This trend shows no signs of stopping anytime soon. The development of class and group action regimes in non-US jurisdictions will also continue to be explored and expanded by consumers and investors seeking access to justice to redress for the losses and injuries caused by the world’s largest corporate malfeasance.
Multiple consumers may easily be affected by the same harmful conduct of a trader due to globalisation and digitalisation. The European Commission’s New Deal for Consumers passed on 24 November 2020 and aims to improve the position of consumers within the EU by allowing consumer groups to initiate collective actions. Now that we are approaching the end of 2022, and the EU member countries are set to conform to the directive’s mandate, more consumer organisations are beginning to take a greater and proactive role in seeking collective redress for their constituencies.
There will be continued evolution of collective redress regimes across the globe — litigation finance will continue to mature, and legal technology companies will continue to innovate.
All of these factors will benefit claimants in current and future collective redress actions as the parties also become more sophisticated. There will be greater access to justice, and better tools to achieve the justice sought.
Verity: The class actions space is only going to continue to expand. Cases will continue to appear and possibly become more complex. As a result, the service to file these claims will move away from traditional service providers who are already struggling to find they do not have the resources available to stay up to speed on the current caseload, as well as the knowledge to handle the additional complexities.
To add to that, as the last few years have been so turbulent, many industries have been greatly impacted and I believe further actions will arise from this. This space is not one I envisage slowing down any time soon. In fact the opposite applies.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
