Filing away the damage
12 June 2013
Increased corporate governance scrutiny and some hefty class action lawsuits have made custodians and their outsourced competitors sit up and take note. AST investigates
Image: Shutterstock
Sometimes, custodians slip up. Late last year, Financial Recovery Technologies (FRT) explained in a release that one of its clients was previously relying on a different custodian to process securities class action claims.
The client had changed custodians prior to partnering with FRT, which created a period of time when there was a lot of uncertainty as to the filing of class action claims. FRT discovered that as a result of the custodian change and the gap in class action coverage it created, a major filing was missed by both custodians on behalf of the client.
“When a firm relies on multiple custodians or moves from one custodian to another, the accuracy of its securities class action coverage can be affected,” said FRT.
“Transferring funds or accounts between custodians can cause breaks in the overall transaction data picture. The accuracy of a firm’s transaction data directly affects the accuracy of claims. Incomplete or impartial data history can result in completely missed filings or incorrect filings for which the maximum recovery will not be obtained.”
With ever-tightening reins on corporate governance scrutiny, as well as growing class action lawsuits, institutional investors simply cannot afford to ignore what could potentially be millions in clients’ securities class action settlements.
But there are obstacles in achieving a satisfactory outcome. “Usually the deadlines to participate to a class action are less restrictive than for a corporate action and the class action offer lasts for a few weeks and months. Therefore, there is less pressure on the global custodians to provide timely notification,” explains Philippe Kerdoncuff, head of global custody product at BNP Paribas Securities Services.
“However, if notification comes late, you give less time to the investors to decide to participate or not, you have less time to retrieve all historical data that are required for the filing and ultimately as for any other corporate action, you may miss the deadline and not be able to file and lose the opportunity to recover the available money.” ??
Typically, the country that has been first up to bat when it comes to filing class action settlements has been the US. “For several years, the US has been the most developed legislature for securities class actions,” says Stephen Everard, CEO of GOAL Group, a class action service provider. “Now, however, although the US is still the dominant centre, securities class action growth elsewhere around the globe is now increasing rapidly, and is predicted to mirror the growth of the US scene in the early part of the 21st century.”
“The largest markets aside from the US are Canada and Australia,” says Kerdoncuff. “Canada and Australia continue to grow quickly, and the most significant new market may be the Netherlands.”
International diversification of class actions seems to have resulted from a combination of restrictions on jurisdiction definitions in US federal courts, along with a growing desire to develop domestic class action procedures in many countries around the globe, says Everard.
“A handful appear to be allowing international class actions to be tried in their courts, even if the securities in question are quoted on a non-US exchange, and the case involves only a minority of domestic investors.”
Recent Supreme Court activity has also limited the ability of overseas plaintiffs to bring securities class action claims within the US. A particular blow for foreign litigants came in 2010 when the court ruled in Morrison v National Australia Bank that US securities laws only apply to companies listed on US exchanges.
“This wiped out the eligibility of f-cubed actions, which involve a non-US shareholder suing a non-US company whose stock was purchased on a non-US exchange, and who is bringing a case in a US court,” says Everard.
“As a result, plaintiffs are now instigating litigation in more flexible jurisdictions in Europe and overseas. This means that international companies listed on multiple exchanges are now having to defend themselves against securities class actions in multiple jurisdictions. This is further exacerbated as regulators tighten regulation following the global financial markets crisis and governments institute fiercer enforcement measures.”
“There is a pattern developing whereby non-US companies with ADRs (American depository receipts) are sued in the US and then a foundation is established in the Netherlands to bring suit on behalf of non-US holders of the stock,” says Kerdoncuff.
“Outside of the US, the Netherlands poses the greatest risk for litigation in a class action lawsuit for issuers,” says Kerdoncuff. “Although Canada and Australia have active and well developed class action systems, their laws are generally only applied within those countries or to issuers with substantial contacts within those countries.”
The Netherlands is among several jurisdictions where US-style securities litigation is developing and where a framework is already in place, alongside Germany, Canada, Australia and Japan, comments Everard.
“These geographies are current front-runners in the growing pressure of global class action cases looking for a home in a legislature that is able to define and prosecute a global class.”
However, despite this growing global focus, US securities class actions are still increasing and Goal Group’s analysis of its class actions knowledge base shows that, although non-participation rates have marginally improved since 2007, just over 24 percent of possible claims are still not being filed by eligible investors. Between 2000 and 2011, losses due to US and non-US investors’ non-participation in securities class actions amounted to $18.3 billion.
But, now that global class actions are moving away from the singular and relatively straightforward focus on a single legislature—the US—to a multiple and complex series of legal systems spread across the world, custodians, trustees, fund boards and fund managers may once again feel daunted by the international monitoring, participation, claims and payments task, concludes Everard.
“However, the availability of tried and tested participation services means that fiduciaries can easily fulfill their duties to shareholders and beneficiaries, duties that are increasingly being written into fund management and custodian service contracts.”
The client had changed custodians prior to partnering with FRT, which created a period of time when there was a lot of uncertainty as to the filing of class action claims. FRT discovered that as a result of the custodian change and the gap in class action coverage it created, a major filing was missed by both custodians on behalf of the client.
“When a firm relies on multiple custodians or moves from one custodian to another, the accuracy of its securities class action coverage can be affected,” said FRT.
“Transferring funds or accounts between custodians can cause breaks in the overall transaction data picture. The accuracy of a firm’s transaction data directly affects the accuracy of claims. Incomplete or impartial data history can result in completely missed filings or incorrect filings for which the maximum recovery will not be obtained.”
With ever-tightening reins on corporate governance scrutiny, as well as growing class action lawsuits, institutional investors simply cannot afford to ignore what could potentially be millions in clients’ securities class action settlements.
But there are obstacles in achieving a satisfactory outcome. “Usually the deadlines to participate to a class action are less restrictive than for a corporate action and the class action offer lasts for a few weeks and months. Therefore, there is less pressure on the global custodians to provide timely notification,” explains Philippe Kerdoncuff, head of global custody product at BNP Paribas Securities Services.
“However, if notification comes late, you give less time to the investors to decide to participate or not, you have less time to retrieve all historical data that are required for the filing and ultimately as for any other corporate action, you may miss the deadline and not be able to file and lose the opportunity to recover the available money.” ??
Typically, the country that has been first up to bat when it comes to filing class action settlements has been the US. “For several years, the US has been the most developed legislature for securities class actions,” says Stephen Everard, CEO of GOAL Group, a class action service provider. “Now, however, although the US is still the dominant centre, securities class action growth elsewhere around the globe is now increasing rapidly, and is predicted to mirror the growth of the US scene in the early part of the 21st century.”
“The largest markets aside from the US are Canada and Australia,” says Kerdoncuff. “Canada and Australia continue to grow quickly, and the most significant new market may be the Netherlands.”
International diversification of class actions seems to have resulted from a combination of restrictions on jurisdiction definitions in US federal courts, along with a growing desire to develop domestic class action procedures in many countries around the globe, says Everard.
“A handful appear to be allowing international class actions to be tried in their courts, even if the securities in question are quoted on a non-US exchange, and the case involves only a minority of domestic investors.”
Recent Supreme Court activity has also limited the ability of overseas plaintiffs to bring securities class action claims within the US. A particular blow for foreign litigants came in 2010 when the court ruled in Morrison v National Australia Bank that US securities laws only apply to companies listed on US exchanges.
“This wiped out the eligibility of f-cubed actions, which involve a non-US shareholder suing a non-US company whose stock was purchased on a non-US exchange, and who is bringing a case in a US court,” says Everard.
“As a result, plaintiffs are now instigating litigation in more flexible jurisdictions in Europe and overseas. This means that international companies listed on multiple exchanges are now having to defend themselves against securities class actions in multiple jurisdictions. This is further exacerbated as regulators tighten regulation following the global financial markets crisis and governments institute fiercer enforcement measures.”
“There is a pattern developing whereby non-US companies with ADRs (American depository receipts) are sued in the US and then a foundation is established in the Netherlands to bring suit on behalf of non-US holders of the stock,” says Kerdoncuff.
“Outside of the US, the Netherlands poses the greatest risk for litigation in a class action lawsuit for issuers,” says Kerdoncuff. “Although Canada and Australia have active and well developed class action systems, their laws are generally only applied within those countries or to issuers with substantial contacts within those countries.”
The Netherlands is among several jurisdictions where US-style securities litigation is developing and where a framework is already in place, alongside Germany, Canada, Australia and Japan, comments Everard.
“These geographies are current front-runners in the growing pressure of global class action cases looking for a home in a legislature that is able to define and prosecute a global class.”
However, despite this growing global focus, US securities class actions are still increasing and Goal Group’s analysis of its class actions knowledge base shows that, although non-participation rates have marginally improved since 2007, just over 24 percent of possible claims are still not being filed by eligible investors. Between 2000 and 2011, losses due to US and non-US investors’ non-participation in securities class actions amounted to $18.3 billion.
But, now that global class actions are moving away from the singular and relatively straightforward focus on a single legislature—the US—to a multiple and complex series of legal systems spread across the world, custodians, trustees, fund boards and fund managers may once again feel daunted by the international monitoring, participation, claims and payments task, concludes Everard.
“However, the availability of tried and tested participation services means that fiduciaries can easily fulfill their duties to shareholders and beneficiaries, duties that are increasingly being written into fund management and custodian service contracts.”
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