Australia has become the second-most importantfor shareholder litigation, through class actions, in the world, according to Rob Adler, the chief executive officer of US-based Financial Recovery Technologies (FRT). Recovering moneys owed has become a fiduciary duty for large investors and an opportunity for individuals.
Adler, in Australia last week to speak at an investment conference and meet with clients, said Australia had passed Canada in terms of the scope of the litigation market. “We can now think of it as having three basic jurisdictions: active opt-in global jurisdictions, the US and Australia,” he said.
At a roundtable for big investors, custodians and fund managers in Melbourne, Adler said: “Our clients want to know what they should be doing. Our skills are around data, technology and understanding damages. People want to know what the risks are in participating, including cost risks, reputational risks, and the risk of overly burdensome recovery. For instance, you don’t want your portfolio manager getting a deposition to appear for three days in a court in Berlin, especially if you didn’t even tell him you were participating in the action.”
One of the fundamental questions for all involved in class actions is whether or not this represents an asset, or even an asset class, in its own right, or whether it is more of an operational execution problem. Adler says that FRT tries to support its clients in the role which is the best fit for them. “Our mission at FRT is to look for the way to best partner with asset owners and asset managers,” he says. “Our clients want to know that when it comes to shareholder litigation anywhere in the world, we’ve got them covered.”
At the Melbourne roundtable last week, the conversation turned, as it inevitably does, to fees and charges in the class action process. “The settlement pool is fixed as an outcome of the legal settlement process between the lawyers, the issuer and the court. And the number of claimants can be quite large,” Adler said. “In the US, a judge has the final say in what the fee should be set at. If enough people participate, then everyone agrees the fees will come down.”
In the US, of course, law firms are able to charge on a contingency – success fee – basis, which doesn’t happen in many other countries. In Australia, the Australian Law Reform Commission has proposed that contingency fees should be permitted to be charged by lawyers in class actions. Law firms active in the space have also lobbied for contingency fees as a way to make class actions more accessible for all investors.
Maurice Blackburn, one of the major law firms which take on class actions in Australia, has been advocating a move for the legislators to allow contingency fees for several years. Cameron Scott, Maurice Blackburn’s national manager, stakeholder engagement, said at the roundtable that it was important that there were both private and public enforcement of the laws. Lawyers, such as his firm, played an important role in the process, he said.
“The cost issue is constantly at the front of our minds,” he said. “We have been saying for quite a while that if there is more competition between funders [most class actions involve a litigation funding firm]that this should help drive fees down… Our [Lawyers’] fees tend to average between 12-15 per cent of the settlement. And then you have the funder’s fee on top of that. In that context, the economic argument for contingency fees is a strong one in favour of better returns to clients.” Funders will tend to take more than the lawyers, on average.
Adler estimated that funders would take, on average, about one-third of the settlement amount. But it is important for clients to recognise that they only pay on success in any action.
Asked about the possibilities for covering Australia’s “largest asset sector” in investments, which is the SMSF sector, Adler said that FRT’s origins came from a retail base. “We are the only one [of the handful of class action litigation administration companies]that provides a retail solution. Our goal is to integrate our information service such that if you are on a platform, you can just check the boxes to participate.” FRT is currently on the PowerWrap platform and is in the process of discussing this offering with others.
Scott Riedel, of Allen Partners, said: “We need to find an efficient way for all people to be able to access recoveries for smaller investments.” Adler said that, in the US, about 20 per cent of the shareholders who could potentially participate in a class action were retail investors. And he estimated that, perhaps, 80 per cent of those threw their (claim) forms in the bin. “This isn’t right,” he said. “FRT is working to develop solutions that will democratise the recovery process so individual investors will have access to this money just as institutional investors do.”
For big super funds and their managers and custodians, the increasing focus on ESG issues, and their integration into the overall investment process, has provided another fillip for participation in class actions. The ‘G’ in ‘ESG’ is broadening out to include a range of new responsibilities, from concerns about ‘modern slavery’ at investee companies to issues regarding recoveries from company issuers “not being truthful”, as Rob Adler puts it.