by Greg Bright
In the rapidly developing world of class actions, involving recovery of losses by investors and other affected parties, recent trends are impacting the industry. Here are some of them.
With more cases being brought before the courts, in Australia and elsewhere, Financial Recovery Technologies (FRT), a global firm which specialises in shareholder litigation monitoring and recovery, says the four main trends which are impacting the Australian market, are:
- Shift to more passive recovery effort, similar to US
FRT believes that Australian-related class actions market is evolving along similar lines to that in the US where big investors could take a “passive” approach, thereby maintaining anonymity. But they have to register with the courts by a certain date to be able to participate in any winnings. As in the US, investors don’t pay anything to participate but, unlike the US, Australian lawyers are allowed to charge only for their time, not as a proportion of the result. They will usually have a third-party litigation funder.
- Increase in third-party litigation funders
Third-party litigation funders have played a key role in the development of class litigation in Australia. These entities pay counsel fees regardless of outcome, enabling investors to participate in securities lawsuits without the risk of compounding their trading losses with litigation expenses. In exchange for this risk mitigation, funders receive a percentage of the payout if cases prove successful – generally 30-45 per cent.
- Shift from ‘case-centric’ approach towards ‘issuer-centric’
FRT notes that increasingly, fiduciaries are implementing ‘issuer-centric’ policies to recover investment losses from fraud to provide a more holistic view into all affected investments.
When corporate scandals break, they usually impact all of an issuer’s securities to some degree, says Mike Lange, senior vice president of worldwide litigation at FRT. “The better practice is to have in place systems that immediately check a fund’s trading history in all securities of the issuer involved, and that calculate eligible losses- as opposed to market losses- for all of them, not just those covered by filed litigation,” he says.
- Move from ‘market loss’ to ‘inflationary losses’
In a similar way to maximise recoveries, another trend, according to FRT’s Rob Adler, the chief executive officer, is to include “inflationary losses” in the mix for comparison of loss thresholds. The threshold is the amount which many institutional investors set such that when it is breached it triggers direct action. The investors therefore have wanted to assess how these should be gauged for comparative purposes. Increasingly, this will be estimated inflationary losses.
In another client note FRT looks at the three measures of loss: market loss, recognised loss and inflationary loss. The note says that this must be estimated during litigation and before a settlement or court-approved plan of allocation.
The move to use inflationary losses in litigation is another example of the evolution of the class action space. Market loss is the simplest, being the amount realised on the sale of the securities minus the initial consideration paid. Recognised loss is more sophisticated in that it involves creating a formula, including an artificial measure of inflation, specified in a plan of allocation in a settlement. Inflationary loss differs from recognised loss primarily by being included in the proceedings.
“In short, inflationary loss is the preferred method to use in conjunction with board policies containing loss thresholds,” the FRT note says. “It is better than market loss, which can give false results: situations where thresholds are triggered even though the fund has smaller or no legal loss, or where thresholds are not triggered despite legal losses exceeding pre-set amounts.”
Note: Investor Strategy News, in conjunction with its events partner, MSI Group, is producing the Financial Recovery Technologies-sponsored roundtable, featuring Rob Adler, in Melbourne on November 21.