Recently, I had the honor of being asked to speak on a panel at the Corporate Counsel General Counsel Conference 2019. It was an enlightening and thought-provoking session which provided a number of key takeaways regarding the current landscape of non-U.S. securities litigation.
Post Morrison: Expanding securities litigation outside of US
The Supreme Court’s decision in Morrison v National Australia Bank has reduced access to the US courts for investors in non-US securities—the Court held that US law against securities fraud does not apply to securities purchased outside the country regardless of any domestic impact or effect.
As a result, institutional investors are alternatively pursuing securities claims in an ever-expanding number of jurisdictions across Europe and Asia. However, each of these countries present varying degrees of risk and differing participation burdens for investors which merit careful consideration. For instance, the uncapped nature of adverse cost risk could be a major deterrent to pursuing securities litigation in the UK, whilst in the Netherlands adverse cost risk is de minimis and can be fully indemnified by a funder.
Ultimately, investors should take into account the relevant jurisdiction’s legal standards, adverse costs risk, discovery burdens and the likely duration of a case when deciding whether to participate in any action.
The importance of selecting the right finance partner
Multiple funders and law firms may be pursuing similar claims against the same defendants, presenting investors with a dizzying array of options to choose from. Although it is fortunate to have so much choice, it is important to bear in mind that not all funders are created equal. Therefore, choosing the right finance partner is key to a successful securities fraud litigation.
Investors should evaluate the experience of the funder alongside its capital sources and funding obligations. Selecting a listed finance provider like Burford can provide greater transparency and ensure that capital will be available for the full duration of the case.
The scope of authority delegated to the finance provider should also be carefully considered. Some funders demand a greater level of control than others, particularly funders that cater to smaller investors. Burford typically works with larger institutional investors that generally prefer to remain involved in litigation and settlement strategy. These investors typically grant Burford a limited delegation of authority to facilitate efficient case management, while the clients retain final settlement authority.
The experience and reputation of the local counsel that the financier has engaged can indicate a lot about the finance provider’s sophistication and willingness to commit adequate resources to a case and should be carefully considered. Importantly, US plaintiffs’ firms organizing and funding cases abroad may be highly experienced in US securities litigation, but local counsel will ultimately be charged with litigating the case in court.
It is equally important in cost-shifting jurisdictions to evaluate the financier’s ability to address adverse costs risk. Because Burford is a listed company, investors can evaluate Burford’s ability to indemnify adverse costs by reviewing its audited financial statements. In jurisdictions where adverse costs risk is more significant, Burford is able to offer “after the event” insurance through its own wholly owned Guernsey based insurer: Burford Worldwide Insurance Ltd (BWIL).
Investors will typically receive an estimate of their damages from legal financiers before joining a case. It is crucial to understand how the estimate was prepared and whether it was prepared by a qualified third-party damages expert based on the relevant jurisdiction’s legal requirements. If this is not the case, investors may have an unrealistic expectation of their potential recovery.
Monetization as an alternative to funding
Monetization can offer an alternative route to recovery: Investors may have the opportunity to monetize their claim and receive cash up front from the financier rather than waiting for the case to resolve. Instead of following the claim through litigation, an investor can choose to sell their claim to a third-party finance provider in exchange for an immediate cash payment.
This can be an attractive option for investors as it transfers much of the idiosyncratic risk of litigating in a foreign jurisdiction to the finance provider.
Investors are becoming both more active and increasingly sophisticated, but the large-scale and inherently expensive nature of securities fraud litigation implies that legal finance and monetization will become increasingly prevalent as investors look for more cost-effective solutions to recovery.