U.S. pension funds will increasingly turn to foreign courts to recover money lost on securities purchased overseas, according to two new papers aimed at guiding institutional investors about best practices in securities litigation.
In an updated primer for its members, the Council of Institutional Investors concludes that pension funds will file more lawsuits abroad “in hopes that they are able to recoup their losses and deter future frauds” on stock purchased on foreign exchanges. A Morrison working group organized through the National Association of Public Pension Attorneys reaches the same conclusion in an extensive paper presented at the group’s annual educational conference in June. The NAPPA working paper also recommends that U.S. funds monitor foreign litigation as part of fulfilling their fiduciary duty to recover plan assets.
The burgeoning interest in foreign lawsuits stems from the Supreme Court’s 2010 ruling in Morrison v. National Australia Bank Ltd., which has all but barred investors from relying on the anti-fraud provisions of U.S. federal law to recover losses on foreign purchases. Morrison undid more than 40 years of legal precedent allowing U.S. claims involving foreign-bought stock if the fraudulent conduct took place in the United States or significantly affected American investors.
As a result of Morrison, Berman DeValerio has seen a steady increase in inquiries about foreign case monitoring, as clients grapple with the realization that a U.S.-only approach may no longer be sufficient. This is especially true because most foreign litigation is conducted on an opt-in basis, meaning that funds must register as plaintiffs – sometimes before a case is even filed – to participate in a recovery.
“The plain fact is that foreign litigation requires investors to take a much more ‘active’ approach than U.S. class actions,” said Nicole Lavallee, the San Francisco-based partner heading up Berman DeValerio’s foreign monitoring program. “Outside the United States, you cannot generally sit back and wait for a case to settle before deciding whether to cash your check or opt out. You need to get information and an analysis early in order to make an informed decision about participation.”
In its primer, Everything You Ever Wanted to Know about Securities Litigation but Were Afraid to Ask, the Council tells its membership that pursuing meritorious securities claims can be a “critical tool” for shareowners. “Securities litigation sometimes is the only way that investors can recover lost assets,” the authors write. “And securities lawsuits that are pursued cautiously and responsibly can buttress the efforts of regulators and law enforcement to pursue corporate wrongdoers and deter future violations.”
As a result of Morrison, however, institutional investors who buy on foreign exchanges “may no longer be able to pursue federal securities fraud claims against a corporation that has significant operations within the United States, commits securities fraud in the United States and the losses affect American investors,” according to the primer. The primer cites Canada, the Netherlands and other foreign jurisdictions as growing venues for pursuing securities claims. Earlier this year, the Council published a white paper about Morrison‘s impact on institutional investors.
The NAPPA Morrison Working Group’s paper, Living in a Post-Morrison World: How to Protect Your Assets against Securities Fraud, offers public pension lawyers practical tips, including sections describing the legal landscape in the United States and 10 foreign jurisdictions.
The NAPPA paper also contains a section that describes options for tracking foreign litigation and participating in recoveries. Active monitoring of foreign litigation is essential because, unlike in the United States, funds often must register as plaintiffs, sometimes before cases are even filed, to share in settlements. In addition, there is no central clearinghouse where case information is publicly available.
“When it comes to foreign actions, we need a process in place that allows us to analyze all the factors that go into whether to participate in such an action,” the report says. “The question becomes not if we are going to monitor and track foreign cases, but rather what is the best way to do so.”
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.