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Kessler Topaz – Is the U.S. Closing the Courtroom Doors to Shareholder Litigation?

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This article is sponsored by Kessler Topaz Meltzer & Check, LLP.

Since the passage of the Private Securities Litigation Reform Act of 1995, in which the U.S. Congress provided incentives for institutional investors to lead securities class actions, institutional investors have had a remarkable impact on the shareholder litigation landscape. Large institutional investors have successfully used shareholder litigation to recover investment losses, deter corporations from wrongdoing, enforce corporate disclosure requirements, and incentivize companies to adopt corporate social responsibility policies. As of the end of 2012, 88 out of the top 100 settlements, stemming from securities fraud litigation, involved an institutional investor as a lead plaintiff. Recent and pending cases in the U.S. courts, however, have limited shareholders’ right to seek judicial redress for corporate fraud and the resulting investment losses. Between 2010 and 2013, the U.S. Supreme Court issued decisions that fundamentally altered shareholders’ rights to judicial review. These decisions have made it more difficult for public pension funds to recover for their members.

  • In the 2013 decision in Comcast v. Behrend, the U.S. Supreme Court issued a landmark opinion which strengthened the requirement that a class cannot be certified without in-depth analysis and a conclusion that issues and facts that are common to all class members predominate over individual issues and facts. Under Comcast, in order for a class to be certified, plaintiffs must now ensure that both causation and damages can be adjudicated on a class wide basis. Although Comcast was an anti-trust case, it has implications for all class actions.
  • In the 2010 Supreme Court decision in Janus Capital Group Inc. v. First Derivative Traders, the court held that plaintiffs must meet a higher burden of proof when pleading that an individual or entity is responsible for the fraudulent or misleading statements of others. For the purposes of the Securities Exchange Act of 1934 Rule 10b-5 claims (Rule 10b-5 makes it “unlawful for any person…[t]o make an untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made…not misleading”), only the maker of a statement can be liable and a maker is the person with ultimate authority over the statement and not necessarily one who merely prepares or publishes a statement on behalf of another. As a result of this ruling, plaintiffs must now prove that the person or entity who made a false or misleading statement had “ultimate authority,” that is control over both content and the manner of communication of a false or misleading statement.
  • In the 2010 Supreme Court decision in Morrison v. National Australian Bank, the Court closed the door to U.S. courtrooms to investors who purchase securities on non-U.S. exchanges.Investors must now evaluate a number of factors in determining whether to pursue litigation outside the United States.

In addition to the recent decisions, the Supreme Court is currently reviewing a case involving Halliburton Co., which calls the “fraud-on-the-market” theory into question and has the potential to upend twenty-five years of jurisprudence. The “fraud-on-the market” theory is a long accepted theory of liability in a securities fraud case in which a plaintiff need not prove their individual reliance on a defendant’s fraudulent statement and reliance is instead presumed because the statements (and ultimate corrections) impact the price of a given security. If the Supreme Court overturns the “fraud-on-the-market” theory, it will be much more difficult for aggrieved shareholders to recover investment losses through a class action.

It is not just decisions by the U.S. Supreme Court that threaten the ability of shareholders to seek justice. Publicly traded companies are now inserting forced arbitration clauses into corporate bylaws and investment-advisor contracts (which often also contain class action waivers) in order to bypass judicial oversight of the companies’ compliance with federal securities laws.

Given all the recent and pending changes to the shareholder litigation landscape, it’s important for institutional investors to be aware of both new legal developments and the actions that they can take to prevent a further erosion of shareholder rights.

Since 1987, Kessler Topaz has specialized in the prosecution of securities class actions and has grown into one of the most successful shareholder litigation firms in the field.Kessler Topaz is committed to not only serving as legal counsel to its clients, but also to being an educator on all issues related to shareholder activism and asset protection and recovery. To learn more about our Firm, our services, and the investor education opportunities we offer, please visit www.ktmc.com.

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How Does Geopolitics Affect Financial Markets?

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This article is sponsored by State Street Global Advisors.

In Alexandre Dumas’s 1844 novel The Count of Monte Cristo, news of an impending cross-border revolution in Spain leads to financial panic among French investors. Some investors end up selling Spanish bonds at a great loss, only to see the price bounce back after the news proves to be erroneous.

Geopolitics matters to markets in the real world too and has been a major theme in 2018, as the post-war global order is dismantled and protectionism takes hold. But, as in Dumas’ tale, it can be hard for investors to know how to react to such uncertainty. In this paper, we examine attempts to assess the impact of geopolitics on markets and conduct our own analysis on how it plays out over different time periods. Our hope is that investors can use this analysis when considering how best to respond to future geopolitical events, in terms of both the risks and opportunities they may present.

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By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

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Through the looking glass

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This article is sponsored by Dominion.

The decision taken by the British Government to require the 14 British Overseas Territories (BOTs) to establish Public registers of the beneficial owners of Companies registered in these territories has so far created a divided reaction. The BOTs, have generally taken the view that it is grossly unfair for the UK Government to use ancient Constitutional rights to impose the new legislation whereas the Crown Dependencies who are not affected by this decision have unsurprisingly provided a more measured response. This is reflected by Deputy Gavin St Pier in statements very similar to those issued by Politicians in Jersey stating that ‘Guernsey will introduce a public register if that becomes the agreed global standard.’

Gavin St Pier’s words have I am sure been chosen carefully since the body that has the necessary authority to end this debate is The Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) that has been the multinational framework within which work in the area of transparency and exchange of information has been carried out by both OECD and non-OECD economies since 2000. The Global Forum is the only international body endorsed by the G20 on issues of transparency and Exchange of Information for tax purposes.

So what does the Global Forum have to say on this issue. Well, paragraph 14 of the report of the Plenary Meeting of the Global Forum held in Cameroon in November 2017 states ‘The second round of peer reviews launched in 2016 reflects the latest developments in international tax transparency, including the requirement to have beneficial ownership information which strengthens the fight against anonymous shell companies and the use of legal arrangements to conceal ownership of identity.’ So reasonably one might expect, this issue should already have been dealt with. Unfortunately not it seems. The information sharing framework created by the Global Forum is designed as an exchange of information programme between Governments. Information exchanged is not available to the Public. So therein lies the problem. Public disclosure of beneficial ownership, despite what paragraph 14 might say, does not appear to have been clarified by the Global Forum, leaving it to Governments, pressure groups and other Organisations around the World to set the Public Agenda on this thorny subject.

Hopefully at this years Plenary Meeting of the Global Forum guidance will be provided on this issue that will feed through into legislation in all Countries that have adopted CRS. In the Plenary Meeting in Cameroon it was noted that ‘Some Members expressed concern that the ongoing EU listing process (referring to a proposed blacklisting of certain jurisdictions by the EU) is occurring outside the framework of the Global Forum… Statements like this would not I imagine encourage the Crown Dependencies to make further comment on this issue or to take any specific action as the Global Forum is clearly through these remarks reinforcing it’s mandate granted to it by the G20. The direction of travel, if one considers EU anti-money laundering Directives and bodies such as the EITI of which the UK is an important Member, would appear to favour a new regime creating a framework for Public Disclosure but when and in what form all stakeholders in this process will just have to wait and see what develops and whether the Global Forum will opine and then issue model legislation on this important issue.

To read more on this subject please visit: expertsinwealth.com/globalregisters

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How Do Public Pension Funds Invest?

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This article is sponsored by State Street.

Public Pension Funds (PPFs) are highly idiosyncratic and distinct from other types of institutional investors. The universe of investors that fall within our definition of a PPF is numerous and varied. We count 115 institutions in 70 jurisdictions, diverse in geography and economic development. For the purposes of our study, we examined the top 16 funds whose assets constitute just over two-thirds of the total universe. Despite all the idiosyncrasies of PPFs, we have found some shared characteristics in the evolution of their asset allocation over the past decade.

According to our definition, PPFs held around $5.9 trillion in total assets of 2016 and over 4% of all publicly traded assets, making them a significant global investor group. In particular, given their preferences for specific asset classes, their share is disproportionate in some segments. For example, we estimate that by year-end 2016, PPFs owned over 7% of global tradeable fixed income assets (including 8% government bonds and over 13% of inflation-linked bonds) and over 3% of listed public equities.

Similar to other asset owners, PPFs have undertaken a major reallocation of assets over the past decade. However, the motivating driver has not only been the low yield environment, but also changing regulatory and macro policy settings, which either permitted or encouraged greater diversification along asset classes and geographical exposure.

In detail, the most dominant trend has been the move away from holding domestic (local currency) bonds; in their place, PPFs have redeployed assets towards equities and alternatives, with a small share also diverted into foreign bonds. These allocation trends have been almost universal despite a huge diversity of geography and economic development.

It is important to acknowledge how much this investor group has changed over the past decade, with the asset pool growing by over 40% in dollar terms, and even more if measured in local currencies. While some funds are still predominantly captive buyers of government debt, the bulk of PPFs have been transforming into financial institutions with independent firepower and income-generating capacity. The long-term trend towards more diversified fixed income portfolios is likely to continue, as is the shift towards taking on more risk via equity allocations, subject as ever to changes in market cycles. In this context, we expect most PPFs to not only continue taking on more risk overall, but to further internationalise their portfolios.

Finally, one consideration is that maturing funds catering for aging populations will have to make further adjustments to their asset allocations to account for changing cash flow directions and seek greater contributions and investment returns to bridge any funding gaps.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events or developments that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

Tracking Code: 2172159.1.1.GBL.RTL

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Disclaimer
By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

Authors
Elliot Hentov, Ph.D. Head of Policy and Research, Official Institutions Group Elliot_Hentov@ssga.com
Alexander Petrov Policy and Research, Official Institutions Group Alexander_Petrov@ssga.com
Sejal Odedra Business Analyst, Client Strategy, Official Institutions Group Sejal_Odedra@ssga.com

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