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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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Transforming Saudi Arabia’s Capital Markets

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This article is sponsored by State Street.

KEY POINTS

– Vision 2030 and the Aramco privatization mark a decisive point to advance Saudi Arabia’s financial sector — a critical ingredient to the country’s economic transformation

– Saudi’s “Financial Triad” remains partially incomplete with a sound banking system and a rapidly emerging equity market, but an immature bond market.

– The privatization of Saudi state assets (including Aramco) could deliver a boost to the depth and sophistication of the Saudi equity market and — if cleverly designed— have positive spillover effects into other areas of finance and policy.

– The timing is ideal to launch an accompanying systematic drive to build local currency bond markets, which is a prerequisite for achieving the broader economic goals of Vision 2030.

Saudi Arabia’s Vision 2030 is remarkable in its aspiration to engineer far-reaching economic transformation. As a global asset manager, we note that one of the three pillars of this vision sets out the aim to make the country a “global investment powerhouse.” 1

While Saudi Arabia has a strong legacy as a sovereign investor in foreign markets, this ambition also requires its local financial system to deepen across all sectors. Strong capital markets work together with a banking system to channel investment and ensure efficient capital allocation across the economy. In the absence of such channels, many worthwhile business ventures never take place, capital is misallocated and underutilized, and economic growth remains below its potential.

To read the full study please click here.

1 Foreword to Vision 2030, http://vision2030.gov.sa/en/foreword.

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Sovereign Wealth Funds as a Driver of African Development

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This article is sponsored by Quantum Global.

Sovereign wealth funds (SWFs) are becoming important sources of development in many countries. African SWFs have been growing in recent years, as many countries joined the international trend in establishing SWFs, while many others are preparing to join. Growth of SWFs has been driven by rising commodity prices until 2014 and improving economic growth rates. At the same time, Africa continues to face a number of development challenges, raising the question of whether SWFs can play a role in fostering economic development on the continent. This paper analyses the dynamics and role of SWFs in promoting development in Africa. The paper notes that SWFs can play a more active role in Africa’s development by bridging the infrastructure funding gap, supporting industrial development and economic diversification, reducing macroeconomic volatility and enhancing intergenerational equity. For SWFs to be effective in delivering their mandates and supporting economic development, they need to have clear goals and objectives, improve their governance and transparency frameworks, improve their risk management frameworks and embrace the Santiago Principles. African governments need to develop more attractive frameworks and climates for SWFs to invest in the continent, especially in sectors that contribute more directly to addressing Africa’s development needs.

To read the full study please click here.

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Collateral: The New Performance Driver

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This article is sponsored by BNY Mellon.

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In 2017, the global buy-side community faces considerable liquidity and funding pressures, stemming from market and regulatory reforms that are causing disruption. As a result, access to high-quality collateral, funding and liquidity is not only a pressing concern but has emerged as the essential new performance driver for the buy-side.

This disruption is the result of two opposing forces. Stringent regulatory requirements are forcing market participants to seek collateral — generally of high quality — in order to secure trading exposures. At the same time, the sell-side — or dealer-sponsored financial plumbing used to supply liquidity and collateral to the market — is experiencing challenges due to Basel III capital and liquidity constraints.

A major concern among multiple buy-side firms is that the next market-stress event will occur not because of a lack of collateral in the financial system but rather due to the inaccessibility of this collateral.¹ This scenario is forcing firms to reevaluate their collateralized trading portfolios, recalibrate asset allocation strategies and in some cases review the investment products offered to end clients.

This paper presents the findings from BNY Mellon–PwC outreach to senior buy-side executives from over 120 global firms conducted during the first quarter of 2017. It provides insights on demand-supply imbalances that are being experienced by buyside firms and the possible solutions they are exploring in response to fears that ready access to liquidity and high-quality collateral may become scarce in the years ahead.

The picture that emerged from these discussions was one of a buy-side community both grappling to adjust to its new collateralized trading obligations as well as striving to secure access to sustainable sources of funding and liquidity.

To read the full study please click here.

1. Collateral can be inaccessible due to decreasing velocity of collateral, which indicates how much, on average, a single dollar of collateral is reused over a period of time. This is analogous to the concept of “velocity of money.”

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