Even though the number of class action lawsuits brought to court is growing in mature jurisdictions around the world, the United States is still the largest market for securities and antitrust class action litigation. This is not least due to a number of crucial, and favourable, differences in the legal system that distinguish it from Europe, Asia and Australia. Raising funds for class actions in the form of litigation funding is therefore becoming an increasing trend as it effectively creates a U.S.-style scenario for group plaintiffs who bring a claim in another jurisdiction.
Noah Wortman, Managing Director, Americas and Global Head of Class Action Services at Goal Group of Companies and Jeremy Marshall, Chief Investment Officer at Bentham Europe Ltd
The U.S. is a particularly class action-friendly jurisdiction in comparison with other advanced legal regimes globally due to a number of distinct characteristics. First, group actions can be very profitable in the U.S.: it is not unusual for lawyers to act on a contingency fee basis on behalf of the lead plaintiff and the class. Upon a successful resolution to the litigation, lawyers may then apply to the court for attorneys’ fees and reimbursement of expenses. This is not the case in most other jurisdictions; contingency fee litigation is almost regarded with suspicion outside the U.S. as it may create a bias or perceived conflict for the lawyers. Second, there are no adverse costs in the U.S. Most other jurisdictions operate under a so-called “loser pays rule” which means the side that loses an adversary civil proceeding must pay some or all of the winner’s fees and expenses. Even though in such jurisdictions After-the-Event (ATE) Insurance may be able to cushion big losses and mitigate some of the risk, this also means that expenses to begin with are relatively high.
For that reason we have witnessed a global blossoming of a certain type of investment focused on mature jurisdictions that offer a viable legal framework for securities class actions; you will already have guessed that we are referring to litigation funding. This form of finance can take the form of private equity or funds. When tracing back the history of litigation funding we’re going to have a look ′down under′, because it’s in Australia where it all began. Established in 2001, litigation funding group IMF Bentham has been funding class actions and multiparty group actions throughout the country. Since then the business has expanded across the globe and offers its services in many jurisdictions, including the U.S., Canada, New Zealand, Hong Kong and Singapore.1 Today, London-based Bentham Europe Ltd. – originally formed in early 2014 as a joint venture between IMF Bentham and U.S. hedge fund Elliott Management Corporation, and solely owned by Elliott since July 20162 – is funding legal action on behalf of shareholders against supermarket chain Tesco3 and is funding legal actions against car manufacturer Volkswagen in Germany.4
But who does litigation funding really serve? As with all investments, the first and foremost goal of the financier is to get paid at the end. For a litigation funder to get involved in a case four major prerequisites need to be fulfilled: first, no jurisdictional risk should be involved with funding the case, i.e. local laws should allow for funding in a legal fashion. Second, the case should be a strong one and, third, a big one: damages awarded should account for at least ten times of what it will cost. And fourth, the issue of recoverability is an important one to consider. Defendants should be able to pay the damages otherwise even the strongest and biggest case doesn’t bring any financial merits to the investor. This means money will flow into cases that promise a positive outcome for the investor. At the same time the rule that higher risks mean higher returns also applies here and it may still be possible to get multiple litigation funders on board for more challenging cases if the potential rewards are high enough. This is especially true in territories where adverse costs apply. For instance Australian and UK funders tend to charge around 20-35% return on top of their investment to cover risk of loss. Nevertheless, for the plaintiff, litigation funding creates the same level of comfort and protection in a jurisdiction where U.S.-style contingency fee litigation is not allowed as they would enjoy in a U.S. class action litigation. Effectively, the funded litigation doesn’t “cost“ anything, meaning the plaintiff should not be out of pocket for any expenses because the funder covers all of them. Other key benefits to the plaintiff are that a litigation funder comes on board having a true alignment of interest and a litigation funder can often add value in terms of case management expertise and strategic and financial discipline.
The rise of litigation funding on a global scale correlates with a growth in securities and antitrust class actions worldwide. The idea of taking on a case outside of the U.S. is not a scary one any longer. At the same time, more and more legal systems comprise the necessary mechanisms to allow for collective redress in some form. This development is fostered by increasingly complex global markets in which shareholder litigation against global corporates will be brought in the country where the defendant company is headquartered, as we now see with the Volkswagen case in Germany. The same is true for the RBS5 and Tesco cases in the UK. Other jurisdictions with a high growth potential for litigation funding are Canada, France and the Scandinavian countries. In Asia, Hong Kong and Singapore are poised for growth because of international arbitration increasingly being brought here.
In the U.S. the notion of litigation funding is still a somewhat mysterious one compared to countries such as Australia, Canada and some European countries where it is regarded as standard procedure. In fact, class actions are not the type of case financed by litigation funders in the U.S.; here, the focus is on intellectual property and B2B claims. However, given the size of its legal market, the U.S. is one of the areas with the biggest potential for growth for litigation funding. Due to the structure of the legal system, what has become more prevalent in the U.S. are so-called portfolio deals where investors provide law firms with capital for various cases across the firm and profits are dependent on any case the law firm is running. This practically resembles a loan from the litigation funder to the law firm. Similarly, because the U.S. system has become so successful, law firms have been able to build capital reserves that can be used towards litigation funding at home or abroad. When taking a case overseas they now pair with a local firm and act as a litigation funder themselves. There is a risk here though: lawyers are not necessarily business people and therefore might prove less successful in assessing the benefits of getting involved in one particular case.
Another important distinction between jurisdictions has to do with opt-in vs. opt-out systems. Whereas in the U.S. plaintiffs would have to opt-out in order not to be included in a class action, countries like the UK or Germany have an opt-in system (although the UK has now dipped its toe into the opt-out world in relation to certain types of competition claims) . The opt-in/opt-out distinctions complicate the process somewhat. For instance Australian courts have stated that a funder cannot finance an opt-out case. This is because a funder is required to have a contract with every class member which is not provided for in an opt-out case. In Australia, litigation funding is therefore only available for opt-in lawsuits. Given that Australia is the most advanced country for litigation funding, it is likely that the matter of how to fund an opt-out case will be a future issue in the U.S., too.
Due to the peculiarities of its legal system the U.S., as a relatively new market for litigation funding, it differs substantially from heavyweights like Australia and newcomers to the scene such as Germany. Despite its differences, however, the U.S. represents a burgeoning potential market, its already well-established legal industry providing the perfect springboard for growth. Shifting structures in funding have seen a rise in portfolio cases, common to the U.S., which spread risk as with other investments and increase the appeal of litigation funding for investors. The U.S. can therefore become a model case for a highly dynamic niche segment of the financial market being driven by savvy investors. In the rest of the world, litigation funding is likely to be more strongly determined by a need to yield returns in excess of the initial expenses.
1IMF Bentham, http://www.imf.com.au/about#ourhistory
2Bentham Europe Ltd, http://www.benthameurope.com/
3Bentham Europe Ltd, “Shareholder Action against Tesco PLC“,
4Bentham Europe Ltd, “Proposed Volkswagen AG Shareholders‘ Legal Action“,
5Financial Times Online, “RBS at the sharp end in High Court litigation”, 19 October 2015, http://www.ft.com/cms/s/0/10d140c4-6c2a-11e5-8171-ba1968cf791a.html#axzz4CykBfJvQ
How Do Public Pension Funds Invest?
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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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
The Slings and Arrows of Passive Fortune
This article is sponsored by S&P DJI.
If a tale were to be written regaling us with the popular exploits of the modern day active manager in his quest for alpha across the many peaks and valleys of the financial world, passive investment would likely feature prominently in the telling. Passively managed assets have grown tremendously since their introduction in the 1970s to command some 20% of the U.S. stock’s market total-float adjusted capitalization, drawing a deluge of criticism in recent years from proponents of a more traditional, active approach who charge indexers with all manner of supposed ills – from encouraging collusive behavior and exacerbating pricing inefficiencies, to indifference on matters of corporate governance.
But are passive assets and their purveyors really the threat to markets that active management makes them out to be? Or are the problems attributed to their rise merely a reflection of the market forces all participants must face? These are the questions posed by Anu Ganti and Craig Lazzara at S&P Dow Jones Indices (S&P DJI) in their new paper, titled “The Slings and Arrows of Passive Fortune,” which seeks to unravel some of the most pervasive myths surrounding the growing role of index funds, highlight the immense value they bring to asset owners, and posits a future of asymmetric equilibrium between the old and the new that puts each in their proper place based on relative – rather than absolute – performance.
Nobody – including the paper’s authors – denies that index-based investment has made life more challenging for active managers, who count alpha as their very lifeblood; but so too would it be foolish to argue its advancement as one of the most important developments in modern financial history is without merit, or somehow Thucydidean in nature. If anything, active management can and should expect its portion of the pie (which, it must be pointed out, constitutes the majority of assets by a wide margin) to remain subject to nibbles from their passive counterparts – nibbles that may, with time, diminish. The market always has room for more players at the table, after all, and we all play by its rules.
As Director and Managing Director of index investment strategy team at S&P DJI, Ganti and Lazzara provide research and commentary on the firm’s entire product set – covering U.S. and global equities, commodities, fixed income, and economic indices. Both are chartered financial analysts and regular contributors to Indexology, S&P DJI’s appropriately named blog covering developments in the world of indexing.
Battea: 2017 Securities Class Action Industry Lookback and Observations
This article is sponsored by Battea.
There has been incredible growth in securities and antitrust class action litigations and settlements, particularly as they have unfolded in 2016 and 2017. The number of new cases and settlements from traditional securities litigation to antitrust rate rigging, spread inflation and other forms of collusion are at an all time high and shows no signs of slowing down.
With several multi-billion dollar litigations related to Libor, Euribor and Tibor rates, and spread manipulations, the securities, foreign exchange and antitrust class and collective actions litigation space rose exponentially in 2017.
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