The Importance of Nexus for Full Investor Compensation

Recently, we’ve been fielding client questions around European Government Bonds (EGB).  The deadline for submitting claims in the second settlement in the U.S. EGB antitrust class action is November 27. Concurrently, lawyers are reaching out to organize (bookbuild) separate EGB recovery efforts in both the Dutch and U.K. courts.

Clients are at risk of conflating these recovery efforts, which makes it an apt time to discuss the concept of “nexus” and why, in the wake of scandals, we often see suits filed in different countries for the same underlying misconduct. Understanding nexus helps clients distinguish recovery efforts and maximize the chances for all of their losses to be compensated.

How does nexus work?

The laws of most countries require a nexus, or connection, between the dispute at issue in the case and the forum in question (i.e., local courts).  That requirement is generally met when companies are sued in the country where they are located (domiciled and/or headquartered), regardless of where their securities trade. For example, when a U.S. based company commits fraud, investors can sue it in U.S. courts for trades made on exchanges anywhere in the world.

The nexus requirement is more complicated when companies are sued where they are not located.  In those cases, courts look for a nexus or connection between the forum and the transactions involved, i.e., whether they occurred on an exchange in that country. For example, each year roughly 20% of companies sued in U.S. securities class actions are located elsewhere. In those suits, the class is limited to investors in American Depository Receipts (ADRs) and other instruments trading on U.S. exchanges. Securities purchased on exchanges outside the U.S. are excluded.

Nexus shapes where cases when filed, and which trades are eligible

For the EGB recovery efforts, most of the defendant banks are based outside the U.S., so the U.S. class action only compensates trades with connections to the U.S. However, most trades occurred outside the U.S. and are not eligible for compensation.

Thus, investors seeking recovery on trades excluded from the U.S. settlement must join a non-U.S. recovery effort, such as those being organized to potentially pursue claims in the Dutch and U.K. courts.

Nexus can impact after cases are resolved

Nexus can continue to influence things even after suits settle.  Typically, U.S. class actions get filed quicker and resolve sooner than recovery efforts in other countries.  When investors file proof of claim forms in U.S. class action settlements, the form includes a release of liability for the defendants.

If the release language is not narrowly drawn – i.e., limited to claims for U.S. exchange-traded instruments – investors that file claim forms who also have claims pending outside of the U.S. risk abrogating (vacating) them. For example, two years ago in a U.S. class action settlement involving Toshiba Corp., the release language was broad enough to potentially jeopardize ongoing claims in Japan. Investors who had claims in Japan were forced to choose between recovering in the U.S. settlement or foregoing compensation to protect them.

Final takeaways

The nexus requirement explains why, in the wake of corporate scandals involving companies located outside the U.S., we often see multiple global recovery efforts.

• This connection requirement limits eligibility at the start of U.S. class actions and remains relevant through their resolution.
• Where there are multiple global suits, clients must appreciate the scope of each and compare coverage to their trading activity to ensure as many trades as possible get compensated.
• To help protect clients and optimize recovery efforts, FRT reviews the release language for all U.S. class actions involving companies located outside it to identify potential risk to pending claims in non-U.S. recovery efforts.

Read more: Key Takeaways from FRT’s 2024 Mid-Year Shareholder Litigation Outlook