If Your Playing Field Isn’t Level, Change Ground

Securities class actions are under siege in Australia. Political forces led by the Treasurer and Attorney General have cut back investor protections under the continuous disclosure regime and imposed licensing requirements on litigation funders and their financing arrangements. They are now pursuing legislation to force all securities cases into federal court to more effectively ‘reform’ the system and eliminate the ability of lawyers to represent claimants on a contingency fee basis in Victoria[1].

As a former US securities class action lawyer, it feels like déjà vu. During the 1990s, our plaintiff bar faced similar headwinds when Congress passed the Private Securities Litigation Reform Act of 1995, creating barriers for cases, and the Securities Litigation Uniform Standards Act of 1998, which pre-empted state court actions. At the time, we banded together with our clients and fought hard against political and corporate forces. We ultimately lost, and then had to adapt our practices to the more challenging environment. My partners and I were fortunate. Our firm prospered, as did others. While still regularly besieged, the US securities bar has not only survived, but has become so successful that some firms are exporting their practices to other countries including Australia.

We adapt to survive, as they say, and I offer the suggestions below in part for moral support to those walking a similar path in Australia, and in part to encourage further re-thinking of current approaches with observations on what lawyers in other countries are doing.

Why file class actions?
You might instead use a tip of the spear approach in which one or a few large institutional investors pursue direct suits, while other investors sit on the sidelines to see how things play out. Australia has a six-year statute of limitations giving ample time for parties to reach the merits before claims expire. Cases will be further accelerated if there are no competing carriage motions or time spent proving criteria for class treatment. Outside the US and Australia, group litigation is the norm. In many countries, including the UK, courts use test cases to resolve common issues. In Germany, the KapMuG process uses model cases and plaintiffs to resolve common questions, and the court has a claim registration process by which other investors can preserve their claims while staying out of the fray, stepping in later if things go well. Organizers there are increasingly filing enough suits to get or keep things going while registering their other clients.

Who would sue directly?
To date, Australian institutions have been reluctant to take active or lead roles in securities class actions. But there are plenty of large institutional investors outside of Australia significantly impacted by local frauds and willing to sue in your courts. In the US, more and more institutional investors are opting out of class actions to pursue their own suits. The case against Valeant Pharmaceuticals, for example, had more than 100 opt-outs and the one against Petrobras had more than 300. Funds now regularly join group litigations in other countries with much higher risks and participation burdens than Australia, like the UK. We see hundreds and sometimes thousands of funds suing in European courts including Denmark and Germany. Many non-Australian funds have strong governance mindsets and are willing to take leadership roles. AU counsel should form relationships with law firms representing such investors, who can be easily identified from public sources.

What about other investors?
Other investors can wait on the sidelines while the direct suits proceed. They have six years to file and can be organized during this time. Australian counsel can use naked registrations, canvassing investor identities without funding claims. Large investors can be identified via public records and communications to custodians, law firms, and third-party claim filers. We help many non-Australian funds with large losses participate in your class action settlements. Consider decoupling efforts to organize claimants from your litigation. Have lawyers outside Australia do it and refer you their clients for representation. Outside Australia, it’s common for book building in securities cases to be done by firms that have no on-the-ground presence in the country of suit.

How are other investors brought in?
The direct suits can seek declaratory or injunctive relief which, if successful, will make it easier for other claimants to pursue their claims. Joinder and intervention can be used to bring in others and/or create mass actions. Complaints can be amended to add class allegations later in proceedings rather than at the start. If direct suits go well, at some point the defendants will want to settle and re-orient their mindset from wanting to exclude investors to wanting to include as many as possible to buy global peace. Having already identified eligible claimants, plaintiffs can make the defendants aware of the sizeable group waiting in the wings and encourage their thinking in that direction. In the US, plaintiff counsel make defendants aware of their claims in various ways including demand letter, tolling agreements, and motions to intervene for claim preservation.

How can the lawyers or funders get paid?
For cases filed in Victoria, counsel can represent claimants on a contingency fee basis. Outside Victoria, conditional legal fees are permitted. For cases involving larger companies, there are likely non-Australian funds that, alone or with a small number of others, have losses sufficient to motivate someone to finance their suits. In Australia, funding arrangements are exempt if they involve less than 20 members and are not promoted by persons in that business. Query the extent to which these regulations apply to non-Australian claimants financed by sources outside Australia. While common fund orders are disfavored, equalization orders are permitted. Funding sources can charge direct litigants higher percentages knowing that if successful, much of the prosecution costs can be recouped from claimants joining later via equalization orders, reducing the ultimate burdens on the direct litigants.

My personal experience as a securities class action lawyer did not extend to the Australian jurisdiction but I have weathered similar political storms and I know that sometimes changing ground is as important as marshalling forces in opposition.

[1] In 2020, the Victorian Parliament passed an act allowing plaintiff law firms to pursue class actions on a contingency basis. They are not permitted in other states. The act was a victory for investors, reducing fees and increasing their share of case proceeds while making it easier for law firms to bring actions. Pro-business lobbies and politicians are seeking to consolidate securities class actions in federal court in an attempt to undo this act as part of a coordinated effort to restrict them.

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