For securities litigation, Italy is a jurisdiction in flux. The next few years will determine whether it again becomes a hospitable place for recovery efforts. Shareholders are appealing an adverse decision by the Court of Milan on proof of share ownership required to maintain suit. If that decision is upheld, it will frustrate future opt-in group actions.
During the coming years, we will also learn if investors receive compensation in connection with criminal prosecutions of former executives at two companies with earlier shareholder scandals. Finally, last April, legislative expansion of class actions to cover securities disputes went into effect. It only applies to future misconduct, not past misdeeds, so we will need a few years to see how frequently it gets used and to gauge success of the implementation.
However, if two or three of these things break the right way for investors, Italy could once again become one of the more favorable countries in Europe for investor claims.
Italian securities laws
Historically, Italian law has been good for investors. Courts seem to value private enforcement and there have been many decisions giving guidance on claim elements with favorable outcomes.
Securities claims involve both statutory and tort rights. They can be based on misstatements in offering documents and other market disclosures. Liability can be broadly applied to the company, its executives, underwriters, accountants, and others. Defendants will found liable for negligence as well as willful misconduct, and the burden of proof frequently shifts from claimants to defendants to prove their diligence.
In theory, plaintiffs must show reliance on alleged misstatements. In practice, while courts have not formally embraced a fraud on the market theory of reliance – the concept that misrepresentations inflate market prices and harm investors even if they do not actually see or rely on the statements at issue – their decisions come close to embracing it. In other cases, they have found defendants had a duty to disclose, which eliminated the need to show reliance.
The three routes to recovery
While substantive law is good, getting there is a challenge. For defrauded investors there are three (3) potential routes to recovery:
- Opt-in direct actions;
- Civil proceedings collateral to criminal prosecutions; and
- Securities class actions.
As discussed below, the first route is blocked by a lower court decision on standing. The second and third are yet unproven. Events over the next few years should clarify things.
Standing challenges hinder direct actions
On November 9, 2018, the Court of Milan rejected efforts by 64 institutional investors represented by Deminor Recovery Services (Deminor) to recover from Saipem S.p.A their investment losses from alleged misrepresentations, noting the group’s failure to prove ownership of company shares. The Court awarded Saipam €100K for legal expenses.
According to Deminor
“The court was of the opinion that the custodian bank statements produced by the plaintiffs did not constitute sufficient evidence of their purchases of Saipem shares for which they were claiming damages. According to the court, the investors should have produced the holding certificates that are required under Italian law to be admitted to shareholder meetings of Italian listed companies…”
Deminor clients appeal against first instance judgement (Newsletter 02/2019).
The investors are currently appealing this decision. However, if this remains the standard, shareholders will find it more challenging to bring future claims.
Civil proceedings collateral to criminal prosecutions
Deterred by this Saipam decision, some case organizers are trying the second route to recovery: civil proceedings collateral to criminal prosecutions. To date, however, results have been limited. There is little precedent available to predict whether and how courts will assess compensation.
Under Italian law, civil parties impacted by criminal conduct can – with court approval – join the proceedings as interested parties. If executives are found guilty the court can order compensation for victims. However, the time period for joining is typically short, with requests required by the first criminal hearing.
This is a passive, risk-free way for investors to seek redress. Prosecutors run the criminal proceedings and claimants don’t need to file civil proceedings. With counsel, investors don’t have to do anything after registering their claims beyond providing a power of attorney and documents confirming trades. They don’t need to give testimony or appear in court.
This recovery route does not involve filing suit, so claimants don’t face any risk of adverse cost awards. However, the process is lengthy and uncertain. Criminal proceedings can take years and defendants usually challenge investor requests to be joined as interested parties. If joinder is allowed and criminal proceedings result in guilty pleas or convictions, the defendants challenge any award of compensation.
Currently, there are at least two criminal prosecutions where harmed investors have applied for compensation as interested persons. Neither has progressed to the point of compensation. Good or bad, we should see results over the next few years, which will inform future recovery efforts.
Securities Class Actions
The third route to recovery – securities class actions – is new and untested.
In 2019, legislation expanded the use of class actions beyond consumer cases to other types of disputes including securities matters. The law became effective on April 19, 2020, and only applies to unlawful conduct occurring after this date. So it’s too early to judge its impact on securities recoveries.
Class actions will be still be brought on opt-in basis. However, they can now be started by individual claimants, not just approved non-profits and associations. The process is also easier. Class actions can be started by ad hoc court applications rather than summons served on the defendants.
The changes permit class actions to be advertised through publication in the online portal of the Italian Ministry of Justice, which along with other changes, should significantly increase public awareness and participation.
After presentation and challenge by defendants, and assuming the court accepts a matter for class treatment, investors are given at least two opportunities to opt-into the class: once after its acceptance and before evidence gathering, and again after a decision on the defendants’ liability and before determining compensation. This second opt-in opportunity should significantly boost participation.
Class actions may now be brought before courts specializing in corporate matters, rather than the general courts, encouraging specialization and uniformity of treatment. Judges can order the defendants to provide information during an evidence-gathering phase and can appoint technical experts to assist their decisions, paid for by the defendants. If the defendants fail to comply with production orders they can be sanctioned with monetary fines or have facts and inferences construed against them.
Cases are handled by summary proceedings, speeding prosecutions, and if the class action is successful, the court can award compensation and will appoint class representatives to handle its distribution to class members.
In short, class actions under this new regime will have three litigation phases and two opt-in opportunities for shareholders:
- Phase I: presentation and acceptance of the class action and a first opt-in window;
- Phase II: evidence gathering and a determination on defendants’ liability that, if successful, includes a second opt-in window; and
- Phase III: final formation of the class and determinations with regard to quantum of damages to class members.
The court can decide how much each class member must pay from their recoveries for the costs of prosecution. It can order the defendants to pay contingency fees to class representatives and their counsel. The court can award premium fees for particularly complex matters. Other provisions permit the court and parties to propose settlements, with class members having rights to object to proposed settlements or to refuse to be bound by them.
In short, while yet tested, the legislation appears quite promising for investors. However, a few cases and a few years will be needed to measure its success.
Investors can be guardedly optimistic about the prospects for shareholder suits in Italy. Class actions may replace opt-in group actions as the preferred method for recoveries, particularly given the short term hamstring of the Court of Milan’s decision on standing. Hopefully, this decision will be reversed on appeal, enabling investors to take full advantage of favorable substantive law in Italy through direct actions. If not, in the near term shareholders may need to continue trying the uncertain prospects of civil proceedings collateral to criminal prosecutions, shifting to class actions as the new scheme gets implemented and assuming it develops in ways favorable to investors.
 As Deminor explained later:
“According to the Court of Milan, investors are required to provide statements, not only from their global custodian bank, but from each intermediary bank in the investment chain down to the local Italian bank holding the shares with the local Italian central securities depositary (the ‘Monte Titoli’ in Italy).
The court came to this conclusion by assessing the formalities required to participate in shareholder meetings for an Italian listed company. For shareholders to participate in a shareholders’ meeting, a local bank member of Monte Titoli needs to confirm the number of shares held on a specific date, which entitles the shareholder to cast a vote. Note that such a confirmation of holding does not contain any evidence of the purchase transactions carried out during a certain period (for example the ‘class period’) nor does it indicate the prices of those transactions, so in se [sic] it cannot be evidence of losses suffered on those purchases during a defined period of time. …
Aside from these legal considerations, it would be near impossible for investors to get a statement confirming transaction history from each bank in the investment chain in practical terms. This is because custodian banks make use of omnibus accounts (combining various client positions in one account) and compensate purchase and sale transactions at different levels of the investment chain, a practice which is explicitly permitted under EU law. If the Milan court decision were to be confirmed on appeal, it would make it practically impossible for investors holding accounts with foreign global custodian banks to claim damages from an Italian listed company.”
Custodian bank statements considered insufficient evidence by Italian court (Newsletter 11/2018)
To learn more about how FRT can help your firm maximize recoveries in shareholder class action settlements, contact us at firstname.lastname@example.org.
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