By Mike Lange, Securities Litigation Counsel, Financial Recovery Technologies and Andrew Lasky, Legal Product Specialist, Financial Recovery Technologies

Overview

Outside of the U.S., Taiwan is the most active jurisdiction for securities cases, comprising roughly 50% of all non-U.S. and Canada matters during these years.

While both countries use a class action device, they differ in several fundamental ways.

CREATING A CLASS: 

In the U.S., private plaintiffs serving as lead plaintiffs prosecute securities class actions represented by private plaintiff law firms. By contrast, in Taiwan, class actions can only be brought by the Securities and Futures Investors Protection Center (SFIPC), a quasi-government agency created under the Securities Investors and Future Traders Protection Act. Class actions require at least 20 investors and when an action is contemplated, the SFIPC issues a public notice on its website (in English and Chinese) notifying investors and inviting them to join the recovery effort.

PROSECUTING CLASS ACTIONS: 

In the U.S., securities class actions are separate from criminal or regulatory (SEC) prosecutions. In many cases, they’re brought long before and most U.S. matters don’t involve any such non-private litigation proceedings. U.S. cases primarily target defendant companies and their most senior executives, and on occasion, accounts, underwriters, and other professionals involved in creating the allegedly false and misleading information disseminated to the market. In Taiwan, SFIPC class actions are brought concurrent with criminal prosecutions for insider trading, usually against individuals and their trading entities. If the insider trading prosecution fails, the SFIPC class case does as well.

DAMAGES: 

As a result of the nature of the underlying claims, the damages differs. In the U.S., the false and misleading information artificially inflated share prices in the market, causing investors to pay too much as a result. By contrast, as Taiwanese cases typically involve insider trading by individuals or their trading entities, damages are limited to those who traded opposite – either buying or selling in the opposite direction of the insider – and damages represent the amount by which the defendant’s trading temporarily influenced the market price.

CLASS PERIODS:  

Class periods in Taiwan have a much different meaning. In the U.S., plaintiffs allege the false information inflated stock prices for an extended period of time before disclosure of the ‘truth’ removed the artificial inflation from the price. By contrast, in Taiwan, the class claims relate to insider trading activity, so prices were affected only on those days when it occurred. This results in sporadic class periods – days here and there over time when the insider trading happened – and thus limits the ability to estimate losses ex ante, unless the SFIPC publishes a damages formula in its public notice soliciting participants for the class action.

FEES AND COSTS:

In both countries, class actions are prosecuted on a contingent basis with legal fees and costs subtracted from recoveries. However, Taiwanese litigants face a significant additional risk: that of adverse party ‘loser pays’ cost shifting, which does not exist in the U.S. litigation system. So if the SFIPC prosecutes a class action and prevails, it subtracts the related fees and expenses and then distributes the balance to class members. However, if the SFIPC loses and gets taxed the defendants’ costs, it charges them back to class members. In other words, class members have no control over prosecution and foot the bill if the agency loses. This frequently deters fiduciaries from getting involved.

Conclusion

Given the narrow nature of the claims (insider trading during limited times, often by individuals), the potential upside for recoveries is limited. By contrast, the risk of costs can be significant if the criminal prosecution fails, since these are passed back to class members. Investors should think hard before registering, unless the SFIPC has already recovered against the defendants and participation resembles a claim submission.