The Certain Uncertainty of Shareholder Loss Estimates in Non-US Securities Litigation

With continued expansion in non-US securities litigation, we’re getting more client questions around losses, particularly how they’re calculated, why estimates differ, what they mean, and how to use them when making participation decisions.

Here are four important things to keep in mind when it comes to shareholder loss estimates in non-US securities litigation.

1. Loss estimates are educated guesses – not certainty.
In non-US jurisdictions, there’s little or no authority on how shareholder losses should be calculated. Few cases have successfully resolved and fewer have progressed to the point of judicial guidance on the issue. Organizers (lawyers and funders) can only make educated guesses about how courts will later measure them.

With the proper method an open question, organizers choose different ways. We recently saw an organizer simultaneously register clients in two matters in the same country using different methods.

Competing organizers can use different approaches for the same matter. Some will be conservative while others will choose aggressive methods to increase eligibility and recruitment, and because some clients mistakenly believe that selecting the organizer with larger estimates will get them more.

2. Even with the same method, inputs can differ.
Even when organizers choose the same method, their estimates can vary significantly due to different inputs. They may use different time periods, different disclosure dates, and different price drops. They may use gross price drops or try to isolate that part related to company-specific news rather than broader market forces. Share matching techniques (Last-in-First Out versus First-in-First Out) can differ; trade gains may offset losses; and later share price movements may be reflected.

3. Loss estimates only roughly correlate with recoveries.
In most cases, claimants are in the same court and have the same law applied to their claims. Any earlier differences in loss estimates become moot as judges choose the final method after input by both sides. During this process, defendants factually and legally attack the organizer’s method and assumptions to reduce liability. Most cases settle rather than try, so loss estimates end up being one of many things impacting ultimate recoveries. As a result, initial figures only generally correlate with final outcomes.

4. How investors should use loss estimates in their participation decisions.
Given this uncertainty, how should investors use estimates when deciding whether to register?

• Loss thresholds: Loss thresholds specify – specifically or generally – a minimum amount required to consider registering for cases. This threshold should account for jurisdiction risks including adverse costs, participation burdens, anonymity, and other considerations. If organizer loss estimates are consistent in magnitude – e.g. they all exceed the threshold – investors can be more confident that joining a recovery effort will be worth it.
• Understanding differences: If organizer loss estimates differ significantly, it’s important to understand why and to consider how vulnerable the numbers will be to challenges by defendants. There’s less reliability in large numbers based on aggressive methods that are vulnerable to factual or legal attacks.
• Reflections of organizer styles: Sophisticated investors use loss estimates for insight into organizers including the thoroughness and aggressiveness of their litigation strategies and styles.

Conclusion
Investors must appreciate that there’s no one “right” loss number. Estimates are just that – educated guesses – and will differ based on the method and inputs chosen by organizers. They should be one of several factors considered when registering. Investors should try to understand the methods being used, their legal and factual predicates, and how vulnerable loss estimates will be to factual and legal challenges by defendants. Most important, they should keep in mind that in the end, early loss estimates will have only a general correlation with later recoveries.

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Michael G. Lange, Esq.

SVP of Worldwide Litigation
Financial Recovery Technologies

Mr. Lange, SVP of Worldwide Litigation at Financial Recovery Technologies, is the senior member of FRT’s Legal & Research team responsible for global opt-in, opt-out, and antitrust case analysis and legal research. During his more than 20 years of practice, he has built a rich network of relationships around the world including corporations, government agencies, lawyers and other professions, which he brings to bear for FRT clients.

Before joining FRT, Mike was a Partner at Berman DeValerio & Pease, one of the country’s leading law firms prosecuting securities, consumer, and antitrust litigation. He personally identified and initiated cases recovering more than $200 million for investors. Mike led the firm’s business development, marketing, and government affairs efforts and was its primary media strategist and spokesperson, handling press calls and interviews. He was principal contact for a number of institutional investor clients, advising them on case merits, damages calculations, lead plaintiff or other involvement, and related strategies. Mike negotiated and oversaw settlements, working closely with administrators on all aspects, from allocation plans and claims notification through processing and distribution.

Education: J.D., cum laude, Harvard Law School (1991), Writing Prize in Law and Economics. B.A., Economics, magna cum laude, Swarthmore College (1988).

Professional Contributions: Former co-chair of BBA Class Action Committee (2001-2002). Executive Committee Member, Vice President (Securities), and Head of Media Committee for National Association of Securities and Consumer Attorneys (NASCAT) (2001-2003; member of senior management and administration committees developing political agenda and strategies for organization, as well as conceiving and implementing lawyer education programs).

Presentations: Lecturer on securities and litigation topics at numerous investor conferences, law school (Boston College) and legal seminars. Co-chair and featured speaker: December 2015 Council of Institutional Investors (CII) panel “Understanding Appraisal Rights”; February 2001 Class Action Litigation Summit (Washington, D.C.); June 2001 MCLE Seminar “Class Action Practices in Massachusetts and Federal Court”; May 2002 BBA Seminar “The Life Cycle of a Class Action.”

Publications Authored articles include “The Evolving Fiduciary Landscape: Antitrust (AmLaw 360, May 10, 2016); “The Probable Effects of Regulation FD on Private Securities Litigation” (Securities News, Winter 2001); and “The Sarbanes-Oxley Act of 2002: Political Sound Bites Posing as Reform” (Securities News, Winter 2003).

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Founded in 2008, Financial Recovery Technologies (FRT) is the leading technology-based services firm that helps the investment community identify eligibility, file claims and collect funds made available in securities and other class action settlements. Offering the most comprehensive range of claim filing and monitoring services available, we provide best-in-class eligibility analysis, disbursement auditing and client reporting, and deliver the highest level of accuracy, accountability, and transparency available. For more information, go to www.frtservices.com.

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