The Next Frontiers for Investor Recoveries: Non-US Passive Recoveries, Commodity Class Actions, and Cayman and Bermuda Appraisals

Passive recovery opportunities for investors have never been greater.  Last year, despite the pandemic, securities class actions recovered $4.2B, well within the normal range of $3B to $6B.  To date, 20 fully or partially settled antitrust class suits have brought in $7B+, with billions more expected over the next several years.

Most institutional investors file these claims and are now asking what’s next.  We’re seeing growth in opportunities beyond securities and antitrust.  These ‘other’ cases represent the next frontiers for savvy funds.  The challenge will be capturing them as there’s no centralized source for identification.  Cases get filed in federal district courts; federal bankruptcy court; state courts; foreign courts; or involve regulatory proceedings in the US or abroad.

Below we profile three of these forefront areas.

Non-US Passive Participation Recoveries

Roughly two dozen countries are active in securities fraud recoveries.  More than half have legal mechanisms for representative suits including class actions.  While some countries lack the other ingredients necessary for robust recoveries, several have emerged as reliable sources for claim filing opportunities including Australia, Dutch Foundations, and UK Financial Conduct Authority (FSA) compensation schemes, their equivalent of SEC Fair Funds.  With time, more will join this group including potentially Italy, which adopted class actions last April.

We expect to see 3 to 5 of these recoveries per year.  If investors do nothing else outside the US, they should file for these non-US passive recoveries.  The amounts are significant.  From 2018 through 2020, 13 Australian settlements brought in more than $400M.  Since 2013, 9 settlements have exceeded $90M.  While smaller than many US settlements, keep in mind that in Australia, claims are submitted before settlement negotiations and parties negotiate with actual not modelled class losses; so average recovery rates there are about 25% of losses, compared to just 3%-8% in US class actions.

Commodity Exchange Act and Other Federal Class Actions

We’re tracking more than 40 non-securities class actions in the federal courts relevant to investors.  Of these,

  • 31% involve antitrust claims;
  • 38% involve Commodity Exchange Act (CEA) claims; and
  • 31% involve ‘other’ claims like state law breach of contract or fraud.

Several cases concern cryptocurrency including fights over whether instruments must be registered as securities or for misconduct by market makers.

Over time, we expect commodity and ‘other’ cases to become a larger portion of total recoveries.  Compare the litigation pipeline metrics with those for the 20+ fully or partially settled non-securities class actions to date (e.g. CDS, Libor, and FX):

  • 65% involve antitrust claims;
  • 20% involve CEA claims; and
  • 15% involve ‘other’ claims.

The higher percentage of commodities and ‘other’ cases in litigation suggests future recoveries will be more heavily weighted towards them.

The uptick in CEA cases correlates with stepped-up regulatory enforcement.  In 2020, the CFTC – the SEC for commodities markets – achieved three of its biggest outcomes to date.  In September, JPMorgan settled with the CFTC, the AG/DOJ, and SEC, who alleged the firm was spoofing orders in precious metals and U.S. Treasury futures contracts.  All three regulatory resolutions include restitution funds totaling $312M.  We expect those administrations to start this year.  The CFTC also sanctioned Bank of Nova Scotia $127.4 million for spoofing; and ordered Vitol Inc. to pay more than $95 million in civil penalties and disgorgement for attempted manipulation of two physical oil benchmarks.  Private class actions are now pending against all three companies.

Cayman and Bermuda Appraisal

Most sophisticated funds are familiar with Delaware appraisal rights.  Dissenting shareholders can vote against a proposed merger or eligible transaction and instead of accepting those terms have a court determine the true value of their shares.  Historically, hedge funds were big players in this space, buying up shares to exercise appraisal and capture the significant premiums Delaware courts were awarding.  Over time, more investors joined, premiums shrunk or went negative, and the forum became more inhospitable, prompting plaintiffs to seek warmer shores.

They found them in the Cayman Islands.  The Caymans offer a receptive judiciary, better law, and a track record of significant premiums.  For years, these suits were largely hedge fund plays.  In 2020, Cayman appraisal went ‘mainstream’ with the WUBA ( matter.  Besides hedge funds, participants included US state retirement systems and household name financial service firms.  Earlier this year, we saw similar claims against China Biologic, and a general uptick of client interest in this area.

We expect 2-3 Cayman appraisal matters per year.  We’re also seeing early appraisal activity in Bermuda.  That country offers some, but not all, of the advantages of the Caymans, although precedents are limited.  To date, there only been one relevant decision on fair value.

While there are ‘green fields’ now, they may not last long.  Appraisal groups are growing to the point of constraining premiums.  At some point, corporate interests may exert negative pressure as in Delaware.  But for now, it’s the ‘go-to’ place for appraisal rights and impacted investors should consider these opportunities.

Recovery opportunities exist in many other areas, too, and we expect investors to seek them out in the coming years to enhance their recovery programs and ensure they get everything to which they’re entitled.

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