As a vital tool to tackle fraud and losses from malpractice, among other things, securities law ensures that investors have an informed and precise idea of the interest they are purchasing or selling and its value, and governs the procedures involved in the exchange of such assets.
Over the next few pages, Lawyer Monthly talks to Alexander Reus, Managing Partner of DRRT, a boutique international law firm and litigation funder. Alexander gives insight into the global challenges surrounding securities regulations, his and DRRT’s thought leadership in the sector, and discusses the past and due evolution of securities law on a multinational scale.
What are the most recent talking points on the matter of international securities law?
Given that our area lies in the enforcement of securities laws and claiming damages for securities laws violations, I would say the most commonly discussed phenomena is the strong growth of securities litigation outside of the US in Europe, Asia, Australia and Canada. In the US, the biggest uncertainty is surrounding the elections and who will come out as president and have the largest impact on a Supreme Court currently fairly evenly divided. A Republican president would certainly appoint a more conservative, business friendly justice who would continue the trend of anti-class action decisions, which will make the life of plaintiffs’ lawyers even more difficult.
Have there been any recent regulatory developments to affect your work in this legal segment?
Not really, as the Sarbanes Oxley Act had some impact on securities laws enforcement but otherwise, it has been the stronger focus on FCPA enforcement and even whistle-blower cases which have had an impact on shareholder litigation as well.
The most obvious pitfall is the likelihood of securities litigation in the form of class actions in the U.S. and Canada, which not only cost money, but also time, and tie up management in lengthy litigation and litigation related matters. The SEC has also been very tough on enforcing blatant violations of securities laws, but simply does not have enough manpower to pursue each borderline case.
How can companies ensure that they avoid these pitfalls? What is the one piece of ‘golden’ advice you give your clients about this, in particular regards to investor protection?
Our clients are the institutional shareholders in large companies, the largest institutions, mutual funds, sovereign wealth funds, insurance companies and other investors, all of whom are stakeholders in the company and therefore asked to act as owners in stewarding a company from the remote shareholder perspective as opposed to the daily management activities handled by management. The UK has promulgated a very detailed and strong Stewardship Code which lays out the obligations of asset owners to be involved in the company, and most countries even require that shareholders exercise their ownership rights through voting or engagement. The golden advice for companies is to treat the owners as such and not as a burden, to engage positively and affirmatively with the shareholder base, to have them involved in the company strategy and direction.
How costly and complex can compliance and enforcement proceedings become?
Compliance with laws and regulations is a major aspect of any business and the growth of the industry in the past years as far as allocation of resources and employees is concerned. It is expensive and time consuming but a necessary aspect of a successful business which wants to protect itself from bad employees or practices which may threaten the very existence of the company. As you can see in companies such as Petrobras and Volkswagen, if the corporate culture is one of cheating, bribing and corruption, then that will eventually catch up with the company and have severe consequences.
Over the past decade, have you seen a significant evolution in the demand for legal services in this regard, and in the frequency of litigation surrounding securities disputes? To what do you attribute these shifts?
Litigation has grown, so legal services in the securities litigation area are high in demand, as well as investigative services such as the ones Jones Day is performing for VW in a yearlong, very expensive internal investigation of the Dieselgate scandal. Hence, law firms are growing their investigative services capacities to review internal processes of companies and come up with a post-facto review of internal operations once a scandal has broken. There is also an increased need for legal services in connection with the protection of shareholder interest in proper compensation for damages causally related to the false or misleading statements of a company on a certain subject.
There is also a growing need for litigation funding in jurisdictions which do not have the US opt-out class action system and the associated financial handling of cases through law firms. Hence, in these jurisdictions, typically some third party funder will come in to underwrite and fund a litigation against a solvent company. There has been much development in this area. This, combined with the recent publicity concerning international corporate governance scandals such as in Japan (Olympus and Toshiba), Brazil (Petrobras) and Germany (Volkswagen), has led to an increase in international securities litigation. That is also encouraged by non-US settlements for large amounts, such as with the March 2016 settlement between shareholders and Ageas fka Fortis for €1.2 billion in the Netherlands.
In terms of accounting and disclosure, what are the key issues international companies need to take into consideration? What are the key directives for EU based companies?
The directives are pretty much the same, be transparent and timely in your disclosures, and avoid the abuse of certain market powers a company might have. It is easy when it comes to accounting fraud such as in the Olympus and Toshiba cases in Japan, as the rules are fairly clear and as the restatement of numbers typically indicates that something was (intentionally) wrong before. It is also easier for a shareholder to point at numbers which are substantially different before and after a disclosure and claim that there was materiality in the disclosure so that any damages resulting therefrom can be reasonably attributed to the false information.
Are there any challenges you frequently encounter in litigating antitrust matters on behalf of your clients, especially cross-border?
Antitrust laws in financial litigation matters have become a very interesting and sharp tool for plaintiffs. Especially in the benchmark cases (LIBOR, FX etc) in the US, the antitrust claims are the claims with the biggest threat because of joint and several liability, and because of the treble damages claim. In Europe, the antitrust claims are typically advanced by the European Commission and then, once a decision and judgment has been rendered, private claimants can piggy back on the decision to claims damages. In an interesting development, the UK has introduced an antitrust claim opt out class action mechanism but only for UK residents and only after a EC decision has been made.
As a thought leader, how would you change the law surrounding this area, if you could?
I would not change the laws per se, but I would change the procedures for private enforcement of securities and antitrust laws. The small investor and consumer is not sufficiently protected and without some bundling mechanism such as the class action, cannot effectively pursue damage claims against a multi-billion dollar company. Maybe the concept introduced in Brazil for mandatory arbitration clauses in publicly listed companies could be used in Europe to bring shareholder arbitrations in front of a single arbitration institution dealing with shareholder compensation claims. If that would be coupled with some threshold sign up of 5% of outstanding shares to start an opt-out class arbitration, then this might lead to very effective and fair results.
Is there a particular securities case you were recently involved with that required you to apply particular thought leadership to succeed?
I believe the Ageas fka Fortis settlement, that concluded in March 2016, in which I was deeply involved, proved to be a challenging but also interesting case to be resolved after many years of litigation, using mediators from different continents and different groups protecting different interests. It was a cultural experience just as the Olympus accounting fraud case we settled in October 2014, which required the introduction of the concept of pre-trial mediation techniques to settle a shareholder case in a jurisdiction (Japan) which is not typically open to or familiar with such alternative dispute resolution mechanisms at a time when there has not been a court decision at least on the lowest level.
How is the firm working towards changing the securities and antitrust landscape, and develop its thought leadership internationally in this legal segment?
We keep on exploring and developing new markets, adjusting to the local laws, procedures and ethical rules when coming up with client friendly financial and legal concepts to handle group litigation cases for institutional investors
