TheAdvocate - Bernstein Litowitz Berger & Grossmann LLP€¦ · year due to the currency rigging scandal. On May 20, 2015, five banks pled guilty to felony charges by the US Department

TheSummer 2016Advocate

F O R I N S T I T U T I O N A L I N V E S T O R S

US Supreme Court: How Recent Cases MayShape Class Actions,Securities Liability andInsider Trading

Courts Divided onClass Action “Tolling”Rule: What’s at Stakefor Institutional Investors?

All Eyes on the UK: Investors Track ThreeCollective Action “TestCases” in the LondonHigh Court

Petrobras Scandal Fallout: Mandatory Arbitration in BrazilLimits Recovery Options for Investors

“If You Ain’t Cheating,You Ain’t Trying!”

How Big Finance Continues to Rig Global Markets

After the Financial Crisis

FOR INSTITUTIONAL INVESTORS

2 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com

Summer 2016

Features

3 Inside Look

14 Eye on the Issues

28 Contact Us

Departments

“If You Ain’t Cheating, You Ain’t Trying!”

How Big Finance Continues to Pullthe Strings on Global Markets

By C.J. Orrico

4

Supreme Court RoundupA Look at Three of the Court’s Recent Decisions and CurrentCases and Their Impact on Investors

By Alla Zayenchik

8

Time Flies for Individual Claims

With the Class Action “Tolling”Doctrine in Jeopardy, InstitutionalInvestors Face New Challenges

Principally authored by David Kaplan

18

As part of BLB&G’s firmwide Going Green Initiative, this publication has been printed on recycled

paper. If you would prefer to receive The Advocate for Institutional Investors as an electronic PDF

file instead of a printed copy, please contact us at [email protected].

ContentsINTERNATIONAL FOCUS

All Eyes on the UKHigh Impact Cases Work Their WayThrough the London High Court

By Brandon Marsh

22The Only Game in Town

Mandatory Arbitration Clauses Severely Restrict Petrobras Investors’ Recovery Options

By Jenny Barbosa

26

GOING GREEN

Summer 2016 The Advocate for Institutional Investors 3


LookInside

T he more things change, the more they stay the same. This theme flows throughout this issue of The

Advocate. Even after waves of corporate scandal and on the heels of the financial crisis, we continue

to witness major investment banks brazenly manipulate global financial markets, instruments and

benchmarks, while corporate interests attempt to erode investor rights and limit shareholder access to the

courts. In this issue’s cover story, “If you ain’t cheating, you ain’t trying!,” BLB&G Associate C.J. Orrico discusses

the latest wave of scandals to rock Wall Street and the global financial markets as many of the largest banks in

the world have been caught colluding to manipulate foreign currency exchange rates and international bench-

mark rates, such as Libor, at the expense of investors and consumers.

In our “Supreme Court Roundup,” BLB&G Associate Alla Zayenchik provides an in-depth look into three

Supreme Court cases that are of interest to the institutional investor community and likely to have a significant

impact on securities cases and the future of class actions.

Also in this issue, BLB&G Partner and Advocate Co-Editor David Kaplan discusses the recent split in the federal

courts concerning the class action “tolling” doctrine — which stops the running of statutes of limitations and

repose and allows courts to efficiently process complex cases. The authors argue that undermining this estab-

lished rule would impose heavy burdens on investors and the judiciary, emphasizing the importance of private

class actions to institutional investors, and the importance of the tolling doctrine to the court system as a whole.

Securities litigation in jurisdictions outside the United States also continues to evolve. BLB&G Associate Brandon

Marsh reviews three “test cases” working their way through the English courts. These three cases highlight the

promise and risks of pursuing collective actions in the United Kingdom. In “The Only Game in Town,” BLB&G

Associate Jenny Barbosa discusses another difficulty investors face in foreign jurisdictions — mandatory arbi-

tration — focusing on the massive losses incurred by investors as a result of the bribery and kickback scheme

at Brazilian energy giant Petrobras, the largest corruption scandal in Brazil's history.

Also, in our regular “Eye on the Issues” column, BLB&G Associate Ross Shikowitz highlights the most significant

developments in the securities litigation and regulatory arena impacting the institutional investor community.

Please note that we always make the current issue of The Advocate (as well as all past issues) available on our

website at www.blbglaw.com.

The Editors, David Kaplan and Katherine Stefanou

As a postscript, our Co-Editor Katherine Stefanou has moved back to her home state of Michigan as this issue

goes to press, and we want to thank her for her many contributions and wish her well.



Despite the purportedrecommitment to clients

and transparency afterthe financial crisis, a

new wave of scandalsand serious misconducthave rocked Wall Street

in recent years.

T he greed and fraud associated

with the US mortgage meltdown

and global financial crisis of

2007-2008 tarnished the reputations of

many large Wall Street investment banks.

Post-crisis, Wall Street, legislators and

regulators vowed to restore investor

confidence in the big banks by, among

other things, increasing transparency. For

instance, in 2011, Goldman Sachs’ Chief

Executive Officer, Lloyd Blankfein, stressed

that the vows “represent a fundamental

recommitment to our clients.” Despite

this purported recommitment to clients

and transparency, a new wave of scan-

dals has rocked Wall Street and the global

financial markets in recent years. The

scandals are massive in scale, and arise

from interbank conspiracies to rig global

benchmarks and the markets for widely-

held financial instruments, in order to reap

huge profits at the expense of investors

and consumers.

The Libor Scandal

In 2012, an international investigation

revealed that since at least 2003, Barclays

and fifteen other financial institutions col-

luded to manipulate the London Interbank

Offered Rate, or Libor. Banks use Libor as

a base rate for setting interest rates on

consumer and corporate loans. Libor

affects the costs of hundreds of trillions

of dollars in loans used to pay for, among

other things, college, cars, and homes.

If you ain’t

you ain’tCheating,

Trying!Reputation in tatters? No problem! Wall Street’s Masters ofthe Universe are at it again — this time pulling the strings to

manipulate benchmark rates and financial instruments.

By C.J. Orrico

The big banks’ Libor manipulations resulted in trillions of dollars of

financial instrumentsbeing priced at the wrong

rate. The international investigations, led by USand European regulatory

bodies, have led to severalmajor settlements.

For context, over half of the flexible-rate

mortgages in the United States are linked

to Libor. Despite its importance to the

global lending market, Libor was lightly

regulated and calculated by a representa-

tive panel of global banks — the British

Banker’s Association or BBA. The BBA

would submit an estimate of its borrow-

ing costs to a data collection service each

morning, which averaged the rates to

determine Libor. Preying on the lack of

oversight, multiple bank traders colluded

to submit borrowing rates which did not

reflect the actual cost to borrow money in

order to manipulate the Libor calculation.

As a result, the traders were able to sub-

stantially limit the risks of their trades and

maneuver Libor based on their positions.

The big banks’ Libor manipulations

resulted in trillions of dollars of financial

instruments being priced at the wrong

rate. The international investigations, led

by US and European regulatory bodies,

have led to several major settlements.

For example, Barclays settled with au-

thorities for $435 million in July 2012,

UBS was fined a combined $1.5 billion in

penalties, and Rabobank settled charges

for over $1 billion in October 2013. In

April 2015, Deutsche Bank also agreed to

the largest single settlement related to the

Libor scandal, paying $2.5 billion to US.

and European regulators and entering a

guilty plea. Further, in May 2016, the US.

Commodity Futures Trading Commission

settled claims against Citibank for abusing

Libor and the Euroyen Tokyo Interbank

Offered Rate for $425 million. To date,

banks have paid over $9 billion in fines

and many are still under investigation.

The global probes and enforcement

actions have also led to reforms. Since

2014, the NYSE Euronext took over the

administration of Libor from the BBA,

and is now directly regulated by the

Financial Conduct Authority. Moreover, it

is now a criminal offense in the United

Kingdom to knowingly or deliberately

make false or misleading statements in

relation to benchmark-setting under the

United Kingdom’s Financial Services Act

in 2012.

The Forex Scandal

Shortly after the investigation of Libor

manipulation began, Bloomberg News

reported in June 2013 that currency deal-

ers were rigging the foreign exchange

benchmark in the $5.3 trillion-a-day for-

eign exchange market. Once again, the

scandal arose from collusion among coun-

terparts at competing banks. Thereafter,

an international investigation uncovered

transcripts of electronic chat rooms where

currency traders conspired to plan the

types and volumes of trades. The chat

rooms had names such as “The Cartel,”

“The Bandits’ Club,” “One Team, One

Dream” and “The Mafia.” US. Attorney

General Loretta Lynch commented that

the traders “acted as partners — rather

than competitors — in an effort to push

the exchange rate in directions favorable

to their banks but detrimental to many

others.” As a Barclays trader exclaimed

in one of the chat rooms, “If you ain’t

cheating, you ain’t trying.”

The Forex scandal adversely impacted

customers around the globe for over a

decade. For example, British pension fund





holders alone were losing £7 billion a

year due to the currency rigging scandal.

On May 20, 2015, five banks pled guilty to

felony charges by the US Department of

Justice and agreed to pay fines totaling

more than $5.7 billion and on November

18, 2015, Barclays was fined an additional

$150 million. Like the Libor scandal, the

investigation concerning Forex manipula-

tions is ongoing with total fines reaching

$10 billion to date.

Respective authorities have announced

remediation programs aimed at repairing

trust in the foreign exchange marketplace.

For example, in December 2014, Swiss

regulators announced that for two years

the maximum variable compensation for

UBS foreign exchange employees will be

limited to two times the base salary for

such employees globally. Additionally, in

2014, the Financial Conduct Authority of the

United Kingdom announced an industry-

wide remediation program which requires

banks to review their systems, controls,

policies and procedures in relation to their

foreign exchange business to ensure that

they are of a sufficiently high standard to

effectively manage the risks faced by the

business. Senior management at banks

are also asked to confirm that action has

been taken and that the banks’ systems

and controls are adequate to manage

risks. The Financial Conduct Authority

requires the confirmation to ensure that

there is clear accountability of senior

management at banks.

The Implications of the Libor andForex Scandals

The adverse economic consequences

associated with the Libor and Forex scan-

dals are not yet fully understood. How-

ever, the scandals have only increased

the public’s deeply-held distrust of large

investment banks. Aitan Goelman, the

Director of Division of Enforcement of the

US Commodity Futures Trading Commis-

sion, explained, “[t]here is very little that is

more damaging to the public’s faith in the

integrity of our markets than a cabal of in-

ternational banks working together to

manipulate a widely used benchmark in

furtherance of their narrow interests.”

In an attempt to restore some faith in

industry, relevant authorities announced

remediation programs for Wall Street.

Unfortunately, efforts to hold benchmarks

to a higher standard of accountability

have so far been piecemeal and regula-

tors in the US and Europe disagree on

proposed reforms. Many banks have

scrambled behind the scenes to persuade

regulators to grant exemptions and a num-

ber of banks, such as JPMorgan, received

waivers from the SEC to conduct busi-

ness as usual even after these banks

admitted guilt in connection to the various

benchmark scandals.

Most troubling is that no government

agency is responsible for monitoring

many of the financial markets and their

benchmarks, which leaves the banks to

police themselves. The lack of oversight

and the constant pressure to suck profits

out of every trade creates an “ends justify

the means” culture driving collusion and

corruption.

The Forex scandal arosefrom collusion amongcounterparts at competingbanks. An international investigation uncoveredtranscripts of electronicchat rooms where currencytraders conspired to plantheir types and volumesof trades. As a Barclaystrader exclaimed in one of the chat rooms, “If youain’t cheating, you ain’t trying.”

Continued on page 13.

The Court’s rulings continue to have a

significant impact onsecurities cases and

class action litigation.

T he Supreme Court’s current roster has

several cases of interest to the institu-

tional investor community. These cases

raise important issues, ranging from defendants’

attempts to end a class action by buying off a repre-

sentative plaintiff, to standards of liability for insider

trading, to the possibility that the long-running Halliburton

securities case may revisit the high court for the third time

and continue to define the counters of liability under the

general antifraud provision of the federal securities laws.

Supreme Court to Hear an Important Insider Trading Case

Under the federal securities laws, it is forbidden to trade on the basis of

material nonpublic information known only to company insiders. In United States

v. Newman, 773 F.3d 438 (2nd Cir. 2014), the Second Circuit severely hindered the

government’s ability to prosecute insider trading cases when it held that in order

to secure a conviction, prosecutors must prove that the receiving party knew that

the insider shared material nonpublic information and also knew that the insider

divulged the information to obtain a personal benefit in exchange for the tip. The



Investors watch three key High Court cases

By Alla Zayenchik

SupremeCourt

Roundup



The Supreme Court hasagreed to hear an insider

trading issue that resultedin a split between the Ninth

and Second Circuits. Theissue, which is of great

practical consequence, iswhether the government

must prove that anindividual who disclosed

inside information did so in exchange for a

personal benefit.

practical implications of Newman are

troubling, effectively destroying insider

trading liability in all cases lacking a quid

pro quo.

In welcome news to the Department of

Justice, the Supreme Court has agreed to

hear Salman v. United States, an insider

trading case that resulted in a split between

the Ninth and Second Circuits. As in

Newman, the issue at the heart of the

Salman case is whether the government

must prove, in order to secure a conviction,

that an individual who disclosed inside

information did so in exchange for a per-

sonal benefit. The defendant, Bassam

Salman, was indicted for securities fraud

and conspiracy to commit securities fraud

arising from an insider-trading scheme

involving members of his extended family.

His brother-in-law Maher Kara, a mem-

ber of Citigroup’s healthcare investment

banking group, had been providing infor-

mation about upcoming mergers and

acquisitions involving Citigroup clients to

his brother Mounir “Michael” Kara.

Mr. Salman became close to the Kara

family as a result of Maher’s engagement

to Salman’s sister, and Michael shared

with Mr. Salman the inside information

provided to him by Maher, encouraging

Salman to “mirror image” his trading

activity. Salman booked trades through a

brokerage account held by his wife’s

sister and her husband Karim Bayyouk.

Salman, who was aware that the insider

tips were coming from Maher, disclosed

the information to Bayyouk and shared

in the profits of Bayyouk’s trading. As a

result of the insider trading, Salman and

Bayyouk’s account skyrocketed from

$396,000 to over $2 million.

Relying on Newman, Mr. Salman argued

that prosecutors presented insufficient

evidence that Maher disclosed the confi-

dential information in exchange for a per-

sonal benefit or that Salman knew of the

benefit. Mr. Salman made this argument

despite Maher’s own testimony that he

intended to “benefit” his brother and

“fulfill” his needs. The Ninth Circuit re-

jected Salman’s argument and sustained

his conviction, finding that “the disclo-

sure was intended as a gift of market-

sensitive information,” and that no evi-

dence of a personal benefit to Maher was

necessary. To hold otherwise, the Ninth

Circuit reasoned, would yield a perverse

result by allowing “a corporate insider or

other person in possession of confiden-

tial and proprietary information [to] be

free to disclose that information to her

relatives, and they would be free to trade

on it, provided only that she asked for no

tangible compensation in return.”

With the upcoming argument in the

Salman case, the Supreme Court is ex-

pected to provide clarity as to whether an

intention to benefit a family member,

friend or acquaintance is sufficient to

establish insider trading liability.

An Unaccepted Offer of SettlementDoes Not Moot Class Claims

The Supreme Court recently addressed a

question of significant practical import to

class action litigation: whether a defen-

dant’s settlement offer under Rule 68 of

the Federal Rules of Civil Procedure, pro-

viding complete relief to a representative

or “named” plaintiff — but not to the rest

of the plaintiff class — can moot the entire

class action lawsuit.





In Campbell-Ewald Co. v. Gomez, the class

consisted of individuals who received

Navy recruiting text messages on their

cell phones despite having not opted-in

to receive such messages as required by

the Telephone Consumer Protection Act

(“TCPA”). The named plaintiff, Jose Gomez,

brought a class action lawsuit against the

advertising agency that was sending

these unsolicited text messages. Mr.

Gomez sought $500 in statutory damages

for each violation of the TCPA, along with

treble damages, injunctive relief, and an

award of attorneys’ fees. Before the case

was certified as a class action, Campbell

made a Rule 68 offer to settle Mr. Gomez’s

individual claims. Campbell did not, how-

ever, make a similar offer to settle the

claims of the rest of the prospective class.

After Mr. Gomez refused Campbell’s set-

tlement offer, Campbell moved to dismiss

under Rule 68.

The district court denied Campbell’s

motion to dismiss, holding that the com-

pany could not “make an end-run around

a class action simply by virtue of a facile

procedural ‘gotcha,’ i.e., the conveyance

of a Rule 68 offer of judgment to ‘pick off’

the named plaintiff prior to the filing of

a class certification motion.” Gomez v.

Campbell-Ewald Co., 805 F. Supp. 2d 923,

930 (C.D. Cal. 2011). The Ninth Circuit af-

firmed the decision below and Campbell

then appealed to the Supreme Court.

In January 2016, the Supreme Court up-

held the Ninth Circuit’s opinion. Writing

for the Court, Justice Ginsburg explained

that “an unaccepted settlement offer has

no force. Like other unaccepted contract

offers, it creates no lasting right or obliga-

tion. With the offer off the table, and the

defendant’s continuing denial of liability,

adversity between the parties persists.”

Campbell, 136 S. Ct at 667. The Supreme

Court pointed out that a ruling in defen-

dant’s favor would inappropriately “place

the defendant in the driver’s seat” and

found that an unaccepted offer of settle-

ment to the lead plaintiff cannot moot a

class claim.

Justice Thomas authored a concurring

opinion in which he agreed that an offer

of complete relief does not moot a claim,

but based the conclusion on common law

principles rather than on Rule 68 or on

contract law principles.

In contrast, Chief Justice Roberts issued

a dissent suggesting that the majority’s

decision was limited to its facts and that

the outcome might have been different

had the defendant actually deposited the

funds with the district court. Chief Justice

Robert’s dissent invites defendants to test

the limits of the Court’s ruling in Camp-

bell by attempting to “pick off” named

plaintiffs via a payment that purports to

provide “complete relief” to the named

plaintiff only. Indeed, this very scenario

was addressed by the Ninth Circuit in a

case decided after Campbell. In Chen, et

In January 2016, theSupreme Court ruled that “an unaccepted (settlement) offer has no force” and cannot moot a class claim.

Halliburton II provided defendants with the

opportunity to present evidence challengingwhether alleged mis-

representations had an impact on a stock's price.

Defendants argued thatsuch evidence should be

considered at the classcertification stage, but theCourt ruled that questions

of materiality should bereserved for the merits

stage. Defendants haveappealed the issue and the

Fifth Circuit has agreed to hear it.

al. v. Allstate Ins. Co., 2016 WL 1425869,

at *11 (9th Cir. April 12, 2016), the Ninth

Circuit found that a putative class action

was not moot where the defendant

deposited the settlement offer funds in an

escrow account to be paid upon entry of

judgment in plaintiff’s favor. The Ninth

Circuit reasoned that even though the

money had been deposited into an escrow

account, the plaintiff had not actually re-

ceived the money and the defendant had

the ability to reclaim the money if no

judgment was entered. It remains to be

seen whether courts outside the Ninth

Circuit will adopt a similar view.

“Halliburton III” on the Horizon?

In November 2015, the Fifth Circuit agreed

to hear the third appeal of the long-running

securities class action, Erica P. John Fund,

Inc. v. Halliburton Co. (“Halliburton”).

Halliburton last visited the Supreme

Court in 2014 (“Halliburton II”) when the

Court refused to overturn the presump-

tion of class-wide reliance established in

Basic v. Levinson, 485 US 224 (1988). In

that appeal, the Court upheld the “fraud

on the market” theory, a foundational

principle of securities litigation, which

holds that investors are entitled to rely on

the integrity of the price of securities that

trade on well-developed markets such as

the New York Stock Exchange. However,

the Court also afforded defendants an

opportunity to rebut the presumption of

reliance through a showing of direct or

indirect evidence that an alleged misrep-

resentation did not have an impact on the

stock price.

Applying the Supreme Court’s ruling in

Halliburton II, the trial court provided

defendants with the opportunity to pres-

ent evidence of lack of price impact. How-

ever, the judge determined that the

evidence offered by the defendants was

inadmissible at the class certification

stage. The defendants appealed, arguing

that the court should have considered

the evidence at class certification even

though it went to the merits of the claim.

As many commentators have noted,

Halliburton II appears to be at odds with

the Court’s previous ruling in the Amgen

case that questions of materiality —

including lack of price impact — are not

appropriately addressed at the class cer-

tification stage and should be reserved

for the merits stage of the litigation

process.

The Fifth Circuit agreed to hear the appeal

in order to clarify what types of evidence

can be presented at the class certification

stage and what types of evidence must

be reserved for later stages of the litiga-

tion. This appeal gives rise to the possi-

bility that Halliburton will revisit the

Supreme Court for a third time and re-

quire the Court to reconcile its opinions

in Halliburton II and Amgen. If the argu-

ments advanced by the defendants are

accepted, it would increase the hurdles

for investors to maintain securities fraud

cases as class actions.

Alla Zayenchik is an Associate in BLB&G’s

New York office. She can be reached at

[email protected].





Indeed, in 2015, the Justice Department

announced an investigation of at least 10

major banks for possible rigging of pre-

cious metal markets including the price

setting process for gold, silver, platinum

and palladium in London. The Commod-

ity Futures Trading Commission opened

a civil investigation as well. The precious-

metals probes are just another example

of Wall Street’s widespread manipulation

of major markets, and there are a multi-

tude of examples of investment banks

conspiring to manipulate the markets for

widely held financial instruments, includ-

ing credit default swaps, interest rate

swaps, and various types of governmen-

tal and quasi-governmental bonds.

Unfortunately, for big banks, the fines

and investigation are nothing more than

symbolic shame —the mere cost of doing

business. Many banks remain committed

to trading in benchmark markets because

it attracts potential corporate clients to,

among other things, their highly lucrative

mergers and acquisitions business. As

such, the victims of the benchmark scan-

dals are left to fend for themselves in

seeking to redress Wall Street’s illegal

conduct. For example, investors defrauded

by Bank of New York Mellon in Forex

transactions brought suit in the Southern

District of New York, and, in September

2015, a federal judge approved a $335

settlement for 1,200 investors. In Febru-

ary 2016, Citigroup paid $23 million to re-

solve an investor class action concerning

allegations that the bank rigged yen Libor

to benefit its own position. Further, on

May 2016, the Court of Appeals for the

Second Circuit reversed a lower court’s

decision and reinstated a private antitrust

lawsuits filed against 16 banks — includ-

ing JPMorgan, Bank of America and Citi-

group — for allegedly rigging Libor

interest rates. If the litigation succeeds,

the banks could be liable for billions of

dollars in damages. While these recoveries

are limited compared to the massive harm

inflicted by the banks, many investors,

like the BNY and Citigroup investors, are

increasingly coming to grips with the fact

that in a world where regulatory agencies

are slow to the punch it is up to investors

to protect their own assets from financial

fraud and collusion.

C.J. Orrico is an Associate in BLB&G’s

New York Office. He can be reached at

[email protected].

Most troubling is that in most cases no government agency is responsible for monitoringmany of the financial markets and their bench-marks, which leaves thebanks to police themselves.

If You Ain’t Cheating…Continued from page 7.

David Sipress/The New Yorker Collection/The Cartoon Bank

loss in its corporate center for the fourth

quarter of 2015, wiping out virtually all

of the company’s profits reported by its

other divisions, and other banks in the

EU have disclosed significant corporate

center losses as well. While accounting

experts have said that the manner in

which lenders in the EU have booked

corporate center losses complies with

International Financial Reporting Stan-

dards, investors should still demand

that they be provided with a clear and

accurate depiction of the company’s

true performance.

> Source: Wall Street Journal


EyeBy Ross Shikowitz

on the Issues

Wall Street banks continue to pay multi-

billion dollar settlements to resolve claims

arising out of the financial crisis, yet no

major executives have been jailed or

held accountable for Wall Street’s mis-

conduct. In March 2016, despite the

serious allegations and substantial re-

coveries in private civil litigation, a Fed-

eral Housing Finance Agency’s Office of

Banks in Europe have increasingly relied

on intricate accounting tactics to stow

losses in an area of their balance sheet

known as the “corporate center.” Gener-

ally, these corporate centers are a catch-

all category for losses arising out of

nearly anything—from bad acquisitions

to penalties for engaging in improper

business practices. However, while the

use of corporate centers is relatively com-

mon among large, complex financial in-

stitutions, their use is growing and making

it more difficult for investors to distinguish

where losses occur at a time of economic

and interest rate uncertainties in Europe

and elsewhere. Indeed, investors and

Inspector General report stated that the

agency believes “there was not enough

compelling evidence” to pursue claims

against Citigroup’s employees, even

though Citigroup paid $7 billion in 2014

to resolve federal and state enforcement

actions related to its sale of toxic mort-

gage bonds. The FHFA report marked

the first public acknowledgment by US

authorities that executives at a major

Wall Street bank would not face a single

criminal charge for selling mortgage-

linked securities. Three months later, in

June 2016, the DOJ announced that it

had abandoned its case against Angelo

Mozilo (pictured), the co-founder of

Countrywide Financial Corporation and

veritable “face” of the subprime lending

crisis, after a two-year quest to bring a

civil suit against him. Mozilo’s attorney

stated that he was “pleased and grati-

fied” with the DOJ’s decision. According

to Ben Bernanke, former Chairman of the

Federal Reserve, “It would have been

my preference to have more investiga-

tion of individual action, since obviously

everything that went wrong or was ille-

gal was done by some individual, not by

an abstract firm,” and that Wall Street

bankers should have gone to jail.

> Sources: Reuters; Fortune; Wall Street Journal; Bloomberg

analysts have complained that the

accounting practice masks the true per-

formance of a company’s business and

operations in specific segments or loca-

tions. According to Filippo Alloatti, a

Hermes Credit senior analyst in London,

the use of corporate centers makes

determining a company’s or division’s

true financial condition more difficult and

investors are concerned that the use of

corporate centers hurts accountability

because typically, there are no execu-

tives in the corporate center to be held

responsible for those losses. For instance,

Banco Santander, the EU’s largest bank

by market value, booked a €1.6 billion

Banks Pay Billions to Resolve Mortgage-Related Claims, Yet Still No Executives Held Responsible

EU Lenders Muddle Financials Through the Use of “Corporate Centers”

CEOs of banks involved in the mortgage crisis, including Countrywide Financial’s Angelo Mozilo, aresworn in during a House Oversight and Government Reform hearing.

15


Martin Shkreli — the former CEO of

Turing Pharmaceuticals who notoriously

increased the price of a drug that fights

life threatening infections from $13.50

per pill to $750 per pill — was arrested

on December 17, 2015 for engaging in a

Ponzi scheme and defrauding investors

in hedge funds that he ran. According to

a criminal indictment filed by the US

Attorney for the Eastern District of New

York as well as a related civil complaint

filed by the SEC, Shkreli had been

losing hedge fund investors’

money and lying to them about

it for years. When the in-

vestors began to redeem

their money, Shkreli

and his lawyer con-

cealed the losses,

paying some

investors with money from a company

named Retrophin Inc., where Shkreli

was also CEO.

Shkreli was arrested, pled not guilty to

the charges, and was released on $5

million bail. According to Brooklyn US

Attorney Robert Capers, “Shkreli essen-

tially ran his company like a Ponzi

scheme where he used each subse-

quent company to pay off defrauded

investors from the prior company.”

Shkreli’s lawyer who aided the

fraudulent scheme was also

arrested and charged with

fraud.

> Sources: US Securitiesand Exchange

Commission; WallStreet Journal

JPMorgan London Whale TraderBreaks Silence

On February 22, 2016, Bruno Iksil, the

trader at the epicenter of JPMorgan’s

“London Whale” trading scandal, broke

years of silence in a letter delivering his

side of the story. Iksil wrote that JPMor-

gan made him a scapegoat for a risky

trading strategy that was “initiated, ap-

proved, mandated and monitored” by

JPMorgan’s most senior executives. The

scandal— which occurred in 2012 and

caused JPMorgan to incur over $6 billion

in losses — led to several high-level res-

ignations and undermined the credibility

of the bank’s CEO, James Dimon, who dis-

missed the notion that JPMorgan faced

significant risk of losses arising out of the

bank’s strategy. According to Iksil, “Not

only were my actions ‘not unauthorised’

in 2012, but I was instructed repeatedly

by the [Chief Investment Office’s ] senior

management to execute this trading strat-

egy.” Specifically, Iksil’s letter describes

the times he flagged the trading strat-

egy’s risks to “the highest management

levels,” including Chief Investment Officer

(“CIO”) Ina Drew in “repeated warnings”

beginning at least as early 2011. Iksil also

wrote that he “kept raising alarms in the

first half of March 2012,” just before the

losses began to mount. CIO Drew, who

resigned in the wake of the scandal,

faced no government charges. Iksil no

longer works at JPMorgan and escaped

criminal prosecution by agreeing to

supply US prosecutors with testimony

against his colleagues.

> Source: Wall Street Journal

Corporate Directors’ Pay S pikes

According to a Wall Street Journal analysis, from 2006 to

2014, directors of the largest companies in the world saw

their paychecks increase nearly 50 percent. Currently, the

median pay of a director who sits on an S&P 500 company is

$255,000 per year, with some directors receiving much more. In total,

the annual pay for all directors of S&P 500 companies —approximately 4,300 men

and women — was $1.4 billion. While investors, regulators and the public have in re-

cent years focused their attention on soaring executive compensation, the increased

pay of directors who are tasked with supervising those executives has gone relatively

unnoticed. And the significant pay hike is all the more questionable given that corpo-

rate directorships are generally part-time positions, taking just five hours per week,

and full board meetings are held less than once per month. Even then, many directors

simply do not attend the meetings. Further, there are relatively scant rules on director

pay — which boards generally set themselves —and those rules only require that the

companies disclose the pay. In addition to the increased pay, directors also receive

compensation in the form of company equity, free company products— such as cars,

or cruises — free travel and tax gross-ups. > Source: Wall Street Journal

Price-Gouging Pharmaceutical CEO Indicted on Fraud Charges for Ponzi S cheme

Summer 2016 The Advocate for Institutional Investors

New Fiduciary Standards for Retirement Advice

On April 6, 2016, the US Department of

Labor announced new rules that require

retirement advisors to act as fiduciaries

and put the best interests of their clients

above their own. Under the prior set of

regulations, brokers’ recommendations

were only required to be “suitable” for

investors— a less rigorous standard that

critics said encouraged some advisers

to sell high-fee products that pay them

high commissions, but offer subpar

returns. The new fiduciary rule extends

the reach of the rule that currently

applies to advisers working with 401(k)s

and other workplace plans, and is ex-

pected to cover an additional $14 trillion

in retirement savings as well as the

attendant broker fees generated by those

investments. According to the White

House Council of Economic Advisors,

conflicts of interest arising from retire-

ment advice cost investors $17 billion

annually, resulting in annual losses of

approximately 1 percent per year. To

demonstrate how these small differences

can add up: A 1 percent lower return

could reduce savings by more than a

quarter over 35 years. In other words,

instead of a $10,000 retirement invest-

ment growing to more than $38,000 over

that period, it would be just over $27,500.

When announcing the rules, Labor Sec-

retary Thomas Perez stated that they

“ensure [] putting the clients first is no

longer a marketing slogan…It’s now the

law.” Compliance with the new require-

ments will begin in April 2017.

> Sources: US Department of Labor — Employment Benefits Security Administra-tion; Wall Street Journal


On June 17, 2016, the SEC approved a

new national stock exchange named

Investors Exchange LLC (“IEX”) despite

months of lobbying by Wall Street firms

that sought to block its launch. Unlike

other national exchanges, IEX is unique

in that it employs a “speed bump” that is

intended to slow down the fastest

traders. These rapid-fire traders, other-

wise known as “high-frequency” traders,

utilize powerful software algorithms and

computer systems to trade securities at

lightning speed in order to jump ahead of

and profit off of traditional investors,

such as pension and mutual funds. In ad-

dition to taking advantage of long-term

investors, these fast traders are also

widely suspected of causing the 2010

“Flash Crash,” the day that the Dow lost

nearly 600 points within minutes, only to

regain all the losses just moments later.

The speed bump incorporated into IEX’s

platform is intended to ensure that all

investors are able to trade securities on a

level playing field and also to increase

the integrity of the securities markets.

When approving the new exchange, SEC

Chair Mary Jo White announced that IEX

“promote[s] competition and innovation

…protect[s] investors, maintain[s] market

integrity, and promote[s] capital forma-

tion.” Indeed, after IEX’s approval, even the

most established stock exchanges that

have traditionally courted high-frequency

traders to boost revenue, such as the

New York Stock Exchange and NASDAQ,

began exploring the introduction of

speed bumps to slow some orders in a

bid to compete with IEX.

> Sources: United States Securities and Exchange Commission; Wall Street Journal

EyeBy Ross Shikowitz

on the Issues

SEC Approves New Exchange to Combat High-Frequency Trading



In March 2016, several “Dutch foundations” representing in-

vestors agreed to resolve all proceedings against the former

Fortis group for €1.204 billion ($1.3 billion) —the largest-ever

settlement under the Dutch Act on Collective Settlement or

“WCAM.” The settlement stems from Fortis’ disastrous €24

billion 2007 acquisition of the Dutch operations of ABN AMRO

and Fortis’ false representations to investors that Fortis’ bal-

ance sheet was strong. In 2008, Fortis collapsed, was required

to sell its holdings of ABN AMRO in exchange for a bailout

and was eventually taken over by the Dutch government.

In October 2008, Fortis investors filed a securities class action in

the US alleging that the company defrauded shareholders with

regard to its financial condition. However, the court dismissed

the case in 2010 for lack of jurisdiction, finding under then-

applicable standards that the case lacked a sufficient US nexus.

Thereafter, investors sought to recover their damages through

shareholder foundations in the Netherlands. WCAM allows

parties to settle their claims, and then petition a Dutch court

to declare the settlement binding, on an “opt-out” basis, on

all those that have substantially similar claims.

The $1.3 billion Fortis settlement under WCAM is not only

significant because of its size — rivaling even the largest class

action settlements under the US securities laws, but it is the

first instance in which WCAM’s procedures were used where

there was no prior settlement in the US. Further, the resolution

in Fortis was not limited to a Dutch company and Dutch

investors — Fortis’ successor is based in Belgium, and the

investors are based in a variety of countries, and purchased

securities over several different exchanges — demonstrating

once again that settlements under WCAM have a broad juris-

dictional basis. The size and scope of the Fortis settlement

suggests that engaging with defendants under the WCAM con-

tinues to be a viable mechanism for resolving shareholder claims

on a collective basis when a US class action is not an option.

Indeed, since the massive emissions cheating scandal at Volk-

swagen — the disclosure of which caused VW shareholders

and bondholders to incur billions in losses — efforts are under

way to utilize Dutch foundations to secure collective investor

relief. Institutional investors from across Europe and in the

United States have joined the Volkswagen Investor Settlement

Foundation, which is led by a distinguished Board of Directors

that includes current and former judges of the Amsterdam

Court of Appeals. The Foundation is focused on securing a

favorable settlement with VW covering all publicly traded VW

securities, other than American Depository Receipts (ADRs)

for which there is a separate class action pending in the

United States.

> Sources: : Reuters; AGEAS press release (www.ageas.com)

After three years of negotiations, on

February 10, 2016, the European Com-

missioner for Financial Stability, Financial

Services and Capital Markets Union, and

the US Commodity Futures Trading Com-

mission Chairman announced the adop-

tion of a common approach for the

clearing of swaps and other instruments.

Under the agreement, both the European

Commission and the CFTC will recognize

each other’s rules for central clearing

counterparties, allowing firms in Europe

to do business in the US while following

EU rules, and vice versa. The agreement,

heralded by regulators as a significant

achievement, will ensure that the swaps

market operates in a consistent, unified

manner, and will enhance financial stabil-

ity in derivatives markets.

The European Commission and the CFTC

are now in the process of implementing

the changes and will continue to cooper-

ate to ensure that the approach is applied

consistently, fairly, and does not result in

any negative unintended consequences.

The regulators are also working together

to determine other areas of financial reg-

ulation that might benefit from further

international harmonization.

> Source: US Commodies Futures TradingCommission Press Release

Ross Shikowitz is an Associate in BLB&G’s New York office. He can be reached at [email protected].

$1.3 Billion Fortis Settlement Largest-Ever Under Dutch Collective Settlement Act

US and EU Harmonize Clearing Rules

Institutional investorscall on the courts for

broad application of theclass action “tolling”

rule to both the statuteof limitations and

the statute of repose for federal securities

law claims.

S tock fraud, accounting scandals,

and predatory behavior by invest-

ment banks have long plagued

our nation’s financial markets. Fortu-

nately, investors’ individual claims for

recovery of damages under the US secu-

rities laws have long been protected by

the filing of a securities class action,

which “tolled” (stopped) the statutes of

limitations on investors’ time to file

claims. In 2013, however, a split emerged

among the federal appellate courts re-

garding the scope of this class action

“tolling” rule. That split, which recently

deepened, has created great uncertainty

and imposed heavy burdens on the insti-

tutional investor community.

This timeliness issue — which impacts

not only securities cases, but virtually all

class actions involving claims governed

by statutes of limitation and statutes of

repose — will likely be taken up by the US

Supreme Court in the near future.

Background

The Supreme Court laid down the class

action tolling doctrine over forty years

ago in the case of American Pipe & Con-

struction Company. v. Utah. Under the

American Pipe rule, all prospective class

members are entitled to rely on the com-

mencement of a class action to preserve

the timeliness of their individual damages

claims until the court decides whether to

formally grant the case class action status

or the class member decides to opt out and

assert its claims in an individual action.

For decades, it has been understood that

the American Pipe rule applied to both

the statute of limitations and the statute

the repose (a separate time period) gov-

erning claims brought under the federal

securities laws. This includes the 3-year re-

pose period for strict liability claims under

the Securities Act of 1933 for material

misrepresentations in public offerings,

and the 5-year repose period for claims



for individual claims

With courts split onclass action “tolling,”

TimeCan Fly

Principally authored by David Kaplan

Previously, an unnamedmember of a prospective

investor class has been able to rely on the

commencement of a securities class action toprotect and preserve the

timeliness of its individualdamages claims until thecourt decides whether to

grant the case class action status or the

investor decides to optout and assert its claims

in an individual action.

under the Securities Exchange Act of

1934 and SEC Rule 10b-5 for fraud in con-

nection with open market purchases.

In 2013, the Second Circuit Court of

Appeals upset this settled law by holding

in the IndyMac case that the American Pipe

rule does not apply to statues of repose,

and specifically, the Securities Act’s 3-year

statute of repose. In May 2016, the Sixth

Circuit in Stein v. Regions Morgan Keegan

extended IndyMac in holding that Amer-

ican Pipe also does not apply to the 5-year

repose period governing antifraud claims

under Section 10(b) of the Exchange Act.

(In July, the Second Circuit reached a sim-

ilar conclusion in the SRM Global Master

Fund case.) Most recently, in August, as

this issue of The Advocate was going to

press, the Eleventh Circuit joined with the

Second and Sixth Circuits in holding that

American Pipe does not apply to “control

person” claims under Section 20(a) of the

Exchange Act. See Dusek v. JPMorgan

Chase & Co. Consequently, there is now

a 3-2 split among the federal circuits on

this critical timeliness issue as the Tenth

Circuit (Joseph v. Wiles) and the Federal

Circuit (Bright v. United States) line up on

the other side and take the long-accepted

view that the American Pipe rule is a form

of “legal” or “statutory” tolling applica-

ble to both the statute of limitation and

the statute of repose. The Third Circuit is

set to weigh in on this critical issue in the

case of North Sound Capital v. Merck &

Co. (“North Sound”).

Notably, in North Sound, the institutional

investor community spoke loudly in ex-

pressing its strong support for broad appli-

cation of the American Pipe rule through

a “friend of the court” supported by 55

prominent pension funds with over $1.5

trillion in assets under management. In a

“friend of the court” brief, 55 pension funds

with over $1.5 trillion in assets under man-

agement detailed the severe adverse con-

sequences to institutional investors of

overturning the established class action

tolling doctrine, the importance of private

securities class actions to the interests of

long-term institutional investors, and the

importance of the class action tolling rule

to the court system as a whole.

What’s at Stake for Investors

Limiting the American Pipe tolling rule

to only one time period for filing claims

imposes heavy burdens on investors. In

the Second, Sixth and Eleventh Circuits

— which cover Alabama, Connecticut,

Florida, Georgia, Kentucky, Michigan, New

Hampshire, New York, Ohio and Tennessee

— institutional investors must now incur

the costs and burdens of extensively

monitoring dozens of active securities class

actions and, in any case in which the fund

has a material financial interest, deciding

whether to intervene or file opt-out actions

to prevent their individual claims from

lapsing under the statute of repose.

Just keeping track of the applicable repose

periods can be highly burdensome, as

the periods are generally measured from

the date of each alleged misrepresentation

or material omission, and a single case

may involve dozens of them. Those mis-

statement and omission dates must then

be cross-referenced against the investor’s

individual trading history to determine

whether the expiration of each repose

period is financially important, and thus

whether litigation is warranted, and at

what point in time.





Highlighting how extensively such moni-

toring procedures must be applied, a study

by nine leading civil procedure and secu-

rities law professors shows that certifica-

tion decisions are often not issued until

well after repose periods have expired.

According to the professors’ study:

■ The Securities Act’s 3-year repose period

would have expired prior to an order on

certification in roughly 50 percent of all filed

cases, and in over 80 percent of cases that

actually reached a certification order; and

■ The Exchange Act’s 5-year repose period

would have required investors to take

protective action in 25 percent of all filed

cases, and in 75 percent of cases that

reached a class certification order.

As a practical matter, these figures likely

understate the number of cases requiring

proactive monitoring. First, certification

battles have grown increasingly complex

in light of recent federal jurisprudence, in-

cluding the Supreme Court’s decisions in

Dukes, Comcast, and Halliburton II. More-

over, even if certification is granted within

all applicable repose periods, courts can

revisit certification at any time, which

requires investors to consider taking

proactive measures to protect against

potential decertification of a class after

repose periods have lapsed. Furthermore,

under a narrow reading of American Pipe,

investors must protect against any defect

potentially fatal to the class action, in-

cluding (i) dismissal based on technical

grounds such as standing, (ii) curable de-

fects such as failure to adequately allege

the defendants’ state of mind, and (iii)

failure to proffer adequate expert testi-

mony, such as accurately apportioning

price movements among fraud and non-

fraud related factors.

In cases where institutional investors

deem it wise to take affirmative action to

protect potentially valuable securities

claims, they must incur the time and cost

of retaining outside counsel to prepare

and actively litigate protective interven-

tion motions and new individual actions.

Investors must often make this decision

on an incomplete discovery record and

long before it is clear whether the class

action will be successful — or even be

certified. Investors’ prophylactic filings

may involve an array of subsequent pro-

cedural motions and other court-clogging

motions — all of which are unnecessary,

wasteful, and defeat the purpose of the

American Pipe rule, namely, preventing

such litigious activity.

This “parade of horribles” is no scare tactic

or exaggeration. We have seen this trend

play out in practice in many recent cases,

where institutional investors have filed opt-

out actions at or very near the commence-

ment of a securities class action to ensure

protection of their individual claims for

recovery. A prime example is the Petrobras

securities litigation, which arises out of

the largest corruption scandal in Brazil’s

history and where nearly 500 individual

plaintiffs opted out early in the litigation

(and continue to opt out) and are set to

have their individual damages claims

heard in a joint class/direct action trial this

September in Manhattan federal court.

Because of the present national uncertainty

regarding the scope of the American Pipe

rule, institutional investors cannot limit

these extensive monitoring procedures and

proactive litigation measures to cases

filed in the Second, Sixth and Eleventh

Circuits. Instead, because the majority of

In cases where institutionalinvestors deem it wise totake affirmative action toprotect potentially valuablesecurities claims, theymust incur the time andcost of retaining outsidecounsel to prepare andactively litigate protectiveintervention motions andnew individual actions.


Many institutional investors are watchinglitigation in the United

Kingdom to assesswhether UK courts will

be a favorable venue to pursue securities

actions.

T hree “test cases” pending in the

United Kingdom highlight the

promises and risks of pursuing

shareholder litigation outside the United

States. As reported in prior editions of

The Advocate, the Supreme Court’s 2010

Morrison decision has almost completely

curtailed investors’ ability to bring secu-

rities fraud suits in the United States to

recover losses incurred on foreign ex-

changes. Because of the London Stock

Exchange’s prominent role in the world’s

capital markets, many institutional in-

vestors are keeping an eye on litigation in

England to assess whether its courts will

be a favorable venue to pursue securities

recoveries. Three pending and contem-

plated cases in the London High Court

illustrate both the prospect for meaning-

ful shareholder recoveries and the risks

of litigating such cases outside the United

States — and, in particular, “loser pays”

jurisdictions such as the United Kingdom.

Royal Bank of Scotland

The long-running securities “class action”

case against the Royal Bank of Scotland

highlights the complexities of financing

and prosecuting securities litigation in

England. Pending since 2009, the RBS case

includes claims by over 15,000 investors

against RBS, seeking more than £5 billion

(over $7 billion) in damages related to a

stock offering RBS made in 2008 during

the height of the financial crisis, shortly

before the company received a massive

government bailout. The number of in-

vestors participating in this case is large

compared to other “opt-in” collective ac-

tions outside the United States. Unlike

US-style “opt-out” class actions, in which

investors’ claims are automatically included

in the case unless they elect to exclude

themselves, collective actions in most for-

eign countries are structured as “opt-in”

cases requiring investors to affirmatively



All Eyeson theUK

By Brandon Marsh

INTERNATIONAL FOCUS

Institutional investors monitor high-profilecases in the London High Court

Unlike US-style class actions, in which investors’

claims are automaticallyincluded in the case,

collective actions in theUK and most other foreign

countries are structured as“opt-in” actions, in which

investors must affirma-tively elect to join the

litigation at the outset ofthe case. However, in

doing so, investors becomesubject to England’s “loser

pay” rules, which importsignificant downside

financial risk not presentin US securities litigation.

join the litigation at the outset of the case.

In doing so, investors often become sub-

ject to “loser pay” rules, which inject sig-

nificant downside financial risk not present

in US securities litigation.

Under the so-called “English Rule,” pre-

vailing parties are entitled to reasonable

costs and fees they incur as part of litiga-

tion, including attorney’s fees. Plaintiffs,

like defendants, thus obtain private insur-

ance in order to cover their liability expo-

sure for adverse party costs and fees. In

September 2015, the RBS defendants

doubled their initial projection of attor-

ney’s fees, raising their forecast to £90

million (approximately $130 million).

Moreover, the ultimate figure could be

much higher. Reports have surfaced that

the defendants have a team of over 150

attorneys and “fee-earners” working on

the matter, and the trial date for the case

has now been extended to March 2017.

The RBS defendants’ doubling of their an-

ticipated attorney’s fees greatly expanded

the risks of the litigation for investors. It

also likely increased the costs of the liti-

gation and decreased any potential net

recovery, due to the cost of securing

additional insurance coverage for the

increased exposure.

The RBS case also highlights the precari-

ous role that outside litigation financing

firms play in foreign securities litigation.

In the US, plaintiffs’ attorneys typically

agree to prosecute investors’ claims on a

full-contingency basis, and also advance

all costs and expenses of the litigation.

In the UK, however, investors typically

enter private agreements with litigation

funding companies, which finance the

costs of the litigation (including attor-

ney’s fees) in exchange for a share of any

eventual recovery. Despite the importance

of litigation funders, there are only a

handful of established litigation funders

in the UK, and their principal trade or-

ganization, the Association of Litigation

Funders (“ALF”), has limited ability to

scrutinize its members’ assets and ensure

their financial viability.

Last year, Argentum Capital resigned

from the ALF and was delisted in connec-

tion with reports that one of Argentum’s

feeder funds operated a Ponzi scheme.

Argentum was associated with one of the

principal law firms prosecuting the RBS

action. While it is not clear whether plain-

tiffs’ prosecution has been adversely

affected by Argentum’s resignation from

the ALF, the disappearance of a promi-

nent litigation funder from the UK’s

legal landscape, amid serious questions

regarding its asset base and disclosures

to claimants, further emphasizes how

important it is that institutional investors

or their counsel undertake due diligence

regarding litigation funders, funding agree-

ments, and other transactional agreements

governing the funding and prosecution of

the case.

Finally, the RBS case highlights the

importance of plaintiffs’ choice of counsel

in foreign actions. The RBS plaintiffs have

weathered several tumultuous changes

of leadership. In late 2014, the plaintiffs’

RBS Shareholders Action Group parted

ways with its solicitors at Bird & Bird,

citing high costs. Bird & Bird claimed

over £1.5 million in fees and costs, but

the plaintiffs prevailed upon court author-

ities to reduce the bill by to £1.2 million.

According to reports, the plaintiff group

then retained the Fladgate law firm to

prosecute the action, but within months





that firm faced a cash crunch that forced

the plaintiffs to shift to a third law firm,

Signature Litigation. More recently, an-

other controversy regarding plaintiffs’

counsel unfolded. The Mishcon law firm

and its clients left the larger shareholder

group to pursue their claims individually,

prompting lead counsel at Quinn Emanuel

Urquhart & Sullivan, Stewarts Law and

Signature Litigation to seek, in June 2016,

millions of pounds in costs they incurred

prosecuting the litigation for Mishcon’s

clients. The dispute is substantial, as the

Mishcon clients’ alleged damages are ap-

proximately 10 percent of the total alleged

damages. These series of events highlight

the need for investors contemplating par-

ticipation in foreign cases to undertake

due diligence regarding the proposed

local attorneys prosecuting the claims,

and to understand the complexities of

multi-counsel prosecution arrangements.

As the RBS case proceeds to trial in

March 2017, the presiding judge, Sir

Robert Henry Thoroton Hildyard, has ex-

pressed frustration with the pace of the

case. As of June 29, 2016, there had been

ten case management conferences, and

another is scheduled for September 2016.

With document discovery finally com-

plete, the trial date has been postponed

until March 2017, at RBS’s request, with

Justice Hildyard voicing dissatisfaction

with defendants’ inability to conduct the

litigation in a timely fashion.

Actions Against Lloyds and Tesco

In addition to the RBS case, two other UK

securities litigations continue to attract

attention. Like the case against RBS, the

pending shareholder action against

Lloyds Banking Group is a financial-era

case focusing on misleading or insufficient

financial disclosures in the context of a

bank bailout. Approximately 6,000 plain-

tiffs, including 300 institutional investors,

have reportedly joined the case since its

inception in 2014. Among other things,

the case has unearthed a note by a senior

director of Lloyds, written during a 2008

board meeting debating whether to pro-

ceed with the Halifax Bank of Scotland ac-

quisition, that there was “no value left in

HBOS” ahead of the ill-fated takeover.

Institutional investors will continue to

monitor the Lloyds case, which involves

novel breach of fiduciary duty claims and

could proceed to trial as early as 2017. If

the Lloyds case does proceed to trial as

projected in 2017, its pace would be

faster than the long-running RBS action

— which is also scheduled for trial in 2017

but has been pending for approximately

five years longer. A case management

conference in the Lloyds matter was cur-

rently scheduled for July 22, 2016.

Finally, several law firms have announced

plans to file major collective shareholder

actions in London against Tesco PLC, one

of the world’s top retailers, with annual

sales behind only Walmart and France’s

Carrefour SA. The case involves an alleged

accounting fraud in which Tesco report-

edly booked income prematurely and

delayed the booking of costs in an effort

to mask declining sales and portray the

company as more profitable than it was.

In late 2014, the market learned the truth

about Tesco’s improper accounting prac-

tices and its foreseeable consequences,

including government investigations of

the Company, suspensions of its top

executives, and the firing of its outside

auditor. At the same time, Tesco’s share

The RBS case highlightsthe precarious role thatoutside litigation financingfirms play in foreign securities litigation. In theUS, plaintiffs’ attorneystypically agree to prosecuteinvestors’ claims on a full-contingency basis, andadvance all costs and expenses of the litigation.In the UK, however,investors typically enterprivate agreements withlitigation funding companies, which financethe costs of the litigationin exchange for a share ofany eventual recovery.


In Brazil, arbitration hasbecome the sole means

for resolving disputes relating to securities

purchased on Brazil’s primary stock exchange

— the Bovespa.



Mandatory arbitration clauses outside the USseverely restrict investors’ recovery options

F oreign companies are increas-

ingly turning to arbitration in an

attempt to limit or avoid their

liability exposure for securities fraud.

This practice is common in Brazil, where

public companies are encouraged by reg-

ulators to adopt bylaws mandating arbi-

tration, supposedly in an effort to avoid

the already overburdened and unreliable

Brazilian court system. In fact, arbitration

has become the sole means for resolving

disputes under Brazilian law relating to

securities purchased on the Bovespa,

Brazil’s primary stock exchange. While ar-

bitration may, in some cases, be prefer-

able to running the gauntlet in foreign

courts, mandatory arbitration provisions

also drastically restrict investors’ recov-

ery options for losses incurred on foreign

exchanges.

The Petrobras securities litigation, which

arises out of the largest corruption scan-

dal in Brazil’s history, serves as a prime

example. Petrobras is a multinational

state-run energy company headquartered

in Rio de Janeiro, and at one time, was

one of the largest companies in the

world. The securities litigation against

Petrobras arises from a decades-long

bribery and kickback scheme in which

Petrobras officials conspired with a cartel

of company contractors to overcharge

Petrobras on construction and service

contracts, with billions of dollars in kick-

backs and bribes funneled back to Petro-

bras executives and distributed to Brazil’s

ruling political parties. The scheme caused

Petrobras to overstate the value of its

refineries, oil rigs, and other assets by

billions of dollars and materially misstate

its financial results. As details of the

scheme became public, the price of

Petrobras securities plummeted.

Investors filed lawsuits in federal court in

Manhattan, seeking to recover losses on

Petrobras securities purchased on the

Bovespa, the New York Stock Exchange,

and the over-the-counter bond markets.

Shortly thereafter, Petrobras moved to

dismiss the Brazilian securities law claims

asserted on behalf of investors who pur-

chased their Petrobras securities on the

Bovespa, arguing that the claims were

subject to mandatory arbitration pur-

suant to the company’s bylaws. The court

agreed, and on July 30, 2015, the Honor-

able Jed Rakoff, applying Brazilian law,

held that the company’s arbitration clause

Only GameThein Town

By Jenny Barbosa

INTERNATIONAL FOCUS

Where Arbitration is


was “valid and enforceable against pur-

chasers of Petrobras securities on the

Bovespa.” Judge Rakoff held that Article

58 of Petrobras’s bylaws bound all share-

holders who purchased Petrobras stock

on the Brazilian stock exchange after the

bylaws had been adopted.

As a result, the sole recovery option for

investors who purchased Brazilian-listed

Petrobras securities appears to be manda-

tory arbitration at the Market Arbitration

Chamber of the Bovespa. While at least

one mass solicitation for a collective share-

holder arbitration in Brazil was circulated

as early as September 2015, it appears

that to date no arbitration proceeding has

actually been filed. As such, there is no

pending action or proceeding providing a

means for investors who purchased Petro-

bras securities outside of the United States

to obtain compensation for their losses.

In stark contrast, investors who pur-

chased Petrobras American Depository

Receipts (ADRs) on the NYSE and Petro-

bras bonds in the domestic OTC market

continue to enjoy the strong protections

of US federal securities laws. Members of

the investor class in the Petrobras US

securities litigation, as well as hundreds

of investors from the United States and

internationally that have chosen to pur-

sue direct action claims, have overcome

defendants’ repeated pleading attacks and

are set to have their claims for recovery of

damages under the US federal securities

laws adjudicated in a joint trial scheduled

to begin in September 2016.

On June 15, 2016, the Second Circuit

Court of Appeals agreed to hear Petro-

bras’s interlocutory appeal of the district

court’s certification of a subset of the class

case, namely, concerning purchases of

Petrobras US dollar-denominated bonds

trading on the OTC corporate bond market.

Petrobras argues that individualized proof

will be necessary to establish a sufficient

domestic nexus under the Supreme

Court’s 2010 decision in Morrison for

these off-exchange transactions in Petro-

bras bonds. Notably, Petrobras does not

argue that such individualized questions

prevent certification as to purchasers of

the Company’s ADRs on the NYSE.

Jenny Barbosa is an Associate in BLB&G’s

California office. She can be reached at

[email protected].

While mandatory arbitration may be preferable to running thegauntlet in Brazil’s court system, this developmenthas drastically restricted investors’ recovery optionsfor losses on foreign securities.



800-380-8496

E-mail: [email protected]

Editors: David Kaplan and Katherine StefanouEditorial Director: Alexander Coxe“Eye” Editor: Ross ShikowitzContributors: Jenny Barbosa, David Kaplan,Brandon Marsh, C.J. Orrico, and Alla Zayenchik

The Advocate for Institutional Investors ispublished by Bernstein Litowitz Berger &Grossmann LLP (“BLB&G”), 1251 Avenueof the Americas, New York, NY 10020, 212-554-1400 or 800-380-8496. BLB&Gprosecutes class and private securities andcorporate governance actions, nationwide,on behalf of institutions and individuals.Founded in 1983, the firm’s practice alsoconcentrates in general commercial litigation, alternative dispute resolution,distressed debt and bankruptcy creditorrepresentation, patent infringement, civilrights and employment discrimination,consumer protection and antitrust actions.

The materials in The Advocate have been preparedfor information purposes only and are not intendedto be, and should not be taken as, legal advice.The thoughts expressed are those of the authors.

© 2016. ALL RIGHTS RESERVED. Quotation with

attribution permitted.

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federal Circuits have not weighed in on

the issue, fiduciaries should be careful to

ensure that best practices are in place to

safeguard claims for recovery of damages

in all securities class actions nationwide

that are identified as meritorious and in

which the investor (or its clients) has sig-

nificant losses.

In sum, the constant monitoring, protec-

tive filings, and litigation activity that would

be required if investors lost the full benefit

of American Pipe would place a substan-

tial burden on the court system, taxpayers,

and investors. Such a change undermines

the purpose of the class action device,

eviscerating class members’ ability to rely

on a class action to protect their interests,

and encouraging the filing of individual

actions to guard against the loss claims

to the statue of repose. The end result

would be “[a] needless multiplicity of

Class Action Tolling RuleContinued from page 21.

All Eyes on the UKContinued from page 25.

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price fell by a third, erasing over £2 billion

in shareholder value. As of the time of

writing, no action has yet been filed (de-

spite a glut of repeated solicitations).

Nearly two years have elapsed since the

first corrective disclosures in the Tesco

case, illustrating how foreign jurisdic-

tions’ opt-in class mechanisms can lead

to significant delays in case filings as

litigation aggregators, funders, and law

firms work to organize the structures and

framework for case prosecution, and so-

licit investors to be included as claimants.

It is, however, widely expected that the

Tesco case will commence soon with a

large number of participants given the

perceived strength of investors’ claims.

In sum, the landscape for shareholder

“class actions” in the UK continues to

actions —precisely the situation that Fed-

eral Rule of Civil Procedure 23…[was]

designed to avoid.” Crown, Cork & Seal

Co., v. Parker.

Supreme Court Resolution?

The Supreme Court was set to resolve the

critical statute of repose issue less than

two years ago in the IndyMac case. How-

ever, just days before oral argument, the

Court dismissed the appeal after a sub-

stantial settlement of the case. Now that

the Circuit split has widened, the High

Court should have an even greater inter-

est in resolving the issue. The institutional

investor community would greatly benefit

from such clarity.

David Kaplan is a Partner in BLB&G’s

California office. He can be reached at

[email protected].

develop as three test cases work their

way through London courts. Given the

unique circumstances of litigation in the

UK, including potential downside finan-

cial risk and the high costs and expenses,

investors should remain cautiously opti-

mistic about the prospect for meaningful

recoveries in UK litigation while remain-

ing selective in joining any particular

action or claimant group. Given the size

and prominence of London’s financial

markets, these three test cases have the

potential to develop strong precedents

for investors seeking to recover securities

fraud losses incurred on the London

Stock Exchange.

Brandon Marsh is an Associate in

BLB&G’s California office. He can be

reached at [email protected].

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TheAdvocate - Bernstein Litowitz Berger & Grossmann LLP€¦ · year due to the currency rigging scandal. On May 20, 2015, five banks pled guilty to felony charges by the US Department