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
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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
FOR INSTITUTIONAL INVESTORS
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.
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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
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FOR INSTITUTIONAL INVESTORS
Summer 2016 The Advocate for Institutional Investors 7
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
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Investors watch three key High Court cases
By Alla Zayenchik
SupremeCourt
Roundup
Summer 2016 The Advocate for Institutional Investors 9
FOR INSTITUTIONAL INVESTORS
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.
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Summer 2016 The Advocate for Institutional Investors 11
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
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FOR INSTITUTIONAL INVESTORS
Summer 2016 The Advocate for Institutional Investors 13
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
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
14 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
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
FOR INSTITUTIONAL INVESTORS
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
16 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
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
Summer 2016 The Advocate for Institutional Investors 17
FOR INSTITUTIONAL INVESTORS
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 INSTITUTIONAL INVESTORS
18 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
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.
FOR INSTITUTIONAL INVESTORS
20 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
FOR INSTITUTIONAL INVESTORS
Summer 2016 The Advocate for Institutional Investors 21
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.
Continued on page 28.
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
FOR INSTITUTIONAL INVESTORS
22 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
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
FOR INSTITUTIONAL INVESTORS
24 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
FOR INSTITUTIONAL INVESTORS
Summer 2016 The Advocate for Institutional Investors 25
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.
Continued on page 28.
In Brazil, arbitration hasbecome the sole means
for resolving disputes relating to securities
purchased on Brazil’s primary stock exchange
— the Bovespa.
FOR INSTITUTIONAL INVESTORS
26 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
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
Summer 2016 The Advocate for Institutional Investors 27
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
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.
FOR INSTITUTIONAL INVESTORS
28 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
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
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].