Another Look at the Role of International Investors

 

At a time when the global credit crisis continues to reveal the interconnectedness of world economies, it is worth taking another look at the role that international institutional investors are playing in securities class actions brought in the United States.

This phenomenon has garnered substantial attention during the last year, both from academic observers and the courts. Much of that attention has centered around the role U.S. courts should play in so-called “foreign-cubed” cases, or those where (1) foreign plaintiffs (2) purchased securities of a foreign issuer (3) on a foreign securities exchange. In October, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a foreign-cubed lawsuit on behalf of shareholders of National Australia Bank. However, SCAS research shows that the foreign-cubed cases represent just a fraction of the activity of international institutional investors in U.S. securities class actions.

This article (which is an update to a SCAS white paper published in May 2007) reviews all instances where an international institutional investor filed a lead plaintiff motion in a federal securities class action, adds full year data for 2007, and also slightly revises some of the prior published data due to both additional research and delays in receiving confirmation from some of the law firms involved of the nationality of their clients.

It is also important to note that this article only examines the role of international institutional investors in class actions--and does not examine the increasing number of “opt-out” or so called “direct” actions that these same investors are filing. This separate phenomenon, to be addressed in another white paper, has occurred at least partially in response to court decisions that have excluded international investors in certain cases, such as Vivendi.

As discussed in our prior paper, the first example of an international institutional investor filing a lead plaintiff motion in a federal securities class action, occurred in 1999, in the Network Associates litigation. In every year since 2002, international institutional investors have filed lead plaintiff motions in more than 5 percent of all new federal securities class actions.

In contrast to earlier years, 2007 saw a sharp increase in the number of international institutional investors from Sweden, the United Kingdom, and the British Virgin Islands filing lead plaintiff motions. We have also seen that the early enthusiasm that German investors had for involvement in U.S. class actions has remained tepid, with the number of movants remaining steady at levels two-thirds below their historical peak. Canadian investors also continued their historical trend of increased activity in even numbered years, followed by 50 percent or greater drop-offs in odd numbered years. We also added three new countries to the list, with investors from Finland, Bahrain, and the Czech Republic all having filed the first-ever lead plaintiff motion by international institutional investors from one of those countries.

Furthermore, these candidates are not limiting themselves to cases involving either non-U.S. companies, or only companies headquartered in the same home country as the investor. Prominent examples included the recently settled Coca Cola and General Motors cases. And while these investors have been involved in many of the cases arising out of the ongoing credit crisis, in 2007 they were particularly clustered in another area altogether--life sciences and pharmaceuticals, filing lead plaintiff motions in the GlaxoSmithkline, Amgen, Eli Lilly, and Bristol Myers Squibb cases, among others.

We previously posited a number of reasons to explain the continued trend of increased international institutional investor involvement in securities class actions, namely:

• The educational and marketing efforts of U.S.-based securities litigators.
• An increasing emphasis by U.S. plaintiff-side law firms on solidifying their relationships with international institutional investors and outside counsel for those investors.
• A gradual realization, both domestically and abroad, that institutional investors of all stripes are failing to file claim forms in securities class actions to claim their share of the settlement proceeds.

To that list, we add a fourth possible explanation: The increasing availability and acceptance of securities litigation in non-U.S. jurisdictions.

While this may initially sound counterintuitive, as other cultures become more familiar, both at home and abroad, with the concepts and realities of securities litigation, they are increasingly likely to become involved with it. Despite the increasing number of jurisdictions now allowing some form of securities litigation, the most robust system for investors seeking recoveries through securities litigation remains here in the United States.

And while all of these possible motivations are anecdotal, they have been substantiated through interviews with various market participants.

Statistics
According to SCAS data, there were 234 different instances of an international institutional investor seeking to serve as a lead plaintiff in a U.S. securities class action from 1996 through 2007.

• Those lead plaintiff filings occurred in 134 different cases.
• The investors hailed from 26 different countries. Germany, Canada, Israel, Italy, the United Kingdom, Austria, and Sweden were the most often represented countries.
• The investors involved in these cases are widely varied and include public pension plans, asset managers, mutual funds, union pension plans, hedge funds, and other types of investors.

Thirty-one different law firms represented the international institutional investors. The firms that most often represented investors: Milberg; Barroway Topaz Kessler Meltzer & Check; Grant & Eisenhofer; Bernstein Litowitz Berger & Grossman; Glancy Binkow & Goldberg; and Murray Frank & Sailer.  

There was little change at the top of the ranks of investors that filed the largest number of lead plaintiff motions:

• Various DekaBank entities sought to serve 11 times, but in only eight cases (three filed together in the Coca Cola litigation).
• Activest Investmentgesellschaft, a German asset manager, filed 10 motions in 10 cases.
• Metzler Asset Management, another German asset manager, filed 10 motions in 10 different cases.
• Erste Sparinvest Kapitalanlagegesellschaft, an Austrian investment manager, filed seven motions in seven cases.
• Union Investment and Union Asset Management Holding, two related German entities, also filed seven motions in seven cases.
• The Ontario Teachers’ Pension Plan Board filed seven motions in seven cases.

(Note that some of these figures differ slightly from our prior report due to both additional research and delays in receiving confirmation from some of the law firms involved of the nationality of their clients.)

Media reports have noted that the class action concept, or a close cousin, the group or mass action, is increasingly taking hold across the world, as investors are given (or seize) the power that collective action grants to similarly situated groups in litigation. While 2007 saw the first reported securities class action filed in Africa--in a case involving the Nigerian subsidiary of Cadbury Schweppes--2008 saw legislation become effective in a number of European countries that would allow securities class actions for the first time.

This article is derived from a longer paper and is an update to our May 2007 paper “Accountability Goes Global.”

Tentative Settlements

Amkor Technologies
Amkor Technologies has agreed to pay $11.25 million to resolve the securities class-action lawsuit filed in federal court in Arizona in January 2006. The complaint was filed on behalf of purchasers of Amkor stock between July 26, 2001, and July 26, 2006. The investors alleged that company officials shipped excessive inventory to customers to inflate the firm’s operating results so that the company could successfully raise $152 million.  

Chandler, Ariz.-based Amkor operates as a subcontractor of semiconductor packaging and test services.

http://scas.issproxy.com/casesummary.php?CaseId=29463

 

NovaStar Financial
NovaStar has agreed to pay $7.25 million to resolve the securities lawsuit filed in the U.S. Court for the Western District of Missouri in June 2004. The lawsuit was filed on behalf of investors who purchased the company’s stock between Oct. 29, 2003, and April 8, 2004, and still held those shares as of that latter date, or sold put options during the class period (whose options extended beyond and were exercised after April 8, 2004). The complaint alleged that company officials overstated the actual number of branch offices and illegally conducted business in Nevada and elsewhere.

Kansas City, Mo.-based NovaStar operates as a non-conforming residential mortgage portfolio manager.

http://scas.issproxy.com/casesummary.php?CaseId=28841

 

Select Medical
Select Medical has reached a $5 million agreement to settle the securities lawsuit filed in the U.S. District Court for the Eastern District of Pennsylvania in August 2004. The complaint filed on behalf of purchasers of the company’s securities between July 29, 2003, and May 11, 2004. The lawsuit alleged the company reported remarkable quarterly increases in revenues, income, and earnings per share, while operating under the shadow of a regulatory crackdown that could have a devastating effect on the company's financial performance. The suit also contends that insiders sold more than 11 million shares at artificially inflated prices.

Mechanicsburg, Penn.-based Select Medical is an operator of specialty and outpatient rehabilitations facilities in the United States and Canada.

http://scas.issproxy.com/casesummary.php?CaseId=29748

 

Other recent tentative settlements include: Societe Generale (Canada), Jarden, and National City (Delaware and Ohio actions).

Dismissals

CarMax
CarMax announced that the securities class-action case filed in October 2008 has been dismissed. The complaint was brought in the U.S. District Court for the Eastern District of Virginia on behalf of investors who purchased the company’s shares between April 2 and June 17, 2008. The lawsuit alleged that the company officials issued materially misleading statements and failed to disclose that CarMax was not positioned to meet its sales targets or earnings objectives for fiscal 2009.

Richmond, Va.-based CarMax is a retailer of used vehicles.

http://scas.issproxy.com/casesummary.php?CaseId=30651

 

Bear Stearns
A New York state judge has dismissed the shareholder litigation filed against Bear Stearns in March 2008. The complaint alleged that the company’s directors breached their fiduciary duties by agreeing to sell to the firm to JPMorgan Chase for far below its value.

Bear Stearns, which was one of the world’s largest investment banks, collapsed in March 2008 after a liquidity crisis.

http://scas.issproxy.com/casesummary.php?CaseId=30351

 

Medquist
Medquist announced the dismissal of the securities litigation filed in January 2008 in state court in New Jersey. In the complaint, Medquist investors alleged that current and former directors breached their fiduciary duties by not permitting shareholders the opportunity to decide whether they wanted to participate in a share purchase offer with CBaySystems Holdings.

Mount Laurel, N.J.-based Medquist provides medical transcription technology and services.

http://scas.issproxy.com/casesummary.php?CaseId=30668

 

Other recent dismissals include: Blackstone Group and Vodafone Group.

Reversal of Tentative Dismissals

The ValueClick case had been tentatively dismissed. Plaintiffs were given leave to file an amended complaint, and they have now done so.

Tentative Dismissal Affirmation

The Cutera litigation had been tentatively dismissed.  The investor plaintiffs were given leave to file an amended complaint but have now filed a notice of intent not to file an amended complaint.

Class Certification

The court ruled in favor of class certification in the Metropolitan Mortgage & Securities litigation.

Reversal of Dismissals

A federal appeals court reversed dismissals and remanded the following cases to the district court for further proceedings: Dana Corp. and Hartford Financial Services Group.

Funds have been recently disbursed (or approved for disbursal) in the following cases:

Aetna (2001) Applica Gravity Mirant Americas Generation Newpark Resources

Optical Coating Laboratory Orange 21 Rayovac UICI