Public pension plans take shareholder litigation international

It was only a matter of time before the litigation portfolios of U.S. public pension funds started catching up with their investment portfolios and spending more time overseas.

Thanks to a game-changing Supreme Court decision in 2010, that time is now beginning in earnest, say lawyers who serve or advise large pension funds.

“The larger funds have absolutely jumped on this issue,” said Eric Belfi, a partner with Labaton Sucharow LLP in New York, whose firm tracks potential or developing cases abroad, and helps public pension funds decide whether to get involved.

One indicator that this trend is taking off is the number of large pension funds — like the $43.3 billion Los Angeles County Employees' Retirement Association, Pasadena, Calif., and the $130 billion Texas Teacher Retirement System, Austin, — that are in the process of soliciting foreign litigation monitoring or advising services. The Oregon State Treasurer's Office, which oversees the $66.5 billion Oregon Public Employees Retirement Fund, Salem, solicited outside counsel in 2013 “to address the complicated nature of overseas litigation,” said spokesman Michael Cox. “We are looking forward to launching the program.” Still others, like the $189.1 billion California State Teachers' Retirement System, West Sacramento, recently updated their litigation policies to address overseas activity.

Overseas shareholder litigation is also a main topic of conversation during the National Association of Public Pension Attorneys' monthly litigation calls, said Chris Supple, deputy executive director and general counsel of the $60 billion Massachusetts Pension Reserves Investment Management Board, Boston, who co-chairs NAPPA's securities litigation committee. “Our committee is trying to enable all of our fellow pension fund GCs to combine our resources and help each other learn together how best to navigate this new world of foreign litigation, instead of each of us trying to learn it separately on our own.”

Until 2010, it didn't matter where securities were purchased. U.S. institutional investors pursued investment litigation cases in U.S. courts. Everything changed in June 2010, when the U.S. Supreme Court ruled in Morrison vs. National Australia Bank that suits against companies involving foreign-bought securities could not be brought in federal U.S. courts.

That gave large institutional investor plaintiffs little choice but to shift their focus overseas to the defendant's home base or the point of purchase when considering litigating over losses. Now, a trend of securities class actions that started in courts in Canada and Australia is spreading to Europe and Japan.

Some of the high-profile cases that potential plaintiffs and their lawyers are watching closely include ones brought by several groups of investors, including U.S. pension funds, in 2012 against Olympus Corp. in Japan over a 2011 accounting scandal that sent the company's share price plummeting and a lawsuit brought in London in March 2013 by 21 pension funds and investment firms against the U.K.'s Royal Bank of Scotland Group for misstatements before a 2008 government bailout. Other notable pending securities fraud class actions are against Vivendi Universal SA in France, Volkswagen AG in Germany, and financial services company Fortis SA/NV in Belgian and Dutch courts.

Cases in each country present their own learning curves and potential pitfalls, but legal experts say the climate is getting better for plaintiffs. More countries are changing, or considering changing, their legal systems to offer more American-style securities litigation processes to demonstrate that their markets are safe in order to attract foreign investors. In Europe, the Netherlands is considered at the forefront of establishing a process for shareholder litigation, while Italy recently passed legislation making it easier to bring cases.

Still, overseas litigation is a new frontier for U.S. institutional investors when compared to the well-established class-action system at home. In the U.S., investor plaintiffs benefit from robust pretrial discovery, the "fraud on the market” legal concept recently upheld by the Supreme Court, a well-established plaintiffs' bar, contingency fees instead of expensive legal fees upfront, and sharing of legal costs by all parties.

By contrast, some countries — including the Netherlands, the U.K., Germany and Australia — have “loser-pays” rules that make starting a case more of a gamble, while others, like the Netherlands, do not allow contingency fees. Some legal systems, including the U.K. and Germany, require plaintiffs to decide early on whether to opt into a class action, while in others investors are included unless they opt out.

Foreign class action is “never going to be like the United States,” said Jay Eisenhofer, co-managing partner of Grant & Eisenhofer PA in New York, who leads the suits against Olympus Corp., Vivendi SA, Volkswagen AG, Fortis NV and Royal Bank of Scotland on behalf of public pension funds and other institutional investors. “Each country has specific impediments, and that doesn't even get to the cultural differences.” Although Mr. Eisenhofer sees an increasing number of potential claims that U.S. institutional investors could pursue, he said it's a risk unless “facts really justify taking an action.” For U.S. pension funds thinking about suing overseas, the main risk now “is the amount of time they're putting into it” and their reputation, said Mr. Eisenhofer, who predicts more international arbitration as well.

“The process can take longer and the path to success can be more uncertain,” said Blair Nicholas, San Diego-based managing partner at securities litigation firm Bernstein Litowitz Berger & Grossmann LLP, who advises public pension funds. “If I can get comfortable with the information, I will make a recommendation.”

“U.S. public pension plans are understanding that at the very least, they have to have a process in place to identify the cases and analyze them,” said Mr. Nicholas.

“A lot of the funds we deal with feel very strongly about” considering overseas litigation, said Mr. Belfi of Labaton Sucharow.

Mr. Supple of MassPRIM agrees. “We view litigation claims as an asset of our fund to be maximized just like any other fund asset,” he said. “Just because the Supreme Court, in its Morrison decision, said we can no longer litigate our foreign securities claims in the U.S. courts, we still have to monitor our portfolio for actionable losses and we still have to pursue claims appropriately from a cost/risk/return standpoint, even if that means litigating in foreign jurisdictions.”