Securities fraud litigation in Europe: Part I – Simon Bushell

Europe has become an increasingly attractive venue for institutional investors to pursue recoveries against issuers accused of fraud. What makes Europe so attractive?

Simon Bushell: The increased interest across Europe in shareholder claims brought collectively is based first and foremost on the EU’s transparency regime which has been adopted widely. The way certain EU Member States have implemented these laws has reinforced the strength of their securities markets and made shareholder claims viable. At the end of the day, shareholders have limited options when it comes to a choice of EU Member States in which to bring claims because the default is going to be the place of domicile of the issuer. Generally speaking, the UK, Germany and the Netherlands are leading the charge, but significant claims have also been brought recently in Denmark. As collective shareholder redress becomes more commonplace, institutional investors will inevitably see such claims as a necessary feature of their business, both in terms of protecting investor assets and fostering better corporate governance in general. The EU continues to develop the law in relation to collective actions, although the law of England & Wales remains ahead of the game.

What are the most significant challenges institutional investors face when pursuing securities fraud litigation in Europe?

Simon Bushell: One of the major challenges in the UK to any large-scale litigation is cost. Under the English system, the loser generally pays the winner’s costs. This can be a major deterrent to any claimant nervous of running out of funds to pursue the claim to the very end if necessary. Corporate and banking institutions facing significant shareholder claims will typically seek to mount robust, and sometimes quite technical defenses. Overall, these defendants’ objectives will be to delay and complicate the process in order to drain the claimants of financial resource and create potential disharmony amongst a potentially disparate group of shareholders. Often, the defendants will be entitled to security for their costs, to be provided by the claimants at an early stage and thus tying up capital for a long period. Where security is provided by a funder or via ATE insurance (paid for by a funder), the potential cost of capital eats into the damages eventually recovered. This, in turn, makes settlement more difficult. As the market evolves, judges will become ever more vigilant in looking out for defendants wishing to stifle claims by deploying these tactics. Claimants themselves will come to recognize that when a large claim is funded, the scale of deployed capital is double-edged.