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The Actuary The magazine of the Institute & Faculty of Actuaries
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Litigating circumstances

In July 2005, The Times reported that ‘ British institutional investors, custodians, and pension funds are missing out on an $8.2bn (£4.7bn) payday by failing to collect settlements assigned to US securities class-action winners’.
By September 2005, that message had moved on to such an extent that The Times headline ran ‘Pension trustees face lawsuits over unclaimed cash’.
But do these headlines accurately reflect the current law and practice? What responsibilities do pension fund trustees have to their members in instances of corporate fraud?

What is corporate fraud?
Corporate fraud generally occurs when a company knowingly or recklessly makes false statements to the market about its products or financial results. These positive yet false statements entice investors to buy the company’s stock, causing the price to rise. Once the truth is disclosed, the stock price drops, and investors lose money.
There have been many examples consider Enron, Vivendi, WorldCom, Parmalat, and Royal Dutch/Shell. In the US over 200 cases alleging corporate fraud are brought each year. In the UK the Financial Services Authority (FSA) has fined or publicly censured just seven companies (which is surely the tip of the iceberg), but the facts listed below still make interesting reading:
– When the Big Food Group plc (trading as Iceland) belatedly gave full disclosure to the market in January 2001 its share price fell by 42.4%.
– When the SFI Group did the same in October 2002 its share price fell by 67%.
– 35m trades were made in Marconi shares at a price close to 250p in the 48 hours before it issued a late trading statement. When it did so 500m trades were made the next day and the share price fell to 112.5p.
– On 31 December 2001 Sportsworld Media Group’s market capitalisation was £163.5m; as at 13 February 2002, soon after it had disclosed results that its directors had known about for weeks, it had fallen to just £2.4m.
– When Shell ‘recategorised’ its proved reserves on 9 January 2004 its market capitalisation fell by £2.9bn on the same day.

A starting point
A trustee has an overriding fiduciary obligation to act in the best interests of the beneficiaries. Further, trustees are required by law to publish a statement of investment principles, including a statement of their policy in relation to the exercise of rights attaching to investments. ‘Rights’ clearly includes voting rights, but could also be taken to extend to the right to bring a claim in respect of those investments.
The Myners Review (2001) into institutional investment in the UK made notable reference to decision-making by trustees. One of its main principles referred to shareholder activism. In December 2004, HM Treasury issued a proposal to strengthen and amplify the Myners principles which, if adopted, would result in trustees complying with the Institutional Shareholders Committee (ISC) statement of principles on the responsibilities of institutional shareholders and agents. The ISC statement expressly refers to (emphasis in bold):
The policies of activism set out. do not constitute an obligation to micro-manage the affairs of investee companies, but rather relate to procedures designed to ensure that shareholders derive value from their investments by dealing effectively with concerns over under-performance. Nor do they preclude a decision to sell a holding, where this is the most effective response to such concerns.
What should trustees and investment managers do to ensure that shareholder ‘derive value from their investments’? By the time a holding is sold the damage may be done and the loss already incurred.
One option rarely if ever considered is to sue, but suing can have benefits both in securing direct compensation and in promoting better corporate governance.

Trustee awareness
The Pensions Regulator requires trustees to have appropriate levels of knowledge and understanding. Each pension trustee must therefore ensure that he is notified of possible corporate governance failures that may affect his fund’s investments.
The trustee should consider the following:
– Does he or she have procedures and policies in place to ensure that he is informed of dramatic issues such as those relating to Shell? In such a case, there would be extensive media publicity, but is the trustee immediately able to identify their fund’s exposure to a fall in share price?
– What information is he or she getting from the fund manager, brokers and/or investment consultants? Is he or she aware of each party’s contractual obligations to act and/or provide information in situations like this?
– Does he or she have immediate access to specialist legal advice?
– How should members’ queries be fielded? Are any, or many, enquiries expected?

A global market
Most funds have significant investments overseas. Accordingly, trustees should be aware of where to turn for advice in each jurisdiction, and of the different time limits that apply if they wish to take action.
Possibly the most relevant market in this context is the US market. The US has a highly developed shareholder class action regime which can often directly affect non-US investors.

US shareholder actions
In the US, the securities markets are policed both by regulatory bodies, such as the Securities and Exchange Commission, and by private investors largely through shareholder class actions.
A class action allows a large group of investors to join together to bring one action. US courts require that one or two members of a class step forward as ‘lead plaintiffs’ to represent all of the investors in the class.
Perhaps unknown to many pension trustees in the UK, US securities laws are not limited to US citizens, and when monies are recovered through class actions, the distribution of those monies is often but not invariably available to all of the shareholders who were injured because of the fraud. Sometimes, however, if a US shareholder has control as lead plaintiff he may move to exclude non-US investors. This is one of the primary reasons European investors have increasingly applied to become lead plaintiffs themselves.
For a pension fund trustee, the primary message, beyond awareness of rights, is the need to move quickly. In the Shell case actions were filed in the US within three weeks of the announcements to the markets. Within a further 60 days the opportunity to become a lead plaintiff had passed.
If and when the case settles, members of the class will have only 90 days to claim their settlement money. If they don’t, the money allocated for their claim will be distributed to the other investors, given to charity, or may even default to the US Treasury.
However US settlements are generally not required to be advertised outside the US even if they affect non-US citizens. Accordingly unless a trustee has other notification procedures in place he or she simply will not claim money their beneficiaries are entitled to. That may well represent an actionable breach of duty for each instance where the money is just left on the table for others to collect.
Taking action in the UK
It is relatively easy to bring investor actions in the US, provided proper regard is had to the strict time limits involved. However, many of the key features of US litigation differ from this jurisdiction.
Consider, for example, the case of Shell. At present, whether trustees know it or not, those funds that were the beneficial owners of Shell shares in the period between 1998 and 2003 are probably members of the US class action which is already under way in New Jersey (as an aside the lead plaintiff is a US public authority pension fund). However, Shell’s lawyers are keen to restrict the US class to US citizens only. If they are successful, what are UK pension funds going to do to get their beneficiaries’ money back?
The FSA has already found that the Shell group was guilty of market abuse as well as breaches of the FSA’s Listing Rules, pursuant to sections 123 and 91 of the Financial Services and Markets Act 2000 (FSMA). Perhaps surprisingly the FSMA does not provide for any private right of action in the event of market abuse under section 123.
But it is still possible that cases such as Shell may give rise to common law claims of deceit. Helpfully, the US class action complaint mirrors many of the issues needed to prove a claim of deceit in England and Wales, highlighting the importance of tracking and understanding action taken in other jurisdictions.
Although class actions as such are not available in the UK, claimants could act alone or together through a ‘group litigation order’.
Another distinction between the UK and US actions is the fee regimes, with US lawyers able to take a cut of any settlement, avoiding the need for upfront costs to the fund. In the UK such agreements are illegal. Without an idea of the costs of an action, no trustee can accurately assess the risk/cost/benefit ratios to the fund in bringing a claim. However there are ways to mitigate the fund’s exposure to legal costs, such as insurance policies to remove, in effect, the costs of losing.

And now?
The indications are that UK trustees will start to take action. A representative of the Universities Superannuation Scheme (USS) has been quoted as saying that the USS would consider being a lead plaintiff on a case-by-case basis ‘ if it would bring corporate governance reforms that are beneficial to long-term shareholders’. In addition, Hermes, a fund manager created out of the British Telecom and the Post Office pension schemes, is currently acting as a co-lead plaintiff in a class action against Parmalat, an Italian dairy producer.
These examples raise the bar for all trustees. How long can trustees wait before their own members look to them for answers for their apparent inaction, particularly in the US, where money is actually allocated to the fund but not collected?
Can trustees sue their way out of pension deficits? No, but they should consider their ability to sue as part of a day-to-day strategy to protect and recover their members’ money. If they don’t, they may soon be defendants themselves.

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