Misconduct can devastate the value of an investment.
A recent study on the pervasiveness and scope of corporate fraud by Alexander Dyck, professor of finance and economic analysis at the University of Toronto’s Rotman School of Management, found securities fraud by U.S. companies costs investors about US$830 billion each year.
For Canadian institutional investors, participating in class action litigation is an integral part of a robust risk management plan, according to the Government Finance Officers Association. Class actions are private legal actions initiated by individual investors, pension plans or other institutional investors, rather than by regulators or other government entities.
In both Canada and the U.S., pension plan sponsors can recover their losses to misconduct by participating in class action proceedings in civil courts. Unlike Canadian class action proceedings legislation, which differs between provinces, U.S. legislation applies nationwide.
Actions are brought for the benefit of all investors that purchase U.S. debt and equities on a U.S. exchange at fraudulently inflated prices — including Canadian pension plan sponsors. Since the ability to participate in a U.S. class action doesn’t depend on where an investor resides, Canadian institutional investors may pursue and benefit from U.S. class actions.
Although the U.S. Securities and Exchange Commission often pursues companies that commit fraud, its primary focus is ensuring compliance with securities laws and regulations and not recovering investor losses. This may explain the stark disparity between regulator and private class action recoveries. The meltdown at Valeant Pharmaceuticals International Inc. illustrates this point.
Valeant was a Canadian pharmaceutical company alleged to have acquired existing drugs, including life-saving medicines, and then price gouged by raising prices on those drugs dramatically to boost short-term profitability via a secretly controlled distribution network. In Valeant, a private U.S. class action recovered $1.21 billion for investors, while the SEC recovered $45 million.
The Valeant case also illustrates the scope of U.S. recoveries compared to Canadian ones. In 2020, the company paid approximately $94 million to settle the Canadian class action and 17-times that amount to settle the U.S. class action — US$1.21 billion.
Private class actions focus on investor losses and can yield significant recoveries for all investors who are part of the class, which is why Canadian institutional investors should — and often do — have a plan to participate in U.S. securities class action litigation.
Portfolio monitoring is a simple way for institutional investors to maximize recovery of losses from securities fraud. Some U.S. law firms that specialize in securities class actions offer portfolio monitoring as a complementary service to institutional investors along with legal advice on how to recover such losses.
To monitor a pension fund, the fund’s board enters into a portfolio monitoring agreement. While also ensuring the confidentiality of the data provided, the monitoring agreement authorizes the pension fund’s custodian to permit the law firm electronic access to transactional data for analysis.
The monitoring law firm generates monthly monitoring reports regarding a pension fund’s domestic and international securities. The reports provide the plan sponsor with the contemporaneous and accurate information necessary to make an informed decision on what steps, if any, should be taken to maximize recoveries from losses due to fraud in Canada, the U.S. and around the world. It’s vital that Canadian investors rely on U.S. counsel with sufficient experience and resources to evaluate claims accurately and pursue them diligently.
An investor that purchases shares on a U.S. exchange within the time period fixed by the court is usually automatically part of the class action and entitled to a proportionate share of any recovery upon filing a proof of claim form. In most instances, the investor will await the outcome of the class action and then, after the case has been tried or settled, file a proof of claim form to receive its pro rata share of any recovery.
In rare cases, an investor may decide it’s prudent to affirmatively opt out of a class action and pursue a separate action. Although this approach should be used sparingly, opting out has, on a number of occasions, increased recoveries substantially. Law firms experienced in U.S. class action suits can provide the advice necessary to determine whether opting out can maximize an investor’s recovery.
A pension fund may consider initiating the class action or acting as lead plaintiff for the class. Canadian funds can, and often do, act as the lead plaintiff in U.S. securities class actions. In doing so, they help to obtain significant recoveries, effect corporate governance change and promote the rights of all investors.
An investor or pension plan sponsor must consider several issues before deciding to act as lead plaintiff. Plan sponsors should seek advice from experienced class action lawyers who have the resources to maximize recovery by vigorously litigating the claims — through trial, if necessary. Accordingly, Canadian institutional investors should ask prospective counsel hard questions about their resources (both financial and human), experience (including bringing securities cases to trial) and past recovery amounts.
The rise in corporate misconduct, combined with the volatile nature of domestic and global markets, warrants careful monitoring and analysis of investments — and opportunities to recover losses. Indeed, portfolio monitoring is a best practice and an integral part of a fiduciary’s obligation to plan beneficiaries.
Canadian pension plan sponsors have proven themselves well-positioned to continue to punch above their weight by confidently asserting their rights in the U.S. In doing so, plan sponsors maximize fraud recoveries and encourage corporate transparency.
Darren Robbins is a lawyer who specializes in securities class actions and a founding partner of Robbins Geller Rudman & Dowd LLP. Donna Campbell is a principal with the firm who focuses on securities law, litigation and enforcement. Christopher Kinnon is an associate with the firm who focuses on securities fraud litigation.