Litigation as an asset class: marrying fiduciary role with alpha

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There are 27 open class actions in Australia at the moment, accounting for roughly 10 per cent of the market capitalisation of the ASX 200. Australia has become the second-most important market for investor class cations in the world. Investors need to take note.

Whether or not it is an emerging asset class, there is certainly a lot of money at stake. Bill Petrovski, a specialist class action lawyer with William Roberts Lawyers, thinks it is. Bryan Gray, a managing director at asset servicing firm JP Morgan, thinks it isn’t. He says it’s an “obligation”. Steven Longley, of Financial Recovery Technologies (FRT) in the US, says however you categorise it that the results of class actions can represent an uncorrelated investment opportunity for big super funds and other investors. And, of course the shareholders in the companies being sued have a lot to gain and not much to lose from the actions. Petrovski discussed a recent paper which compares the Australian experience with that in other countries and provides details on the main legal participants in the local market.

Longley, a senior vice president and corporate development manager of FRT, based in California, said last week that, in Australia to date every single class action had been a success. The company had always settled with the plaintiffs either prior to going to court or during proceedings.

Australian class actions became possible with a change in the law in 2006 and the local industry is evolving along the lines of that in the US. The moving parts are the same: a litigation funder, in which super funds can invest, a big law firm, such as William Roberts or Maurice Blackburn, and an administration partner, such as FRT, which has the technology to search globally for the opportunities, monitor them and administer the actions on behalf of clients. There is usually a custodian involved in the mix as well as another representative of the asset owners. In Australia, it has to be said, asset consultants have been slow to catch on to what is on the table for their super fund clients. Longley calls it “money for jam”.

At investor roundtables in Sydney and Melbourne last week, Longley said that a lot of work went into the actions before the writs were issued, with the litigation lawyers and litigation funders making their assessments of the likely success rate beforehand. FRT, also, he said, was getting more active in providing information and opinions to all the parties prior to any actions.

Petrovski said that everyone had sharpened their pencils in the past couple of years and charges had come down, including the lawyers and the funders’ shares. Nevertheless, litigation funders are still making a lot of money. One funder in the US, according to Longley, returned more than 800 per cent to its investors last year.

Nick Sherry, former federal senator and first minister for Superannuation , who is a strategic advisor to funds in Australia and internationally and chair of FNZ (APAC ) a leading global IT/administration provider, said that the Royal Commission was likely to have a major impact on the industry.

“In the context of a trustee’s fiduciary duty under the SIS Act, to act in the best interests of members,  clearly, the evidence shows manifest failure to do so by many in retail and some in the profit-for-member sectors ( industry, public sector and corporate funds). I expect greater regulatory action from APRA in this area as well as legal action on behalf of members where the evidence shows a failure to act in that best interest.”

Patrick Liddy, principal of consulting firm MSI Group, who advises funds and managers on implementation efficiencies, said that there were several areas where investors were leaving money on the table by not being diligent enough. Involvement in class actions was one of them, and the handling of cash and FX were others. These could add up to sizable sums for members, he said.

Lee Taylor, from Maurice Blackburn lawyers, said that there were a lot of new entrants coming to the class action market. There was increased activity, as everyone knows, following the Royal Commission into banking and superannuation. “It’s a bit like after the global financial crisis,” he said. “And there is quite a deep funding market in Australia.”

– G.B.

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