Investors Gain Traction Overseas in Securities Fraud Litigation

Investors suing multinational companies for securities fraud are finding their footing in the Netherlands and other courts outside the US.

US courts are the epicenter of securities fraud litigation. But legal procedures in other countries’ courts are maturing, and litigation funders are flowing money into these jurisdictions, helping to remove obstacles.

Investors are increasingly filing lawsuits in places like the Netherlands and Australia in recent years, data show. ESG-related litigation and other emerging issues are expected to spur additional cases. The globalization of securities litigation can create additional risks for multinational companies, attorneys say.

Since 2016, shareholders brought almost 60 securities fraud lawsuits, on average per year, in courts outside North America, according to ISS Securities Class Action Services statistics. That’s nearly double the number of cases the two previous years.

They are also securing larger settlements overseas. That includes a record-setting $1.6 billion settlement this year against Steinhoff International Holdings NV in the Netherlands and South Africa over an accounting scandal.

“We do expect to see more cases and large settlements outside the US,” said Joni Jacobsen, co-chair of the US securities litigation and enforcement practice at Dechert LLP. Global companies should “continue to stay apprised of all of this developing legal framework and where you do business.”

Class Action ‘Shangri-La’

Investors in the past rarely needed to go outside the US to sue companies for securities law violations.

But US courts in recent decades started to show signs of limiting the global scope of class actions, a typical form for securities lawsuits, industry watchers say. The trend was punctuated with the Supreme Court 2010 ruling in Morrison v. National Australia Bank.

In the decision, the high court limited the reach of US law to domestic transactions or securities listed on US exchanges. The court cited concerns of the US becoming the “Shangri–La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets.”

The ruling shut certain investors out of US courts, forcing them to look abroad to recover losses. Many investors were, however, reluctant to pour money into that effort, as they were unfamiliar with other countries’ procedures.

That is changing.

Many countries in Europe, Latin America, and Asia have recently adopted a form of collective action mechanism, allowing investors to pursue claims as a group, Olav Haazen, an attorney at Grant & Eisenhofer, said.

Investors also feel more comfortable, having watched various cases navigate the process.

Some companies are facing securities fraud claims from investors both in the US and abroad. Volkswagen AG, for example, was sued in the US over its diesel emissions scandal. It is also facing claims from investors in Germany.

“I think it’s clear that investors and their lawyers and their litigation funders are getting more aggressive and trying to hold companies accountable by bringing litigation in these home countries,” said Jeff Lubitz, head of ISS Securities Class Action Services.

Australia, which has one of the more established class action rules outside North America, has handled the most new cases—over 110 since 2014, according to ISS Securities Class Action Services statistics.

Australia has also been home to many of the largest overseas securities settlements. The UK has had its share, while three of the four largest settlements have occurred in the Netherlands.

But there are challenges litigating cases in places where case law is sparse.

“Outside of maybe a half dozen countries, to date there is still not a lot of great success,” Lubitz said. “But it takes time. You’ve got to figure out the roadmap of how to navigate that litigation.”

Emerging Path

That roadmap is starting to become more defined in some countries.

The UK High Court of Justice in 2021 clarified the test for when the clock starts to run for determining when certain claims are time-barred. The court this year further clarified a key element of the test for liability for statements made by UK-listed companies.

In Australia, the nation’s High Court in an October ruling rejected BHP Group Ltd.'s argument that would’ve excluded non-Australian residents from a class action against the company over the Mariana dam disaster in Brazil.

“The BHP case was an attempt to have the Australian courts copy the US res judicata limitation to global classes, but the High Court would have none of it, and ruled that recognition of Australian class action judgments abroad is for foreign courts to worry about and not Australia’s concern,” said Haazen, whose firm represents investors in the case.

Res judicata is the legal principle that a claim can’t be litigated once it’s been judged on the merits.

Litigation like that against Volkswagen in Germany, and against oil and gas company Petroleo Brasileiro SA in Brazil, could provide legal precedent and guideposts for shareholders.

Finding Partners

Investors are also finding more litigation finance companies willing to support the litigation.

“We expect there will be a continued increase in case filings in jurisdictions like the Netherlands and Australia where the law is generally favorable for investors, and the courts have demonstrated they can deal with cases relatively efficiently,” said Michael Sternhell, a director at legal finance firm Burford Capital.

Other jurisdictions, like the UK, can present challenges but recent settlements show “investors can obtain substantial recoveries in meritorious cases if they work with the right counsel and legal finance partners willing and able to commit the resources necessary to see cases through to a successful conclusion,” Sternhell said.

For investors pursuing suits overseas, litigation finance companies’ help can be crucial, industry watchers say. In the US, investors can opt-in to a class action at the end. But investors suing in the UK and Europe must be more actively involved, which means they may need an outsider’s financial help.

And contingency fees, common in the US, are prohibited or capped in many countries. Losers of a litigation can also be on the hook for the other side’s fees in the UK and some other countries.

Litigation funders like Burford and Woodsford Group Ltd. can also help organize shareholders in a way that funders say allows shareholders to engage with the company as a group.

“When shareholders have been wronged, it’s important to give shareholders a way of seeking redress,” said Adam Erusalimsky, a senior investment officer at Woodsford in London. “It’s a way of policing the corporate issuers and creating a deterrent from misbehaving.”

Woodsford is supporting investors litigating against Airbus SE in the Netherlands. The case is linked to accusations that Airbus bribed officials in entering new markets.

Woodsford called it one of the most “egregious breakdowns of ESG in recent years,” referring to environmental, social, and governance concerns.

Investors could increasingly challenge companies about misleading ESG claims, both in the US and abroad. Areas like greenwashing or labor issues in supply chains could be particular areas of focus, attorneys said.

“The evolving regulations around ESG disclosures really increases the uncertainty and the risk of litigation,” Jacobsen said. “And as various companies begin to tout their ESG efforts, to the extent that they fall short, we’re going to see an increase in securities litigation.”