Last week, Judge Naomi Buchwald of the Southern District of New York provided final approval of a nearly $22 million settlement between a class of indirect investors and five Wall Street banks that the plaintiff investors accused of manipulating the London Interbank Offered Rate (LIBOR) in violation of the Sherman Act. The plaintiffs are over-the-counter (OTC) investors who indirectly interacted with the defendant banks via interest rate swaps and other transactions. These plaintiffs made purchases from other banks that are not defendants in the case; the five settling defendants are JPMorgan, Citibank, Bank of America, HSBC, and Barclays. The suit is one of many filed after Barclays admitted in 2012 that it had manipulated LIBOR.

LIBOR is a benchmark that is designed to reflect the cost of borrowing funds in the market and is applied to many types of financial instruments, including futures, swaps, options, and bonds. It is also referenced by consumer lending products such as mortgages, credit cards, and student loans. The alleged LIBOR manipulation had a widespread impact on global markets and consumers, including government entities and not-for-profit organizations.

Plaintiffs alleged that the defendants, who are members of a panel assembled by a bank trade association to calculate a daily interest rate benchmark, conspired to submit artificial, depressed rates from August 2007 to May 2010. They claim that the defendant banks instructed LIBOR rate submitters to artificially lower their LIBOR submissions in order to avoid the appearance that the banks were in financial difficulty. Also, plaintiffs allege that the defendants’ traders asked LIBOR rate submitters to adjust the submissions to benefit the traders’ positions. Plaintiffs claimed that their positions in various financial instruments were negatively affected by this manipulation of LIBOR, in violation of the Sherman Act.

Under the terms of the settlement agreement, Citi must pay approximately $7 million, HSBC must pay $4.75 million, and JPMorgan and Bank of America must each pay approximately $5 million. Barclays will “substantially” assist the plaintiffs in ongoing related litigation against other banks, providing proffers, documents, and testimony to the plaintiffs, instead of making any payment. The other four defendants also agreed to provide “significant” cooperation to the plaintiffs in their continued litigation.

The case is In re: Libor-based Financial Instruments Antitrust Litigation, index number 1:11-md-02262, pending in the U.S. District Court for the Southern District of New York.

In a previous post, we discussed Kirschner v. JPMorgan Chase Bank,[1] an action in which the trustee of bankrupt Millennium Labs brought state law securities fraud claims on behalf of a group of “approximately 400 mutual funds, pension funds, universities, [CLO]s and other institutional investors,” against banks that organized a $1.765 billion syndicated loan.

The threshold issue faced by the court was whether an investor’s share of a syndicated loan qualifies as a “security” for the purposes of state securities laws. Federal courts have previously held that syndicated loan interests do not qualify as securities for purposes of federal securities fraud claims.[2]

The trustee in Kirschner urged the court to embrace an inclusive view of the definition of securities when applying the test originally set forth by the Supreme Court in Reves v. Ernst & Young, specifically in light of the possibility that an instrument can be deemed a security based on “the reasonable expectations of the investing public”:[3]

“Whatever similarities early generations of syndicated bank loans once shared with traditional commercial lending, the Note offering mirrored a high yield bond issuance.”[4]

The court, in its decision of May 22, 2020, took a less expansive view, observing that:

“[T]he Credit Agreement and [Confidential Information Memorandum] would lead a reasonable investor to believe that the Notes constitute loans, and not securities. For example, the Credit Agreement repeatedly refers to the underlying transaction documents as ‘loan documents,’ and the words ‘loan’ and ‘lender’ are used consistently, instead of terms such as ‘investor.’”[5]

Notably, the court premised its decision in part on the sophistication of the investors, concluding:

“[I]t would have been reasonable for these sophisticated institutional buyers to believe that they were lending money, with all of the risks that may entail, and without the disclosure and other protections associated with the issuance of securities.”[6]

The prevailing trend in capital markets is for increasingly sophisticated instruments to be made available to ever-broader groups of investors. Where the public once had limited—if any—access to short selling, short-term trading, and complex equity option strategies, all of these have become feasible for individual investors in recent years. Access to participation in syndicated lending may follow the same route, and this may eventually require courts to revisit the scope of investor protections available.

For now, the court has extended its deadline for counsel to the trustee to file its motion and supporting papers to amend the complaint through July 31, 2020.[7]

The case is Kirschner v. JPMorgan Chase Bank, N.A., No. 17-cv-06334-PGG (S.D.N.Y.).

[1] Kirschner v. JPMorgan Chase Bank, N.A., No. 17-cv-06334-PGG (S.D.N.Y.).

[2] Banco Espanol de Credito v. Pacific National Bank, 973 F.2d 51 (2d Cir. 1992).

[3] 494 U.S. 56, 66 (1990) (“The Court will consider instruments to be ‘securities’ on the basis of such public expectations, even where an economic analysis of the circumstances of the particular transaction might suggest that the instruments are not ‘securities’ as used in that transaction.”)

[4] Kirschner, ECF No. 81 at 17.

[5] Kirschner, ECF No. 119 at 18-19.

[6] Id. at 22.

[7] Kirschner, ECF No. 127.

As cryptocurrency and blockchain technology have expanded, so too have regulatory scrutiny and ensuing litigation. The lack of a uniformly applicable regulatory framework–particularly regarding whether virtual currencies constitute securities subject to the federal securities laws and registration requirements–has led to confusion and uncertainty. Recently filed “fintech” actions are poised to establish precedent in this novel legal landscape.

The Securities and Exchange Commission (SEC) Enforcement Division’s recently created cyber unit investigated and recommended the commission bring charges in several cases in 2019 involving blockchain technology and digital assets. In June 2019, the SEC filed its first contested litigation against a digital asset issuer, alleging violations of federal registration requirements.[2] In the complaint, the SEC alleges that between May and September 2017, Kik Interactive Inc. offered and sold one trillion digital tokens for approximately $100 million but failed to file a registration statement with the SEC for its offer and sale of securities.[3] The main issue the Kik court is expected to address is whether an initial coin offering (ICO) is a securities offering subject to the registration requirements of the Securities Act of 1933.

In October 2019, the SEC obtained a temporary restraining order in the U.S. District Court for the Southern District of New York, preventing Telegram Group Inc. and its wholly owned subsidiary TON Issuer Inc. (together, Telegram) from making a $1.7 billion digital token offering without filing a registration statement.[4] Telegram agreed to postpone its offer and sale of tokens until after a court hearing scheduled for Feb. 18 and 19 on the SEC’s request for a preliminary injunction to prevent the offering. Telegram has contested the SEC’s theory that its tokens constitute securities, alleging it does not intend to offer them through an ICO but instead plans to sell through private agreements, which are exempt from registration requirements.

The ultimate determinations by the Southern District of New York–the federal court in Manhattan hearing both of these cases–are expected to shed light on the status of cryptocurrency offerings, but it remains to be seen whether any bright-line rules will be established.

[1] Securities and Exchange Commission’s Division of Enforcement 2019 Annual Report at 12.

[2] The case is SEC v. Kik Interactive Inc., No. 19-cv-5244 (SDNY).

[3] SEC v. Kik Interactive Inc. Complaint at ¶¶ 1, 18.

[4] The case is SEC v. Telegram Group LLC et al, No. 19-cv-9439 (SDNY).

Until 2010, securities fraud class actions pursued in American federal courts dominated the means by which investors sought redress for alleged fraud committed around the world. Securities fraud litigation in non-U.S. legal systems was fraught with risks, such as fee-shifting rules and limited precedent. However, once the U.S. Supreme Court decided Morrison v. National Australia Bank in 2010[1], foreclosing many foreign claims from being brought in U.S. courts, foreign investors–with claims against foreign companies resting on transactions occurring outside the U.S.–needed to avail themselves of foreign laws and procedures.

In the wake of Morrison, many foreign investors developed strategies suited to their locales, such as litigation funding to address fee-shifting risks. With U.S. courts foreclosed to them, procedures to bring and resolve single and group securities fraud actions based on existing law became increasingly well defined in Australia, Japan, and France, as well as in less common venues such as the Netherlands and Denmark. In Germany, the Capital Market Investors’ Model Proceeding Act, or KapMuG[2]–enacted in 2005 in response to a specific corporate accounting scandal involving Deutsche Telekom–became the focus of renewed interest.

In the United Kingdom, securities litigation had long been confined to claims arising from allegedly false statements in offering documents, such as a prospectus. However, as in Germany, new legislation was introduced in the wake of major corporate fraud–in this instance, the catalyst was BP’s Deepwater Horizon oil spill disaster. Sections 90 and 90A of the UK Financial Services and Markets Act now offer British investors causes of action roughly analogous to those available under Sections 11 and 10(b) of the Securities Act and the Securities Exchange Act in the United States. UK securities fraud actions, however, are still limited to the opt-in method, in which each claimant is required to be an actual party rather than having the option to participate in any recovery as a passive class member.

This ability to pursue a U.S.-style opt-out class action was still not available in the UK until the enactment of the Consumer Rights Act 2015, which applies primarily to certain goods and services and unfair business terms, including violations of competition laws[3]. UK class actions face stringent judicial review and are currently available to address only a limited set of product- and service-related claims, a scope that does not include securities fraud. But the first UK opt-out class action against financial company defendants has already been brought, alleging damages related to unlawful manipulation of the foreign exchange market between 2007 and 2013, in violation of competition laws[4].

Thus, the UK has now established all the elements of a U.S.-style securities fraud class action. The next step is simply to make the cause of action and the procedure available together. In light of the trend in developments in the UK away from continental traditions and possibly toward U.S.-style litigation, the future of UK law may hold the seeds of U.S.-style securities class actions.

[1] 561 U.S. 247 (2010).

[2] Kapitalanleger-Musterverfahrensgesetz, BGBl 2005, I, 2437 (Aug. 16, 2005).

[3] Consumer Rights Act 2015, 63 Eliz. 2, 2015 c. 15, sched. 8 (Eng.) (amending section 47B of Competition Act 1998).

[4] Michael O’Higgins FX Class Representative Ltd v. Barclays Bank PLC and Others, case no. 1329/7/7/19.

In the latest development in a prosecution previously covered on this blog, Privinvest Group executive Jean Boustani was acquitted of all charges on Dec. 2 by a jury in the U.S. District Court for the Eastern District of New York, following a six-week trial.

The case centered on nearly $2 billion in loans from Credit Suisse and Russian financer VTB to help fund maritime projects in Mozambique. Prosecutors alleged that Boustani paid $100 million in bribes and kickbacks to high-ranking Mozambican government officials to secure three lucrative contracts for his employer, Privinvest Group, an international shipbuilding firm based in Abu Dhabi. Privinvest Group itself was not charged in this case.

Boustani, a Lebanese national, was found not guilty on all counts brought against him, including conspiracy to commit wire fraud, conspiracy to commit securities fraud, and conspiracy to commit money laundering after taking the stand in his own defense. Boustani and his lawyers readily admitted that he paid millions of dollars to Mozambican officials, but the government did not bring actual bribery charges against Boustani beyond the conspiracy counts, likely because of a recent decision from the U.S. Court of Appeals for the Second Circuit, U.S. v. Hoskins, 902 F.3d 69 (2d Cir. 2018). In that decision, the Second Circuit held that non-U.S. citizens cannot be charged with violating the Foreign Corrupt Practices Act if the defendant does not have a sufficient nexus to a U.S. company and the alleged wrongdoing took place in another country.

After the acquittal, jurors, including the jury foreman, stated that the evidence presented by prosecutors failed to show why venue was proper in the U.S., especially in the Eastern District of New York, when Boustani had never been to the U.S. before he was arrested. Prosecutors asserted at trial that most of the transactions at issue in the case were conducted in U.S. dollars and involved U.S. correspondent banks, but those ties were not strong enough for jurors to conclude that Boustani should be held accountable for any wrongdoing in the U.S.

Lowenstein Sandler’s Capital Markets Litigation team recently defeated a fund administrator’s renewed motion to dismiss on jurisdictional grounds, a second key victory in an action for common law fraud, securities fraud, and Racketeer Influenced and Corrupt Organizations Act violations, among other claims. The plaintiffs, investors in a tax lien fund, seek to recoup millions of dollars in losses resulting from the fund’s operation as a Ponzi scheme. The defendants include the fund’s now-dissolved New Jersey-based administrator, Apex Fund Services (US), Inc., as well as its Bermuda-based parent and several other affiliated entities (collectively, the “Apex Defendants”).

New Jersey Superior Court Judge Peter Bogaard of the Law Division, Morris County, denied the Apex Defendants’ entire renewed motion to dismiss on jurisdictional grounds. In their motion, the Apex Defendants claimed that the Court lacked personal jurisdiction over the Apex Defendant entities based outside of New Jersey.

The Lowenstein team persuaded the Court to deny the motion based on theories of agency, alter ego, and successor liability. “Apex is playing a shell game, trying to hide behind layers of phantom entities to evade liability for the fraud it actively committed in New Jersey,” the team argued.

Following jurisdictional discovery, the Lowenstein team submitted extensive evidence convincing the Court to look beyond–or pierce the veil of–the corporate form of the now-dissolved Apex New Jersey entity in order to exercise jurisdiction over its parent. The team successfully argued that the New Jersey Apex subsidiary was the alter ego of its parent entity, functioning as a mere conduit in New Jersey for the Apex parent’s self-described “global” fund administration business. The evidence demonstrated that the Apex subsidiary was not capitalized at inception, that it was financially dependent on its parent, and that it disregarded corporate formalities with respect to intercompany transactions, as well as transfers of employees and clients among the various Apex entities, without compensation. In addition, and consistent with similar Ponzi scheme cases, the team showed that the Apex New Jersey entity acted as its parent’s New Jersey-based agent, providing another basis for the court to exercise personal jurisdiction over the parent. See Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010).

Additionally, the team showed that the evidence supported a finding of successor liability as to Apex Charlotte because of a de facto merger that occurred between it and Apex New Jersey, and because Apex Charlotte thereafter continued the business of Apex New Jersey, simply “becoming a ‘new hat’ for the predecessor.” Woodrick v. Jack J. Burke Real Estate, Inc., 306 N.J. Super. 73, 74 (App. Div. 1997). The evidence demonstrated that, just as the fraudulent scheme was being revealed, the Apex parent stripped the New Jersey entity of its assets and transferred its ongoing business to a Charlotte, North Carolina-based entity also bearing the Apex name, again for no consideration, ultimately dissolving the New Jersey entity.

Having defeated the jurisdictional challenge, the Lowenstein team will continue to pursue claims on behalf of the investors, who seek more than $40 million in damages based on the defendants’ false representations to them concerning Apex’s control of the money invested in the fund, as well as its active concealment of the theft by providing investors with false monthly net asset value statements. Rather, and remarkably, Apex had been permitting the fund’s manager, Vincent Falci, to access the accounts and embezzle millions of dollars; Falci has since been sentenced to 15 years in federal prison for securities and wire fraud.[1]

As reported by Law360, Judge Bogaard stated at the motion to dismiss hearing: “Justice, while to be blind, is not to be blissfully ignorant of things, and I certainly find based on the materials submitted that plaintiffs have established on a prima facie basis that exercising jurisdiction over the named defendants is appropriate at this time.”[2]

This decision marks the second time the team defeated a motion to dismiss in this action.[3]

The case is Maffei et al. v. Apex Fund Services (US) Inc. et al., case number L-63-18, pending in the Superior Court of New Jersey, Morris County.




Prosecutors are nearing the end of their case after over three weeks of trial for Privinvest Group executive Jean Boustani, who is accused of conspiring to defraud investors in loans made by Credit Suisse and Russian bank VTB to Mozambican state-backed special-purpose vehicles (SPVs).

The government alleges that Boustani structured the deals so that the $2 billion in loans to fund maritime projects for Mozambique were instead funneled directly to the bank accounts of Privinvest, the projects’ main contractor. Prosecutors claim that the three Mozambican SPVs were created as shams to divert over $200 million in bribes and kickbacks to Mozambican government officials and investment bankers. The superseding indictment alleges that after conducting little or no business activity, each of the three SPVs defaulted on its loan.

Credit Suisse employees have admitted to their role in facilitating the fraud and kickback scheme. Andrew Pearse, the former head of Credit Suisse’s Global Financing Group, testified that he received $45 million in kickbacks from Privinvest for ensuring loan approval. Surjan Singh, a former Credit Suisse banker, also testified that he took $5.7 million in kickbacks for promoting two of the SPV deals. The bankers also allegedly intentionally withheld red flags about the likelihood of corruption connected to the deals from Credit Suisse’s compliance department. Pearse and Singh, along with another former Credit Suisse investment banker, Detelina Subeva, have pled guilty to conspiracy charges.

A former AllianceBernstein portfolio manager testified that the hedge fund lost millions of dollars from its approximately $75 million stake in one of the impacted SPVs. AllianceBernstein was offered and accepted Eurobonds in exchange for its debt securities, and ultimately liquidated its position at a loss.

The case is U.S. v. Boustani et al., case number 1:18-cr-00681, in the U.S. District Court for the Eastern District of New York.

In the latest development in one of two federal cases examining whether New York usury laws can limit the interest rates charged on credit card debts that are securitized, the Capital One affiliate defendants have moved to dismiss the action brought by plaintiff credit card holders. The plaintiffs alleged that their interest rates, ranging from 22.5 to 27.74 percent, exceed New York’s statutory interest rate limit of 16 percent for civil usury, and even, in some cases, the 25 percent limit for criminal usury. The case is Cohen et al. v. Capital One Funding LLC et al., docket number 19-cv-03479, pending in the U.S. District Court for the Eastern District of New York.

As previously covered on this blog, the U.S. Supreme Court has held that the National Banking Act of 1864 preempts state laws that “significantly interfere” with national bank activities. Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299, 313 (1978). Accordingly, while national banks must comply with the usury laws of the state in which they are located, if a borrower moves to a state with a lower maximum interest rate, the bank need not comply with that state’s lower rate. Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 33 (1996).

In 2015, the U.S. Court of Appeals for the Second Circuit examined this National Banking Act preemption when a Delaware bank lent to a New York borrower. Although the loan complied with Delaware usury law, the Delaware bank then sold the loan to an entity that was not a national bank. Because the loan purchaser was not a national bank or acting on behalf of a national bank, the appellate court concluded that New York usury law did not “significantly interfere” with the purchaser and that New York’s maximum interest rate cap applied to the loan. Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).

In moving to dismiss the Cohen claims, the Capital One defendants argued that the Second Circuit recognized in Madden that usury claims are still federally preempted when there is still substantial connection between a national bank and the debt after it is sold, so that state usury laws would still “significantly interfere” with national banking activities. Because Capital One, N.A. – the ultimate parent entity of the defendants – still retained ownership of the plaintiff’s credit card accounts after selling the credit card receivables to its affiliates to be securitized, the defendants argued that New York’s usury limit would “significantly interfere” with Capital One’s ability to run its credit card business nationwide.

Capital One received support from the Bank Policy Institute and the Structured Finance Association in an amicus brief, urging the court to adopt the defendants’ reading of Madden. Plaintiffs argued in their opposition brief that because defendants are not national banks and do not exercise national banking authority, Madden is dispositive and New York’s usury limits apply to their debts.

The motion was fully briefed on Nov. 1, 2019, and the parties await a decision from Judge Kiyo A. Matsumoto. We will cover the decision when it is published.

As cross-border business continues to grow, litigation too is increasingly crossing borders. In a recent decision addressing several issues of first impression, the U.S. Court of Appeals for the Second Circuit opted to aid international litigants, interpreting Section 1782 of Chapter 28 of the United States Code to allow discovery in aid of foreign proceedings to be taken in the U.S. from entities that are subject to personal jurisdiction in the U.S. In re del Valle Ruiz, 939 F.3d 520 (2d Cir. 2019). The appellate court held that “there is no per se bar to extraterritorial discovery” in the United States, and that district courts may exercise personal jurisdiction in their discretion, consistent with the mandates of due process, in ruling on an application for discovery under Section 1782. Id. at 524, 533-34. The Second Circuit noted “that a court may properly, and in fact should, consider the location of documents and other evidence when deciding whether to exercise its discretion to authorize such discovery.” Id. at 533.

Armed with this ruling, parties litigating abroad can file a petition in a U.S. district court seeking documents and information, thereby taking advantage of the breadth afforded by American-style discovery. However, the Second Circuit preserved constitutional limitations on this extraterritorial reach by mandating that the target individual or entity from which discovery is sought be subject to personal jurisdiction in the district where the petitioned court sits–holding that Section 1782’s “resides or is found” language extends only to the limits of personal jurisdiction consistent with due process. Id. at 528.

The decision was a victory for Pacific Investment Management Company LLC and Anchorage Capital Group, LLC (the PIMCO petitioners)–investment and asset-management firms–which filed petitions under Section 1782 in the U.S. District Court for the Southern District of New York. The PIMCO petitioners sought to obtain discovery from Banco Santander S.A. (Santander) and its New York-based affiliate, Santander Investment Securities Inc. (SIS) concerning a 2017 transaction in Spain.

In June 2017, Santander purchased Banco Popular Espanol, S.A. (BPE), which was then Spain’s sixth-largest bank, with assets approximating $150 billion. The 2008 financial crisis had filled BPE’s balance sheet with toxic assets, putting the bank at risk of failure and on the brink of bankruptcy after large withdrawals from Spanish government entities in 2016. In lieu of a bankruptcy filing, the Spanish government forced a sale of BPE in June 2017; Spain’s national banking supervisory authority invited several banks to submit bids for the purchase of 100% of BPE’s equity. A single bid–Santander’s, for a total of one euro (€ 1)–was received on June 6, 2017 and accepted the next day.

The forced sale to Santander caused many investors–including the PIMCO petitioners–significant losses, causing a myriad of foreign proceedings challenging the BPE transaction. Among them, the PIMCO petitioners and certain individual investor petitioners led by Antonio del Valle Ruiz filed Section 1782 applications against Santander, seeking documents and communications relating to BPE’s liquidity and the sale. The PIMCO petitioners also sought discovery from SIS. Before the trial court, Santander challenged the extraterritorial reach of the statute–protesting that Santander does not reside in the Southern District of New York, and while its U.S. affiliate SIS resides or is found in the district, SIS was not involved in the BPE acquisition. The district court held that “at a minimum § 1782 must comport with constitutional due process, i.e., the court must have personal jurisdiction” and “none of the Santander entities except SIS met the requirement for general jurisdiction.” In re del Valle Ruiz, 342 F. Supp. 3d 448, 453-57, 459 (S.D.N.Y. 2018) (Ramos, J.).

Accordingly, the trial court denied both petitioners’ discovery requests to Santander but granted the PIMCO petitioners’ discovery requests to SIS. The petitioners appealed, arguing that they were entitled to discovery from Santander, and Santander cross-appealed, arguing that the PIMCO petitioners were not entitled to discovery from SIS.

The Second Circuit resolved the issue of the meaning of “resides or is found” under Section 1782, finding that the statute reaches as far as the constitutional limits of personal jurisdiction, affirming the district court’s holding that SIS had sufficient contacts with the Southern District of New York such that allowing discovery would not violate “traditional notions of fair play and justice.” In doing so, the Second Circuit declined to adopt “a categorically lower showing of due process needed to obtain discovery from a nonparty,” holding that it is “enough for purposes of due process in these circumstances that the nonparty’s contacts with the forum go to the actual discovery sought rather than the underlying cause of action.” In re del Valle Ruiz, 939 F.3d at 530. The Second Circuit also affirmed the district court’s ruling that investor plaintiffs could not seek discovery from Santander in the United States because Santander did not have sufficient minimum contacts in the district prior to the nominal purchase of BPE–the underlying impetus of the case.

This decision will have far-reaching impact on other foreign litigants who seek to enforce Section 1782 petitions in the U.S. to obtain expansive discovery unavailable in foreign courts.

Should mutual funds take a more active role in securities litigation? Data appears to suggest that they should.

According to Sean J. Griffith[1] and Dorothy S. Lund[2], authors of “Toward a Mission Statement for Mutual Funds in Shareholder Litigation”[3], mutual funds can improve returns for investors by taking on a greater role in enforcing shareholder and investor rights in court. Griffith and Lund survey participation in derivative suits, direct and class claims under state law, appraisal claims, and private securities litigation, and develop a recommendation for “a few simple changes [by which] mutual funds will be able to reap litigation benefits without substantially increasing their costs.”[4]

Amy Roy and Robert Skinner[5] offered a counterpoint in their piece “Mutual Funds Should Stay Out Of Shareholder Litigation,” asserting that “[l]itigation opportunities–like investment opportunities–come with opportunity costs, which the authors fail to acknowledge.” Focusing primarily on burdens of private securities litigation, such as serving as a lead plaintiff and what they view as the “myth” of improved opt-out recovery, Roy and Skinner concluded, “Notable exceptions aside, fund shareholders are generally better served by allowing their advisers to remain focused on what it is they were hired to do–investing their money and outperforming the market.”

Griffith and Lund responded to this critique in “Mutual Funds Should Use Litigation For Shareholders’ Benefit.” They wrote that the “notable exceptions” that Roy and Skinner brush aside are, in fact, “specific evidence . . . showing that shareholder litigation can benefit mutual funds and their investors–directly, by securing compensation, or indirectly, by deterring misconduct, among other things.” Looking at securities class actions and finding an active participation rate of only 0.6 percent–i.e., 10 cases out of 1,500 over a 10-year period–Griffith and Lund wonder (and rightly so) whether the true “rate of good cases to bad ones” could be so low.

Griffith and Lund’s conclusion that mutual funds’ “dismal litigation record . . . raises serious questions of whether mutual funds are acting as faithful governance intermediaries for their investors” presents an issue that both mutual fund managers and investors need to address, due in part to the rising prevalence of mutual funds.

By one recent measure, if mutual funds chose to functionally self-exclude from securities litigation, this would sideline nearly a quarter of all equity ownership:


As Congress noted when drafting the Private Securities Litigation Reform Act of 1995:

Private securities litigation is an indispensable tool with which defrauded investors can recover their losses without having to rely upon government action. Such private lawsuits promote public and global confidence in our capital markets and help deter wrongdoing and to guarantee that corporate officers, auditors, directors, lawyers, and others properly perform their jobs.[6]

This sentiment was echoed more recently by then-SEC Commissioner Luis Aguilar in his 2012 statement in the wake of the Supreme Court’s decision in Morrison v. National Australia Bank, Ltd.:

It is unrealistic to expect that the Commission will have the resources to police all securities frauds on its own, and as a result, it is essential that investors be given private rights of action to complement and complete the Commission’s efforts.[7]

Relegating the largest single group of institutional investors to the role of onlookers in the face of securities fraud is not the path to maintaining a robust and trustworthy capital market. Mutual funds would often do well to adopt a more active role in protecting their investors.


[1] T.J. Maloney Chair and Professor of Law at Fordham University School of Law.

[2] Assistant Professor of Law, University of Southern California Gould School of Law.

[3] Griffith, Sean J., and Lund, Dorothy S., Toward a Mission Statement for Mutual Funds in Shareholder Litigation (July 19, 2019), Univ. of Chicago L. Rev., Forthcoming; European Corporate Governance Institute–Law Working Paper No. 468/2019; USC CLASS Research Paper No. CLASS19-23; USC Law Legal Studies Paper No. 19-23. Available at SSRN:

[4] Id. at 48.

[5] Roy and Skinner are partners at Ropes & Gray LLP.

[6] H.R. Rep No. 104-369, at 31 (1995).

[7] Aguilar, Luis A., Statement by Commissioner: Defrauded Investors Deserve Their Day in Court, Secs. & Exchange Comm., Apr. 11, 2012, available at