Foreign securities class actions have been on the rise since the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, Ltd., which held that federal securities laws apply only to securities purchased on domestic exchanges. 561 U.S. 247 (2010). Investors are increasingly turning to foreign forums to recoup losses associated with securities purchased or sold outside of the U.S. In addition to differences in substantive and procedural law, certain foreign jurisdictions have laws on how litigation is funded, which make for significant practical distinctions as compared with U.S. class action participation.
In contrast to the typical U.S. securities class action contingency fee arrangement, several countries–including Australia, the UK, France, and Canada–prohibit the use of contingent fee agreements. The U.S. system also generally does not require the losing party to pay costs or legal fees, whereas several foreign jurisdictions, including those listed above, obligate the loser to cover the prevailing party’s costs and expenses. These legal prohibitions on contingency fee arrangements and “loser pays” systems have fueled the surge of third-party litigation funders for foreign securities class actions.
Not only do litigation funders finance the cost of proceedings in exchange for a portion of the recovery, but they also often function as coordinators amongst investor-plaintiffs, provide access to legal resources, and are even beginning to influence the legal systems themselves. In Australia, funders require each class member to contract directly with them, which has essentially morphed the country’s opt-out class action procedure into a de facto opt-in system. Recently, Australian regulators have started investigating certain aspects of the class action funding regime. The Australian Law Reform Commission is looking into potential conflicts of interest with third-party litigation funding, and the Victorian Law Reform Commission is considering whether law firms should be allowed to receive contingency fees in class actions.
The growth in third-party litigation funding in recent years has also created a competitive environment among funders, resulting in better and less expensive options for investors. While major recoveries are possible, investors should be aware of the fundamental distinctions between U.S. and international securities litigation, particularly with respect to the challenges raised by funding arrangements. Lawyers with experience in international securities class actions are a helpful resource for potential plaintiff investors when considering different foreign jurisdictions, reviewing funding agreements, and ultimately deciding whether to participate in a foreign securities class action.
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