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04 December 2020

Securities litigation set to rise in wake of Covid-19 crisis, according to Dechert

Litigation funders fuelling increase in collective action cases outside US, new report states

By Ben Edwards

nberra, Australia - March 12, 2018: High Court of Australia

Greg Brave; Shutterstock

Covid-19 is expected to cause an increase in securities-related law suits around the world after a tumultuous year for financial markets that has seen both steep declines and rapid rises in asset prices, according to a new report from Dechert.

The firm’s Global Securities Litigation Trends report notes that while the US remains a leader in securities and collective action litigation, the number and size of settlements outside the US continue to grow.

Dechert wrote in the report: 'The landscape of global securities litigation is continuing to evolve rapidly… multinational companies must continue to brace for a new era of global securities litigation as they may be forced to defend against securities class actions not only in the United States, but also around the world, as collective action mechanisms continue to evolve.'

The US Supreme Court’s recent decision on Morrison v. National Australia Bank to prevent plaintiffs from bringing ‘F-cubed’ cases in the US – where foreign investors sue a foreign issuer based on a security traded on a foreign stock exchange – means that shareholders are likely to look to other jurisdictions to pursue such cases. Australia has seen securities litigation activity surge after recently permitting third-party litigation funding, accounting for 17 of the 25 largest settlements outside the US. 

The report suggests that differences among collective action proceedings in different countries will likely result in certain jurisdictions becoming more attractive destinations for litigants, “increasing the potential for forum shopping”.

Against this backdrop, issuers could risk facing identical litigation in multiple jurisdictions if no universal jurisdiction emerges. Differences in opt-out and opt-in structures across jurisdictions means if issuers settle in one country they may still find themselves liable somewhere else.

Dechert says the increase in collective action suits across the world has been fuelled by the rise of third-party litigation funders, which have been eagerly bankrolling shareholder claims because of the potentially large payouts up for grabs.

“Without proper restrictions on how much control third party funders may have over the conduct of the litigation, the practice continues to be susceptible to abuse,” Dechert wrote in the report.

In May, Australia’s federal government announced that litigation funders will be subject to stringent new regulatory requirements in the same week that a parliamentary committee announced an inquiry into litigation funding citing concerns the ‘booming industry’ was leading to ‘poor justice outcomes’.

In September, 12 litigation funders teamed up to set up the International Legal Finance Association (ILFA), which aims to represent litigation funders in their dealings with governments, regulators, international associations, as well as professional legal bodies.

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