Investment Loss Recovery: An Opportunity for South African Funds”
Photo Caption: Bruce Leppla (Right), Partner at U.S. based law firm, Lieff Cabraser Heimann & Bernstein and Kim Robinson (Left), Consultant for Lieff Cabraser Heimann & Bernstein and CEO of Renaissance Strategic Solutions.
When corporate fraud or misconduct is discovered and made public, often the price of the relevant stock or bond drops significantly. Then, investors lose value in their portfolios. Under these facts, it makes sense that pension funds and investors should have the opportunity to recover their losses.
Although investment loss recovery is well established in the U.S. and Europe, strangely, it is virtually unknown in South Africa. Given the exposure that South African pension funds have to the global investment markets, this is worrying. Non-U.S. investors in Canada, Australia, the United Kingdom, and throughout Europe routinely sue in American courts to recover losses due to fraud. South Africans are “leaving money on the table ” – when they don’t have to. In this regard, Steinhoff is illuminating. It was a wake-up call. The case demonstrates the need for an investment loss recovery strategy.
Pensions Africa spoke to Bruce Leppla, Partner at U.S. based law firm, Lieff Cabraser Heimann & Bernstein and Kim Robinson, Consultant for Lieff Cabraser Heimann & Bernstein and CEO of Renaissance Strategic Solutions in Johannesburg about investment loss recovery and how it can benefit South African and other investors in Africa with exposure to the U.S. investment markets.
PA: This is still a bit abstract. Can you make this concept a bit more clear?
KR: Sure. Let me give you an example. You are a trustee or principal officer or member of a fund. You wake up to news that the stock price of Kraft Heinz has fallen dramatically. The stock price has dropped because it has been made public that management at Kraft Heinz allegedly misled investors about its business prospects. You know that your fund portfolio includes Kraft Heinz. Or your asset manager informs you that your fund portfolio includes Kraft Heinz. With the stock price drop, your fund has lost significant value. Now what do you do? This is where investment loss recovery comes in.
PA: Investment loss recovery appears to be a very topical item in an investment world that, on a daily basis, continues to generate daily headlines of fraud, poor financial reporting, and the manipulation of stock and bond prices. What is investment loss recovery?
BL: Investment loss recovery is the legal process for funds to “get back the money” that they have lost when a corporate engages in alleged fraud, like Steinhoff or Boeing or Kraft Heinz. The legal process is either a lawsuit or a negotiated settlement. The lawsuit may be an independent action or a class action. Lieff Cabraser helps funds through this process on a no up-front cost basis.
PA: Why is investment loss recovery important for South African pension funds?
KR: It is important for pension funds because it is a way to address the harm, the loss of value that innocent investors have experienced through no fault of their own. What do you say as a trustee to a member when they ask “have you tried to get back my money?” When an investment loss has occurred it is an unfortunate situation. But it is not the fault of the fund, the asset manager or the investment company. Once there is a loss, the question is “how do we proceed?” If there’s fraud, as a fiduciary, it’s the right thing to try and get back the money.
PA: What’s the benefit to the fund?
BL: Recovery can increase the net asset value of fund. Recovery also shows investors that funds are fulfilling their fiduciary duty. More broadly, the process can increase corporate accountability and enhance the integrity of the marketplace for investors.
PA: You both have mentioned fraud. What do you mean? When should funds be suspicious?
BL: Fraud generally takes two forms. Either a corporate knowingly misrepresents facts about, for example, its performance, prospects, or financial condition. This is an affirmative misrepresentation. Or the corporate knowingly fails to disclose information. This is fraud by omission. In doing either of these things, the company’s managers are breaching their fiduciary duties to their shareholders. It is impossible to invest without being touched by fraud. Cases come up by virtue of the existence of a portfolio. So trustees should always be suspicious.
PA: If fraud is inherent in the markets, how can funds protect themselves?
KR: Through investment portfolio monitoring, which is a confidential data review of your transactions. Monitoring is critical. It enables us to tell our clients in advance the level of their loss. If there is action to be taken, we are in a position to take action. We routinely provide investment portfolio monitoring and case evaluation services at no charge to many of the largest funds in the U.S.
PA: How does portfolio monitoring work?
KR: There are two scenarios. Under the first, the fund knows that is holds “Kraft Heinz” or “Steinhoff” in its portfolio. The fund provides Lieff Cabraser with transaction data with respect to these investments and we measure the amount of loss. Under the second, the fund has an agreement with us. Under the agreement, we monitor the fund’s portfolio and report to the fund when there is a drop in value due to alleged fraud.
The second scenario is like when your bank calls you because there is suspicious activity on your credit card. You may not be pleased about the reason for the call but still, you’re thankful that you got that call. If you’re using your own card, you feel good knowing your bank is watching. If you’re NOT using your card, you want the wrongful spending to stop to limit the damage. Investment portfolio monitoring works something like this.
PA: If a trustee or asset manager or investment consultant reads in the news that the value of a stock has decreased dramatically due to some alleged wrongdoing, what should they do?
BL: Find out if that stock is included in your portfolio. They could ask the asset manager or investment consultant. If the stock is in the portfolio, you can begin a conversation with Lieff Cabraser. The consultation will cover: is there a loss? Is the loss significant? Should we attempt to recover? Will recovery have a significant impact on the net asset value of the fund? Do we have a strong legal case? Can the defendant pay? We will only pursue litigation or settlement when there is a high likelihood of success.
PA: What’s the process to make the decision on the way forward?
KR: Arrangements are made to send Lieff Cabraser transaction data regarding the relevant stock or bond. Based on the data we provide the fund with a legal and financial case evaluation and options (class action, settlement, independent action). The fund chooses an option and we pursue the option chosen by the fund. Lieff Cabraser advances all costs to final resolution -- lawsuit or negotiation.
PA: You’re saying that the fund does not have to incur any up-front costs to pursue a lawsuit or settlement or to have its portfolio monitored. How is this possible?
BL: We work on a full contingency basis. We get paid only after we recover for the fund. Since we have the same interest in the case that the fund does we choose our cases carefully. And we’ve been very successful. We have recovered $118 bn for clients in several practice areas. In the investment fraud space, we have recovered $2 bn for our clients. Our clients include BlackRock, Charles Schwab, Franklin Templeton, New York City Pension Funds, Regents of the University of California, and several union funds. As a result of this success, we can afford to advance all the costs of litigation.
PA: And what does the law firm earn in these matters?
BL: When we recover, we are paid costs and an agreed upon percentage as a fee. Perhaps 8-17% of the recovery in a class action and 15-25% of the recovery in an independent action.
PA: Many of our readers are trustees. What is their duty regarding investment loss recovery?
KR: Trustees are fiduciaries required to act in good faith and in the interest of members. They’re not required to know everything. But, the duty of care requires trustees to ask questions. Arguably, it’s not responsible to do nothing. It is responsible to ask: should we try to recover our loss when we can do so with no up-front costs? What does a trustee say to members when they ask: “why haven’t you tried to get my money back?”
PA: What results have non-US funds had when they have pursued investment recovery in U.S. courts?
BL: Funds from outside the U.S. routinely file cases to recover in U.S. courts. This is well established law. For example, in the Nortel Networks case, the lead plaintiff was based in Canada. The settlement was for $2.2 billion. In the Delphi Corporation case, two European funds were lead plaintiffs. The settlement was for $284 million. The opportunity is wide open for South African funds and other African funds with U.S. investments to do the same.
PA: Under what conditions would you advise a Fund to consider instituting litigation?
KR: When there is a strong legal case against the defendant, a high probability of success, and a solvent defendant who can pay damages.
PA: If a fund wants to pursue a case, how much time is involved?
BL: Our approach is to take as little of management’s time as possible. It usually takes 2-5 years to resolve a case. The management time is intermittent over those 5 years, but can be estimated at less than two weeks.
PA: Any final thoughts?
BL: When there is a loss, it is critical that the fund is engaged. Not taking action is a decision, but it’s a decision that should be made actively, after due consideration, rather than by an absence of attention. Fund managers are fiduciaries. As a fiduciary, it’s difficult to justify not even making an inquiry about seeking recovery.
Kim Robinson, Consultant, Lieff Cabraser Heimann & Bernstein, is a Harvard educated attorney, Fulbright Scholar, commercial mediator accredited in South Africa and the United Kingdom, Certified Ethics Officer with the Ethics Institute of South Africa. She is also CEO of Renaissance Strategic Solutions, www.renaissance-ss.com, a Johannesburg based consulting firm.
While an Associate at Morgan Lewis (then McCutchen Doyle), she second chaired and successfully represented the plaintiff in The Utility Consumers’ Action Network v. Pacific Bell where the court awarded $24 million in damages.
Ms. Robinson's experience in South Africa dates from 1991 when she was a Human Rights Intern at the law firm of Smith, Tabata, Inc
Bruce Leppla, Partner, Lieff, Cabraser, Heimann & Bernstein, represents some of the largest investment companies and retirement funds in the U.S. in investment loss recovery cases. He was part of the litigation team that successfully represented BlackRock in the recent case against Valeant Pharmaceuticals. Mr. Leppla was CEO and President of Redwood Bank, has been awarded 11 U.S. patents, and is a California licensed investment advisor. He is based in San Francisco.