Tuesday, April 01, 2008

Class Action at the TUC

Apologies to those who may have just choked over their beer and sandwiches at the thought of some sort of radical action taking place within our beloved Trades Union Congress.

However, yesterday, I attended a seminar at Congress House, organised by its Pensions officers for trade union pension fund trustees. The seminar was on whether or not British pension funds should be taking part in "Class Actions" court cases in the US.

In a nutshell, US securities class actions are were investors sue a company (which is listed on the US stock exchange – not only US based companies, but nowadays many large European companies) for given “misleading” or false information (or simply lying) that caused these investors or funds to lose money. Usually as a result of a fall in the share price of that company.

Some well known cases in recent years have been against Enron and WorldCom. There have also been high profile equal pay cases against that bad guy of the international trade union movement “Wal-Mart”

So far so good. If a British Pension fund lost money by paying over the odds for a US listed company, since its fund manager had been mislead by that company over the true fair price for its shares, then it is logical to assume that the pension fund could sue to recover this loss.

In Britain the legal system makes it very difficult to pursue such claims. In the Good Old US of A things are very, very different.

Here, lawyers can sue companies on a “no win no fee” basis and the rewards from such litigation are potentially huge. These lawyers earn a fixed percentage from successful claims which are often for hundreds of millions of dollars. Many of the most successful "Class Action" lawyers are now multi-millionaires.

Many people find the whole business “distasteful”. Not just trade unionists! Some pension fund advisers think that if you take part in such lawsuits, you are just “Robbing Peter to Pay Paul”. Since if you a sue a company and are successful, the lawyers take most of the money and the bill is actually paid by either the company or its insurance company in which you may also hold shares.

It is not helped by the rather sleazy image of “Class Action”. Over the years I have now attended at least 3 presentations by teams of US lawyers recommending that British pension funds get involved. The first team of US lawyers that I saw 5 years ago, are now apparently about to go to jail in the US on bribery convictions connected to "Class Actions". Apparently this firm also attempted to "bride" British trade unions with an offer of $10 million to allow them access to their member trustees.

I accept fully that the other US firms I have seen in the more recent past, and of course yesterday, are totally different from these “rotten apples”. Mark Willis, the US lawyer from Cohen Milstein Hausfeld & Toll, who spoke at the seminar seemed pretty upfront and honest about the seedy side of his business.

Just because this is potentially a dirty business then this does not mean that in the UK we should be too sniffy about the whole process. Not only have lawyers in the past made huge amounts of money from class actions but US pension funds have also received back millions and millions of dollars. At the seminar, Caroline Goodman, the MD of the British company "Institutional Protection Services" (IPS) said that, on average, a pension fund with £500 million of equity and bonds should receive back £100, 000 per year from taking part in class actions. That is a lot of money. Imagine what the return would be on the whole of the LGPS scheme at £125 billion.

I will seek advice from my pension fund investment advisers and trade union. Of course, the governance argument is that pension fund contributors would ensure that their money is only invested in decent well run companies that would not face such legal action over such dishonesty.

No doubt there will have to be some sort of “due diligence” test but if there is no further financial risk to the fund (no win, no fee) I cannot see what on earth we have to lose? Except a little bit of our deficit chains?

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