Wolf Popper LLP

PRESENTATION TO:
Wolf Popper LLP
By
Chet B. Waldman, Esq.
Wolf Popper LLP
May 19, 2013
Honolulu, HI
Defending Your Defined Benefit:
Capital Stewardship
The Fiduciary Duty to Take Reasonable
Steps to Recover Damages for Injury
Suffered by Your Fund.*
By Chet B. Waldman, Esq.
Wolf Popper LLP
* I use Plan, Fund or System to mean the same thing.
1
Plan
Assets
2
The Fiduciary Duty to Recover
Plan/Fund Assets
 “A fiduciary has a duty to ‘take reasonable
steps to realize on claims’ that are property of
the trust, including claims in tort...”*
 “A fiduciary ‘cannot properly abandon claims
affecting the trust property unless it
reasonably appears that a suit would be futile
or the expense of the litigation or the
character of the claim would make it
reasonable not to bring suit.’”**
* E. Weiss & J. Beckerman, “Let the Money Do the Monitoring. How Institutional Investors Can
Reduce Agency Costs in Securities Class Actions”. 104 Yale L.J. 2053-2113 (1995) quoting
Restatement (Second) of Trusts Sec. 177 (1959).
** Id.
3
 “If a third person commits a tort against trust
property, the trustee has a duty to take reasonable
steps to compel the tortfeasor to redress the
injury…”*
 The court in that case recognized that “[w]hen the
trustee fails to bring suit against a third party
tortfeasor, the beneficiaries may
properly bring an action against
the trustees and third parties as
co-defendants.”**
* Witzman v. Gross, 148 F.3d 988, 990 (8th Cir. 1998) quoting Uselman v. Uselman,
464 N.W.2d 130, 137 (Minn. 1990); see also Anoka Orthopaedic Associates, P.A. v.
Mutschler, 773 F. Supp 158, 168 n. 16 (D. Minn. 1991).
* Witzman, 148 F.3d at 991, citing Uselman, 464 N.W.2d at 137-38; see also Anoka
Orthopaedic, 773 F.Supp. at 168.
4
Audience Response Question #1:
If monies are stolen from your System’s
pension fund, and you know who took it,
as a trustee, do you have a fiduciary
responsibility to commence a litigation to
recover the monies?
a.
b.
c.
Yes
No
Maybe
5
BIG – BIZ SCAMS
Sunbeam “Chainsaw” Al Dunlap’s
company and Arthur Andersen
charged by SEC with accounting fraud
6
WORLDCON
7
The Victims
 Employees who purchased stock for
their retirement
 Individual Investors
 Institutional Investors and Pension
Funds
– Pension Funds collectively have
lost $ Billions.
8
Audience Response Question #2:
Has your Fund ever lost money on an
investment (stocks, bonds, mutual funds,
hedge funds, etc.) due to a corporate
fraud, breach of fiduciary duty or other
unlawful conduct?
a.
b.
c.
Yes
No
I don’t know
9
National Association of
Pension Funds:
“[I]t seems self-evident that trustees have a duty to
protect the assets in their scheme and that they
should therefore at the very least not neglect
opportunities to recoup losses….”
-- Securities Litigation, Questions for Trustees, NAPF March, 2007
10
U.S. Department of Labor:
“Assets” include not only the securities held, but also
the rights attached to those securities … and “it
would be a breach of fiduciary duty not to pursue a
valid [securities fraud] claim.”
-- Secretary of Labor’s Memorandum of Law as Amicus Curie, In
re Telxon Corp. Sec. Litig., 67 F.Supp.2d 803 (N.D. Ohio, 1999)
11
Securities Litigation
 Lawsuits to recover money damages
 Defendants make false statements about
company’s business, performance or inflate
profits through accounting manipulation
 Information that defendants’ statements were
untrue comes out – stock value declines –
causing damages to investors
 Class or individual actions
12
What is a Class Action?
• Definition:
–
–
–
Representative lawsuit on behalf of a
group of similarly situated persons.
E.g.:
Shareholders of the same
corporation who were misled
by the same written false
statements.
E.g.: Purchasers of the same car
model which has defective
brakes.
One class member can represent
everybody in that Class.
13
Class Action Participants
and Roles
a.
Class Representative/Plaintiff
(i) Has standing
(ii) Is adequate and typical
1.
2.
Has no conflict of interest;
Has retained competent, experienced
counsel.
(iii) Key Duties of Class Representative
1.
2.
Act in best interest of the Class
Watchdog over counsel
a)
b)
ensure case is being prosecuted;
ensure any settlement of action is in best
14
interest of the Class, not lawyers.
Class Action Participants
and Roles
b.
Absent Class Members
(i) Have no role in litigation;
(ii) If case is brought to recover money for
the Class, Class members can do nothing and
stay in Class or “opt-out” of the case to bring
their own individual action.
•
•
c.
After Class is certified by Court or case is
settled, Notice is sent to Class members.
Proofs of Claim are sent out for Class
members to fill out.
Defendants – alleged wrongdoers.
15
Advantages of a Class Action
a.
More powerful litigation posture (i.e. “leverage”)
for Plaintiffs;
b.
Greater likelihood of attracting top legal
representation for Plaintiffs:
1.
c.
Primarily contingent fee arrangements with counsel
in class actions.
Public Policy
(i)
Greater deterrent of wrongdoing because of
potential for larger recoveries;
(ii) All class members may participate in recovery
of damages not just largest, best financed class
members.
d.
Allows defendants to litigate in one forum and resolve a
litigation “globally” (i.e., at one time).
16
Disadvantages of a Class Action
●
A Class member may get a smaller recovery
than if it had brought an individual action or an
action with a small group of other shareholders.
–
●
However, amount of damages must be great (in
the millions of dollars) to seriously consider
pursuing an individual action.
Legal Fees may be high if Class representative is
not sophisticated.
17
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.”*
 A primary goal of the Reform Act was to
encourage institutional investors to take a
leadership role in securities actions to
increase overall recoveries.
* Joint U.S. House and Senate Conference Committee
18
The Fiduciary Duty to Investigate Whether
to Become Involved in Litigation
 “Not only is a fiduciary not prohibited from
serving as a lead plaintiff, the Secretary
believes that a fiduciary has an affirmative
duty to determine whether it would be in the
interest of the plan participants to do so. The
Secretary has previously taken the position
that it may not only be prudent to initiate
litigation, but also a breach of a fiduciary’s duty
to not pursue a valid claim.”*
* Secretary of Labor’s Memorandum of Law as Amicus Curiae in Support of FSBA’s Motion For
Appointment As Lead Plaintiff in the Bragdon v. Telxon Corporation litigation, Civ. A. No.
5:98-CV-2876 (N.D. Ohio), at p. 6.
19
The U.S. Department of Labor’s View
 “[A] fiduciary may have a duty to serve as lead
plaintiff where no single individual has sufficient
interest or resources to serve in such capacity or
where, as a large stakeholder, the fiduciary has
an interest in assuring that an alternate class
representative with a less substantial stake in
the outcome does not unduly compromise the
interests of the class in settlement, fail to
vigorously prosecute the actions, or fail to
protect the interests of the class vis a vis its
attorneys.”*
* Secretary of Labor’s Memorandum of Law as Amicus Curiae in Support of FSBA’s Motion
For Appointment As Lead Plaintiff in the Bragdon v. Telxon Corporation litigation, Civ. A.
No. 5:98-CV-2876 (N.D. Ohio), at p. 7.
20
Pension Funds Have Made Valuable
Contributions To Securities
Litigations In U.S. Courts
• Recoveries are larger
• Legal fees are lower
• Corporate governance measures
have been instituted
21
Total Shareholder Recoveries
Since 1999, shareholders have recovered approximately
$77 Billion . . .
Number of Securities Class Action Recoveries Since 1999
Year
Number of
Settlements
Total Settlement
Dollars (in Billions)
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
63
89
93
109
94
109
118
91
110
97
103
110
87
92
$
1,231
5,154
2,067
2,949
2,642
3,517
9,989
18,262
7,186
3,094
3,830
11,531
2,623
3,312
Total
1,365
$
77,387
22
Institutional Investors Who Applied To Be
A Lead Plaintiff In The Enron Securities
Litigation










Florida State Board of Administration
The Regents of the University of California
New York City Pension Fund
The State of Georgia
The State of Ohio
The State of Washington
Local 710 Pension Fund
Archdiocese of Milwaukee Supporting Fund
Amalgamated Bank
Deutsche Asset Management
23
Institutional Investors Who Have Served
As, Or Otherwise Applied To Be, Lead
Plaintiffs In Securities Class Actions
 Illinois State Pension Systems
 CalPERS
 State of New York
 State of New Jersey
 State of Minnesota
 State of Wisconsin Investment Board
(“SWIB”)
 State of Connecticut
 City of Philadelphia
24
Audience Response Question #3:
Has your Fund ever been involved in
a litigation to recover monies it lost
on an investment?
a. Yes
b. No
c. I don’t know
25
Advantages and Disadvantages of
Being a Lead Plaintiff
Pros to being a named plaintiff in a class litigation:
• Participating as a named plaintiff will ensure that your
interests are adequately represented
• Role in litigation strategy and settlement
• Potential recoupment of incentive fee and/or expenses
beyond pro rata share of damages
• Satisfying one’s fiduciary duties
Cons to being a named plaintiff in a class litigation:
• Some time and effort in participating in discovery and engaging
in litigation and settlement strategy.
• An absent class member can:
─
Request exclusion from the class when notice to
mailed to investors if it does not like the
progress of the litigation or the amount of the
settlement (if applicable)
26
Settlement Claims Management
 Since 1995 more than $12 billion, or 20% of
settlement funds, have gone unclaimed
Studies have found that . . .
 Only 33% of institutions actually collected their
settlement funds
27
Council of Institutional
Investors:
“An increasing number of plan sponsors,
litigation experts, plan counsel,
academics and not-for-profit and
professional organizations generally
agree that, at a minimum, pension fund
fiduciaries are required to monitor
securities litigation and pursue recovery
when securities actions are settled or
judgments are awarded.”
28
Audience Response Question #4:
Does your Fund have a process in place
to ensure that proof of claim forms related
to class action settlements are being filled
out on its behalf to recover monies?
a.
b.
c.
Yes
No
I don’t know
29
Portfolio Monitoring
 Free Service
 Identifies securities class action settlements to
ensure Fund files proof of claim forms and recovers
monies
 Monitors plan assets for losses resulting from fraud,
misrepresentations and breach of fiduciary duty
 Provides current monitoring of losses in specific
securities, where linked to violations by company,
executives or others
 Provides evaluation of those losses and
recommendation as to whether further action is
required
30
Non-U.S. Investments
● A U.S. Supreme Court decision handed down in
2010 in a case titled: Morrison v. Nat’l Australian
Bank Ltd. held that an investor in a security of a
company purchased over a non-U.S. exchange
cannot sue for a securities fraud in a U.S. Court.
31
Audience Response Question #5:
Does your Fund invest in securities
purchased on a foreign exchange?
a. Yes
b. No
c. I don’t know
32
The Importance Of Monitoring
Securities Class Actions
Larson v. J.P. Morgan Chase & Co., Civ. No. 8-1045, 2008 U.S.
Dist. LEXIS 13298 (7th Cir. Jun. 23, 2008)
In Larson, the 7th Circuit Court of Appeals sent a
strong message to public pension funds:
“Fiduciaries are assumed to be
monitoring securities class actions to
protect viable claims and ensure
recovery of funds lost as a result
of securities fraud”
33
Audience Response Question #6:
Does your Fund have a securities
portfolio monitoring program in
place?
a. Yes
b. No
c. I don’t know
34
How Many Law Firms Does
A Fund Need?

A firm can be both reviewer, recommender, and litigator as the securities
monitoring, evaluation and litigation special outside counsel to a fund

Recent federal court cases have questioned a client/lawyer’s “conflict of
interest” status with only one firm performing all roles simultaneously

Judge Rakoff of the U.S. District Court, Southern District
of New York stated in an opinion in the Merrill Lynch
case on May 26, 2009 that this “practice fosters the very
tendencies toward lawyer-driven litigation that the PSLRA
was designed to curtail” …. and “questioned whether the
seeming conflict of interest inherent in this arrangement
violated ethical prohibitions.” Id. at p. 5.

Clients should engage at least 2 firms for this service to analyze and
recommend a course of action and rotate the litigation function to the other
firm(s) if client decides to seek lead plaintiff in a case. In this manner, your
Fund will have the benefit of similar or conflicting analysis and avoid the
ethical prohibitions of a conflict of interest.
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Wolf Popper LLP
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