A TURNING POINT FOR GLOBAL SECURITIES LITIGATION

Royal Dutch Shell Settlement in Europe May Signal Greater Investor Protection for non-US Investors

© 2009 - Alexander Reus

Co-Managing Partner

Diaz Reus & Targ, LLP

In a global financial marketplace, it is important for investors to understand trends in securities laws and effective investor protection via regulation, as well as private and public enforcement in the United States and Europe. While the U.S. has traditionally led the world in addressing securities fraud, the recent approval of a settlement in the Netherlands involving Royal Dutch Shell indicates that greater protection may now be available for non-U.S. investors as well.

From a historical perspective, securities rules and regulations have played a vital role in shaping the flow of capital for hundreds of years. In the early days of the United States, for instance, foreign direct investments in large amounts flowed into the fast-growing nation, resulting in the development of capital markets as public platforms for company financing and public ownership. By the 20^th century, U.S. stock exchanges had developed into the world’s largest equity markets with a value of over $18 trillion in 2007 before the recent crisis wiped out substantial capital.

During the Depression years of the early 1930s, the U.S. created the Securities and Exchange Commission to police the nation’s vast financial markets and to protect the investing public. While enforcement was initially considered to be a public matter, the “private right of action” was recognized by the Supreme Court in 1971 after some federal courts had already extended these rights to investors as early as in the 40’s. This paved the way for private securities litigation as a means of investor protection against fraud or misrepresentation by public companies.

A significant overhaul of the private enforcement groundswell came in 1995 with the Private Securities Litigation Reform Act. That was followed by conservative Supreme Court rulings that tended to favor corporations rather than investors. During the Bush administration, the United States turned more protectionist, imposing substantial restrictions in terms of immigration and taxation, as well as investment protection for U.S. and specifically foreign investors.

As a (potential) result, investments into the United States have slowed and foreign capital has flowed to other markets. Listings by foreign companies in the U.S. have fallen below the levels of 2000-2002. In some cases, U.S. listed foreign companies have even considered de-listing or in fact de-listed from U.S. exchanges.

From a securities litigation perspective, more cases are being filed outside the United States than ever before, especially also in Canada, which has an appealing system, and foreign legislatures, think tanks and officials, including the European Commission, are discussing effective investor protection much more frequently and actively than in the past.

While the U.S. system of class actions under Rule 23, Fed. R. Civ. Pro. has been very effective and efficient in protecting investors for more than 35 years, it is sometimes said to have taken its toll on public companies. In light of more than $7 billion per year being paid out to investors from class actions over the last 10 years this might actually be the case. However, this number dwarfs against the hundreds of billions of market capitalization being wiped out because of securities fraud or misrepresentation.

It is interesting to see how the Old World mentality has reacted to securities fraud since the turn of the new century. First, securities fraud by unscrupulous boards and management is no longer the domain of the U.S., as European and Asian companies have discovered their own versions of abuse and deceit in their own capital markets. Examples of Royal Ahold, Parmalat, Shell, Hypo Real Estate, Fortis, EADS and many others indicate the extent of this rise in corporate fraud.

However, the public and private enforcement of securities laws through litigation is still “sub-standard” or less effective in comparison to the U.S. system. In particular, private securities law enforcement is lagging behind the U.S. due to different procedural rules including “true” class actions and discovery as well as fee rules including success fees and the absence of the “loser pays” rule. However, the European Commission is rushing to find “collective redress” methods, avoiding the dreaded term “class action” at all costs, to protect those private investors who have lost substantial assets in the past years and are looking for effective legal protection in the future.

The EC has been publishing various white and green papers in the advancement of potential collective actions, mostly for the benefit of consumers, but also of investors. Additionally, countries such as Italy, France, the Netherlands, UK, Germany, Finland, Sweden and Norway have passed laws that purport to establish effective procedural methods for the protection of investors from securities fraud and misrepresentation. Nevertheless, most of these efforts still fall short because of their lack of true class actions procedures as well as other systemic reasons.

An important exception are the Netherlands, which are the forum of choice for parallel securities class action settlements thanks to the appealing and beneficial Dutch legal and procedural framework for investor litigation. This has already worked well in the just-approved $500 million Royal Dutch Shell settlement. The system provides a blueprint for other cases to come, including the $143 million SCOR/Converium settlement, and various other securities litigation cases that either have no U.S. jurisdiction or in which U.S. courts deny access to courts to foreign investors for other reasons.

The Royal Dutch Shell settlement is an excellent example of how non-U.S. investors might seek to resolve securities disputes in the future if Dutch jurisdiction is given. The Shell settlement results from the fraudulent overstatement of proven oil reserves by Shell throughout a period of five years from 1999 to 2004. When the truth came out, the market reacted and Shell lost about $3 billion of its market cap, substantially affecting each shareholder’s position.  About 75% of the damage affected European investors buying Shell securities in London or Amsterdam.

However, a U.S. class action sought compensation for all Shell investors, U.S. and non-U.S alike.  When the U.S. court threatened to dismiss the foreign investors from the U.S. case, Shell and a group of European investors represented by a Dutch foundation entered into a settlement worth over $500 million to resolve the non-U.S. aspects of this case. The settlement was entered before the U.S. court dismissed the non-U.S. investors and before the U.S. investors entered into a settlement. However, it still took almost two years for the Dutch settlement approval process to conclude. On May 29, 2009, the Amsterdam Court of Appeals finally declared the settlement binding for all class members defined in the articles of the foundation.

The Shell case may be the turning point for large global securities litigation and particularly the effective protection of non-U.S. investors. It shows that the Old World is not a toothless tiger anymore and finally starting to provide effective investor protection even on a private enforcement level.

While the Dutch legal system now provides an effective venue for securities litigation and investor compensation cases, it is too soon to tell if the Shell case – with its U.S. litigation component – is an indicator of a broader trend in the European community. It will be important to follow the resolution of Dutch cases filed independently of any U.S. cases to see whether European investors can expect to receive better treatment in the future.

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Diaz, Reus & Targ LLP, with its U.S. and European offices, has been on the forefront of the global developments in securities and investor protection matters and has played a substantial role in the Royal Dutch Shell settlement in the Netherlands. Diaz Reus is also active in other securities litigation on behalf of institutional investors in the United States and several European countries. Diaz Reus is a Miami-based international litigation and transaction law firm with full service offices in Frankfurt, Germany, Shanghai, China, Dubai, United Arab Emirates and Caracas, Venezuela, as well as satellite offices in Sao Paulo, Brazil and Bogota, Colombia. For further information, please contact Alexander Reus at areus@diazreus.com or visit www.diazreus.com