Covering the legal costs of cases alleging fraudulent mis-selling of financial products by Britain’s battered banks poses both a threat and opportunity to commercial law firms seeking to bring a claim on behalf of disgruntled investors.
The shareholders may not quite be queuing around the block to reclaim their losses, but supplying properly assessed, risk-managed and priced funding for a class of individuals is exactly what the nascent litigation funding industry is about.
The Royal Bank of Scotland (‘RBS’) is facing two separate claims, one multimillion and one multibillion, which has alleged that investors suffered from misreprentations of the share value.
Claims against banks are not new but the range of options available has increased, as we have also recently noted. Funders have argued strongly for flexibility in the approach of lawyers to their products, and for a strong emphasis on communicating their virtues.
Yet, in an industry where the regulator is still gaining acceptance, there needs to be concrete examples as to who is backing what and how. Stories of the growing war-chests at funders abound. And the rise of boutique firms willing to handle such claims have been well publicised.
Yet the changes in the Jackson reforms to insurance might lead some to suppose that that section of the funding market may see such business decline.
Hence the significance of TheJudge’s announcement that, in support of one of the two RBS claimants, it negotiated a GBP 12 million insurance package to ensure the case proceeds.
Bashing the bankers
The policy means that the litigation funding broker TheJudge has tied up the largest litigation insurance placement of 2013, with the costs of the RBS case covered by four different insurers.
RBS is facing action in two cases over the alleged mis-selling of shares arising from an April 2008 rights issue that priced shares at two British pounds each.
Investors subsequently lost money when the failed bank had to be rescued by the UK Government, which purchased shares for less than half the original price. Claimants argue that the bank mislead them in its rights issue prospectus by overstating its financial stability.
TheJudge has secured the insurance for the smaller of the two cases, backing the costs incurred by Stewarts Law that could cost the 82 per cent government-owned bank over GBP 200 million in damages.
Bird & Bird is representing claimants in the parallel case against the bank worth up to GBP 4 billion. Led by the RBS Shareholder Action Group, the claim centring on the alleged misleading of investors in the 2008 rights issue prospectus has dragged four former directors, including ex-CEO Fred Goodwin, into proceedings.
The group said in a statement on 3 April that “the bank’s directors sought to mislead shareholders” when it issued shares in April 2008.
The group represents over 12,000 private shareholders and over 100 institutional lenders. The group claims investors were deceived over the reasoning behind the rights issue, with the bank allegedly covering up its precarious capital position following its bungled takeover of Dutch bank ABN AMRO in 2007.
Rise of litigation boutique firms
With large international firms unwilling to act against banks that have provided them with so much revenue over recent years, smaller firms such as Stewarts have picked up the disputes emerging from the economic crash in 2008.
Stewarts issued a claim against RBS at the High Court in London on 28 March. The firm has refused to disclose the size of the claim, which is being brought on behalf of 21 claimants, including a number of financial institutions and pension funds, rather than a large collective.
“The claimants allege that the prospectus on which the Rights Issue was based was defective in that it contained material misstatements and omissions,” said Stewarts in a statement released on 28 March.
The claimants have based their claims on Section 90 of the Financial Services and Markets Act 2000, which stipulates that prospectuses and other documents must be accurate. They have a right to compensation for losses sustained as a result of the defective prospectus.
“The claimants maintain that although the prospectus portrayed an image of the bank being in a state of financial good health and stability, the reality was very different and that had the truth been known, the take up of shares under the rights issue would have been severely impacted,” the statement continued.
However, with wallets not as deep as those defending the banks, (Herbert Smith Freehills is defending RBS in both rights issue claims), these firms need to secure against losses should the claimants lose the case. After all, the range of shareholders – both large and small – could find it difficult to support such cases.
Despite being the largest brokerage of an insurance package this year in the UK, the figure is not unprecedented, with TheJudge having secured a USD 40 million package for an unnamed case against a financial institution in the US.
James Delaney, director of TheJudge, explained:
There has been a lot of hype surrounding third-party funding. After the Event (ATE) insurance gets little print but it underpins a lot of the action pursued in UK Courts. Without it, these cases wouldn’t get off the ground as clients wouldn’t be able to take the adverse costs exposure.
It can be incredibly difficult to put cases together when dealing with such large sums, as they require syndication of different capacities from different insurance markets.
Indeed, “you are not buying an off-the-shelf policy so insurers will be wary that a case isn’t successful,” adds Delaney, who notes that the “shift towards larger indemnity policies over the past 12 months” has made syndicating a group of insurers, which may have their own views over pricing, reporting and conditions, even more difficult.
This policy and a wave of other large limit deals recently completed for commercial arbitrations and litigation demonstrate that although litigation funding often grabs the limelight, the insurance market is often the foundation for many claims,
As recoverability for ATE insurance premiums has now passed as a result of the Jackson reforms, save for a few select areas, TheJudge says that they are seeing increased price flexibility with insurers often providing more than one pricing format.
The cost of funding and insurance for a client can vary depending on the stage and value of a settlement. If there are five or six different offers on the table, that can be quite a challenge to decipher into a client-friendly format.
The Menu for Success
“Increasingly lawyers will see insurers and funders promoting a menu of options,” says Delaney. “The challenge for us as brokers is to provide lawyers with a clear summary of the ever-expanding range of funding options for their clients.”
It is not uncommon for large cases to require top-ups, so TheJudge could yet be sourcing the insurance market for further protection, which would break the existing record protection the case has just set. The funding industry needs examples like TheJudge’s to promote itself to law firms and sophisticated claimants alike that sound claims will be supported.
The credit may be theirs in this case, but others may yet also benefit from what TheJudge will hope is second judgment on their part in backing the case. Judge for yourselves.