Making Clients Aware of Class Actions

Advisers who don't keep abreast of class-action lawsuits on securities once held by their clients may be running a big risk.

"It's just a matter of time in Canada before an institution is sued for not filing a claim in a class action," says Paul Battaglia, one of two principals behind Canada Claims Management, a firm recently established to help guide investors through the process of participating in a class-action suit.

Increasingly vocal investors and a very volatile market mean class actions are going to be "even more prevalent," Battaglia said at an investment conference last week. Indeed, earlier this year NERA Economic Consulting reported there were a record 28 active securities class actions in Canada, representing C$15.9 billion in outstanding claims.

But most of that money "is being left on the table," says Jonathane Ricci, Battaglia's partner. Only about 20%-25% of funds set aside in claims settlements is actually returned to shareholders, he says.

Part of the problem, Battaglia and Ricci say, is that few financial-services companies have a specific person mandated to pursue class actions and thus notices of a settlement often fall through the cracks.

"There is a disconnect," Ricci says. "No one knows who takes responsibility."

This gap does a disservice to investors, Battaglia says. Advisers who ensure their clients are included in a class when a suit is filed do not only demonstrate they are acting in the best interests of their clients, but they can also recover lost funds.

"Imagine how it would help your performance to get some of that money back in your portfolio," Battaglia says.

However, there are situations where investors, for one reason or another, were not notified. Battaglia and Ricci point to the case of Gildan Activewear, which paid a class-action settlement of US$22.5 million last November. When Canada Claims Management called a series of institutional investors that would have been in the affected shareholder class, either emails were ignored or the issue was deferred. In one case, the principals note, the settlement notice was sent by compliance to corporate, but was not followed up.

Battaglia and Ricci warn that some investors may determine it is the fiduciary duty of a money manager to ensure they are included in these lawsuits and could follow up if action isn't taken.

Michael Schafler, a partner with Fraser Milner Casgrain LLP, who specializes in defending companies against class-action suits, says it is theoretically possible an investor could file a suit against a money manager for failure to participate in a class action. But the majority of class-action suits are launched by law firms mandated to do so, he notes.

Still, he agrees the number of suits is rising, in part due to increased activism among shareholders and in part to regulatory changes in the late 1990s that opened the door to investors who purchased shares in the secondary market to participate in class actions.

Moreover, he says, judges are more likely to certify a class action. In Ontario alone, 20 of the 24 motions to certify a class-action heard in the past year went in favor of the plaintiff.

"The trend, generally with respect to class actions, has been quite remarkable," Schafler says.