Fall of Company Value – Part 3

MALE VOICE 1: [Catalan].

MALE VOICE 2: [Catalan].

MALE VOICE 3: Yes, that is–that’s true. The strict liability statute is only for public offerings new securities. So if a company is preceding, is trading on an exchange, there is no strict liability for materially false and misleading statements. Any statements that artificially inflate the price of the security–sorry, I was getting a little feedback there. Hearing myself speak is frightening sometimes.

[Laughter]

There is no strict liability for those types of securities, for raising the price of the security beyond which it would be trading. It is–there is strict liability for new securities. So in that case, a different type of security not previously issued, there would be a strict liability for that new security. And that new security has a different statute of limitations and has different requirements than the old securities that were already being traded.

And that’s true even for more of the old securities that are offered in the market. So in common stock, you have the initial public offering. And then later on, there may be secondary public offerings. If your security is the secondary public offering, you can get strict liability. But it has to be those securities that were purchased from an underwriter on the secondary offering, whereas if it’s a new type of security, of course, it’s easily traced back to the offering because it didn’t exist before. And even that gets confusing because there’s something called Rule 144 securities. They may have existed and held in private hands. And that may defeat the strict liability statute.

You’re primarily looking at a fraud statute, which again has more onerous requirements. It has that C-enter [phonetic] requirement. In fact, you had to have intended to prove fraud. And it’s not easy to prove that you intended to prove fraud or the defendants intended to prove fraud. You never find a document saying–well, I don’t want to say never. Once in awhile, you do find those documents. We found them in emails in the Merrill Lynch analyst litigation, where the analysts were sending to the investment bankers emails saying, “We better get out of these terrible securities.” But they used worse words than terrible. “We better get out of these terrible securities.” And yet they would put out public statements that say, “Please buy. These are great securities,” while at the same time they were sending internal emails out. But generally, you don’t find that.

MALE VOICE: Gracias. ¿Preguntas, alguna pregunta desde el público?

MALE VOICE 4: – – . If I understood correctly, you were explaining that your friend had lost $125.

MALE VOICE: Espera, espera un Segundo, porque hasta que no tengas el micrófono, no lo pueden traducir desde la… Bueno, y además, así le veremos todos mejor.

FEMALE VOICE: Sí.

MALE VOICE 4: No, I will repeat the question. My question is the following. If I–maybe I didn’t understand correctly. But if I understand correctly–

MALE VOICE: No se oye. No se oye.

MALE VOICE 4: ¿No? Hola.

MALE VOICE: Ahora sí. Otra vez.

MALE VOICE 4: If I understood correctly, you were explaining a case that a friend of yours lost $125 in the stock exchange. He called you and told you, “I have lost this money.” And you told him, “Let me help you in this litigation.” And he got back $40 million. I didn’t understand it correctly probably.

MALE VOICE 3: No, at the end of the day, he actually got nothing because there is a limitation on how much that we will pay a person. So we don’t cut checks for anything less than $10. And it turns out he lost because of the–well, that was a strict liability case because it was an offering. But he lost because of the misstatements in the prospectus about $9.50. So he didn’t get anything back. But there were thousands of people among which the $40 million, among who–

MALE VOICE 4: [Interposing] Okay.

MALE VOICE 3: –that were distributed.

MALE VOICE 4: Now I understand. Thanks.

MALE VOICE: Señor. Allí hay dos. Allí, allí.

MALE VOICE 5: Thank you. Hello? Yes, it works. Thank you. I have a question. Here is normally unusual for a lawyer to invest money in cases of a client. You were saying that in some cases you have to even advance a lot of money. What happens if the plaintiff changes the lawyers? Is that something that happens often?

And then I would like to ask a second question because I also had the wrong like misunderstanding. And I thought that this client of yours that lost $125 received the $40 million. So basically, you–the client can only get as much compensation as he has actually lost, like it’s here basically. We were not talking about any punitive damages or anything like that. The money that you lose is the money that you may get back.

MALE VOICE 3: See, that’s the purpose of the class action that the money that is lost is not your client’s amount of loss. It’s everybody who purchased the securities’ loss. So it’s aggregated damages. In the case of–that I was talking about, where my client lost a minimal amount of money, there were–well, there were $1 billion worth of securities floated. They were $25 apiece. So I don’t–what is that? My math is lawyer’s math. It’s not very good. So it’s whatever $1 billion–it’s actually $1.1 billion–there was an overage–divided by $25. It’s a lot of shares. And we were able to get a certain amount of money back for everybody who purchased on that offering.

And that’s the difference. That’s what a class action is. And that’s the purpose of the opt out, that even though those thousands or tens of thousands of individuals who purchased the securities did not come forward, we got their money. And at the end of the day, we mailed them notice because, of course, in a securities class action, we know who bought the security. At some point in time, the defendants have to give us the names of all the purchasers. And all the brokerage houses know who they are. Actually, they’re all kept at the depository trust company in New York. So DTC has those because you have to send out end-of-year tax forms and whatever.

So we sent it all out to everyone. And we also published notice. And in worldwide class actions, we put out notice in every country in the world in which we think that somebody purchased the security. And we have it translated–the notice translated into that language. And the negotiator is a fairly comprehensive document approved by the court and, you know, negotiated between defendants and plaintiffs because if it’s a settlement, they don’t want to ever admit liability or, you know, whatever.

So you know, everybody had the opportunity to find out. But they frequently don’t want to know. There was an institution in New York that we knew who had purchased a substantial amount of securities on an initial public offering because that’s public information. And I called the CEO of that company, the Chief Investment Officer actually, of that investment company and said, “You own $3 million of this security. Did you know that?”

And he said, “No, we don’t.” And I had a fight with him for about two weeks to prove to him that he actually owned it. And then he said, “Oh, yeah, you’re right.” He didn’t know, which is frightening to me that he had no idea he had purchased millions of dollars of this security. But that’s the way it is.

You asked another question about plaintiffs changing lawyers. In fact, that does happen. And what do you do? It doesn’t happen very frequently. So there are no standard rules. The law is in the United States if a plaintiff changes lawyers or anybody changes lawyers, you’re entitled to your something called quantum meruwit proportion of, you know, of success. You know, what that means, you know, in English and not Latin is you get your benefit of your bargain. If you did half the work, you’re going to get half of the fees at the end of the day.

Now it gets a little trickier as to what happens to the expenses. Generally speaking, the more expenses there are, they happen later in the case because the most expensive thing about a case–in the Williams case, the $125 case, it was about $8.5 million worth of expenses. And they were primarily incurred later in the case by experts and by the document reviewers, hundreds of document reviewers going over the documents.

I really haven’t come across a case that was lost in which there was an issue over who pays for the expenses because if I were the attorney being replaced and a case was lost, I’d be concerned that it was lost because of the actions of the new attorneys. And then they’re costing me money. So I negotiate that upfront and try to get reimbursed by the new attorneys first.

If I spent $1 million on a case and then the plaintiff decides to replace me, first of all, he’s got to get court approval. And I could fight that. Okay. Secondly, if that were the case, I’d make him give me my money back so that he has something at risk.

MALE VOICE: Thank you. Hay una pregunta.

MALE VOICE: Si, si le pudiera hacer una pregunta al profesor Peláez. Bueno, la pregunta es, básicamente es, bueno, ha planteado muy claramente que es muy restrictivo todo el ámbito de las acciones colectivas. Y lo que pasa es que, ha habido alguna posibilidad que se haya apuntado que un despacho podría organizar una acción de este tipo, pero no me queda muy claro exactamente en qué caso y cómo se podría, en qué casos y cómo se podría hacer. Es decir, aislando lo que sería la Asociación de Consumidores, etc., ¿cuándo podría un despacho normal agrupar una serie de afectados, un tipo de plataforma y, y entonces, plantear una acción de, o grupal o colectiva.PROF. PELAEZ: A ver, el supuesto está sólo en el caso de que defiendas un interés colectivo, o sea, que los consumidores y usuarios afectados estén determinados o los puedas determinar con facilidad. En ese supuesto, la ley dice que puede actuar ante los tribunales, no sólo la asociación sino el grupo de afectados. Y el grupo de afectados tendría que ser a través de alguien que los haya agrupado, valga la redundancia. Entonces, en este caso es donde podría – gastándote los cuartos.

MALE VOICE: Muy bien. Adelante, por favor.

MALE VOICE 6: Sí, gracias. Brevemente, para el Sr. Balsi y el Sr. Peláez, aunque si hay algún comentario de, de Marvin también lo agradecería, ¿no? Pero es un tema simplemente en España, ¿no? Recientemente, aquí está de moda el tema de Madoff y el tema del Banco Santander, puesto que hay unas inversiones y unos inversores que se consideran que han sido engañados, ¿no? No obstante, según todos los papeles que firmaron, bueno, en principio asumían un riesgo. Y además, alto. Resultan ser personas, aparentemente, de muy alto patrimonio, ¿no? Y más que la acción jurídica o la acción judicial, por cuestiones comerciales o de imagen, el banco parece que les va a tratar de resolver o minimizar el problema.

Con independencia de que en Estados Unidos hay inversores que no están de acuerdo con la propuesta del Banco Santander. Dicho esto, que es un poco lo que está de moda y me agradaría un poco saber la opinión sobre este tema, yo diría que aquí en España se han producido en entidades muy conocidas, exactamente lo mismo que con Madoff pero con fondos de inversión. Algunos monetarios, por ejemplo. Fondos de inversión, con capitales de dos mil millones de euros, que han perdido un 20%, o sea, 500 millones de euros. Y además, lo han perdido en un mes. La pregunta sería, esto – ¿a los inversores que han invertido en estos fondos, son consumidores y usuarios respecto a la ley española o como no están en Madoff no pueden recurrir?

Esta sería un poco la pregunta. Hablo de un fondo monetario, ¿eh? Vendido como alta seguridad. Además, que invertían en letras del tesoro y que se desmarca con un 20% de pérdida: 500 millones. De dos mil millones se queda reducido a 500 millones. No he dicho el nombre, pero voy a decirlo, porque a lo mejor cambia la aproximación al tema jurídico, ¿eh? Porque no soy jurista. Se llama Banco Santander, Emilio Botín, y el fondo es Santander, Corto Plazo Plus. – -. 500 millones de euros.

MR. BALSI: Bueno, aquí se trata de – hay que ver, analizar el supuesto concreto que es si el inversor ha ido al banco intermediario, que a su vez le ha recomendado este fondo monetario que ha tenido la pérdida del 20% posterior, o si ha invertido directamente por decisión propia, etc. O sea, hay que ver si un supuesto como si ha comprado en un mercado o si ha sido una recomendación del intermediario. Si es una recomendación del intermediario, entra una normativa que ya he dicho antes, totalmente distinta, una normativa donde en el, para simplificar, tendríamos que analizar si la entidad que ha recomendado esta inversión ha cumplido sus deberes como comisionista bursátil, como conocedor frente a su cliente minorista, de todas las circunstancias le ha informado de los riesgos y se ha informado bien.

Ese es el análisis de la directiva MiFID fundamentalmente. Si se trata -para ampliar el supuesto- de la adquisición de unos valores en el mercado, lo que tendríamos que ver si es la caída del 20%, es debido a, o falta de información u omisión o falsedad de la información, o es debida a los avatares del mercado. Si es debida a los avatares del mercado, entramos, evidentemente estamos otra vez fuera del supuesto. Si es debida a omisión de información o a falsedad en la información, entonces, sí que teóricamente se activan los supuestos de responsabilidad que hemos expresado anteriormente.

MALE VOICE: Muy bien. ¿Alguna pregunta más?

MALE VOICE 7: Sí, es una pregunta para el Sr. Marvin Frank. Está relacionada con el tema de las ADRs y concretamente sobre la competencia de la jurisdicción americana. En aquellos casos concretamente de compañías españolas que no cotizan en Estados Unidos, pero que bancos americanos distribuyen ADRs de estas empresas. ¿Puedes comentar la competencia jurisdiccional, ¿cómo funciona concretamente?

MALE VOICE 3: I’m not sure I understand the question. The problem I’m having–you’re talking about Spanish companies that are not traded in the United States for which American companies distribute ADRs. And there is no such thing. At least, I’m not aware of it. I believe American depository receipts that I’m aware of are the shares of non-U.S. companies that are somehow aggregated in the United States.

So sometime, it’s–let’s say it was Banco Santander. And let’s say they may be 20 to 1. So there may be 20 common shares traded in Europe put together in one American depository share that had traded in the U.S. exchange. And that’s the way I understand an American depository share. Or American depository receipt and an American depository share are the same thing.

So it has to be traded in the U.S. Now if American companies are distributing some other type of security that’s traded elsewhere, I’m just not aware of it. I’m aware of the ADRs. When they’re traded in the U.S., then the Securities and Exchange Commission, the SEC, gets involved. And those companies have to file annual reports. They’re not called 10-Ks for American companies. They’re called 20-Fs. And they have to file quarterly reports and immediate reports, the equivalent of an 8-K if something happens. But those shares that I’m interested in are the ones trading on some American exchange.

MALE VOICE: Okay. ¿Alguna otra pregunta?

MALE VOICE 8: Another question. Can you hear me?

MALE VOICE 3: Oh, you speak English, yes.

MALE VOICE 8: Okay. Is this working?

MALE VOICE 3: I don’t think it’s working.

MALE VOICE 8: No.

MALE VOICE 3: But I can hear you.

MALE VOICE 8: I’ll shout.

MALE VOICE 3: Okay.

MALE VOICE 8: Okay. Bueno. Another question for you, of course–I have a procedural question. If I am a holder of securities which may be affected by a class action, when and how do I learn of this class action? And when and how can I opt out if I want? This would be my first question, which is a procedural one.

The second question would be–other than to pursue an action on my own, why should I want to opt out?

MALE VOICE 3: For the first question, I can think off hand of three different times that you would find out. Okay. After the lead plaintiff is determined, the court picks the lead plaintiff. And that’s generally the individual or institution that came forward within the statutory period 60 days from the filing of the first complaint and asked to be lead plaintiff.

After that then, a motion to dismiss is generally, you know, filed by the defendants. If they don’t file a motion to dismiss and just answer the complaint, then you know you’ve got a big problem because the only time that happens is when the company has no money and no insurance. So you’ve got a real problem.

But generally speaking, they’ll move to dismiss, that there’s no legal basis for the complaint. That we–that gives us the opportunity to oppose it. Then they reply. Then the court hears oral argument on it. Generally, courts throughout the country do different things. And you may not even find out what the ruling on that is for six months or more after that.

You’re not allowed to start discovery or do anything else until that’s determined. The thing you generally do thereafter after you’ve won the motion to dismiss–by the way, if you lose it, you’re generally given an opportunity to replead the case, to put in a new complaint, because the judge tells you what’s wrong. And a lot of times, these cases are so complex. The complaint maybe 200, 300, 400 pages long. And he just doesn’t understand it. So you have to reorganize it.

That happened recently in a New Century Finance case, a subprime mortgage lender. And the second time around, we survived the motion to dismiss. And it’s a standard procedure that you’re allowed to have a second bite of the apple, sometimes more. After that, you get into discovery. You’re allowed discovery. And you have to move expeditiously for class certification.

If the class is certified, which is not easy–it’s getting more complex–if you win that, then you have to send that notice that time. Okay. Frequently, however, that’s delayed. And the–well, let’s continue. You send out notice. At that point, anybody could opt out. They don’t have to at that point. But they can. You go through discovery. You go through summary judgment. And the case is tried. Okay?

Another time that the notice is sent out that you would find out about the case is if the class certification motion were not made because it was delayed due to settlement negotiations. And that could take a year. So nobody’s making that motion because you’re trying to send out the settlement notice along with the notice of the case at the same time so that you save all of those processing costs, which could be hundreds of thousands of dollars. So it may be simultaneous. Okay?

Now if the class is certified, you go through discovery, and then you settle the case, well, then you have to send out the notice of the settlement. So you get the double cost. So sometimes you put it altogether in one because if the defendants if they settle earlier settle less expensively because it’s just less work has been put in. And you know, less risk has been taken. You can settle it cheaper.

There’s a third time when you or your client can find out. And that’s if you subscribe to our portfolio monitoring service. Marketing, we’re here for marketing. Here it is. It’s someplace in here, the portfolio monitoring services. Many institutions, most of the big institutions, tell us what their portfolios are. And we monitor them to see what’s going on in a class-action context. In our specific one–so there are a few law firms in this end of the business. It’s a very specialized practice because it’s very risky and very expensive.

I mean, it cost for the Williams case–as I said, we laid out over $8.5 million. If we lost that case, it would’ve been very unpleasant. So not every lawyer gets involved in that.

Ours we do through ISS. I think they call it risk metrics now. They’re Institutional Shareholder Services, which is a very large American-European-based–I think they’re out of Geneva or Brussels–Brussels?

Oh, okay. I’ll finish this up–where they do all the proxy solicitation work for companies. So they’re known for their ability to keep their mouth shut and keep–you know, keep confidential documents and so forth. We use them. They have a service. And you would get an email. Your client and you would get an email telling you that a case has been filed for a security that you’re holding. So, there’s three different ways.

MALE VOICE: Carlos.

MALE VOICE 8: Why should I, though? Why should I want to opt out?

MALE VOICE 3: Oh–

MALE VOICE 8: [Interposing] Other than–

MALE VOICE 3: You could frequently get more. When a case settles for X percent of damages, an opt out will get more. It’s a matter of they want to put everything to bed. And they know they’ve got to pay you more. But you can only opt out if you’ve got a significant claim, I’d say $10 million, $20 million, and up.

MALE VOICE: Thank you. [Catalan].

MALE VOICE: [Catalan]. Very especially to you, Martin, thank you very much indeed for coming to this session with us. You will be very welcome when you want to come again. So we are really satisfied with very instructive and informative everything. And okay. I hope you enjoy your time here in Barcelona. Okay.

MALE VOICE 3: Thank you very much.

MALE VOICE: Gracias por todo.

[Applause]