Bulletins | June 20, 2017

RBS shareholder deal shows that the UK is warming to group litigation

Royal Bank of Scotland has paid out £200 million to a 9,000-strong legal action group, and disputes with other banks loom.

  • Banks and bankers – still not popular
  • All eyes shift to Lloyds case
  • Third-party funders stoking the market

Nearly a decade may have passed since the dark days of the 2007-08 global financial crisis, but bankers are not off the hook yet.

Earlier this month, Royal Bank of Scotland, still partially owned by the state, paid out £200 million to be shared among 9,000 investors who were part of a legal action group. The group’s members maintained that the bank had misled them about its financial health prior to a £12 billion rights issue in spring 2008. Much of their investment was wiped out when RBS was embroiled in the financial crisis and bailed out by the UK government at a cost of £45.5 billion.

This case, and others in progress, demonstrates a growing willingness to take the group litigation route to hold institutions to account, according to David Golten, a partner and head of commercial litigation at the London law firm Wedlake Bell. 

“Litigation tends to develop as part of society,” Golten says. “Go back to the 1950s, even the 1970s, and people wouldn’t have dreamt of questioning the advice of their lawyers or doctors. Now, as a society, we’ve become much more aware of our rights and that feeds into the legal system. If someone doesn’t like the way they’ve been treated, they will much more readily seek the courts’ assistance in enforcing what they regard as their rights.”

Banks in the crosshairs

Partly as an ongoing consequence of the 2008 crash, banks are particularly in the line of fire, Golten adds. “Fairly or unfairly, banks are not the most popular institutions and, to an extent, they have been the authors of their own misfortune because some individual bankers have behaved in unlawful ways. The RBS case, for example, was about misreporting financial performance, but there are other examples, such as Libor and FX rigging.”

To prove the point, attention is now turning to a group action claim involving Lloyds, which was reprivatised in May nine years after having to go cap in hand to the government. About 6,000 investors in the bank, previously called Lloyds TSB, claim that it withheld important information about the ailing HBOS banking and insurance company before it struck a £12 billion deal to buy it in 2008.

Damon Parker, head of litigation at the London law firm Harcus Sinclair, which is acting for the investors, says: “The fact that the RBS case has settled has meant that all eyes are on the Lloyds case. A lot of our clients want the case to go to trial because they want to see the director defendants cross-examined so that we can be clear on who knew what and when they knew it. They want to expose the injustice of Lloyds TSB shareholders being made to bail out HBOS.”

The Lloyds group is made up of 5,700 private shareholders and more than 300 institutional investors.

The RBS case may prove to have been a game-changer for instructional giants, says Boris Bronfentrinker, a partner at the London office of Quinn Emanuel Urquhart & Sullivan, the US litigation specialist firm that represented the claimants.

“The RBS litigation was the first time the really large institutional investors have decided to litigate these issues,” Bronfentrinker says. “The group of clients we acted for – all blue chip institutions – were quite reluctant to get involved, but given all their regulatory responsibilities to act in the interests of their investors they felt they had a duty to do something because litigation was happening.

“It was a watershed moment. We’re now seeing a lot more interest [in shareholder group actions] at the top end of the institutional market. We have a lot of interest right now from that sector, in relation for example to the manipulation of the FX market.”

Funding options

The variety of funding options available is another factor that is fuelling interest in shareholder group actions. Golten of Wedlake Bell says: “Litigation remains expensive but now, with the right case, people can find lawyers who will act on a conditional fee agreement basis, third-party funding and insurance to cover the costs in the event that they’re unsuccessful.”

Third-party funders are actively looking for cases, Golten says, adding: “That’s not because they’re benevolent, charitable people who are seeking good causes to back. It’s because this is an area where they can make really good returns.”

However, Neil Purslow, founder of the third-party funder Therium Capital Management, suggests that funders are not purely focused on profit. “Some cases wouldn’t make it to court if it wasn’t for funding,” he says.

“The Lloyds case is a good example. Group actions are expensive and lengthy. This particular case involves 6,000 claimants with different levels of shareholdings and many wouldn’t be able to pay legal costs or take the risk as many are pensioners who held Lloyds as a retirement stock.”

A shift in culture

Does an increasing appetite for group action suggest that the UK is heading towards a US-style legislation and compensation culture? Bronfentrinker of Quinn Emanuel suspects not. “Are we moving closer towards the US? Yes, given where we were in Britain. Are we like the US? No,” he says, adding that the UK is “still a long way from US-style class action litigation. We’re a US firm and we quite often do cases on both sides of the Atlantic, but I’m not a big believer that the UK will ever have a US-style class action mentality.”

This is partly due to fundamental differences in legal culture. “Jury trials are a huge driver of US class action litigation,” Bronfentrinker says. “You’ve got to persuade a group of 12 individuals about subjects about which they probably don’t have a great deal of understanding. It becomes a question of who’s got a better story.

“No matter how much we introduce mechanisms such as group actions, at the end of the day you still have to persuade an English judge that you’ve got a claim and that you’ve suffered loss.”

Therium’s Purslow agrees. “It’s unlikely that the UK will become more litigious,” he says. “The costs are still far higher in the UK than the US because here you pay the other side’s costs if you lose, which means that funders will not get involved in frivolous claims. Where there are meritorious claims, however, then funding provides improved access to justice.”

Getting a share of the action

Royal Bank of Scotland Litigation focused on a £12 billion rights issue in 2008. Claimants argued that the bank’s directors issued misleading statements in the period leading up to the offering, causing RBS shares to trade at inflated prices. This, they alleged, was in violation of section 90 of the Financial Services and Market Act 2000. There were five groups of claimants, three comprising institutional investors and two retail investors.

Tesco The company is alleged to have overstated the profits that it reported for the first half of 2014. Claimants are seeking compensation based on falls in the business’s share price that were allegedly the result of announcements related to improper accounting practices. A group of 124 institutional funds has brought a claim for more than £100m. Stewarts Law is representing this group and the action is being funded by Bentham Europe.

Lloyds Banking Group The action relates to Lloyds’ acquisition of HBOS in January 2009. Claimants allege that shareholders were not given sufficient information about the latter company. The 6,000 claimants are seeking losses suffered through the dilution of their shareholdings as a result of the issuing of shares to HBOS investors and the Treasury. The law firm Harcus Sinclair is acting for the claimants.

This article was first published by The Times’ Brief on 20 June 2017.