Portfolio monitoring and the European institutional investor

According to recent studies, European institutional in­vestors are leaving billions of dollars on the table when it comes to filing claims in securities class action settle­ments. The dollar amounts are staggering. US-based investor class actions have recovered over $43.6bn since 1996.1 In 2004 alone, European investors were entitled to roughly 40% of these funds – yet often failed to submit their claims.2 These figures in­dicate that European investors have failed to claim close to $20bn from securities settlements since 1996.3

            Securities law violations have an immediate effect on the bot­tom line for defrauded investors. The decrease experienced by in­dividual companies’ stock prices as the market adjusts to reflect newly disclosed adverse information is often drastic and – due to the nature of securities fraud – unexpected. Private investor class actions have long been important in policing corporate conduct. Investors’ rights to compensation for losses arising from alleged securities law violations are combined into a single lawsuit in a US court on their collective behalf. When money is recovered by such class actions, all investor class members are entitled to their pro rata share, based on their investment activity and losses. Un­fortunately, an overwhelming proportion of European institu­tions entitled to share in such recoveries never do.


Why do settlement funds go unclaimed?


            There may be numerous reasons for European investors’ fail­ure to claim their rightful shares. Even when they know of the opportunity for large recoveries, European investors may lack timely and cost-effective mechanisms to monitor US-based se­curities class actions that affect their portfolios and to participate in a class process in the US.

            If the past 10 years are an indicator, a little over 224 inves­tor class actions on average are initiated each year in the US.4 Roughly 827 such actions since 1996 have resulted in investor recoveries.5 Keeping track of these actions can be a complicated and daunting task, particularly for European investors. Such an undertaking requires timely and accurate information about the relative merits and procedural posture of the actions. It also re­quires the time and resources to review and digest relevant settle­ment provisions. Investors must then cross-reference such terms against extensive individual trading activity data and then com­pile and submit the often complex paperwork necessary to make a valid claim. Many – if not most – institutional investors be­lieve that the cost of undertaking these tasks is likely to outweigh the benefits from potential recoveries. There are, however, ways of reducing the administrative costs of processing these claims while recovering the monies to which investors are entitled.

What is portfolio monitoring?


            The need for efficient and economically prudent means of par­ticipating in investor class action litigation and recoveries has fuelled the development of outsourced services known as ‘port­folio monitoring’. Portfolio monitoring principally includes one or more of the following processes:

            ■    identifying and informing investors of portfolio losses suf­fered due to corporate fraud or malfeasance;

            ■    providing accurate and thorough legal advice concerning US law, investor rights and legal options;

            ■    tracking and monitoring US-based securities class actions; and,

            ■    effecting strategies and procedures on investors’ behalf to submit valid claims and obtain recovered funds.

            The first step to recognising and minimising losses caused by securities fraud is identifying circumstances where losses arise from corporate malfeasance. This requires access to current and complete historical trading activity data for each client, typical­ly provided in electronic form by an investor’s custodian bank. On this basis, investors can acquire the information they need to assess their options for reducing their losses – whether that be through taking a leadership role by actively participating in securities litigation or through passive attention to existing litiga­tion, followed by timely submission of appropriate claim forms to their fair share of funds recovered.


            The next important aspect of proper portfolio monitoring is ensuring that investors receive accurate and thorough legal ad­vice. All victims of securities fraud under the US securities laws may pursue a remedy in the US courts – either on their own behalf or on behalf of themselves and all other similarly injured investors. Whether to pursue individual or collective action is a question that requires careful and informed consideration. In determining the best role to play, investors may consider the rel­ative strengths and weaknesses of litigation, the scope of their losses and the condition of the accused company.


            The third and fourth aspects of careful portfolio monitor­ing – accurately tracking and monitoring US securities litigation and effecting appropriate claims-filing strategies – are closely re­lated. Investors may monitor the litigation to ensure the lawsuits are being prosecuted vigorously or may track existing US class actions to ensure they are aware of recoveries once they are ob­tained, so that they are ready to make a claim.


Who provides portfolio monitoring services?


            Given the huge dollar amounts at stake, it is no surprise that institutional investors in Europe have started to inquire about portfolio management services. But who provides these services? Increasingly, European institutional investors are following the lead of their US counterparts and looking to those law firms that specialise in securities litigation, such as Scott + Scott, LLP, to monitor their investment portfolios for securities claims. These law firms are in the best position to provide comprehensive man­agement services because they focus their practice on securities litigation – which is a highly specialised and complex area of the law. For instance, Scott + Scott, LLP, utilises a proprietary com­puter-based portfolio tracking system, as well as the firm’s ex­tensive professional knowledge, to monitor a client’s portfolio for possible securities fraud claims.Once a potential securities fraud claim has been identified, Scott + Scott, LLP, then works with its investor clients to provide thorough legal advice regarding each investor client’s legal rights and to recommend a best course of action. The firm also provides claims-filing services when class action recoveries have been obtained. Importantly, these portfo­lio management services are provided free of charge to investor clients.

            Another alternative is to retain a bank or prime broker to monitor a portfolio for securities claims. In fact, many institu­tional investors assume that their custodian banks or prime bro­kers actively review securities settlements for their institutional clients, and will submit completed settlement claim forms on their behalf. But, since so much of the class action recovery due to European institutional investors goes unclaimed, the banks and prime brokers are clearly not making these claims effectively.


            Moreover, banks, brokers and third-party monitors often charge their customers for portfolio monitoring, either as a per­centage of what is recovered through the claims-filing process, on a claims-made or flat-fee basis, or by embedding costs in overall service fees, though there is no known consensus in this respect. Generally, however, banks, brokers and third-party monitors are not permitted to and do not provide legal advice or guidance as to how and to what extent investors should participate in litiga­tion, either collectively or individually. And US securities class actions are a highly specialised and complex area of the law. Ac­cordingly, choosing a law firm that specialises in securities class actions is the best option. When making this choice, close con­sideration of a law firm’s experience and reputation in this area is necessary.


Why engage in portfolio monitoring?


            Portfolio monitoring is based on common sense. When the ad­ministrative cost of obtaining class action recoveries is less than the increased investment recoveries, there is a significant – if not imperative – economic justification to engage in active portfolio monitoring.6 René Maatman, head of Dutch pension fund ABP Investments’ legal department and University of Nijmegen law professor, recently stated another common-sense consideration: “The compensation ABP is entitled to [arising from US securi­ties class actions] is there for the taking. If we do not take it, our share will be distributed among the other plaintiffs who do take the trouble to get it.”7

            Further, institutional investors and professionals who manage institutional funds for others must consider their fiduciary duties to their investors. It is critical that trustees understand their ob­ligations when their fund is victimised by securities fraud. Trus­tees are fundamentally obligated to maintain unswerving loyalty to their fund and to make decisions in beneficiaries’ best inter­ests. Trustees are also obligated to act prudently and exercise due care, skill and caution in pursuing overall fund investment strat­egies. This necessarily entails active portfolio monitoring for ex­posure to securities fraud, careful consideration of whether to pursue litigation actively or passively and adopting cost-effective means of participating in recoveries obtained.




            Active portfolio monitoring in the securities class action context is an emerging topic. Yet the need for accurate information and thorough guidance cannot be disputed. European investors in­vest vast sums in the US markets; they should be equally active in ensuring that losses experienced are minimised through careful and comprehensive portfolio monitoring.



1     See Tucker, Sundeep, “Investors miss out on US pay-outs,” Financial Times, 19 May 2005, indicating that “Europe-based shareholders in US companies [in 2004] failed to collect $2.4bn awarded to them as a result of securities class action lawsuits ….”

2     Simmons, Laura E and Ellen M Ryan, Securities Class Action Settlements: 2006 Review and Analysis (Cornerstone Research 2007) at 1. It should be noted that this number does not include securities class action recoveries in calendar year 2007 to date, and has been adjusted to reflect 2006 dollar equivalents.

3     The US Treasury Department estimates that non-US investments in American exchange-traded stocks equal roughly $2.43trn – with no less than $1.174trn coming from Europe. It is no surprise, therefore, that investor class actions under the US securities laws are increasingly getting European institutional investors’ attention.

4     Preliminary Report on Foreign Holdings of US Securities at End-June 2006, US Treasury Department Office of Public Affairs (30 March 2007).

5     See Chart of Federal Securities Fraud Class Action Litigation, Stanford Law School: Securities Class Action Clearinghouse, (last accessed 30 April 2007). 

6     See Cox, James D and Randall S Thomas, “Letting Billions Slip Through Your Fin­gers: Empirical Evidence and Legal Implications of the Failure of Financial Institu­tions to Participate in Securities Class Action Settlements,” 58 Stanford Law Review 411 (November 2005), arguing, in part, “[T]rustees should be required to take actions to maximise the value of the assets under their management, such as filing cost-jus­tified claims in securities fraud class action settlements, even if these actions do not create ‘big money.’” Id at 414–415.

7     “How ABP handles class actions,” IPE Netherlands (February 2007), page 13.