Many institutional investors are watching litigation in the United Kingdom to assess whether UK courts will be a favorable venue to pursue securities actions.

Three "test cases" pending in the United Kingdom highlight the promises and risks of pursuing shareholder litigation outside the United States. As reported in prior editions of The Advocate, the Supreme Court's 2010 Morrison decision has almost completely curtailed investors' ability to bring securities fraud suits in the United States to recover losses incurred on foreign exchanges. Because of the London Stock Exchange's prominent role in the world's capital markets, many institutional investors are keeping an eye on litigation in England to assess whether its courts will be a favorable venue to pursue securities recoveries. Three pending and contemplated cases in the London High Court illustrate both the prospect for meaningful shareholder recoveries and the risks of litigating such cases outside the United States -- and, in particular, "loser pays" jurisdictions such as the United Kingdom.

Royal Bank of Scotland

The long-running securities "class action" case against the Royal Bank of Scotland highlights the complexities of financing and prosecuting securities litigation in England. Pending since 2009, the RBS case includes claims by over 15,000 investors against RBS, seeking more than 5 billion (over $7 billion) in damages related to a stock offering RBS made in 2008 during the height of the financial crisis, shortly before the company received a massive government bailout. The number of investors participating in this case is large compared to other "opt-in" collective actions outside the United States. Unlike US-style "opt-out" class actions, in which investors' claims are automatically included in the case unless they elect to exclude themselves, collective actions in most foreign countries are structured as "opt-in" cases requiring investors to affirmatively join the litigation at the outset of the case. In doing so, investors often become subject to "loser pay" rules, which inject significant downside financial risk not present in US securities litigation.

Unlike US-style class actions, in which investors' claims are automatically included in the case, collective actions in the UK and most other foreign countries are structured as "opt-in" actions, in which investors must affirmatively elect to join the litigation at the outset of the case. However, in doing so, investors become subject to England's "loser pay" rules, which import significant downside financial risk not present in US securities litigation.

Under the so-called "English Rule," prevailing parties are entitled to reasonable costs and fees they incur as part of litigation, including attorney's fees. Plaintiffs, like defendants, thus obtain private insurance in order to cover their liability exposure for adverse party costs and fees. In September 2015, the RBS defendants doubled their initial projection of attorney's fees, raising their forecast to 90 million (approximately $130 million). Moreover, the ultimate figure could be much higher. Reports have surfaced that the defendants have a team of over 150 attorneys and "fee-earners" working on the matter, and the trial date for the case has now been extended to March 2017. The RBS defendants' doubling of their anticipated attorney's fees greatly expanded the risks of the litigation for investors. It also likely increased the costs of the litigation and decreased any potential net recovery, due to the cost of securing additional insurance coverage for the increased exposure.

The RBS case also highlights the precarious role that outside litigation financing firms play in foreign securities litigation. In the US, plaintiffs' attorneys typically agree to prosecute investors' claims on a full-contingency basis, and also advance all costs and expenses of the litigation. In the UK, however, investors typically enter private agreements with litigation funding companies, which finance the costs of the litigation (including attorney's fees) in exchange for a share of any eventual recovery. Despite the importance of litigation funders, there are only a handful of established litigation funders in the UK, and their principal trade organization, the Association of Litigation Funders ("ALF"), has limited ability to scrutinize its members' assets and ensure their financial viability.

Last year, Argentum Capital resigned from the ALF and was delisted in connection with reports that one of Argentum's feeder funds operated a Ponzi scheme. Argentum was associated with one of the principal law firms prosecuting the RBS action. While it is not clear whether plaintiffs' prosecution has been adversely affected by Argentum's resignation from the ALF, the disappearance of a prominent litigation funder from the UK's legal landscape, amid serious questions regarding its asset base and disclosures to claimants, further emphasizes how important it is that institutional investors or their counsel undertake due diligence regarding litigation funders, funding agreements, and other transactional agreements governing the funding and prosecution of the case.

Finally, the RBS case highlights the importance of plaintiffs' choice of counsel in foreign actions. The RBS plaintiffs have weathered several tumultuous changes of leadership. In late 2014, the plaintiffs' RBS Shareholders Action Group parted ways with its solicitors at Bird & Bird, citing high costs. Bird & Bird claimed over 1.5 million in fees and costs, but the plaintiffs prevailed upon court authorities to reduce the bill by to 1.2 million. According to reports, the plaintiff group then retained the Fladgate law firm to prosecute the action, but within months that firm faced a cash crunch that forced the plaintiffs to shift to a third law firm, Signature Litigation. More recently, another controversy regarding plaintiffs' counsel unfolded. The Mishcon law firm and its clients left the larger shareholder group to pursue their claims individually, prompting lead counsel at Quinn Emanuel Urquhart & Sullivan, Stewarts Law and Signature Litigation to seek, in June 2016, millions of pounds in costs they incurred prosecuting the litigation for Mishcon's clients. The dispute is substantial, as the Mishcon clients' alleged damages are approximately 10 percent of the total alleged damages. These series of events highlight the need for investors contemplating participation in foreign cases to undertake due diligence regarding the proposed local attorneys prosecuting the claims, and to understand the complexities of multi-counsel prosecution arrangements.

As the RBS case proceeds to trial in March 2017, the presiding judge, Sir Robert Henry Thoroton Hildyard, has expressed frustration with the pace of the case. As of June 29, 2016, there had been ten case management conferences, and another is scheduled for September 2016. With document discovery finally complete, the trial date has been postponed until March 2017, at RBS's request, with Justice Hildyard voicing dissatisfaction with defendants' inability to conduct the litigation in a timely fashion.

Actions Against Lloyds and Tesco

In addition to the RBS case, two other UK securities litigations continue to attract attention. Like the case against RBS, the pending shareholder action against Lloyds Banking Group is a financial-era case focusing on misleading or insufficient financial disclosures in the context of a bank bailout. Approximately 6,000 plaintiffs, including 300 institutional investors, have reportedly joined the case since its inception in 2014. Among other things, the case has unearthed a note by a senior director of Lloyds, written during a 2008 board meeting debating whether to proceed with the Halifax Bank of Scotland acquisition, that there was "no value left in HBOS" ahead of the ill-fated takeover. Institutional investors will continue to monitor the Lloyds case, which involves novel breach of fiduciary duty claims and could proceed to trial as early as 2017. If the Lloyds case does proceed to trial as projected in 2017, its pace would be faster than the long-running RBS action -- which is also scheduled for trial in 2017 but has been pending for approximately five years longer. A case management conference in the Lloyds matter was currently scheduled for July 22, 2016.

Finally, several law firms have announced plans to file major collective shareholder actions in London against Tesco PLC, one of the world's top retailers, with annual sales behind only Walmart and France's Carrefour SA. The case involves an alleged accounting fraud in which Tesco reportedly booked income prematurely and delayed the booking of costs in an effort to mask declining sales and portray the company as more profitable than it was. In late 2014, the market learned the truth about Tesco's improper accounting practices and its foreseeable consequences, including government investigations of the Company, suspensions of its top executives, and the firing of its outside auditor. At the same time, Tesco's share price fell by a third, erasing over 2 billion in shareholder value. As of the time of writing, no action has yet been filed (despite a glut of repeated solicitations). Nearly two years have elapsed since the first corrective disclosures in the Tesco case, illustrating how foreign jurisdictions' opt-in class mechanisms can lead to significant delays in case filings as litigation aggregators, funders, and law firms work to organize the structures and framework for case prosecution, and solicit investors to be included as claimants. It is, however, widely expected that the Tesco case will commence soon with a large number of participants given the perceived strength of investors' claims.

The RBS case highlights the precarious role that outside litigation financing firms play in foreign securities litigation. In the US, plaintiffs' attorneys typically agree to prosecute investors' claims on a fullcontingency basis, and advance all costs and expenses of the litigation. In the UK, however, investors typically enter private agreements with litigation funding companies, which finance the costs of the litigation in exchange for a share of any eventual recovery.

In sum, the landscape for shareholder "class actions" in the UK continues to develop as three test cases work their way through London courts. Given the unique circumstances of litigation in the UK, including potential downside financial risk and the high costs and expenses, investors should remain cautiously optimistic about the prospect for meaningful recoveries in UK litigation while remaining selective in joining any particular action or claimant group. Given the size and prominence of London's financial markets, these three test cases have the potential to develop strong precedents for investors seeking to recover securities fraud losses incurred on the London Stock Exchange.