While securities-fraud lawsuits against U.S. companies have waned in recent years, shareholders' lawsuits against deep-pocketed foreign firms are gaining momentum and may be the next legal flashpoint between businesses and investors.
Litigation involving foreign companies reflects the global explosion of financial markets and multinational corporations — plus a growing cast of U.S. and foreign investors willing to sue multinationals suspected of securities fraud.
Attorneys say there's no data yet on securities lawsuits worldwide against companies. But in U.S. federal courts, 16 securities lawsuits have been filed this year against foreign businesses as of early October — three more than in all of 2006, says Patricia Etzold, a partner at PricewaterhouseCoopers.
Shareholders' lawsuits have been filed against L.G. Philips in South Korea, Xinhua Finance Media, a subsidiary of Xinhua Finance Ltd. of China, GlaxoSmithKline in the United Kingdom, Alvarion in Israel and others, according to PricewaterhouseCoopers.
Shareholders have agreed to several huge settlements with foreign firms, including a $2.2 billion settlement last year with Nortel Networks of Canada, a $1.1 billion settlement in 2005 with Royal Ahold in the Netherlands and a $300 million settlement with DaimlerChrysler of Germany in 2003.
"Cross-border litigation is a reality today," says attorney Mark Wegener at the Howrey law firm in Washington, D.C., "and it will only expand and accelerate over the next five to 10 years and beyond."
Wegener says that it's not unusual for one securities lawsuit to involve shareholders, lawyers, judges and regulatory agencies in three or four different countries. "It's complexity squared," he says.
Why are securities lawsuits involving foreign firms and foreign investors rising now?
It's a growth business
Global civil litigation of all stripes is growing, according to attorneys and legal scholars who specialize in international law.
In addition to securities-fraud lawsuits, more international cases are emerging in antitrust, intellectual property and consumer protection law.
Another factor: U.S.-style regulatory practices are being exported overseas. The Securities and Exchange Commission has agreements with dozens of countries to prosecute fraud, and that's leading to tougher oversight and enforcement of foreign firms.
In the United Kingdom, for instance, 81% of companies surveyed by international law firm Fulbright & Jaworski said they have received SEC inquiries this year, compared with 25% of firms last year.
Moreover, plaintiffs' law firms are actively seeking to bring cases on behalf of foreign institutional investors with holdings in U.S. companies, says Gerry Pecht, a partner at Fulbright & Jaworski.
"It's a small but growing number of U.S. cases that's occurring with greater tenacity now," Pecht says.
Only Canada, Australia, the United Kingdom and a few other countries allow class-action-type or "collective action" lawsuits for shareholders to sue and recover losses as a group. So shareholders in most nations must go it alone, which can lead to a legal morass. In Germany, 754 law firms have filed 2,100 claims against Deutsche Telekom alleging fraud, according to attorneys Wegener and Peter Fitzpatrick of the Howrey law firm.
In a groundbreaking class-action case last spring, the Grant & Eisenhofer law firm of Wilmington, Del., represented 90 pension and investment funds and other foreign shareholders who settled for $450 millionafter accusing Royal Dutch Shell of inflating its oil and gas reserves from 1997 to 2003.
If the Netherlands case had been filed in the USA, it would have ranked as the third-largest U.S. shareholders' case against a foreign firm, based on PricewaterhouseCoopers' study.
More to come
"As foreign companies start taking large roles in the markets, we're going to see them subject to lawsuits as much as U.S. companies," says plaintiffs' attorney Stuart Grant at Grant & Eisenhofer. "They're no more immune to fraud than U.S. corporations."
In Europe, policymakers, shareholders, executives and consumer groups are battling about whether their countries should adopt stronger laws and civil litigation practices for investors.
Without tougher legal avenues, shareholders' attorneys argue that investors have little or no recourse to recoup their losses — especially in the wake of financial scandals involving Parmalat in Italy, HIH Insurance in Australia and other troubled companies.
Business leaders such as the U.S. Chamber of Commerce warn that aggressive, U.S.-style litigation and class actions will flood other countries, hurt multinational companies and scare foreign businesses from investing in the USA.
Lisa Rickard, president of the chamber's Institute for Legal Reform, says other countries "need to be very careful not to create the same type of abusive litigation environment that we've seen here in the United States."
In Canada, for one, lawmakers debated for years before strengthening the country's securities act in 2005 to give shareholders greater legal license to sue executives, auditors, attorneys and others for securities fraud.
Paul Steep, an attorney at the Canadian law firm of McCarthy Tétrault, says there are caps on dollar liability for businesses that have been sued. But companies in Canada still fear a rise in frivolous shareholders' lawsuits as Canadian attorneys start to team more with U.S. law firms, he says.
The cross-border cases in all countries also raise vexing new legal issues, such as clashing jurisdictions and regulations, according to securities-fraud attorneys and legal scholars.
In U.S. federal courts, shareholders clearly can sue foreign companies with shares listed on U.S. stock exchanges. Judges also can add foreign shareholders to securities-fraud lawsuits.
Differing views abroad
But many foreign courts do not recognize U.S. court rulings, nor are there international treaties that require other countries to enforce U.S. court judgments, says attorney Ilana Buschkin at the Williams & Connolly law firm.
In one case earlier this year, the U.S. judge in a shareholders' lawsuit against Vivendi Universal granted class-action status to English, French and Dutch investors because their countries recognize U.S. rulings.
But the judge refused to add German shareholders, because German courts typically do not honor U.S. court decisions.
John Coffee, a Columbia University law professor, cautions that when U.S. courts certify foreign investors as class-action plaintiffs, it exposes foreign firms to a worldwide class of investors and potentially devastating judgments here.
"Do we want our courts to be the securities policemen of the world?" Coffee says.
As securities-fraud lawsuits go global, attorneys and judges will have plenty of time to hash out the legal issues.
"The challenge for everyone will be to keep up with it and respond to it," Wegener says. "I think we're just at the beginning."