Third-party funding for litigation could improve investors’ ability to seek recourse

ALLOWING third-party litigation funding for securities-related disputes would better equip investors to pursue claims against errant players and receive financial compensation, said lawyers and industry observers.

Recent changes to the litigation framework, including allowing lawyers to make "no win, no fee" arrangements with clients, are expected to improve Singapore's competitiveness for certain legal proceedings.

For shareholders who have lost money in the stock market, however, the options are still limited.

In Singapore, there have been class action suits against recreational and country clubs.

But Robson Lee, partner at Gibson, Dunn & Crutcher, noted there has been no precedent of retail investors coming together to institute class action against corporate managers for losses suffered in the securities market.

This could be because losses of retail securities investors are disparate and divergent, he said, unlike club members whose losses are similar.

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The divergence makes it difficult for the high costs of a class action litigation to be equitably apportioned amongst retail investors.

Lee therefore believes third party funding should be extended to securities-related claims.

Currently, there are hurdles for investors to overcome when looking to pursue claims against errant individuals.

Investors could, for instance, initiate a suit under section 234 of the Securities and Futures Act, which imposes civil liability on a contravening person.

But Lee noted that the underlying basis for instituting a lawsuit under section 234 is that the contravening person must have gained a profit or avoided a loss as a result of the contravention.

“This underlying basis may not be satisfied in a situation where the corporate debacle resulted purely from mismanagement or negligence,” he said, noting that there is also a maximum recoverable amount.

Meanwhile, the cost of litigating is often disproportionate to the loss.

“Section 234 of the SFA is useful theoretically, but it must be a pretty big loss directly attributable to the market misconduct," said Thio Shen Yi, joint managing partner at TSMP Law Corporation.

"It is also difficult to prove the exact quantum of the loss, and such computation may require expert advice and evidence, another expensive disincentive for an individual investor to litigate."

Thio noted that shareholders and investors could also use section 216A of the Companies Act to sue in the name of the company.

“But this can be expensive, as shareholders will have to jump through procedural hoops and probably pay the expenses of litigation upfront”.

Individual shareholder losses may also not be sufficient to justify the necessary legal expenses.

Extending third-party funding to securities disputes would at least address the cost part of the equation for investors.

“Otherwise, you’ve got shareholders losing money with no ability to reclaim,” said Christopher Bogart, chief executive at Burford Capital.

His company provides financing for litigation, and is active in other major markets such as the United States and Europe.

In the United States, investors overcome funding difficulties by using contingency fee lawyers – who charge fees based on a percentage of the amount recovered on behalf of clients – but such arrangements aren’t currently allowed in Singapore.

Class actions on an opt-out basis, similar to the US, could help individual investors in pursuing claims, but Bogart said this would be a “fundamental change” in the legal system, and he doesn’t see Singapore moving towards such opt-out class actions any time soon.

In Europe – where contingency fees are also generally not allowed – investors would need to opt in to join a group to be a part of a claim, and Burford Capital has helped such investors fund claims.

Institutional investors, such as fund managers, are their main clients using such funding services.

Burford Capital – which is listed in New York and London – spends more than US$10 million a case on average.

The company has been involved in arbitration funding in Singapore, and is keen to do more here. Bogart said: “We appreciate that the government has taken a very methodical approach to doing this, and now we would like to see that speed up a little.”

TSMP’s Thio said allowing class actions where the individual plaintiff can sue and claim damages on behalf of the entire class is a possible solution, but added that class actions require law firms to fund litigation and that they may be reluctant.

“To truly level the playing field, you need third party litigation funding along with a liberal class action regime,” he said.

“But this is ultimately a philosophical question as to whether we want to control bad market actors through the threat of litigation, impose extensive paternalistic state regulation, or adopt a caveat emptor attitude.”

Stephen Chen, who is a private investor, believes having funding options for lawsuits would empower investors, but questioned whether litigation would be the most practical solution.

“The ability to have hope, I think that is helpful,” he said. “But the bigger impact is still if the regulator is seen to have teeth; is seen to have the enforcement ability; and is seen to do the right action.”

In its enforcement report published on Apr 27, MAS said it is studying options for enhancing investors’ recourse for losses due to securities market misconduct.

Peggy Pao, executive director (enforcement), noted in the report that this is a “complex issue requiring the careful weighing up of various policy and practical considerations”.

MAS will look at the experience of other jurisdictions, and plans to consult relevant stakeholders. It aims to release further details to the public this year.