Third-party funder Argentum has agreed to bankroll a multimillion-pound claim against The Royal Bank of Scotland (RBS) in London’s High Court.
The floodgates have opened for cases against RBS following its £20bn government bailout in 2008, as investors seek to recoup their losses following its nationalisation.
The group of 21 claimants includes a number of UK and international financial institutions and pension funds suing the bank over a rights issue in April 2008, in which RBS sold its shares at £2 per share. The claimants allege that the prospectus on which the rights issue was based was ‘defective’ and contained material misstatements and omissions.
Stewarts Law issued the claim at London’s High Court in late March, led by partner Clive Zietman and instructing 3 Verulam Buildings’ Andrew Onslow QC. Argentum has chosen to fund this particular action.
Bird & Bird is leading a second claim against RBS, which is not third-party funded, led by partner Steven Baker and instructing Serle Court barrister Philip Marshall QC. That action represents over 12,000 private shareholders (of which many are pension funds). The RBoS Shareholders Action Group (RBoS) issued proceedings in April against the bank’s former chief executive Fred Goodwin and three other directors, filing a claim that it says could be worth up to £4bn.
Herbert Smith Freehills is defending RBS in both cases.
‘If this succeeds, it may open the door for future financial services litigation.’
Matthew Reach, Argentum
The claimants in the second case allege in a RBoS statement that the directors ‘sought to mislead shareholders by misrepresenting the underlying strength of the bank and omitting critical information from the 2008 rights issue prospectus’, following the takeover of Dutch bank ABN AMRO in 2007.
Investors wish to recoup their losses for the ‘inexcusable actions taken by banks and their directors in the financial crisis,’ continued the statement.
The claimants in both cases have attained the services of two high-profile firms unfettered by any conflicts. Such a dispute is familiar territory for Zietman, Stewarts’ head of commercial litigation, who previously represented 83 former bankers in a dispute with investment bank Dresdner Kleinwort in 2012 – a four-year fight and one of the largest banking disputes following the 2008 financial crisis.
However, given its ambitions to be a major international player, the appearance of Bird & Bird on the claimant side is more unusual, but Baker took the RBS case with him to his new firm when he left Olswang last year.
It is no surprise that RBS turned to Herbert Smith Freehills, which recently advised UBS on criminal and regulatory issues arising from the unauthorised trading of Kweku Adoboli that resulted in the loss of $2.3bn.
That Argentum is funding the first claim is particularly unusual given it will be on a previously untested area of law – the prospectus provision within the Financial Services and Markets Act 2000. Section 90 of the statute stipulates that prospectuses must be accurate, providing an avenue for claimants to sue for losses incurred on the basis of any defects.
The cases will be watched very closely by other investors, especially when Lord Jackson’s newly implemented cost proportionality test is applied, according to Enyo Law partner Annabel Thomas. It could also lead to an influx of new litigious claims and a shift towards US-style class actions.
‘We don’t yet have the mechanism for true class actions in the UK, although it does seem that we are slowly moving more towards a US approach to civil litigation, with developments such as damages-based agreements and one-way costs shifting,’ said a City disputes partner.
Litigation funders clearly see the merits of tapping into claims against banks. Argentum is the lead investor in the case, along with a consortium of other third-party investors.
‘It’s safe to say Stewarts Law presented us with a good opportunity. It had already done a lot of work on it,’ said Matthew Reach, solicitor and head of Argentum’s legal review department. ‘It is, in a sense, a slightly novel piece of litigation in that section 90 doesn’t have a body of case law referring to it. However, the claimants’ legal team expressed strong views on the prospects and we saw a lot of compelling financial data and the Financial Services Authority report published in 2011. We felt very good about it.’
He adds: ‘From a third-party funding perspective, the UK isn’t known as a place for financial services litigation, like New York, where cases are brought more frequently. If this succeeds, it may open the door for future financial services litigation, particularly given the effects of the 2008 financial crisis. If the response from the court is favourable, people will realise they have more in their arsenal to obtain redress from errant financial institutions.’
Many believe that Argentum has taken a significant gamble in funding this case, although third-party funders do not have a reputation for funding disputes they are likely to lose.
‘The attraction broadly is that banks, on the whole, tend to have the ability to pay the amounts claimed from them,’ said Susan Dunn, co-founder of Harbour Litigation Funding. ‘However, they do fight cases fiercely – even when they are not in the right – in the hope of outspending claimants. That is where funding can be especially helpful – most claimants simply can’t afford to fight claims costing several million pounds each time.’
The claimants in the Argentum-backed claim have also secured after-the-event insurance through broker TheJudge, which announced last month that it ‘successfully secured over £12m of litigation insurance’ on behalf of the shareholders represented by Stewarts Law in order ‘to protect the clients from an adverse costs order’.