Bloodied Investors Fight Back

A growing number of bruised investors are turning to the courts in an effort to get their money back.  But will they be able to land a knockout punch?

Barry J Whyte and Philip Connolly report. (Sunday Business Post) 

Warren Buffett, perhaps the world’s most famous investor, famously said of investment that “only when the tide goes out do you discover who’s been swimming naked”. It has taken along time for the tide to go out, according to Victor Clarke of Clarke Jeffers & Co, a Carlow-based law firm with extensive experience in group litigation, but now a large number of cases are coming because the statute of limitations – which is very generally six years – is looming for many of the in investments sold at the end of the boom years. However, that six-year statute of limitations is by no means a hard of fast rule. “You could fill up many pages of the Sunday Business Post listing the exceptions to that rule,” Clarke said.  “It is very much a case-by-case basis, and very specific to the facts,” he said.

Nevertheless, potential litigants will likely be emboldened by the increasing number of cases being taken by groups of investors. While the leveraged and risky investment funds of the pre-crisis days are not likely to come back, these class action-style cases are likely to continue.

Risks of throwing good money after bad

If you believe you have been mis-sold an investment, preparation is crucial. After nearly six years of recession, many investors burned during the boom years are beginning to see light at the end of the tunnel. They’re also beginning to see that time is running out on any potential litigation over the funds they may feel they were mis-sold. The six-year statute of limitations, however, is not the only consideration for any investors who may want to take a case against their former investment managers.

For starters, the six years is a permeable barrier. “There are exceptions to the general hard and fast rule of the statute,” said Victor Clarke of Carlow law firm Clarke Jeffers.  “Certain factors [can] have the effect of allowing the statute to be extended.  If a defendant hides something material [related to the investment], for example, then it would be inequitable to allow them benefit from that.”

Exceedingly complex.  Victor Clarke pointed out that those exceptions were exceedingly complex and investors needed to examine them very carefully before taking any proceedings. “You’re not going to have an automatic cause of action in every case just because you lost money,” he said. In legal terms a cause of action must exist.  For example there could be an element of mis-selling, or misrepresentation, fraud, or negligence, to name but a few of the possible grounds on which a burned investor could sue.  The cost of even taking a case should also be considered carefully.  “Setting out on a course of litigation is akin to making another investment so all relevant due diligence should be carried out to ensure that one is not just throwing good money after bad,” Clarke said. Even if the case is successful, there’s no guarantee that investors will be made whole again.  Most investment funds are complex schemes involving multiple companies, many of which can be off shore.  “For example, the property investment may be in Britain, but the investment company in which the individual actually invests may be Cyprus based,” Clarke said.  They unravel the scheme and follow the money will be complicated, involving property experts, overseas values, forensic accountants and a host of other costly bills and at the end of it, the money recouped may not be huge. “A lot of collapsed funds are merely shell companies, with only bankrupt promoters left behind,” Clarke said.

To even get a legal opinion on a case will cost the burned investor some money.

“Any prospectus litigant or group would need a barrister’s opinion on the cause of action and the statute of limitations, if applicable,” Clarke said.  “Further to this it would be likely that an independent financial expert’s report, actuarial report and forensic accountant’s report and analysis may be needed.  Certainly if the investment was a property-based investment then a valuation from a valuer would required.”  All of this costs a lot of money and funding legal cases in Ireland, unlike America or Britain, must be borne by the investors alone – no third party can put up the cash for the case. In Ireland, the existence of the champerty law means that it is illegal for someone to fund another person’s law suit in return for a share in the damages.  “The net effect of this is that if innocent investors have been taken in by an unscrupulous business and they can’t afford to take the case then unfortunately it’s game over and the money is lost forever,” Clarke said.

In London, for example, this is not the case, as there are finance houses which can fund the litigation for a percentage of the ultimate award.  While the finance houses may take up to 40 per cent of the award, investors would get the other 60 per cent, “as well as having the satisfaction of bringing the promoters to justice,” Clarke said.  Champerty disappeared as a crime in Britain in 1967.

The difficulty of funding a case is partly why investors, of late, have been taking a collective approach to failed investment funds – it diminishes the financial burden on any one investor. 

Weaknesses

“Depending on the size of the group, depending on the law firm, and depending on the complexity, there’ll likely be a figure that people will be asked to contribute in order that a full and detailed opinion, specifically identifying the cause of action and also identifying any weaknesses that can be produced,” Clarke said.  “Of course, the bigger the group the smaller this figure will generally be, as the costs are divided by a greater number.”

While getting any group together can be a time-consuming and fraught exercise, especially in the face of a potential expiry of the statute of limitations period, it may be the only cost-effective way for some Irish investors to at least establish whether they have a case. “The [investors[ have to assess what the relative chances of success are,” Clarke said.  which means getting serious legal advice.  “They certainly should not issue proceedings against any fund without very strong legal advice and appropriate reports in place.”