The growing trend of foreign investors’ involvement in U.S. securities class-action lawsuits remains alive and well, according to statistics tracked by RiskMetrics Group.

From 1996 through 2007, international institutional investors sought to serve as lead plaintiff in a U.S. securities class-action lawsuit 234 times in 134 separate cases. Those investors have filed lead plaintiff motions in more than 5 percent of all new federal securities class actions in every year since 2002, RMG reports in a white paper (registration required), “Globalization in Securities Class Actions.”

Institutional investors from Finland, Bahrain, and the Czech Republic all filed the first-ever lead plaintiff motion by investors from one of those countries in 2007. In contrast to earlier years, 2007 saw a sharp increase in the number of international institutional investors from Sweden, Britain, and the British Virgin Islands filing lead plaintiff motions.

Meanwhile, RiskMetrics says early enthusiasm by German investors for involvement in U.S. class actions has remained tepid, with the number of participants remaining steady at levels two-thirds below their historical peak. Canadian investors also continued a historical trend of increased activity in even numbered years, followed by 50 percent or greater of drop-offs in odd numbered years.

2007 also saw the first reported securities class action filed in Africa, in a case involving the Nigerian subsidiary of Cadbury Schweppes. The RMG report notes that legislation became effective in 2008 in a number of European countries that would allow securities class actions for the first time, as well.

The RMG report posits a number of reasons to explain the continued trend of increased international institutional investor involvement in securities class actions, including:

• The educational and marketing efforts of U.S.-based securities litigators;
• Increasing emphasis by U.S. plaintiff law firms on solidifying their relationships with international institutional investors and outside counsel for those investors;
• A gradual realization, both domestically and abroad, that institutional investors of all stripes are failing to file claims in securities class actions to get their share of the settlement proceeds; and
• The increasing availability and acceptance of securities litigation in non-U.S. jurisdictions.

“As other cultures become more familiar, both at home and abroad, with the concepts and realities of securities litigation, they are increasingly likely to become involved with it,” the report states. “Despite the increasing number of jurisdictions now allowing some form of securities litigation, the most robust system for investors seeking recoveries through securities litigation remains here in the U.S.”

The report updates a May 2007 report and revises some of the prior published data due to additional research and delays in receiving confirmation from some of the law firms involved in the nationality of their clients.

RiskMetrics also notes that “F-cubed” lawsuits, where foreign investors who bought shares of a foreign company on a foreign stock exchange still sue that company in U.S. courts, represent just a fraction of the activity of international institutional investors in U.S. securities class actions, despite the attention such suits get in U.S. courts.

RiskMetrics plans to publish a separate paper to examine the “opt-out” or so called “direct” actions that the same investors are filing, a phenomenon it says is at least partially in response to court decisions excluding international investors in certain cases, such as against Vivendi.

Global securities regulators have formed a trio of task forces to coordinate global regulatory efforts to tackle trading abuses related to short selling, derivatives trading, and activity by unregulated entities such as hedge funds.

The International Organization of Securities Commissions Technical Committee announced the launch of the three task forces following a Nov. 24 meeting to craft a detailed work program to address the continuing market turmoil. The task forces will present their reports at the next Technical Committee meeting in February 2009 and to the next G-20 summit in spring 2009.

“To be effective, the regulation of trading abuses must be coordinated across major markets,” said SEC Chairman Christopher Cox, chairman of IOSCO’s Technical Committee. Cox said the task forces will help ensure that global capital markets address the current turmoil on “a sound basis and in a well-coordinated way.”

A Short Selling Task Force, chaired by the Securities and Futures Commission of Hong Kong, will work to eliminate gaps in various regulatory approaches to naked short selling, including delivery requirements and disclosure of short positions. The Task Force will also examine how to minimize adverse impacts on legitimate securities lending, hedging, and other transactions.

The Unregulated Financial Markets and Products Task Force, co-chaired by the Australian Securities and Investments Commission and the Autorité de Marché Financiers of France, will examine ways to introduce greater transparency and oversight to unregulated market segments, such as OTC markets for derivatives and other structured financial products.

An Unregulated Financial Entities Task Force, chaired by the CONSOB of Italy and the Financial Services Authority of the United Kingdom, will examine issues surrounding unregulated entities such as hedge funds, including the development of recommended regulatory approaches to mitigate risks associated with their trading and traditional opacity.

Global securities regulators have slated a meeting to discuss “urgent regulatory issues” related to the credit crisis, including the effectiveness of regulatory efforts to curb abusive short selling, the Securities and Exchange Commission said.

The meeting of the International Organization of Securities Commissions Technical Committee will be held by teleconference on Nov. 24.

“In addressing turbulent market conditions, it is essential not only that regulators act against securities law violations, including abusive short selling, but also that there be close coordination among international markets to avoid regulatory gaps and unintended consequences,” SEC Chairman Christopher Cox, chairman of the technical committee, said. “This high-level coordination among international regulators will allow us to review the steps we have taken thus far and ensure that our ongoing and future actions are effective and mutually reinforcing.”

An SEC press release says the technical committee will consider the effectiveness of recent regulatory responses in reducing manipulative short selling, and possible coordination on rules relating to naked short sales, particularly with regard to position reporting and delivery and pre-borrowing requirements.

Also on the agenda are the development of disclosure principles to promote transparency in over-the-counter markets for derivatives and other financial instruments; an assessment of members’ progress in adopting credit rating agency rules based on IOSCO’s revised Code of Conduct and work on developing a common examination module; and ensuring that the process of developing international accounting standards “continues to take account of the interests of investors.”

Amid continuing discussions among lawmakers and regulators about how to reform the U.S. financial regulatory system, the chairman of the Securities and Exchange Commission says enforcement, and in particular, cooperation with overseas securities regulators on enforcement matters, remains a top priority.

The SEC has been working closely with its international regulatory counterparts to “coordinate our actions and align our strategies” as the global credit crisis has unfolded, SEC Chairman Christopher Cox told a gathering of global securities regulators.

“In our global economy, regulators responsible for maintaining healthy securities markets have to make enforcement a top priority and have to reach across borders to do that job well,” Cox said in a Nov. 7 speech to participants at the SEC’s International Enforcement Institute.

Calling the scale of the agency’s international enforcement cooperation “massive,” Cox noted that, during the last year, the SEC made 556 requests of foreign regulators for assistance with investigations. Meanwhile, the SEC received 454 requests from foreign regulators for law enforcement help, “and we have been eager to provide it,” Cox said.

The SEC is also working with its foreign regulatory counterparts on 12 open sub-prime investigations.

Noting that the SEC executed an enhanced enforcement Memorandum of Understanding with the Australian Securities & Investments Commission, Cox hinted that the agency is looking to forge similar ties with other regulators.

“We hope that this enhanced level of enforcement cooperation will serve as a model for other jurisdictions, and possibly set a new international standard for enforcement cooperation,” he said.

Such agreements would extend to the sharing of accounting information, including audit work papers, telephone and Internet service provider records, the confidential exchange of credit card records, travel records, employment information, and corporate records. Regulators would also assist each other in obtaining records of electronic and telephonic communication, testimony, responses to questions, and statements from witnesses.

As an example of cooperative international efforts, Cox cited a recent case in which the United Kingdom’s Financial Services Authority provided the Commission with intelligence that helped the SEC obtain an asset freeze in the UK against a UK citizen who was a defendant in a pending SEC action in Boston. In another cross-border case still underway, the SEC worked with Andorran authorities to obtain an asset freeze in a securities fraud scheme by a Spanish national living in Barcelona and operating through offshore companies based in Panama, Dominica, Belize, and the British Virgin Islands.

“In the United States, we fully appreciate that the long arm of the law has to reach not only from Boston to San Francisco, but also to Bangalore and Santa Domingo,” Cox said.

The SEC chairman also defended the agency’s enforcement record, which has come under fire in recent months. For the fiscal year just ended, he noted that the SEC brought the second-highest number of enforcement actions in its history, including a record number of insider-trading cases. Among those was a high-profile insider-trading action against former Dow Jones Board Member David Li and three others in Hong Kong that Cox said required “close and very real-time cooperation” with the Hong Kong Securities and Futures Commission.

In each of the last two years, Cox said the SEC has set the record for the highest number of corporate penalty cases in its history. The SEC has also brought a record-setting number of cases under the Foreign Corrupt Practices Act. Since January 2006, the SEC has brought 38 foreign bribery cases—more than all prior years of the Act combined.

Cox said more than a third of the total staff works in the enforcement program, a higher percentage than at any time in the past 20 years. In the past year, enforcement personnel increased by 4 percent.

The SEC has signed an agreement with Australian securities regulators to pave the way for U.S. and Australian stock exchanges and broker-dealers to operate in both jurisdictions without being separately regulated in both countries—yet another step in the SEC’s vision of fewer barriers to global capital markets.

The Aug. 25 agreement provides a framework for the SEC, the Australian government, and Australian Securities and Investments Commission to consider regulatory exemptions that would permit U.S. and eligible Australian stock exchanges and broker-dealers to operate in each other’s jurisdictions. If approved, such exemptions would mean Australian stock exchanges and broker-dealers regulated by ASIC could offer their services to certain U.S. investors and firms without being subject to most SEC regulation, and vice versa.

The SEC has sharpened its focus on mutual recognition in recent months as interest among U.S. investors in foreign securities has increased and cross-border consolidation of stock exchanges has accelerated. Efforts are underway to develop a mutual recognition agreement with Canada’s council of securities regulators.

SEC Chairman Cox said the agreement “marks a significant milestone in our partnership with Australia to reduce the barriers that U.S. and Australian investors now face in investing in each other’s markets.”

Ethiopis Tafara, director of the SEC’s Office of International Affairs, said the agreement with Australia “serves as a pilot exercise in building a cross-border regulatory infrastructure to address the increasing globalization of our securities markets.”

The agreement includes an Enhanced Enforcement Memorandum of Understanding and a new Supervisory MOU to allow for more regulatory and enforcement cooperation and coordination between the two regulators. The SEC and ASIC will retain jurisdiction to pursue violations of their respective antifraud laws and regulations.

SEC and Australian authorities will consider regulatory exemptions under the arrangement as they are submitted. Cox noted that any proposed SEC exemptive orders would be put out for notice and comment before the commission would vote to approve them. He said exemptions could be granted as soon as January 2009.

Related Resource: Video of SEC, Australia Press Conference (Aug. 25, 2008)
Related Coverage: SEC & Australia Talk Mutual Recognition (April 8, 2008)