Bernie Madoff & Titanic: Glencore Joins Illustrious Defendants in New York Court
On top of an investigation in Washington by America's Department of Justice, Glencore's lawyers are fending-off a class action lawsuit; five such cases are filed in the US every day, but settlements can reach $1bn. Should investors be relaxed or concerned?
In a granite court building in Manhattan where Bernie Madoff was convicted for his $65bn Ponzi scheme, investors filed a lawsuit against Swiss trading giant Glencore earlier this month.
Glencore's board, the lawsuit contends, failed to properly warn investors about the risk of doing business in Venezuela and the Democratic Republic of Congo, resulting in a bribery probe by America's Department of Justice, knocking $8.8bn off Glencore's stock in one day's trading.
Similar cases, known as a class action lawsuits (or “stock-drop” suits), are par for the course for conglomerates: when shares gets whacked lawyers dive in, suing on behalf of investors.
Mining companies including Kinross, Wheaton Precious and Rio Tinto have all had class actions filed against them and law firms that specialise in the area bash-out 935 to 1,456 such cases in the US every year, equal to five per day. Lawyers say that bringing a case is “a complicated decision, and one that should not be taken lightly,” but Glencore's lawsuit was filed only four days after its share price tanked. Most stock-drop suits are just as hasty.
But they are not to be scoffed at. Whilst the Department of Justice has been known to doll-out bribery fines of up to $2bn, securities litigation can be just as costly: corporate giants including Pfizer, Motorola, Kinder Morgan and AOL Time Warner have all been thwacked by class action settlements of $200m to $650m.
Between 2009 and 2016, over $32bn was handed out in settlements, according to Lex Machina, a law stats agency. That beats disgorgement as the corporate world's biggest expense under the gavel.
Glencore's case was filed at 500 Pearl Street, the main court for New York's Southern District, encompassing Wall Street and the Bronx. Surrounded by black metal bollards and barricades, it has been witness to America's biggest bankruptcies and its most brazen fraud cases. 27-storeys tall, it is also the unofficial headquarters of all class action lawsuits: when the Titanic sunk, damages were filed here.
Glencore's case, however, is unlikely to reach a courtroom. Less than 1 per cent of all class actions end with a hearing, says Cornerstone Research, because they have to be heard by juries. Corporate America tries to avoid the public for fear of rough treatment, according to judges: companies “fear juries, fear them greatly.”
When it comes to stock-drop cases, the leading law firm is Robbins Geller Rudman & Dowd; it has filed over 800 lawsuits in
the last decade, two a week, giving it 40 per cent marketshare.
If securities litigation was the fizzy drinks market, Robbins Geller is Coca-Cola. It is “a lion at the securities bar”, one court commented. Its attorneys are “champion trial lawyers”, according to a federal judge for the Middle District of Tennessee.
With ten offices, 200 litigators and a pending case against Facebook, Robbins Geller can claim to have recovered “tens of billions of dollars.” In the biggest class action settlement of all time, after the collapse of energy trader Enron, it grabbed $7.2bn from banks, blaming them for sham transactions that kept loans off Enron's books. Three lenders including CIBC settled for over $2bn apiece. The case involved 70 million pages of paperwork. Any clerk brave enough to stack them all at once would make a tower 180 times taller than the Empire State Building.
One of the firm's lawyers, partner Mark Dearman, says he is dedicated to “taking down corporate giants.” Dearman used to represent companies in the Fortune 500 but got into class action lawsuits because he wanted to “fight for the little guy”, according to the firm's in-house magazine. Dearman spends his spare time caring for a tortoise and two fish. In 2016, he helped wrestle $17bn off German car giant VW. Dearman has “two foster kittens as family.”
Another big win took on HSBC: Robbins Geller grabbed $1.6bn off the bank in 2016, saying it failed to advise the market that it was going in for “predatory” business.
The law firm leading the case against Glencore is Rosen Law, another top-shop in securities fraud. From an office on Madison Avenue it has 18 attorneys fighting cases from New York to California, which is the second biggest hotspot for class actions, thanks to in-fighting in Silicon Valley.
Rosen punches above its weight: it is the fourth-biggest law firm in its niche, filing 50 cases each year, but the third-biggest by settlement wins, meaning it hits the target more often than rivals.
Glencore's lawyers can pay to make the case go away, and emerging law firms are more likely to settle early, say researchers from Stanford. But Rosen is anything but an emerging firm. Founded by Laurence Rosen, the son of a litigator, some of its recent wins include a $14m settlement in favour of investors in Silvercorp, a silver miner hit by short-selling.
Critics say stock-drop suits allow absent plaintiffs to file baseless claims, sucking-up time and money that comes out the pocket
of other investors. Lawyers tout for business and shareholders are suing themselves. Rosen, which pushes out updates on its cases via Twitter, is also looking for claimants against gold miner Sibanye. “Report a fraud about a company not listed above,” Rosen's website says.
Others say that lawyers driven by fees can fill a gap left by regulators, unable to properly police thousands of stocks. Judge Jed Rakoff, a celebratory in US legal circles who has presided over more stock drop suits than anyone else on the planet, rebuts claims that the industry is made-up of ambulance-chasers.
Trust in financial markets is one of the “greatest assets” any country can have, Rakoff said on a recent tour of Australia, where class action lawsuits are also taking off. In Victoria, one firm filed a case on Monday against mining giant BHP, which saw a $25bn drop in its stock after a fatal dam burst in 2015. If investors think the corporate world is “all backroom deals”, markets will fail to function, said Rakoff, who has been likened to Rambo, the machine gun wielding action man. “People don't appreciate what a huge economic asset it is to have an honest market.”
One thing Glencore cannot assume is a quick resolution: class action lawsuits drag on for so long, it has become impractical to count how many are open. The longest continued for nearly 3,000 days. Most settle after two or three years.
At the DoJ, which works hand-in-glove with America's FBI agency, Glencore can expect swifter treatment. Its investigation is being led by attorney Sandra Moser, who has previously spearheaded investigations into forex and LIBOR rigging. Moser's fraud division collected $7.8bn in fines and penalties in 2016.
“The productivity of our attorneys, the quality of the prosecutions that we’re bringing,” Mosen has boasted, “it’s really astounding when you look at the group of lawyers that we have here on just these few floors. You would think that we have a thousand people here dedicated to pursuing justice.”
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