A JUDGMENT expected from a US court as early as next month could pave the way for British investors who allege that Royal Bank of Scotland (RBS) falsely reassured them over its financial health, the lawyer heading the case has told Scotland on Sunday.
Thomas Dubbs, a senior partner at Labaton Sucharow, which is leading the action, said the appeal heard in the US Supreme Court last month would have "far-reaching implications" for cases like that surrounding RBS.
The case, Morrison v National Australia Bank (NAB), marked the first time the Supreme Court accepted a case that involved transnational securities fraud and the extraterritorial application of American securities laws. The judgment is due in late May or June.
Dubbs, who briefed Scottish investors at a seminar at Edinburgh's Balmoral Hotel last week, said: "The (NAB] case addresses the issue of the application of US securities laws to cases where allegedly fraudulent conduct occurred in the US.
"Depending on the decision, this may mean cases that have transnational elements, such as the case against the Royal Bank of Scotland, get viewed more carefully by the courts in terms of the US conduct and the overall relationship with the US."
The RBS case is believed to centre on its exposure to subprime mortgage-backed securities through two US subsidiaries, Citizens Bank and Greenwich Capital: investors allege that this was not disclosed and losses were not written down quickly enough.
Institutional investors, including pension funds run by councils in Scotland, allege that RBS – 84 per cent owned by the taxpayer after the government bailed it out – misled investors for 18 months about its financial wellbeing.
The class action is being brought by investors who bought RBS shares between 6 June 2007 and 9 January 2009. It was bailed out by the British taxpayer last October after conducting a 12 billion rights issue in April last year.
Pension funds of two US states, Massachusetts and Mississippi, are lead plaintiffs for the class action, which is also being led by Labaton Sucharow. The two funds are said to have lost around $123 million (80.2m) in RBS.
At least two dozen UK pension funds, including the former British Coal schemes and those run by local authorities across Britain, have also expressed an interest. Total losses are believed to run into hundreds of millions of dollars, with the North Yorkshire and Merseyside council pension funds losing an estimated 7.2m and 5.5m respectively.
Class actions are common in America, where the courts are more flexible and less expensive. The US operates an "opt out" system whereby investors are automatically included in a class action. In Britain and Europe, those who want to be considered part of a group legal action must opt in.
The US legal system is also not subject to "cost shifting", whereby claimants in group litigation cases face the risk of having to foot the legal costs of the victorious party.
David Greene, a partner at Edwin Coe, who also addressed the Edinburgh audience, said: "The general view is: 'Look west, young man; go to the States if you can.' There's a lot of prejudice against American-style litigation, but most of it is misplaced."
Lawyers on the RBS case hope for 100 per cent damages, but such class actions, where successful, generally result in compensation of between 25 and 40 per cent of losses.
Labaton Sucharow is also representing Lothian council pension fund in a case against Lehman Brothers, the collapsed New York investment bank, as well as British investors in cases against the American insurer AIG and investment bank Bear Stearns.
RBS is believed to be considering suing Goldman Sachs, Wall Street's most powerful investment bank, after being hit with a US Securities and Exchange Commission (SEC) civil fraud lawsuit, which it has vowed to defend. According to the SEC complaint, RBS paid Goldman $840m in August 2008 to unwind a position built up by ABN Amro, some of whose operations RBS had acquired.
A source familiar with US securities litigation said: "RBS, as the successor to ABN Amro, may have a mis-selling claim against Goldman Sachs. It would ultimately be up to the (British] government, which effectively controls RBS, to see whether it is brought."
Prime Minister Gordon Brown said on Friday that any bank found guilty of wrongdoing could have to pay millions of dollars in compensation.
"If what happened at Goldman Sachs and in any other bank is proven to be wrong, hundreds of millions of dollars in compensation should be paid to British banks, and because we are the biggest shareholder in many of them, to the British taxpayer," he said in an election campaign speech.