The value of investments, as we all know, can go down as well as up. Some you win, some you lose. But if you lose as a result of fraud or mismanagement there is, in some jurisdictions, the option of redress through securities class action litigation.

But while any investor is entitled to money if a court rules in the plaintiffs’ favour, investors will only get it if they put in a claim before the period during which claims can be made expires. The trouble is, only about 75 per cent of eligible pension funds do this, according to a new study from global class action specialist GOAL Group.

Pension funds in northern Europe lost more than €450 billion in the financial crash of 2008, including €60 billion in US investments. GOAL Group calculates that about €3.9 billion of this is recoverable, but unless current levels of participation in US securities class actions increases, €1 billion will be left unclaimed, including €436 million due to UK funds, €466 million to those in the Netherlands, €56 million in France, €40 million in Ireland and €8 million in Germany. It’s good news for investors that claim, as unclaimed money will usually be divided between them, but very bad news for the others.

There are various reasons why some European pension funds may not be claiming. There is a perception that the time and expense involved outweighs potential gains, typically about 12 per cent of the registered loss. While many cases do take years to resolve (Enron, for example, has kept armies of lawyers occupied for a decade), this does not have to be a problem for the pension funds. A number of service providers, including GOAL, offer outsourced services that identify, then manage and process class action claims on funds’ behalf, mostly on a no win/no fee basis.

Even so, some funds’ trustees and managers may not have time to consider this option. “We’ve been dealing with local authority pension schemes who recognise that this is something they should do, but there’s always something else on top of the pile,” says Stephen Everard, managing director at the GOAL Group. “Some funds we’ve been speaking to for two and a half or three years.

“In some cases there are objections on moral grounds: why should I get involved with suing a company in which I am a shareholder?” Everard continues. “But if you come in at the settlement stage the litigation is done and you’re just coming in when money is distributed. And if you don’t, someone else will take it.” He cites a recent case in which two GOAL clients received payouts much higher than the customary 12 per cent: 55 per cent and 35 per cent respectively, for this reason.

Everard also comes across fund managers convinced that they had nothing to gain from participation in class action. “I spoke to a manager a few weeks ago who was adamant there was nothing he was missing – and when we had a look we found that 23 per cent of the portfolio could have had a claim next to it,” says Everard.

According to the GOAL study the Netherlands, the UK and Ireland were the three European countries where pension funds had the highest proportion of US investments in 2008, suffering losses of €28 billion, €26 billion and €2.4 billion. French funds lost €3.4 billion, while a lower exposure to equities meant smaller losses for German funds, of €485 million.

Despite their place near the bottom of the list, German funds, particularly where administered by larger custody service providers, have been active in this area for many years. In the Netherlands, Stichting Pensioenfonds Zorg en Welzijn (PfZW) was one of five pension funds from across the globe that acted as lead plaintiff in a case against Bank of America that began in 2009 and was related to the bank’s management of information during its acquisition of Merrill Lynch. The Dutch pension fund MN Services is an active participant in class action against the Royal Bank of Scotland (RBS) that alleges misconduct in relation to the bank’s exposure to toxic assets and also to its acquisition of ABN Amro.

In the UK, the West Midlands Pension Fund has participated for some years in shareholder litigation, recovering more than $900,000. In March 2009 the Merseyside and North Yorkshire pension funds filed a motion to become lead plaintiffs in a class action against RBS. A New York court has since ruled that only US investors can pursue this action, so the funds are currently considering whether or not the case could be pursued in the British High Court.

Also in the UK, Lothian Pension Fund and the Northern Ireland Local Government Officer Superannuation Committee (NILGOSC) were co-lead plaintiffs in an action begun in August 2008 against Lehman Brothers over the use of mortgage-backed securities. And 40 pension funds, including some based in Germany, the Netherlands, the UK, Sweden and Norway, withdrew from a US action against Royal Dutch Shell to begin an EU-located action instead. This became the first of its kind to be concluded in a European jurisdiction, with Shell ordered by the Amsterdam Court of Appeals in June 2009 to pay $450 million in compensation for alleged misstatements concerning oil and gas reserves.

“A number of UK funds are extremely interested in getting involved in securities litigation with BP, following the Gulf disaster,” says Beata Gocyk-Farber, partner at US law firm Bernstein Litowitz Berger & Grossmann (BLBG). But, following a US Supreme Court ruling in June 2010 which limits the rights to litigate in the US of investors whose shares were purchased from non US stock exchanges, those UK pension funds that bought BP securities on the London Stock Exchange have been told they cannot litigate against BP. They are currently considering their options.

Among significant cases in the settlement process are a lawsuit against Countrywide Financial that may be worth $600 million; as well as a long-running case involving New Century worth $124 million and a case involving AIG where as much as $1 billion is at stake.

But there is another reason why pension funds may not get involved with securities class actions: the unwillingness of custodians to do the dirty work on their behalf. A US lawyer elaborates, off the record: “The [scheme trustees] believed filling out the forms to get the money from settlements was the job of the custodian. The custodians thought that was not their job. It was only as a result of being dragged into it by large American pension schemes that custodians started to do it. If you’re a pension scheme and you want to make sure you’re getting the money you’re entitled to, you’ve got to make it clear to the custodian.”

Of course, lawyers are more than happy to help pension schemes to do this. But would it be fair to be suspicious of lawyers with a vested interest in drumming up business?

“The lawyers have been accused of ambulance chasing,” confirms Stephen Everard. “But there are extremely reputable firms in the US who we deal with who won’t just fire off so many cases and hope some of it sticks. There are others who do operate in that manner. That certainly wouldn’t be a valid criticism of companies like ours, because we only get involved once the settlement is over.”

Beata Gocyk-Farber believes that working on a no win/no fee basis is a strong motive for lawyers to be disciplined. “We have an interest in bringing the litigation, but we take a risk in bringing it because we fund the entire cost,” she says. “That could be several million dollars. So we have an interest in cases that we consider meritorious. We are very selective.”

If the case is won, the lawyer’s cut might be as low as five per cent but could rise to 15 or 20 per cent, says Gocyk-Farber. “But usually,” she adds, “the fund can negotiate.”

At present those negotiations are overwhelmingly likely to concern US litigation. But Stephen Everard believes growing demand in Europe and the US Supreme Court’s ruling on foreign investors may force other jurisdictions to introduce class action legislation. Such measures were included in the Financial Services Bill scrapped by the Labour government in the UK just before the May 2010 General Election. “But when you think about it,” Everard adds, “in the UK, the first targets for anything like this would be the banks, which are now all publicly owned.”

Nonetheless, say those who advocate class action, if there’s somewhere trustees can sue, they should. They’re not doing it for themselves, after all. “Trustees have a fiduciary duty to maximise all sources of income for their schemes, which includes obtaining their fair share of settlement proceeds in any class actions,” says Thomas Dubbs, partner at US law firm Labaton Sucharow.

“There is often suspicion that because this involves litigation in America, which many Europeans find distasteful, there must be some catch,” he continues. “That is the wrong approach. The proper approach is to start from the assumption that you have a fiduciary duty to maximise returns for your scheme.”

Or, as Everard puts it: “There’s no good reason not to do it. If you don’t, you’re failing in your fiduciary duty.”

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