False Claims Act in 2014: Implementation Issues

Bruce W. LepplaPartnerLieff Cabraser Heimann & Bernstein, LLP415.956.1000 x 3381415.309.3535bleppla@lchb.comwww.lieffcabraser.com

INVESTMENT COMPANY INSTITUTELEGAL FORUMMay 7, 2015INVESTMENT FUNDS AS PLAINTIFFS:On Considering When and How to Act

Im Edward Massey, Director of Private Investor Client Relations at Lieff Cabraser Heimann & Bernstein, here to provide you with an eight minute summary of Bruce Lepplas commentary on the presentation it was his great pleasure to give to two dozen interested Directors and Managers at the Investment Company Institute Legal Forum, in Washington, DC, in May 2015. Bruce would enjoy hearing from you, including your advice on how to modify or improve the discussion of the issues raised today. See his full contact information in this slide. Lets begin our conversation. 1PurposeWHENThe situations that give rise to suitsThe reluctance of the adviser and fund board to bring suitsThe role and fiduciary duties of the key players in litigationHOWPolicies, procedures, and approachesMonitoring and evaluating casesACTServe as class action lead plaintiff or opt-out of the classFactors to consider, representative case studies2Lieff Cabraser Heimann & Bernsteins (LCHB) presentation at ICIs General Membership Meeting opened the conversation on investor companies as plaintiffs. We considered:

An endowment fund client suffered a major portfolio loss when fraud was revealed at a Fortune 100 company. The funds advisers had made principled investments in good faith based on the companys public information and analyst calls. When the loss was discovered two discussions emerged: 1) a serious internal conversation at all levels including the Board about the circumstances under which a major fund should decide to call us. And 2), what to do about this particular case. On the latter, we worked with the staff of the fund and its advisors for months with no promise of being retained. We were retained and engaged the defendant in pre-filing confidential settlement discussions. These are often successful, requiring neither discovery nor litigation filing . In this case the fund manager was not satisfied with the defendants settlement offers. Litigation as a last resort was commenced. Mr. Leppla and his partners are working through this process now with the full cooperation of the fund. They are making every effort to maximize investment loss recovery and minimize the call on fund staff and internal resources. We expect a successful resolution of this case and we now have an open and full dialog with this client on major fund losses as they occur. 2WHENSituations: Investment loss that results from:Disclosure or Non-Disclosure IssuesNegligenceOther, such as lack of compliance, breach of rights, frustration of purposeAfter due consideration of reluctance to sue:Fact: Recovery would have minimal impact on funds NAVsAttitude: Discomfort with litigation, suing parties to business relationships, and losing access to company management3

Perhaps youve seen one or more of the situations shown on the slide that most often give rise to litigation. When these situations are discussed with potential clients, often the focus is on the reluctance of funds to negotiate or sue and the issue that is inherently involved:

3WHEN (contd)And consideration of the role and fiduciary duties:Without clear contractual language, advisers duties relevant to litigation are not clearAt a minimum, if an obligation is assumed in the IMA, there is a duty to fulfill that obligationBoards duties to represent interests of funds shareholders, supervise investment adviser, approve compliance policies and procedures, monitor conflicts of interest, and preserve fund assets. But not a clear duty to litigate4

that is, the fiduciary duty of advisors and their Boards to safeguard fund assets and, to the extent practicable, secure their recovery when lost due to third party misconduct.

We feel analysis of the situation requires real knowledge and skill, akin to science, if you will. We also feel there are no hard and fast rules, no overriding fiduciary duty compels action when it is not in the best interests of the funds shareholders. Consideration of whether and how to proceed requires insight, judgment and values. Akin to art, if you will. 4HOWPolicies, Procedures and Approaches:General policy approach: Investment recovery options with respect to material fund losses will be reviewed in a timely manner Detailed policy approach:Monitoring for claims with a framework and processes Evaluating Claims:Enumerate criteria to weigh in taking action. Conduct cost-benefit analysis of different courses of actionMaintain regular, formal communication with Board and record of processes observed5

Many fund agreements and documents contain provisions governing the responsibilities of the various parties. Our view is to adopt policies, procedures, and approaches that are consistent with the size, capabilities and orientation of the adviser and its client. We are pleased to consult regarding best practices related to litigation and to suggest approaches for consideration.

5HOW (contd)Monitoring and Evaluating Cases:Monitoring Pending Cases:Monitoring services, law firms, in-house.Evaluating Cases:Factors: Fund losses, strength of case, nature of defendants, resources requiredDecisions: Remain a class member or opt out?. 6

It is simply not possible to engage in investing without inevitably being touched by fraud. Cases come up by virtue of the existence of a portfolio. Monitoring and evaluating the cases that arise is integral to decision making. Never taking action is a decision. We respectfully suggest that it should be made affirmatively, and after due consideration, not by the absence of attention. 6ACTDecision maker responsibility: What is the balance and how is it exercised between Adviser and Board?Actively pursue lead plaintiff status in a class action?Lead plaintiff represents the entire classIn limited circumstances a private investment manager role

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Three actions are available to you and each involves considerations both legal and financial, all undertaken in the interest of the shareholder.

We acknowledge that private investment managers rarely take the role of lead plaintiff in class action. There are structural, as well as perceptual and political, reasons for that reality. 7ACT (contd)Passively remain in the Class?Participation in the Settlement Claims ProcessPeriodic reporting to BoardClaims filedRecoveries receivedAllocationsActivity in pending and contemplated individual actionsOpt-out of existing class action and pursue separate litigation?

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Nevertheless, passivity is not the only role. Opting out of an existing class provides a financially meaningful option to advisers and Boards on behalf of their shareholders.

8OPT-OUTPursue separate litigationHire their own lawyersNegotiate / litigate investment loss recovery on their ownThese investors consider: Fiduciary duty to entertain alternative methods to recover large lossesPotential for substantially greater financial recoveriesMany, substantial factors in evaluating Opt-Out litigation9

To choose to act directly, to opt-out, involves the need to hire your own lawyer to negotiate or litigate the recovery of your losses. More importantly, it offers the real prospect of creating greater asset recovery. The guardianship of the asset is the advisers responsibility and the Boards role to oversee. At a minimum, if your loss is large by your standards, or if your particular investment security is not part of the class action, this disparity in potential recovery should be considered. 910

Recoveries in Select Class vs. Opt-Out Cases

As you can see, it is possible to recover 5 to 50 times what might be available in the class settlement. Our purpose in the How and the Act slides was not to predict recovery but to demonstrate that an evaluation of this range is possible. As to Best Practices: we believe every advisor and Board should have a threshold that requires evaluation of the direct action alternative. We do not propose a generic threshold, but we do propose a certain humility about Shareholder losses. To say a $100 million loss does not move the needle may reflect less sensitivity than the Board has a right to expect. 10Thoughts for discussion with Advisers and BoardsLCHB serves only as plaintiffs counsel to Advisers and Boards. Our goal is to develop a relationship that will be of value when investment funds face the need to address loss recovery. Thoughts we suggest for your consideration:Direct action presents opportunity for pre-litigation negotiation as a route to resolution of claim and loss recovery It also provides immediate receipt of settlement funds, upon resolution We can and do represent funds that do not want publicity but are interested in loss recoveryThe focus is on the benefit of loss recovery by pre-litigation negotiation and, only if necessary, litigation.As always, we are guided by the knowledge that any action taken or not taken should be in the funds best interest..

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We have a great team of securities lawyers who will represent you, but my goal and role is to create a relationship. Our firm is honored to represent many of the finest mutual fund families, public retirement systems, hedge funds, endowment funds, and private investors in the country. We are never adverse to our clients we are always on your side. We work on a full contingency fee basis with no out-of-pocket cost.We aim to advise and negotiate far more than we aim to litigate. Our focus is on assisting advisers and Boards to define and then undertake the set of policies that are in the best interests of the shareholders. 1112In 2015, a new era has arrived with many investors committed to protecting themselves. BlackRock, Charles Schwab, Franklin Templeton, Lord Abbett, Nuveen, Regents of the Univ. of CA , and others have all filed investment loss recovery cases.

A NEW ERA

We seek to shine light on the reality that losses will occur. Some of them will occur for reasons that should be redressed. We want to be there, with you, through that process.

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Bruce W. LepplaPartnerLieff Cabraser Heimann & Bernstein, LLP415.956.1000 x 3381415.309.3535bleppla@lchb.comwww.lieffcabraser.comAcknowledgement: The ICI Legal Forum presentation, while not reproduced here, was derived, in part, from a similar presentation made at the 2015 ICI Mutual Funds and Investment Manager Conference by Mr. Leppla; Matt Thornton, Esq., ICI; Lowell Haky, Esq., Charles Schwab & Co.; John K. Forst, Esq., Lord Abbett & Co.; and Nora Jordan, Esq., Davis Polk. All made significant, valuable contributions to The ICI Legal Forum presentation.

Bruce urges you to reach out to him. See his e-mail and telephone number. He believes no concern is minor and no question should go unanswered. Please encourage your colleagues to look in on this brief presentation. We look forward to seeing you in 2016.13