Hong Kong Proposes Allowing Class Actions After Lehman Losses

Hong Kong Proposes Allowing Class Actions After Lehman Losses
By Douglas Wong - November 5, 2009 11:01 EST

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Business Exchange Buzz up! Digg Print Email .Nov. 6 (Bloomberg) -- Hong Kong’s Law Reform Commission proposed allowing class-action lawsuits in cases such as the losses thousands of investors in the city suffered on notes guaranteed by failed Lehman Brothers Holdings Inc.

If there was misrepresentation in the advertising or prospectuses for such unlisted securities, investors could be able to litigate as a group, the chairman of the commission’s sub-committee on class actions, Anthony Neoh, said yesterday.

“This would be an additional weapon” for people without the financial ability to seek damages, he said.

The value of an estimated $1.8 billion of Lehman-backed products known as “minibonds” sold to more than 40,000 investors collapsed after Lehman’s bankruptcy, sparking street protests. Hong Kong banks in July offered to pay at least 60 cents on the dollar to them after regulatory and legislative investigations.

“The need for a new approach to handling multiparty claims has long been recognized,” said Nigel Francis, Asian disputes head at Minter Ellison in Hong Kong. Consumer-related claims might be more suited to class actions than complex misrepresentation claims involving securities, he said.

“Such claims, while they may involve a single product and some common issues, will each ultimately be decided on their own facts,” Francis said.

Class actions allow a representative of several people with a common complaint to litigate on the group’s behalf, with an aim of helping lower the costs for each individual.

Restrictive, Inadequate

A class action regime is appropriate for “a society that has become more advanced,” Neoh said today. Hong Kong currently only allows multiparty proceedings under rules the city’s chief justice criticized as restrictive and inadequate in 2004.

Yesterday’s proposals were published after three years of study by Neoh’s committee, which invited public comment until Feb. 4, 2010. Neoh said he then hopes to make final recommendations for the necessary changes to the law by November next year.

The 314-page consultation paper doesn’t recommend allowing lawyers to take cases on contingency, or being paid only if they win money for their clients. It also said that allowing litigation funding companies would require adequate supervisory measures to be in place.

“Lawyers shouldn’t have a financial interest in the outcome of a case,” said Neoh, a lawyer who acted for a retired couple who sued DBS Group Holdings Ltd. for failing to comply with securities laws while selling minibonds.

Allocating Risk

There are no concrete proposals on how to fund class actions and to allocate the risk of losing them if they were to be allowed, so the likelihood of a regime coming into effect in the next few years is low, said Gareth Thomas, Hong Kong commercial litigation head at Herbert Smith.

As of Oct. 28, 97 percent of the minibond investors eligible for compensation have accepted the settlement offer, according to the Hong Kong Monetary Authority.

The notes were guaranteed by Lehman and linked to debt of Hong Kong companies like Hutchison Whampoa Ltd. and Sun Hung Kai Properties Ltd. Among buyers were elderly and poorly educated people as well as mentally ill individuals, according to an investigation by the city’s central bank that was made public by lawmakers on April 28.