For investor protection, go the US route

Business Opinion: An American journalism student on placement with The Irish Times recently asked me who, or to be more accurate what, was the Irish equivalent of the US Securities and Exchange Commission?

After a lengthy pause I started into a long-winded attempt to explain the relationships between the Irish Stock Exchange, the Irish Financial Services Regulatory Authority, the Office of the Director of Corporate Enforcement and, of course, the Irish Takeover Panel. Eventually, I gave up.

Last week I got a further reminder of just how much better protected investors in the US are courtesy of San Diego-based Lerach Coughlin Stoia Geller Rudman & Robbins and their New York-based counterparts Pomerantz Haudek Block Grossman & Gross.

These two law firms are lead counsel for the plaintiffs in the class action taken by US investors against Elan. They emerged triumphant from an unholy scrap among about 30 similar sounding law firms for the right to represent shareholders who lost money in Elan.

All of the firms brought similar actions against Elan, on behalf of shareholders, in the weeks following the collapse of its share price in February 2002.

That fall was triggered by an article in the Wall Street Journal that questioned some of Elan's complex accounting practices. It then emerged that the Securities and Exchange Commission (SEC) was investigating the company and the rest, as they say, is history.

Under US class action law, all the various actions are lumped together and one or two firms appointed the lead counsel. Usually, it is the firms with the most plaintiffs. And usually the actions are settled for a fraction of the damages being sought.

Elan was no different and, despite maintaining that the action was baseless, it announced at the end of October that it was settling the $1 billion action for $75 million.

The settlement - along with an agreement to pay a $15 million fine to the SEC to bring its probe to a halt - was seen as tidying up a few loose ends following the remarkable rescue of the company by Garo Armen and Kelly Martin.

The settlement has not yet been approved by the US courts and a hearing will be held next February.

In the meantime, the details of the settlement have been sent out to shareholders with a form on which to make their claim.

Shareholders will get an average of 50 US cents for every American Depositary Share in Elan before the deduction of court approved fees and expenses. These will be substantial. The documents state that if the settlement is approved, the lawyers will be looking for fees of up to 25 per cent of the settlement proceeds and expenses of up to $600,000.

This will work out at around 13 cents per ADS depending on the number of shares on which investors are claiming.

The exact amount will depend on when you bought and sold your shares and could be as high as $4.59 per ADS for shares bought between April 2001 and January 29th, 2002 and retained at the end of July 1st, 2002.

All registered holders of Elan ADSs should have received a notice of the settlement and a claim form at this stage and have until March 15th, 2005 to lodge a claim.

According to Marc Gross, one of the lawyers leading the case, some 224,000 notices have been sent out to shareholders. If you are an Elan shareholder and have not got one there are two probable reasons.

Either the shares are not registered in your name or else you hold ordinary Elan shares and not ADSs, because the settlement only applies to shares purchased on the US market.

Anybody who feels they are entitled to share in the settlement but have not received a notice in the post should contact Elan Securities Litigation, c/o Berdon Claims Administration LLC, P.O Box 9014, Jericho, NY 11753-8914, according to Mr Gross. The website is www.berdonllp.com/claims.

The huge fees earned by lawyers are one of the many criticisms levelled against class actions.

They are justified on the basis that the lawyers work on a no-foal no-fee basis and bear all the costs of the litigation themselves.

However, it is relatively risk free as companies which are the subject of unsuccessful class actions cannot recover their costs from the plaintiffs.

Critics argue that this, together with large fees act as an incentive for firms to find plaintiffs and bring actions, rather than wait for genuine plaintiffs to come to them.

The result is a class action litigation industry that many would argue does little to protect shareholders and only damages companies and makes lawyers rich.

Be that as it may, there must be a lot of Elan shareholders right now who are wondering why some of their counterparts are going to get big cheques while they are getting nothing simply because they bought their shares in the Irish market.

The lesson is pretty simple. All else being equal, you should buy shares in Irish companies via the US market where you can avail of the protection offered by the SEC and the zeal of the likes of Mr Gross.

Otherwise, you are putting your faith in the Irish Stock Exchange, or maybe it is IFSRA or perhaps the Director of Corporate Enforcement...