A Frankfurt-based asset manager is leading some of the most high-profile securities lawsuits in the U.S. – including actions against Wells Fargo for its fake accounts scandal, Equifax for its data-hacking debacle and Allergan plc related to alleged drug price-fixing.
Dr. Andreas Zubrod, a member of the Executive Board of Union Asset Management, one of Germany’s largest asset managers, engages actively on a variety of issues with the management teams of many of Union’s portfolio companies. Zubrod recognizes that “bad things do happen to good companies.” Providing that negative outcomes do not result from malicious activity that harms the shareholders or stakeholders, litigation is not his default option. Constructive engagement with corporate managers is typically preferred. But the viable threat of consequential litigation helps keep the managers of capital in line. Zubrod therefore believes that a willingness to pursue shareholder rights litigation is a critical tool when private engagement over misconduct-related issues is not enough.
Managing nearly $400 billion USD, Zubrod deems it “essential to sending a message to portfolio companies that we can and will hold wrongdoers accountable, and push for improved corporate governance across all industries.” He explains that corporate misconduct can become common practice, seemingly legitimized, when large corporations are not held accountable for serious wrongdoing. Without negative consequences, misconduct not only becomes embedded into that company’s culture, but corrupt practices can become embedded into the culture of the market as a whole. Zubrod sees the strategic pursuit of meaningful shareholder litigation as a necessary adjunct to the work of managing the fund itself.
One of Zubrod’s first moves to solidify a strong and consistent approach at Union to monitoring and addressing corporate fraud was to retain prominent U.S. shareholder litigation firm Bernstein Litowitz Berger & Grossmann LLP (BLBG).
Mark Lebovitch, Corporate Governance litigation practice leader at BLBG, sees numerous positives from Zubrod’s philosophy: “I like the idea that Andreas is taking the reins on how Union Investment approaches activism. There’s not always a need to intervene. Corporate managers often do try to do the right thing.
“Yet, he recognizes that thoughtful and impactful litigation is a useful tool, and the knowledge that Union will take action when managers cross the line has a deterrent power all its own. It’s his form of “Teddy Roosevelt activism.” Speak-softly-but- carry-a-big-stick, if you will.”
There is significant evidence that private litigation is far more impactful than government regulation – both in recovering money for defrauded investors and for helping the SEC and other watchdog agencies do their own jobs.
“The Chamber of Commerce and corporate mouthpieces strategically mischaracterize litigation as some sort of interference with the normal order of things,” said Lebovitch. “I’ve always thought that if you’re a real capitalist, if you’re a real market type, you see private shareholder litigation as the free market-based means of checking corporate misconduct. You don’t just look to government regulators as the answer. With private actions, the risk is assumed by shareholders and their counsel, so they should be bringing meaningful cases.”
In addition, Zubrod believes that as a shareholder there can be unforeseen consequences should the purpose of your activism be driven strictly by limited self-interest. “You must be willing to enter litigation for a higher purpose,” according to Zubrod. “If you are using your leverage just to get a seat on the board, or some other type of short term self-empowering goal, that can create other types of inefficiencies and unintended consequences.”
Targeted litigation can affect the way other industry players behave. For example, a significant settlement should draw the attention of the entire market, at which point the market will understand that it was wrong for a company to perform the actions triggering litigation. Said Zubrod, “Getting them to clean up their mess is of primary importance, but equally on our mind is seeking to prevent others from doing the same thing.”
Zubrod continued, “There’s a lot to cover as an active manager. If we are in a position where we recognize we’re now beyond the borders of reasonable business practice or judgment, then we will consider suing that company. For us to be in that position means we firmly believe there was misbehavior or malpractice, or something illegal has occurred.
“There are variety of ways for smart litigation to have positive long-term impacts. For example, not only may there be compensation for injured shareholders, but sometimes important cases can result in a fundamental change of how management does its job, depending on the circumstances.”
As in the Wells Fargo case, where Union just negotiated a $480 million settlement – one of the largest in Ninth Circuit history – arising from the bank’s fake account scandal. “Fabricating customer accounts and then concealing how those fake accounts impacted cross-sell metrics was simply unacceptable, and undermined the trust that Union Investment and other investors put in Wells Fargo’s management,” added Zubrod. The settlement dwarfs the $185 million penalty collectively imposed on Wells Fargo by multiple regulators.
Zubrod concedes that part of influencing the market requires coming down hard on the large players who have committed high-profile corporate misconduct, in order to prevent smaller market participants from intentionally conducting similar wrongdoing.
“If Equifax’s job is protecting people’s information data and they’re not making it a priority, it’s not going to be a priority for anyone,” explained Zubrod. “Concealing information surrounding the data breach is a step towards diminishing trust and accountability for investors in additional ways. When the shareholders suffer for that, it’s essential as a manager to address it.”
Said Lebovitch, “Ultimately what we want in all of our cases is a significant result that forces the entire market to thinking about the broader implications of the case. If the outcome is sufficient and grabs the market’s attention, the conclusion will be that the risk is not worth the price.”
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