Class Actions are a surprisingly complex animal: the concept of the class-action are, usually, a creature of statute, not a creation of the judiciary. Moreover, the class action came of age in the USA where it has been used in an extraordinary range of cases, perhaps most famously the case against Big Tobacco but the cases against Ford (relating to the Pinto) and Bank of New York are also important cases. In relation to the current case, the BoNY case has particular relevance because it was a shareholder action relating to the fall in share prices against the background of a money laundering scandal.

Let's be clear: class actions are, often, driven by lawyers not by plaintiffs per se. In any given week, it is common, in the USA, to see multiple law firms announcing a class action against a company for some arguable harm. Bluntly, those law firms are promoters of a form of investment scheme in which the Plaintiffs do not put up capital but pay their contributions out of winnings. Let's also be clear: defending a large class action is very expensive and it drags out a PR disaster that the Defendant might otherwise be able to quietly shelve. Many of the class actions announced in the USA have far less merit than they should but companies settle and, often, settle early for large amounts. Class actions have become a means of extortion in corporate America.

The promoters compete for numbers, knowing that the Judge will, if he approves the issue of a class action, will allow only one and the one he will choose is the one with the biggest numbers. Often, the cases are announced by small firms who know that, when the Judge in effect awards one of them the trophy of a case that could earn millions, they will bring their followers to the table and form a consortium to run the case. It follows then that marketing tactics to find potential plaintiffs, and identify at an early stage possible witnesses against the case, are both aggressive and intrusive.

In order to launch a class action, the Plaintiffs must, as a preliminary stage, satisfy the Court that there is a defined class, that there is a tortious wrong which must be righted and/or compensated and that that harm must be quantifiable or at least able to be compensated by an Order for damages.

There must be a "lead plaintiff" who is a member of the class, in effect, the person whose name goes on the writ and others are listed in a schedule. A class must be defined and its members identifiable with reference to a specific harm.

Now here's where a border becomes blurred. In shareholder cases, the tort is expressed in ways that are arguably matters of contract. A shareholder action alleges negligence or recklessness on the part of the company and/or its board. But the way that this is framed is very similar to the way that contract cases are framed i.e. misrepresentation.

Therefore, shareholder cases are, usually, a claim that the company and/or its board or certain members "failed to ensure that..." or "acted without regard to...."

Without describing, here, the CBA case, a common form of action would be "the company and its officers failed to ensure that adequate compliance and risk management policies were developed, that those policies were tested, that failures identified by those tests were remedied, that the policies were implemented, monitored and enforced and that as a result events occurred which caused the price of shares to fall and shareholders to suffer losses."

As stated, we are not, here, examining in detail the CBA case and therefore we are making some general assumptions in relation to class actions generally. In the CBA case, the class is defined by those who purchased shares within a "qualifying period." Those who held shares before the qualifying period are excluded.

What can those shareholders do? Remember that the announcement of the class action is a marketing document. It is not a court-approved scheme at that stage. It is therefore open to anyone who held shares during the qualifying period, no matter when they were purchased, to apply to the Court for the expansion of the class to include them. Moreover, that application can usually be made at the time the Plaintiff applies for the approval or (very) shortly thereafter. The case of long-term shareholders is likely to be strengthened if they make strong representations to the law firm promoting the scheme as soon as possible after the scheme is announced.

Class action contracts are, generally, on a no-win, no fee basis for plaintiffs. That means that the law firms carry the cost, hence syndication. There are venture capital-style companies that will under-write all or some of those costs. While the defendant will, if it loses, be ordered to pay costs, there is always a substantial shortfall. It is on this that the lawyers place their gamble: although this differs from jurisdiction to jurisdiction, the contract with the plaintiffs specifies a percentage of winnings that the lawyers will retain. Some jurisdictions limit this to minor percentages; some allow the bulk of the money to go to the lawyers.

It is likely that the date for defining the class relates to the implementation of the technology which lay at the heart of the CBA laundering scam. It is equally likely that the manufacturers of that technology are not primary targets for litigation by the Class, but because noise is cheap, and a class action is, often, little more than legalised extortion. More Defendants means more people who might break ranks with co-defendants and result in pressure being brought on the First Defendant to settle. After all, the PR nightmare is the reason that the case gets legs in the first place: if there was not underlying mass publicity and media-synthesised outrage, getting followers for the case would be difficult.

If I were to be drafting the claim it would be framed that, the company and its officers by their action or inaction failed to take any or adequate steps ensure that the company was protected against criminal conduct in accordance with the laws and regulations designed to detect, deter and prevent money laundering and, in consequence, the company was in fact used by criminals as a vehicle for crime leading to the company's regulator imposing a range of sanctions and penalties which resulted in the share price falling; moreover the company in its marketing material recklessly promoted the technology at the heart of the criminal conduct as safe and secure which is the bedrock of the reputation of a bank and which, it is now known, it or the systems surrounding its implementation and use were not, again causing harm to the reputation of the company and, in consequence, a fall in its share price."

There is a very clear parallel between this and the case against the Bank of New York in the late 1990s where an employee set out to exploit circumstances that allowed her to bypass the bank's systems and controls. In short, as the then Chairman, Thomas Renyi, said "we placed our trust in a senior employee. That trust was misplaced." A shareholder class action was commenced.

And this is where the fun starts: the case was led by a large law firm with experience in large class actions; a lead plaintiff was found; the action was commenced and rumbled on for almost two years until someone thought to check the Registrar's records. On the night before Christmas (actually, that's poetic licence but it was during what New Yorkers like to call "the Holidays") the Bank, with its sheepish Wall Street lawyers in tow, went to court and proved that the Lead Plaintiff had bought his shares outside the qualifying period and was therefore not a member of the class. In the absence of a lead plaintiff, the case was thrown out, never to return. Shhhh.. not many people know that because the cock-up covered everyone in deleterious matter.

Having said that, the case against BoNY was on shaky ground anyway. Long before the case was dismissed, the share-price had recovered and passed its value before the scandal broke. It is arguable that those who lost did so because they lost their nerve and sold when they should have bought more. A valid defence to such cases is a combination of pleading volenti non injuria (you brought it on yourself) and the fact that many shareholders are gamblers not investors (they did not buy in a flotation or other issue, for example). Couple that with the fact that many shareholders do not understand the business risks of the industries in which they buy shares of individual companies) and the chances of failure within any given period are significant even without an intervening act such as the CBA money laundering problem.

The big lie that stands behind the class action is that shares in financial institutions are, literally, money in the bank.