Cherie, RBS and how we can learn a lot from US justice

Lawyers from the California firm Coughlin Stoia launched a class action last month in New York, where Royal Bank of Scotland shares were traded. They accused the bank of falsely reassuring investors that it was well capitalised at a time when it was effectively insolvent, an alleged breach of US securities legislation.

By securing the former Prime Minister's wife to co-ordinate potential UK claimants, Coughlin Stoia may hope they have a better chance of becoming "lead counsel" in the US class action. 

But other US lawyers argue that investors in British companies would be better off if they could bring similar claims without having to go abroad.

"The securities class-action mechanism is appropriately responding in a time of crisis to try to obtain fair compensation for defrauded investors," says Thomas Dubbs, senior partner at the New York firm Labaton Sucharow. "Unfortunately, such a mechanism does not presently exist under UK law."

Class actions - where one person brings a test case on behalf of an entire class of claimants - can already be brought in England and Wales. Crucially, though, everyone who wants to take advantage of a successful outcome must opt into the claim.

US cases operate on an opt-out basis, covering all members of the class except those who deliberately remove themselves from the list - perhaps because they want to sue independently.

A claim covering every possible victim of a fraudulent investment fund or financial intermediary is bound to be worth more than one representing only those who have chosen to come forward. Coupled with a contingency fee system that allows lawyers to take a percentage of the sum recovered, US-style class actions represent a serious threat to companies that - unlike Madoff - are still trading.

Dubbs gives the example of AIG, the world's biggest insurer, which received more than £100 billion from the US government this month to stave off collapse.

The company admitted last Friday that it was "nearly brought down" by traders at the Mayfair office of its financial products arm - described by ABC News as the "epicentre" of the global financial crisis.

Companies like AIG and the investment bank Bear Stearns - which was sold off after it almost collapsed last year - are being sued for alleged violations of US securities laws. These require companies to disclose their positions and the riskiness of their underlying investments.

"I think the deterrent effect of class actions improves securities disclosure and the quality of information that goes into the marketplace generally," says Dubbs. What went wrong in the US was that so much leverage was permitted, magnifying the effects of mistakes and fraud.

Usually, the single investor that has suffered the largest loss is designated by the court as the lead plaintiff. That claimant will appoint a team of lawyers as lead counsel. Although their fees must be approved by the court, Labaton Sucharow say that "in large securities class actions, lead counsel's fees typically range from 10% to 30% of the settlement amount".

Dubbs is convinced that a two-pronged approach is necessary in Britain. "I think that the FSA should be more pro-active in the future and, as a supplement to the FSA, legal remedies should be improved for investors who have wrongfully lost money."

David Greene, head of litigation at the London firm Edwin Coe, agrees that that FSA's higher profile will ensure that many companies act appropriately. "But the introduction of US-style class actions and juries would really strike fear into them."

However, Greene sees little impetus for change at the moment.  "Even if class actions come," he says, "they will be limited in scope."